RBS 2013 Annual Report Download - page 233
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Business review Risk and balance sheet management
231
Loss given default (LGD)
LGD models estimate the amount that cannot be recovered in the event
of customer default. When estimating LGD, the Group’s models assess
both borrower and facility characteristics, as well as various credit risk
mitigants. The cost of collections and a time discount factor for the delay
in cash recovery are also incorporated.
Changes to credit models
The Group reviews and updates models on an ongoing basis, reflecting
more recent data, changes to products and portfolios, and updated
regulatory requirements. Extensive changes were made to wholesale
models in 2012 and 2013. This process continues with further changes,
notably in banks and corporate exposure classes, planned for 2014.
As in 2012, the impact of the model changes implemented in 2013 largely
affected the lower risk segments of the Group’s portfolios, mostly to
customers bearing the equivalent of investment-grade ratings.
Model changes affect year-on-year comparisons of risk measures in
certain disclosures. Where meaningful, the Group in its commentary has
differentiated between instances where movements in risk measures
reflect the impact of model changes, and those that reflect movements in
the size of underlying credit portfolios or their credit quality.
Economic capital
The credit economic capital model is an extensive framework that allows
for the calculation of portfolio credit loss distributions and associated
metrics over a given risk horizon for a variety of business purposes.
The model takes into account migration risk (risk that credit assets will
deteriorate in credit quality across multiple years), factor correlation
(the assumption that groups of obligors share a common factor) and
contagion risk (for example, the risk that the weakening of the sovereign’s
creditworthiness has a significant impact on the creditworthiness of a
business operating in that country).
Credit risk assets*
The table below provides a bridge between balance sheet captions and the related components of credit risk assets (CRA).
Methodology
Within Not within Netting differences
Balance the scope of the scope Credit and and
sheet market risk (1) of CRA (2) adjustments (3) collateral (4) reclassifications (5) CRA
2013 £bn £bn £bn £bn £bn £bn £bn
Cash and balances at central banks 82.7 — (3.9) — — 1.7 80.5
Reverse repurchase agreements and stock borrowing 76.4 — (76.4) — — — —
Loans and advances 418.4 — (3.0) 25.2 (28.4) (7.5) 404.7
Debt securities 113.6 (56.7) (56.9) — — — —
Equity shares 8.8 (7.2) (1.6) — — — —
Settlement balances 5.6 (5.6) — — — — —
Derivatives 288.0 — — 1.8 (242.8) 9.9 56.9
Other assets (6) 34.4 — (25.6) — — (7.8) 1.0
Total assets 1,027.9 (69.5) (167.4) 27.0 (271.2) (3.7) 543.1
Contingent obligations (7) 29.9
573.0
Notes:
(1) The exposures in regulatory trading book businesses are subject to market risk and are hence excluded from CRA. Refer to the market risk section on page 318.
(2) Includes cash in ATMs and branches, items in the course of collection, reverse repurchase agreements, securities and other assets (refer to note below).
(3) Includes impairment loss provisions related to loans and advances and credit valuation adjustment on derivatives.
(4) Comprises:
- Loans and advances: cash collateral pledged with counterparties in relation to net derivative liability positions.
- Derivatives: impact of master netting arrangements.
(5) Comprises:
- Cash and balances at central banks: notice balances with central banks included in loans and advances, reclassified as central bank exposure in CRA.
- Loans and advances: includes offset related to cash management pooling arrangements not allowed under IFRS and reclassification of central bank balances. This is partially offset by
reclassification of disposal groups and prepayments, accrued income and other assets as customer balances.
- Derivatives: reflects difference between netting arrangements and netting within regulatory model sets, and balances with central counterparties after netting but before variation margin presented
net on the balance sheet.
- Other assets: includes amounts reclassified to loans and advances from disposal groups and prepayments, accrued income and other assets and residual value of operating leases.
(6) Other assets: includes intangible assets, property, plant and equipment, deferred tax, prepayments and accrued income and assets of disposal groups.
(7) Includes documentary credits (commercial letters of credit providing for payment by the Group to a named beneficiary against presentation of specified documents), classified as commitments for
financial reporting.
*unaudited