RBS 2013 Annual Report Download - page 32

To deliver its capital plan, RBS has formed
Capital Resolution Group (CRG), which
comprises four pillars: exiting the assets in
RCR, delivering the IPOs of both Citizens
Financial Group and Williams & Glyn, and
optimising the bank’s group-wide shipping
business. RCR was set up from 1 January
2014 and will manage a pool of funded assets
(£29 billion) with particularly high capital
intensity or potentially volatile outcomes in
stressed environments, aiming to accelerate
the run-down of these exposures to free up
capital for the Group.
The Group continues to target a fully loaded
Basel III Common Equity Tier 1 ratio of
approximately 11% by the end of 2015
and 12% or above by the end of 2016. The
timely run-down of RCR and the successful
divestment of Citizens Financial Group, in
particular, are cornerstones of this capital
strategy.
Top and emerging risk scenarios
RBS identifies and monitors its top and
emerging risk scenarios. A number attracted
particular attention from senior management
during 2013 which are discussed below.
For further information on these and other
risks, see pages 179 to 181.
Macroeconomic risks
• Increased impairments arising from defaults
in sectors to which RBS has concentrated
exposures, particularly commercial real
estate and shipping. Optimisation of
the Group’s shipping and a significant
proportion of commercial real estate
portfolios is part of CRG strategy.
• Increased impairments arising from a more
severe-than-expected economic downturn.
RBS developed business plans to take into
account the possibility of slow economic
growth and implemented strategies, such
as cost reductions, to reduce its earnings
vulnerability.
• An increase in RBS obligations to
support pension schemes. The trustee is
responsible for the investment of the main
scheme’s assets, which are held separately
from the assets of RBS.
Conduct, regulatory and legal risks
• Increased conduct costs and reputational
damage arising from a failure to achieve
fair customer outcomes. In order to address
this risk, during the year RBS continued
to embed good conduct at the heart of
the business to ensure fair outcomes for
customers.
• Increased costs and reputational damage
arising from a failure to demonstrate
compliance with existing regulatory
requirements regarding conduct,
particularly with respect to mis-selling.
Although more work needs to be done to
mitigate this risk, RBS has simplified some
products and stopped offering others.
Where appropriate, it has compensated
purchasers of some products and services,
such as payment protection insurance and
certain interest rate hedging products.
• Losses or reputational damage arising from
litigation. RBS defends claims against it to
the best of its ability and co-operates fully
with various governmental and regulatory
authorities.
Risks related to the Group’s operations
• Increased losses arising from cyber
attacks. The Group has participated in an
industry-wide cyber attack simulation. It has
also initiated a program to improve controls
over user access, taken steps to rationalise
its websites, put anti-virus protection in
place and educated staff on information
protection.
• Increased losses arising from the failure
of information technology systems. RBS
has launched a major program to improve
resilience, enhanced back-up systems
and created a ‘shadow bank’ capable of
providing basic services in the event of need.
• Increased costs arising from a failure to
execute successfully major projects. RBS
is working to implement change in line
with its plans while assessing the risks to
implementation and taking steps to mitigate
those risks where possible.
• Increased costs due to an inability to
recruit or retain suitable staff. RBS has
communicated expected changes in its
organisational structure to members of staff,
implementing plans aimed at minimising
unexpected staff losses.
Political risks
• RBSG and the Royal Bank, its principal
operating subsidiary, are both
headquartered and incorporated in
Scotland. The Scottish Government is
holding a referendum in September 2014
on the question of Scottish independence
from the UK. Although the outcome of
such referendum is uncertain, subject to
any mitigating factors, the uncertainties
resulting from an affirmative vote in
favour of independence would be likely
to significantly impact the Group’s credit
ratings and could also impact the fiscal,
monetary, legal and regulatory landscape
to which the Group is subject.
• Were Scotland to become independent, it
may also affect Scotland’s status in the EU.
• The occurrence of any of the impacts above
could significantly impact the Group’s costs
and would have a material adverse effect on
the Group’s business, financial condition,
results of operations and prospects.
The integral role of risk management
Risk management is essential to making RBS
safe and sustainable, and is an activity
performed throughout all of RBS operations.
A strong culture of risk management and
control will provide the foundation for improving
performance and deliver future success.
A more detailed discussion of developments
in 2013 can be found in the ‘Risk and balance
sheet management’ section on pages 187 to
191.
For information on how we manage
Environmental, Social and Ethical (ESE) risks,
please see our Sustainability report, available
at rbs.com/sustainable.
364
For further
information
see pages 174 -
30