RBS 2013 Annual Report Download - page 332
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Business review Risk and balance sheet management
330
Market risk continued
Traded market risk continued
Regulatory capital*
Regulatory treatment
The market risks subject to capital requirements under Pillar 1 are
primarily interest rate, credit spread and equity risks in the trading book
and foreign exchange and commodity risks in both the trading and non-
trading books. Interest rate and equity risks are split between general and
specific risks. General risks represent market risks due to a move in a
market as a whole, such as a main index or yield curve, while specific
risks represent market risks arising from events particular to an
underlying issuer.
Firms can choose from two broad methodologies to calculate their market
risk capital charge: (i) the standard rules, whereby regulator-prescribed
rules must be applied, and (ii) the internal model approach, where,
subject to regulatory approval, a model such as VaR is used to calculate
the capital charge.
RBS uses both methods, with the internal model approach being used to
calculate about 86% of its capital charge.
VaR and SVaR capture general and specific risks but not risks arising
from the impact of defaults and rating changes associated with traded
credit products and their derivatives. For these risks, three product-
dependent approaches are used:
• The Incremental Risk Charge (IRC) model captures risks arising
from defaults and rating changes risks for the more liquid traded
credit instruments and their derivatives.
• The All Price Risk (APR) model covers the generally lower-liquidity
correlation trades and their liquid hedges (such as first-to-default
basket trades).
• Securitisation and re-securitisation risks in the trading book are
treated with the non-trading book standardised capitalisation
approach.
*unaudited
RWAs by legal entity and by regulatory approach*
Market risk RWAs of £30.3 billion and minimum capital requirement of
£2.4 billion are analysed below.
Regulatory VaR*
The Group’s VaR model has been approved by the PRA to calculate its
regulatory market risk capital requirement for the trading book for those
legal entities under its jurisdiction. These legal entities are The Royal
Bank of Scotland plc, RBS Securities Inc, RBS Financial Products Inc,
and National Westminster Bank Plc.
While internal VaR provides a measure of the economic risk,
regulatory VaR is one of the measures of regulatory capital by legal
entity.
The calculation of regulatory VaR differs from that of the internal VaR as
it takes into account only regulator-approved products, locations and
legal entities and it is based on a ten-day, rather than a one-day, holding
period for market risk capital calculations.
The PRA approval covers general market risk in interest rate, foreign
exchange, equity and commodity products and specific market risk in
interest rate and equity products.