Royal Bk Scot.Grp. (RBS) - Interim Management Statement - Part 6 of 7 RNS Number : 1671Q Royal Bank of Scotland Group PLC 02 November 2012 Risk and balance sheet management (continued) Market risk Market risk arises from changes in interest rates, foreign currency, credit spreads, equity prices and risk related factors such as market volatilities. The Group manages market risk centrally within its trading and non-trading portfolios through a comprehensive market risk management framework. This control framework includes qualitative and quantitative guidance in the form of comprehensive policy statements, dealing authorities, limits based on, but not limited to, value-at-risk (VaR), stress testing, and sensitivity analyses. For a description of the Group's basis of measurement and methodologies, refer to pages 229 to 231 of the Group's 2011 Annual Report and Accounts. CRD III capital charges Following the implementation of CRD III in 2011, the Group is required to calculate: (i) Stressed VaR (SVaR) - an additional capital charge based on a stressed calibration of the VaR model; (ii) an Incremental Risk Charge (IRC) to capture the default and migration risk for credit risk positions in the trading book; and (iii) an All Price Risk (APR) measure for correlation trading positions, subject to a capital floor that is based on standardised securitisation charges. The capital charges associated with these models are shown in the table below: 30 September 31 December 2012 2011 £m £m Stressed VaR 1,407 1,682 Incremental Risk Charge 519 469 All Price Risk 34 297 Key points · The decrease in SVaR and APR over the first nine months of 2012 was primarily due to the restructuring of certain trades in Non-Core. General de-risking in sovereign and agency positions in Markets also contributed to the decrease. · The increase in IRC due to the implementation of a new IRC model at the end of Q2 2012 was partially offset by the general de-risking. Risk and balance sheet management (continued) Market risk (continued) Daily distribution of Markets trading revenues The graph below shows trading revenues for Markets for the nine months ended 30 September 2012 and the corresponding period in 2011. http://www.rns-pdf.londonstockexchange.com/rns/1671Q_-2012-11-1.pdf Note: (1) The effect of any month end adjustments, not attributable to a specific daily market move, is spread evenly over the trading days in that specific month. Key points · The average daily revenue earned by Markets trading activities in the first nine months of 2012 was £18 million, compared with £20 million in the corresponding period in 2011. The standard deviation of the daily revenues decreased from £20 million to £14 million. · The number of days with negative revenue decreased to 18 from 27. During Q3 2011 the credit environment deteriorated rapidly causing credit spreads to widen following a heightened period of uncertainty in the eurozone. · The most frequent daily revenue was between £15 million and £20 million, which occurred 32times. In the prior period, the most frequent daily revenue was between £25 million and £30million, which occurred 24 times. Risk and balance sheet management (continued) Market risk (continued) Counterparty Exposure Management (CEM) manages the over-the-counter derivative counterparty credit and funding risk on behalf of Markets, by actively controlling risk concentrations and reducing unwanted risk exposures. The hedging transactions that CEM enters into are booked in the trading book and therefore contribute to the market risk VaR exposure of the Group. The counterparty exposures themselves are not captured in VaR for regulatory capital. In the interest of transparency and to more properly represent the exposure, CEM exposure and total VaR excluding CEM are disclosed separately. The table below details VaR for the Group's trading portfolios, analysed by type of market risk exposure, and between Core, Non-Core, CEM and the Group's total trading VaR excluding CEM. 31 Nine months ended December 30 September 2012 30 September 2011 2011 Period Period Period Average end Maximum Minimum Average end Maximum Minimum end Trading VaR £m £m £m £m £m £m £m £m £m Interest rate 63.7 44.8 95.7 43.6 50.3 73.0 79.2 27.5 68.1 Credit spread 69.4 67.2 94.9 44.9 87.4 69.8 151.1 47.4 74.3 Currency 11.4 8.9 21.3 5.3 10.1 6.5 18.0 5.2 16.2 Equity 6.3 8.2 12.5 3.3 9.8 7.7 17.3 4.6 8.0 Commodity 1.9 2.7 6.0 0.9 0.4 3.6 3.6 - 2.3 Diversification (1) (40.8) (54.3) (52.3) Total 99.0 91.0 137.0 66.5 104.1 106.3 181.3 59.7 116.6 Core 74.2 69.4 118.0 47.4 75.3 83.1 133.9 41.7 89.1 Non-Core 32.3 26.5 41.9 22.1 74.2 38.7 128.6 33.2 34.6 CEM 77.7 74.3 84.2 73.3 44.1 54.1 58.2 30.3 75.8 Total (excluding CEM) 46.4 46.6 76.4 32.2 82.6 66.6 150.0 43.1 49.7 Note: (1) The Group benefits from diversification, which reflects the risk reduction achieved by allocating investments across various financial instrument types, currencies and markets. The extent of diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. Key points · The Group's average and maximum credit spread VaR for the first nine months of 2012 were lower than for the corresponding period of 2011. This reflected the credit spread volatility experienced during the 2008 financial crisis dropping out of the time series window, combined with a reduction in the asset-backed securities trading inventory in Core and the restructuring of some monoline hedges relating to the Non-Core banking book. · Towards the end of September 2012, the credit spread VaR increased, driven by credit spreads widening on the back of a deterioration in eurozone sentiment and by an increase in bought protection on credit indices. This caused both the Group's period end total and credit spread VaR to increase in the third quarter of 2012, compared with the first half of the year. · The period end interest rate VaR for the first nine months of 2012 was lower than that for the same period in 2011, largely driven by position reductions. However, the average interest rate VaR was higher, due to pre-hedging and positioning ahead of government bond auctions. · Since late 2011, CEM started to centrally manage the funding risk on over-the-counter derivative contracts. The CEM trading VaR was considerably higher in the first nine months of 2012 than in the same period in 2011, primarily due to the transfer of funding risk management from individual desks to CEM. Risk and balance sheet management (continued) Market risk (continued) The table below details VaR for the Group's non-trading portfolio, excluding the structured credit portfolio and loans and receivables. 31 Nine months ended December 30 September 2012 30 September 2011 2011 Period Period Period Average end Maximum Minimum Average end Maximum Minimum end Non-trading VaR £m £m £m £m £m £m £m £m £m Interest rate 7.6 5.5 10.7 5.3 8.6 10.3 11.1 5.7 9.9 Credit spread 11.1 8.6 15.4 7.3 19.6 14.8 39.3 14.1 13.6 Currency 3.4 1.5 4.5 1.3 1.8 4.1 5.9 0.1 4.0 Equity 1.7 1.7 1.9 1.6 2.2 1.8 3.1 1.6 1.9 Diversification (1) (8.0) (13.5) (13.6) Total 12.6 9.3 18.3 8.6 20.9 17.5 41.6 13.4 15.8 Core 12.4 9.2 19.0 8.3 20.4 18.6 38.9 13.5 15.1 Non-Core 2.1 3.6 3.6 1.6 3.4 3.7 4.3 2.2 2.5 CEM 1.0 1.0 1.1 0.9 0.3 0.4 0.4 0.3 0.9 Total (excluding CEM) 12.4 9.3 17.8 8.2 20.9 17.5 41.4 13.7 15.5 Note: (1) The Group benefits from diversification, which reflects the risk reduction achieved by allocating investments across various financial instrument types, currencies and markets. The extent of diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. Key points · The average and period end total and credit spread VaR were considerably lower for the first nine months of 2012, due to reduced volatility in the market data time series, position reductions and a decrease in the size of the collateral portfolio. The reduction in collateral was driven by the restructuring of certain Dutch residential mortgage-backed securities during H1 2012 permitting their eligibility as European Central Bank collateral. This allowed the disposal during the first nine months of 2012 of additional collateral purchased during the corresponding period in 2011. · The Non-Core period end VaR was higher at 30 September 2012 than at 31 December 2011, due to improvements in the time series mapping on certain Australian bonds and the purchase of additional hedges. Risk and balance sheet management (continued) Market risk (continued) Structured Credit Portfolio The Structured Credit Portfolio is within Non-Core. The risk in this portfolio is not measured or disclosed using VaR, as the Group believes this is not an appropriate tool for the banking book portfolio, which comprises illiquid debt securities. These assets are reported on a drawn notional and fair value basis, and managed on a third party asset and risk-weighted assets basis. The table below shows the open market risk in the structured credit portfolio. Drawn notional Fair value Other Other CDOs CLOs MBS ABS Total CDOs CLOs MBS ABS Total 30 September 2012 £m £m £m £m £m £m £m £m £m £m 1-2 years - - - 128 128 - - - 120 120 2-3 years - - 6 28 34 - - 5 27 32 3-4 years - - - 45 45 - - - 43 43 4-5 years - - 161 218 379 - - 136 198 334 5-10 years - 298 110 - 408 - 278 53 - 331 >10 years 317 313 436 553 1,619 127 285 267 314 993 317 611 713 972 2,613 127 563 461 702 1,853 31 December 2011 1-2 years - - - 27 27 - - - 22 22 2-3 years - - 10 196 206 - - 9 182 191 4-5 years - 37 37 95 169 - 34 30 88 152 5-10 years 32 503 270 268 1,073 30 455 184 229 898 >10 years 2,180 442 464 593 3,679 766 371 291 347 1,775 2,212 982 781 1,179 5,154 796 860 514 868 3,038 Key point · The Structured Credit Portfolio drawn notional and fair values declined across all asset classes from 31 December 2011 to 30 September 2012. Key drivers were: (i) during H1 2012, the liquidation of legacy trust preferred securities and commercial real estate CDOs and subsequent sale of the underlying assets, and (ii) during Q3 2012, the sale of underlying assets from CDO collateral pools and legacy conduits. Risk and balance sheet management (continued) Risk management: Country risk Introduction Country risk is the risk of material losses arising from significant country-specific events such as sovereign events (default or restructuring); economic events (contagion of sovereign default to other parts of the economy, cyclical economic shock); political events (transfer or convertibility restrictions, expropriation or nationalisation); and natural disaster or conflict. Such events have the potential to affect elements of the Group's credit portfolio that are directly or indirectly linked to the country in question and can also give rise to market, liquidity, operational and franchise risk related losses. The global picture remains mixed, with advanced economies, particularly in Europe, overall much weaker than emerging markets. The economic outlook in Asia is weakening but remains comparatively positive. Although the US and Japanese central banks have both announced additional asset purchases to counteract economic weakness, market confidence will remain primarily influenced by developments in eurozone crisis management and a resolution of the US fiscal deadlock. The Latin American outlook remains positive despite rising external risks. Markets continue to benefit from the European Central Bank's Outright Monetary Transactions (OMT) announcement and the European Stability Mechanism (ESM) approval by the German Constitutional Court, but disagreements over the next steps to eurozone integration highlight the length of the road ahead. Overall, the Group still sees a gradual resolution of the crisis as the most likely outcome. In the short-term, a clearer roadmap towards a joint banking regulator is needed, a prerequisite for the ESM being able to lend to banks directly. Dir The story has been truncated, [TRUNCATED]
Royal Bk Scot.Grp. RBS Interim Management Statement - Part 6 of 7
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