RBS 2006 Annual Report Download - page 91
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Please find page 91 of the 2006 RBS annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.RBS Group • Annual Report and Accounts 2006
90
Operating and financial review continued
Operating and financial review
Short term wholesale deposits are taken from a wide range of
counterparties, with the largest single depositor continuing to
represent less than 1% of the Group’s total funding. The level
of funding from short term unsecured debt issuance and bank
deposits, excluding repos and short positions, has decreased
by £32.9 billion (25%) and now represents 13% of total funding
excluding other liabilities at 31 December 2006. This reflects
the increased use of secured and unsecured term issuance to
fund the higher rate of growth in customer loans and advances
(see ‘net customer activity’ below) and increased repo activity.
Short positions and repos with corporate, institutional customers
and banks are undertaken primarily by RBS Greenwich Capital
in the US and by Global Banking & Markets. Repos and short
positions increased by £50.1 billion (37%) to represent 26% of
total funding excluding other liabilities at 31 December 2006.
The Group remains well placed to access various wholesale
funding sources from a wide range of counterparties and
markets.
Net customer activity
Net customer lending, excluding repos, rose by £9.6 billion (as
the growth in loans and advances to customers continued to
exceed the growth in customer accounts, albeit to a lesser
degree than in previous years), thus increasing the degree of
reliance on wholesale market funding to support loan growth.
2006 2005 2004
Net customer activity £m £m £m
Loans and advances to customers (gross, excluding reverse repos) 407,918 372,223 299,235
Customer accounts (excluding repos) 320,238 294,113 241,181
Customer lending less customer accounts 87,680 78,110 58,054
Loans and advances to customers as a % of customer accounts (excluding repos) 127.4% 126.6% 124.1%
The Group evaluates on a regular basis its structural liquidity
risk and applies a variety of balance sheet management and
term funding strategies to maintain this risk within its normal
policy parameters.
Management of term structure
The degree of maturity mismatch within the overall long-term
structure of the Group’s assets and liabilities is managed
within internal policy guidelines, to ensure that term asset
commitments may be funded on an economic basis over their
life. In managing its overall term structure, the Group analyses
and takes into account the effect of retail and corporate
customer behaviour on actual asset and liability maturities
where they differ materially from the underlying contractual
maturities.
Stress testing
The maintenance of high quality credit ratings is recognised as
an important component in the management of the Group’s
liquidity risk. Credit ratings affect the Group’s ability to raise,
and the cost of raising, funds from the wholesale market and
the need to provide collateral in respect of, for example,
changes in the mark-to-market value of derivative transactions.
Given its strong credit ratings, the impact of a single notch
downgrade would, if it occurred, be expected to have a
relatively small impact on the Group’s economic access to
liquidity. More severe downgrades could have a progressively
greater impact but have an increasingly lower probability of
occurrence.
As part of its stress testing of its access to sufficient liquidity,
the Group regularly evaluates the potential impact of a range
of levels of downgrade in its credit ratings and carries out
stress tests of other relevant scenarios and sensitivity analyses.
Contingency funding plans are maintained to anticipate and
respond to any approaching or actual material deterioration in
market conditions or in the Group’s credit ratings, and the
Group remains confident of its ability to manage its liquidity
requirements effectively in all such circumstances.
Daily management
The primary focus of the Group’s daily management activity is
to ensure access to sufficient liquidity to meet its cashflow
obligations within key time horizons out to one month ahead.
The short-term maturity structure of the Group’s liabilities and
assets is managed on a daily basis to ensure that all material
cashflow obligations, and potential cashflows arising from
undrawn commitments and other contingent obligations, can
be met as they arise from day to day, either from cash inflows,
from maturing assets, new borrowing or the sale or repurchase
of various debt securities held (after allowing for appropriate
haircuts). Short-term liquidity risk is managed on a consolidated
basis for the whole Group including the Greenwich companies
but excluding the activities of Citizens and insurance
businesses, which are subject to regulatory regimes that
necessitate local management of liquidity.
Internal liquidity mismatch limits are set for all other
subsidiaries and non-UK branches which have material local
treasury activities in external markets, to ensure those activities
do not compromise daily maintenance of the Group’s overall
liquidity risk position within the Group’s policy parameters.
Citizens and the insurance companies have their own liquidity
policies which comply with their respective regulatory regimes.
The policies are also reviewed and monitored by Group Treasury.