RBS 2013 Annual Report Download - page 180
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Business review Risk and balance sheet management
178
Risk governance* continued
Business model continued
Over the last few years, the Group has either exited or sold a number of
businesses in order to align its cost structure with its smaller scope and
scale. In addition, it is reducing costs through rationalisation, integration
and simplification. For example, UK Retail is rationalising its service
delivery channels and simplifying the operations that support them, using
the resulting cost savings to invest in new technology and providing
additional channels for customers such as mobile banking. A number of
other divisions are taking similar steps.
The Group’s activities expose it to a number of risks. The Group is
pursuing a strategy of reducing the risks it takes while focusing on the
delivery of products and services to a domestic customer base, giving
rise to strategic risk. The delivery of all of its products and services
exposes the Group to conduct risk, which has recently materialised in the
form of fines and reputational damage, resulting from a failure to treat
customers in line with their and other stakeholders’ expectations.
The Group also faces a range of other risks. As measured by risk-
weighted assets (RWAs), the most significant of these is credit risk, which
consists of counterparty and non-counterparty credit risk. Credit risk
arises from its lending activities in all divisions. Counterparty credit risk
arises from its security financing and derivative trading activities. This is
concentrated in Markets.
RWAs by division
The second most significant source of risk is market risk, which arises
from the Group’s trading activities (traded market risk) and from the
impact of changes in market prices on the value of its other financial
assets and liabilities (non-traded market risk). Traded market risk is
concentrated in Markets while non-traded market risk is distributed
across the Group and with the exception of US Retail & Commercial and
Markets, these divisions transfer this risk to Group Treasury for
management.
Operational risk, which arises from all of the Group’s business activities,
is the third most significant source of risk as measured by RWAs. Its
importance is increasing as a result of changes driven by regulation as
well as the Group’s strategy.
The activities of several divisions, particularly Markets and International
Banking, but also Ulster Bank and US Retail & Commercial, expose the
Group to country risk.
Finally, through the activities of all its divisions, the Group is exposed to a
range of other risks, including pension, business, regulatory and
reputational.
*unaudited
Risk events and lessons learned
LIBOR related settlements
The Group reached settlements with the Financial Services Authority
(FSA) in the United Kingdom, the United States Commodity Futures
Trading Commission (CFTC) and the United States Department of
Justice (DOJ) on 8 February 2013 in relation to investigations into
submissions, communications and procedures around the setting of the
London Interbank Offered Rate (LIBOR). The Group agreed to pay
penalties of £87.5 million, $325 million and $150 million to the FSA,
CFTC and DOJ respectively. As part of the settlement with the DOJ, RBS
plc entered into a Deferred Prosecution Agreement on one count of wire
fraud relating to Swiss Franc LIBOR, and one count for an anti-trust
violation relating to Yen LIBOR. RBS Securities Japan Limited also
agreed to enter a plea of guilty to one count of wire fraud relating to Yen
LIBOR.
Industry-wide investigations were made into the setting of certain
benchmark rates across a range of currencies. Regulators found
wrongdoing on the part of 21 RBS employees, predominantly in the
setting of the bank's Yen and Swiss Franc LIBOR submissions.