Watch Committee - CBD The aim ot this memo is to ensure that the controls around the Watch Committee review have peen designed and implemented ettectively as well as ensuring that the GRG triggers per the FSA guidance are covered by the triggers in and Cle The Watch Committee is a crucial process in pontolio management that ensures all amber status cases are reviewed regularly and it necessary are transterred to GRG in a timely manner Key client contacts Key systems in scope System Name Descrip ion RMPS Front omce lending system used to record and monitor each individual relationship manager's lending pontolio Used across Cle apart trom Large Corporate Coverage and Shipping RMPS has no intertace With general ledgers stems Data Pack Used exclusively within CE to identity problematic loans. it uses around 20 triggers' such as high PD levels and missed payments' which are puilt into the scoring system as risk indicators and classes the loans accordingl Backgroundlsumm ry of pontolio management controls and processes CIB There are 6 Watch Commilleesy each relating to an assel Class General REF (Real Estate Finance) NonaCore REF Structured Finance institutional Coverage Shipping Each committee meets at a set time weekly to look at the cases within their sector All watch committee quorums will be comprised ot representatives trom l=orttolio Management (Ihe Relationship Manager I Relationship Director) Client Coverage Credit GRG An asset is presented to the Watch Committee it it meets Specific criteria as detailed in the Terms of Reterence. Some key triggers are as tollows. Credit has classified the asset as Watch Amoer or Red The asset is pertorming 20% under plan A financial covenant breach is iorecast There are liquidity issues The company has issued a Proms Warning Credit have asked ior its inclusion There has been an internal Credit downgrade to M65 17 or higher The asset has been handed back irom GRG to CIE RMPS monitors the cases on a daily basis, when it detects that a case's PD has gone over 24 it will automatically llag this to be put through to GRG RMPs also generates EWI (Early Warning indicator) reports, they are then reviewed by the RMIRT taking into consideration the aiorementtoned criteria Their comments are then passed on to Credit. who will then make the decision whether to pass it on to the Watch or not. The Relationship team is in charge oi preparing a detailed paper about the case they are presenting to the Watch Committee This has to be submitted to the Watch Committee at least 2 days prior to the date oi the meeting. The proiormas can be downloaded irom the intranet Once a case has been submitted to the Watch Committee the no longer have any input as to the late oi the case Any cases with a new Amber status are automaticain put through to the Watch Committee. those with existing Amber statuses have been reviewed by the Watch Committee already, where a decision will have been made as to the irequency oi its iunher review, When a case is presented to the Watch Committee. the case is discussed by the members present and then a plan oi action is decided on, whether it be to transier to GRG. take it the Watch or to keep it on the Watch and review the case in 3 months. The decision is iniluenced by the GRG triggers at Once a strategy is decided, it is then sanctioned by Credit. sox testing has been periormed on the management process at Specific controls around daiiy excess repons, overdue repons, early warning indicators and the A process waikthrough was periormed and the controls were deemed to have been designed, implemented and operating eiiectively, 5&0 Commercial Banking The Problem Identification (PI) team use iniormaiion irom a report produced by the Data Pack system and examine the evaluation oi triggers to make a decision as to whether the cases it has identified need to be taken to the Regional or National Watch Forum. Meanwhile the Pl team hand the cases irom the RM over to an SRM, Business Banking Business Banking cases are identified through a combination oi two systems. Problem Customer tdentincatton (FCI) is a score card system used solely ior tdentiiying high risk cases within Business Banking. it uses account characteristics such as swings in turnover or movements in the overdraii, to identity the most risky accounts Risk Band 8710 is built into the system and shows a list 0! all cases that have recently moved into the highest risk band over the course of the month The risk hands are automatically derived from back office as soon as data is inputted into based on a varier oi criteria (nature of the business, financials etc.) and the ratings are reviewed by Credit. Each month the system produces a list 0! customers that need to be reviewed by the PI Team to decide which need to he passed to the Watch Forum. The list compiles the top 3% oi the most risky files according to the PCI criteriay and all files that are newly in Risk Band 8710. Watch Forum There is a Regional Watch Forum held regionally (across areas g. South West and Scotland) every week to discuss the problematic loans. Representatives irom SRM. Credit. GRG attend the Watch Forum to ensure an unbiased opinions. in addition to that. there is a National Watch Forum that takes place every month to discuss larger loans that are llagged up with higher risks, lhis typically covers mostly commercial loans as the business loans tend lo be lower values. An example ollhe discussions held lor each loan can be seen in the minules which are produced lor each loan, at ll can be seen thal a high level at discussion takes place lor each loan and any conclusion is supponed by clear reasoning, The below tables are provided lo show the guidance provided to the Watch Forum on whether cases are suitable lor relenal lo GRG or CRM (Credil Risk Managemenu lhe lables list conditions lhat, il meL will determine the next step tor the case Guidance to sac Credit Teams tor the transler/relerral at customers to GRG and CRM The lollowmg risk descriptors are used as a guide when considering migration ol cases to the GRG and CRM. Credit Managers take into account the individual circumstances ol the case under assessment and the accompanying impact on viability prospecls risk ollailure. Mandalory Transfer greater wilh no override appropriale Need to record Stressed Loss Customer litigates againsl the Bank Accountants investigation (IBR) required insolvency or olher action against customer or mahagemehl Fraud by owner or managemenl, incl. (unless otherwise instructed by Debt has to be restructured outside ol normal senior debt paramelers 7 Note 1 Mandalory referral loldiscussion wilh GRG A Any other Bank initiated requesl lorexternal accountants involvement where PD is (a or grealer 7 Note 2 Delaull on any lunding lines with RBSG/other banks Wilhdrawal ol license/registralion elc lrorn main trading business Breakdown oi cuslomer relationship or any proposed exit stralegy Regular/signilicanl unpaid items that lhreatens the luture ollhe business Sustained losses/cash absorption that seriously compromises serviceability Fropeny investment exposure with unacceptable LTVIDSC profile 7 Note 3 2 conseculive years operating losses where customer is unable lo service borrowings Two or more conseculive (uncovered) loan arrears, A change/strengthening ol a customer's management learn at the Bank's insistence and more specifically illhere is lhe inlroduction ol interim specialists to assist the mahagemehl team. Consider referral lo CRM be viewed In comblnallan rather than individually) A For Annual Review and increase applicalions where the lalls within lhe lollowing ranges- 5 or worse 7 Risk Band 3 10 LGD 4 orworse 7 Risk Band 7 with less than PDzz/zs LGD 1 orworse 50% security cover Covenant or moniloring lormula breach Regular excesses/unpaids Adverse PD or movemenl OH or more grades in last a months lncreased hardcore (beyond say 75%) Turnover declining Arrears/staged prelerenlial creditors Other evidence at creditor arrears/pressure (paymenls in round amounts) Significant bad debt incurred Debt has to be reramonlsed/rerscheduled RBS UK Corporale Division 7 31/12/2012 period Emi- 31/12/2012 Severe cost overruns ordevelopment delays Audited or management accounts materially delayed witnout crediple explanalion Loss ot key customer or key supplier at (say 25% turnover+) Known problems wilh olher bank tunding lines investigation by Tax autnorities Protracted pannersnip I directors dispute Trireat /impediment to bank's security (lnC unpaid EFG premium) Bank suppon materially outside current sector credit policy parameters. Requirement tor extended CRH, Losses peing sustained Working capital increase declined Evidence otovenrading Inability to meet pnased reductions in overdraft and/or one loan repayment missed Notes 1 A restructure ctdept is where the terms ottne lending py tne Bank reguire In pe significantly amended as the criginal deal no longer talls witpin standard lending parameters more likely tnan not in view ottne underpertormance ottne pusiness to criginal expectations The restructured deal may involve a realignment ottne capital structure and me Bank taking an equity stake This is ditterent to a rescheduling or racilities wtiicn primarily involves tne zdluslment or tenor cr pricing put wnere tne tacility remains witnin standard lending parameters 2 LTVs are particularly volatile in current market -- CRM Will remain appropriate where passing rent net at costs remains sufficiem to cuver sustainable interest costs and alluw amortisation pack to mcre usual lending levels and management are no>> cperating However wnere LTVs are known In nave moved out peycnd asletm and tnere is no clear line at sigtit |n pring it pack to normal senior dept levels it is to engage GRG in discussicns and in tnese situaticns GRG will decide whether a transter to GRG is considered appropriate 3 Where the Bank or tile customer tias/is considering an independent accountant cr consultant "1 prepare financial intormation where' in tire apsence ct sucn peing received in me normal course at pusiness the Bank would ccnsider instructing an accountants investigaticn Orwnere tne Bank cr customer pas/is considering employing an independent consultant "1 ettect cperaticnal mange In wtiere tne M65 is is or greater Flow grams surges 6mm" raiseme time ck ,2 mm. diam. rainuewwmus i swaggasaumiaivu fi n. w: rm rams mam mu MW .im mm EMsiMlEvlewEflQuiM'yil Ingml: mummies RBS UK Corporale Divlslon a 31/12/2012 Period End- 31/12/2012 -- Com lateness and accurac 0| Watch comm CIB In order to lest tne completeness and accuracy oi tne Wat eeting was neld witn a Watch Commiltee member A meeting was held wit Senior Manager in Stralegic Ponlolio Management). Per discussion Wit a Watcn Comm lee member is appointed by --, Head ol Credit All members are senior members or slall lrorn Ponlolio Management. Credit and GRG wno nave experience is looking al distressed ponlolios it was slressed tnat tne Watcn Commiltee only decides on a slralegy. and trial any decision is sanctioned by Credit The only documenls submitted tor a case is me Prolorma mat is completed by tne relationsnip team All inlorrnation is obtained lrom RMP There is no lncenlive to manipulate tne inlormalion presented lo lne Watch. as it a case is manipulated lo look lavourable. it should appear in tne Watcn in tne first instance. Also tne cases are known by most oi tne members already so lnis will be picked up in me Walcn meeting, and it not. men Credit notice tne discrepancy, as tne cases are compared to RMP again, As tne dmerent Watcn Commiltees meel weekly. a sample size ol 3 meetings were selected as per Deloitte metnodology (see table below) This is because tne Walcn Cornrnittee nas been identified as a nigner risk. For eacn week, all me cases were obtained and tne details were agreed back to RMPS Also tne cases were compared lo tne GRG triggers lo ensure lnat tne correct action was taken, per lne triggers. There were no instances wnere an action was not in accordance witn lne GRG triggers and me conlrol was deemed to be operating etlectively, Please reler to <6511a> lor testing, )n'unvl1 u! \llun in I'H'lunluna- (mind IhehmIdH) Ilka-<> ninrit in ,ui 5&0 RBS UK Corporale Divlslon 31/12/2012 In order to gain assurance over me completeness and accuracy or the Walcn Forum, a meeting was held wiln Gemma Trimble (Regional Business Manager in Specialised Relationsnip Management) Fer tnis meeling' there are two types or Watch Forum- Regional and Nationaly neld weekly and respectively. The Regional Forum discussions tend to relale to Business clienls witn typically lower balances while the National Forum discussions cenlre around Commercial Banking clients. Tne Watch Commitlee is made up or senior members or stall lrom Specialised Relalionsnip Managemenl, and GRG and CRM representatives so lnat input lrom all sides can be heard. As tne Walcn Commitlees meet weekly and mommy, a sample size or a and 3 meetings were selecled as per Deloitle methodology (see table used above) lor the Regional and National Forums, respectively. For each meeling, the SRM Watch papers were oblained lor all the cases and the delails were agreed back to RMPs, The cases were also compared to the GRG triggers to ensure tnat tne correcl aclion was taken, There were no instances where an action was not in accordance witn tne GRG triggers and tne control was deemed to be operaling efleclively. Piease reler ic lor lesting, "Implications ol FSA letter for provisions risk management and capital" in common With their peers. RBS received a letler lrom the FSA in December 2012 wnicn set out i) wnere tne FSA pelieves tnat current economic conditions may nol be rellecled in current provisioning practices, and ii) practices which tne FSA pelieves would he currently appropriale The FSA's aim is to ensure that the guidance, which is efleclively the FSA's inlerprelalion or IAS 39, is applied in the Group's 2012 financiai slalements, We have reviewed triggers in lirle with this letter below, Summary Bdec (sec cu; (sec anidancc append" 4i Si Loan forbearance Some forms of 'icc CIB eiimments Some forms of ithin both CH3 and should be a umed furbcarancc sueh torbearanee sueh the to be a lo as a restructuring as a restructuring unless sutticient senior of normal senior iutside standard to the debt parameters debi parameters end parameters contrary \Hii lead to a will lead to a cqu a mandatory mandatory mandatory ranster to (ERG Iramfcr to (iR(i_ transt'er to (ERG other forms such others such as an This is likely to oecur as LTV breaches iir ue to the \Hii lead to a cmcnanr breach nderpertormance of consultation lead in a he business to mu; and other mandatory iriginai cm enani breaches referral to (nu; rid therefore should \Hii lead to a nclude a number of referral to CRM orbearance measures uch as changing the erm orthe loan' epay ment amounts tc Judgments as in No specirie 'icc CIB eiimments No There are defined whether a loss guidance noted on guldancc noted on riicesses to update event has oecurred the current the current qucsunns as part shunld take into eeoniimic eeiiniimic iflhc Annual Revlcw account the market conditions but it is conditions but it riicess and economic noted that ita is noted that Iffl 01M ithsianding that conditions stressed loss is to stressed loss is in {the RM be recorded then be recorded then eneral intormation need in transfer to need to Iramfcr to eiinomicr industry mu; istress loss (ERG istress loss pecitic and or RBS UK Corporate Division 7 31/12/2012 period Eia- airizrzoiz -- IS a pmx) for a hor:r ea5e 105:) lfa 105wor:r ea5e 105:) .fo105: was cxpcucd 11 onrhh Ml/ annual rhere IS a pdare rhe 115k ralmg ne:r10n5 Thl> led b3 e0n:.dered lrkeh be reeorded he \mlch mdlcatc an rhen need In forecau slugs 01' rran:l'er 10 (ERG meer nnaneral dl5rre:5 (5rre, lo:5 .: a and eurrenr pmx) for a wont crfiumancc are horn ca:e lo:5l onnored no 105: ha5 cxpcucd 1r all loan: \muld he hor are grcatcr rhon 0 da) 1n arrear5 are for ol1eerneh lfnot or ndmduolh L05: ofo kc) N0 5peclrle 15 nor N0 specific hr: 15 a 5pecme renanr fur CR1: guldancc on lo:5 c\ 1cwcd guldancc on lo55 o55 c\cnl/ mandatory IS hheh ro he deemed a 1055 nanrenlorh lfa 0r hu:.ne:5 5eeror subject 10 nnaneral 5rre:5 01' key renanr5 bur 1r 1: nored rhor ll'a :rre55ed 105: 15 10 he recorded rhen need In ro mu; l5rre5: 10:5 15 a pmx) for a hor:r ea5e lo55) lfa 105: eparareh 1n 1322c Therefore rhere are 0 tuggch 5neemc rhe lnduslr) nka renanr5 bur r: nored lhal lfa 5rre:5ed 105: 15m he recorded rhen need ro rran:l'er ro (ERG l:rre5: 1055 15 a prom for a w0r:r ea5e 105:) ran:ler 10 (um rhe Real E:rare 'lnance (RE )5eeror l-lohexer or aerua1 mcnant hreaehe: men by a ererroranon ln radlnd renrol RBS UK Corporale Div1s10n 5 31/12/2012 Penod End' 31/12/2012 has ncome requires \muld he eterral to (nu; This rransterred ro derermined hi rhe (nu; or Borrouers needing No specific ehr has ro he No specific ehr tor rcfmancc CRE guldancc on estruotured guldancc on v; areh Amher/ Red uposulcs the refinancng or iuiside otnormal or asc' In particular shorr to medium CR1: cxposulcs emor deht CR1: cxposulcs rhere are rerm hut ean nor hur ii ls noted rhar aramerers is hur ii ls noted rhar eemed to he ohiain financng ar rta srressed loss ls cqullcd ro he [fa srressed loss oremial/ actual a markcl rate ro he reeorded ransterred is to he recorded rediior eonlliers should umally he rhen need ro nu; rhen need ro drseussrons deemed ro he a lo iranster to (nu; rranster to (nu; rhe crednors/ lsrress loss is a loss is a hen adusors) pmx) for a worst film) for a worst cqullcs a mandarori case lossl case lossl ransler to (nu; A Ifa loss Ifa loss estruoiure ol deht is has was where rhe rerms otthe \muld he would he ending hi the Bank rransterred ro rransterred ro re lcqulrcd to he (nu; (nu; Ignlficanll) amended rhe original deal no ongcr falls \mhln ormal lending rnerra more han nor ten of he underperlormance ifth husrness iriginal he resrruerured deal a) involve a otihe aprral structure a hange of or rhe nrroduenon ot nrerim specialists to ugmcm This is illerenr a "manly .molvesrhe or but where the acrlin remains normal lending We believe that the FSA's interpretation oi IAS 39 ii iully implemented in RES would result in an earlier idenliflcaliorl oi loan losses on a relatively small number oi individual loans when compared to RES's current provisioning practices We also believe that would be the case ior rnost oi RBS's UK listed peers as illustrated in me diagram below (ml to scale 7 tor illustrative purposes only). Please note that this diagram only seeks to represent a comparative assessmenl ior lndividuallyrassessed provisions, lhe eflecl oi additional lalem provisioning is discussed below. RBS UK Corporale Divlslon 7 31/12/2012 Pencd End. 31/12/2012 Earlier Timing of recognition of individual loan loss larer -- mm reunions". reunions" manhunt more is; 37 at Domain>> of us amusing mm roman umnv oi its 39ir) 5&0 Watch Commiltees' as documented earlier in lhis memo. can be split into two calegories 7 Regional and National, meeting weekly and mommy respectively. A sample ol 3 Regional and 3 National meelings was selected, tor which we obtained each unique case thal was discussed (as at Each olthese cases across CIE and 3&0 was tested using lhe same procedures, every case has been reviewed against lhe GRG Relerral and Transler Triggers to ensure lhat the correct action was taken The decision has been recorded wilh a briel explanalion as lo why lhis was lhe correcl step considering lhe specific case details A search on RMPS was periormed tor each case lo ensure thal the PD was nol above 24 lhis is the threshold at which cases should be aulomatically translerred lo GRG To gain assurance over lhe competency oi the Walch Commitlees we have reviewed the atlendees oi the meelings. From lhis we can confirm that all members roles are within GRG and Credit: this means lhat lhey will have been given specific training aboul how to deal with dimcult cases. as well as have the experience in this area through lheir general roles and previous Watch Committee attendance, rigs and Conclu us We are comlonabie Ihat ail cases that should be Iransferred Io GRG have been translerred We are also comiorlable around the compieleness and accuracy oi the information provided lo the Walcn Commitleev as well as lhe competence loe Watch Committee, Satisfactory, RBS UK Corporale Division 7 31/12/2012 period End' suizizoiz