ANNUAL REPORT & ACCOUNTS - Coventry Building Society

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RISK MANAGEMENT REPORT(continued)Financial crimeFinancial crime is managed by the Society’s experiencedFinancial Crime team which is part of the risk managementfunction, reporting directly to the Chief Risk Officer andoverseen by the Society’s Compliance and Financial CrimeCommittee.This reflects the Society’s focus on Financial Crime as aseparate discipline with dedicated expertise to respondprofessionally to the evolving and substantial threat to thesecurity and the safe operation of all financial institutions.Given the rapidly growing developments in technology, cybercrimeand communication and social media, the Societypays close attention to the source, likelihood and impactof financial crime generally and the various ways in whichthis could manifest itself. As such, the Society continuesto increase investment in resourcing its Financial Crimeteam and its monitoring and control systems to preventincreasingly sophisticated criminal attacks.Security and safetyThe Society has a duty of care to its staff, members andvisitors whilst present on Society premises. The Societyhas in place comprehensive health and safety polices anda compliance regime which includes internal and externalinspection. This work is overseen by the Security and SafetyCommittee which is chaired by an executive director andreports to the Operational Risk Committee, RMC and Boardeach month.Business continuityThe Society has developed Business Continuity Plans tomanage situations in which buildings, systems or significantstaff are unavailable, for example in the event of a flupandemic or the loss of utilities. The Society’s BusinessContinuity Plan is overseen by the Business ContinuityCommittee which reports into the Operational RiskCommittee and is subject to regular testing.Business riskBusiness risk encompasses those aspects of the externalenvironment that have the potential to affect the Society’sbusiness model. This is particularly relevant in the contextof the multiple major regulatory initiatives currently beingproposed or implemented, including those covering theFSA’s move towards its twin peaks regime, the Basel IIIdriven capital and liquidity requirements which will formthe basis of the capital requirements regulation and capitalrequirements directive, banking reforms following a turbulentyear of operational events for the major UK banks, andproposed alignment of Building Society legislation with theoutcomes from the Vickers report. The Society has investedin additional expertise in its compliance and business changeareas to manage the implementation of any new initiatives.CapitalThe primary purpose of capital is to absorb any losses thatmight arise from credit losses on lending, trading losses dueto pressure on net interest income or expenses and lossesfrom other adverse events such as operational incidents. TheBoard determines the level of capital required to support theSociety’s business objectives through undertaking an annualInternal Capital Adequacy Assessment Process (ICAAP)as part of the development of the Corporate Plan. In thisprocess the Society reviews its risk management framework,together with the financial projections developed for theCorporate Plan, in order to assess the significant risks towhich it is exposed, the adequacy of its risk management,and the capital resources it needs to support the riskexposures over the planning horizon.An allocation of capital is made for each of the following risksfacing the Society:• Credit risk from mortgages and other retail lending• Credit risk from liquidity and derivatives• Operational risk• Concentration risk• Interest rate risk• Pension obligation risk.This allocation is based on regulatory requirements for creditrisk and operational risk (Pillar 1) with additional allocationsto reflect the degree of residual risk that remains afterallowing for the effect of the risk controls operated by theSociety (Pillar 2A).This initial level of capital allocation is based on a ‘pointin time’ assessment from the ICAAP date (30 September).A further capital allocation is made (Pillar 2B) which is a‘capital planning buffer’ giving assurance that the Society canmeet capital requirements under stressed conditions. Thecalculation of the capital planning buffer is a forward lookingprocess and examines the Society’s business plans in detail,and subjects them to economic and operational stress testsover a five year planning horizon. The severity and durationof the stress scenarios used is determined by the Societywith reference to the ‘anchor stress scenarios’ published bythe FSA. In particular the Society will incorporate secondorder effects of the stress scenarios including the likelihoodof the spread between mortgage rates and Base Ratebeing compressed if interest rates rise significantly fromtheir current level. This stress testing enables the Society34
to estimate the magnitude of losses that may be incurred,determine the impact of these losses on the stock of capitalavailable to the Society, and compare this with the additionalcapital requirements that may be needed in a stressedenvironment.The impact of the stress testing described above is comparedwith the ability of the Society to react to stressed conditionsby modifying its business plans. The Society retains theability to control the rate of asset growth and therefore hasthe flexibility necessary to react to stressed conditions byreducing the overall capital requirement, and so maintainadequate capitalisation. Furthermore, the Society maintainsa significant proportion of the mortgages and retail savingson the balance sheet at administered interest rates. Thisprovides the Society with the option of rebasing the interestmargin if necessary in order to maintain an adequate level ofcapital generation. The capital planning buffer is set havingregard to both the impact of the stress tests and the abilityof the Society to undertake a credible scale of managementaction in response to the stress scenarios.RISK MANAGEMENTREPORTThe ICAAP is used by the FSA in its Supervisory Reviewand Evaluation Process (SREP) through which it sets theGroup’s capital requirements, expressed as Individual CapitalGuidance (ICG). The ICG directly incorporates the Basel IItransitional floor being either the higher of the floor or thescaled Pillar 1 requirement. The FSA adds a capital planningbuffer to the ICG to ensure that the requirements may be metthroughout the planning horizon.The ICAAP is reviewed by the Board Risk Committee beforesubmission to the Board for formal approval as part of thecorporate planning process. The Society’s internal auditfunction reviews the accuracy and consistency of the financialinformation included within the ICAAP document.Capital levels for the Group are reported to and monitoredby the Board on a monthly basis. The Group continues to bestrongly capitalised and maintains its capital substantiallyabove its regulatory requirements. The Group’s core tier 1capital ratio is the highest reported by any top 10 buildingsociety or mutual lender and the Board believes this reflectsthe low risk profile of the Society’s assets.Further information on capital is available within theDirectors’ Report (see pages 15 to 18).Further details of risk exposures are available in ourPillar 3 Disclosures on the Society’s website:thecoventry.co.uk/pillar335
Page 2: CONTENTS1 Performance Highlights2 C
Page 9 and 10: Wholesale fundingWholesale funding,
Page 11 and 12: Putting Members FirstIn presenting
Page 13 and 14: These findings are supported by ind
Page 15 and 16: DIRECTORS’ REPORTBusiness objecti
Page 17 and 18: Group accountsThe Accounts show the
Page 19 and 20: Impact of Basel IIIIn July 2011, th
Page 21 and 22: Liquidity and fundingLiquidity reso
Page 24 and 25: DIRECTORS’ REPORT(continued)Princ
Page 26 and 27: CORPORATE RESPONSIBILITY REPORT(con
Page 28 and 29: RISK MANAGEMENT REPORT(continued)Go
Page 30 and 31: RISK MANAGEMENT REPORT(continued)in
Page 32 and 33: RISK MANAGEMENT REPORT(continued)ba
Page 35: The ILAA is reviewed by the FSA thr
Page 39 and 40: John Lowe (40)John Lowe joined the
Page 41 and 42: • directors receive accurate, tim
Page 43 and 44: The directors retiring by rotation
Page 46 and 47: DIRECTORS’ REPORT ON CORPORATE GO
Page 48 and 49: DIRECTORS’ REMUNERATION REPORT•
Page 50 and 51: DIRECTORS’ REMUNERATION REPORT(co
Page 56 and 57: INDEPENDENT AUDITORS’ REPORTIndep
Page 58 and 59: INCOME STATEMENTSfor the year ended
Page 60 and 61: STATEMENTS OF CHANGES IN MEMBERS’
Page 62 and 63: NOTES TO THE ACCOUNTS1. Accounting
Page 64 and 65: NOTES TO THE ACCOUNTS(continued)1.
Page 82: NOTES TO THE ACCOUNTS(continued)15.
Page 85 and 86: 19. Loans and advances to customers
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22. Property, plant and equipmentLa
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25. SharesGroup Society Group Socie
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30. Derivative financial instrument
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31. Other liabilitiesOther liabilit
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NOTES TO THE ACCOUNTS(continued)38.
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ANNUAL BUSINESS STATEMENT(continued
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ANNUAL BUSINESS STATEMENT(continued
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GLOSSARYThe following glossary defi
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Indexed LTV (Loan to Value)Individu
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Residential mortgagebacked securiti
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ANNUAL REPORT & ACCOUNTS - Coventry Building Society

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