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Rothschild & Co | Annual Report 2017
69
1. Overview
4. Financial statements
3.
Management report
2. Business review
In addition, following the legal and economic reorganisation of the
Rothschild & Co and Martin Maurel groups (as described in paragraph 4.1
of the Results for the 2017 Financial Year Section – see details on page 51),
a Group Credit team has been created by the Group Executive Committee.
This Group Credit team is responsible for the monitoring of the overall level
of credit exposure across the Group, formalising the credit support that is
given in relation to private client and corporate lending exposures, and
reviews Treasury counterparty credit risk. The Group Credit team works
closely with the embedded credit staff in Rothschild Bank AG, Rothschild
Bank International Limited and Rothschild Martin Maurel SCS and provides
a first line of defence in terms of its monitoring of the type and quantum of
the overall lending activity and challenge at the various credit committees.
Group Risk will continue to provide further oversight and reporting of
lending exposure against limits to the Group Executive Committee and
Risk committees.
4.1.1 Governance of credit risk
The Group Credit Committee (“GCC”) oversees all lending in the Group
through three sub-Committees – the Private Client Credit Committee
(“PCCC”), the Group Credit Committee – France (“GCCF”) and the
Corporate Credit Committee (“CCC”).
The PCCC is responsible for the oversight of private client lending
exposures (including credit risk and pricing of loans) in Group entities
outside France and will review Private Client Lending which is on the
balance sheets of the following lending entities: Rothschild Bank AG,
Rothschild Bank International Limited and Rothschild Wealth Management
(UK) Limited (together the “Private Wealth Lending Entities”). The Private
Client Lending policies and associated delegated approval authorities will
be confirmed by the relevant board (or board committee as appropriate)
of each of the Private Wealth Lending Entities.
The GCCF is responsible for the oversight of private client lending exposures
and corporate lending exposures (including credit risk and pricing of loans)
by Rothschild Martin Maurel (the “French Banking Entity”). The lending
policies and associated delegated approval authorities are confirmed by
the relevant board (or board committee as appropriate) of the French
Banking Entity.
The lending exposures assumed and the credit policies followed within the
Group are subject to the oversight of the Rothschild & Co Risk Committee.
The PCCC and GCCF will review the level of risk assumed in respect of
lending to ensure it is consistent with the risk appetite of the Group and in
accordance with the Group Credit Risk Policy. Any material changes to the
lending policies will be reviewed by the Group Executive Committee and the
Group Assets and Liabilities Committee (“Group ALCO”) and will be reported
to the Rothschild & Co Risk Committee.
The CCC is responsible for the oversight of corporate lending exposures
(including credit risk and pricing of loans) by Group entities (excluding
lending to clients by the French Banking Entity), including the NM Rothschild
& Sons Ltd corporate loan book, the CreditSelect Series 4 mortgages, the
Group’s bank counterparty limits and other counterparty limits and lending
to Group companies/investments in Group funds.
The CCC is also responsible for reviewing staff loans.
The CCC is not responsible for loans/investments made by funds managed
by Rothschild Merchant Banking or Real Estate Debt Management or other
funds managed by the Group since each fund managed by the Group has
its own separate investment committee. However the CCC is responsible for
any co-investment in, or any direct credit exposure to individual Rothschild
Merchant Banking transactions.
4.1.2 Approach to credit risk
The Group has Credit Risk and Large Exposure policies which are reviewed
by the Managing Partner and the Risk Committee. In conjunction with the
Group’s Risk Appetite Statement the policies set out the credit risk appetite
of the Group, the limits that have been set and establish reporting protocols.
All exposure to credit risk is managed by detailed analysis of client and
counterparty creditworthiness prior to entering into an exposure, and by
continued monitoring thereafter. A significant proportion of the Group’s
lending exposures are secured on property or assets; the Group monitors
the value of any collateral obtained. The Group also uses netting
agreements to restrict credit exposure to counterparties. For internal
monitoring purposes, credit exposure on loans and debt securities is
measured as the principal amount outstanding plus accrued interest.
Stress testing is an important risk management tool used to evaluate,
gain an understanding of the impact of unexpected or extreme events
and to validate the firm’s risk appetite. Each Banking Entity is required to
set out in its credit risk policy its approach to stress testing and whether
it is considered appropriate to the entity’s risk management.
4.1.3 Settlement risk
Settlement risk arises in circumstances where a counterparty does not
deliver a security or its value in cash as agreed when the security was
traded after the other counterparty has already delivered a security or
cash value. Within the Group, settlement risk can arise when conducting
derivatives transactions and also though the sale and purchase of
securities. There are a number of mitigants available to ensure that
such risks are minimised and managed appropriately.