Annual Report 2017

Rothschild & Co | Annual Report 2017

1. Overview

4. Financial statements

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.