Capital Requirements Directive Capital Re Marsden Building Society

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					Pillar 3 Disclosure - 31 December 2011




MARSDEN BUIL DING SO CI ETY



Ris k Pro file D is c los ur e



P illar 3 – Ca pita l Re qu irem en ts Dire c t ive
Pillar 3 Disclosure - 31 December 2011


CONTENTS

1.   In tr od u c t io n

2.   S tr uc tu r e O r g an is a tion o f R is k M an ag e men t

3.   R is k M an ag e men t O b je c ti v es an d P ol ici es

4.   C ap ita l R es ou r c es

5.   C ap ita l Ad eq u ac y

6.   C r ed it R is k

7.   In t eres t Ra t e R is k

8.   R em u n er a t i on P oli c ie s an d Pr a c t ic es

9.   C on ta c ts




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1.        INTRODUCTION

Background

Th e C ap i ta l R equ ire m en ts D ir e c t iv e ( C R D) go v er n s th e a m ou n t o f c ap i t al a ll b an k s an d
bu i ld in g s oc i e ties mu st h o ld t o p r o te c t t he in ter e s ts of m em ber s, dep os it or s an d
shar eh o ld er s. Th e fr a mew or k w a s in tr odu ce d b y t h e Eu r op ean Un i on a t th e b eg in n in g o f
20 0 7 an d i s im p le m en t ed in th e UK b y th e F in an c ial Ser v ic es A u th or it y (F S A) .

Mar s den Bu i ld in g S oc ie t y h as a c lear ob li ga t i on t o en su r e t h a t th e s a vin gs o f me m b er s ar e
pr ot e c ted b y a s u f f ic i e n t am ou n t o f c ap i ta l fo r th e p r e v a il in g e c ono m ic con d it i on s . In t er na l
sy s te m s an d m od els h a ve b een cr e a te d t o pr ed ic t p ot en t ia l l oss es w h ich ma y ar is e d u r in g
a r ece ss i on fr om b oth m or t ga g e len d in g and op er a ti on al r is ks .

Th e C a p it a l R eq u ir e me n t s Dir ec t i ve c on s is ts of th re e ‘ P il lar s’ de t a iled in th e ta b le b e low .


CAPITAL REQU IREMENTS DIRECTIVE

PILLAR 1                                      PILLAR 2                                      PILLAR 3

M in i mu m                     C ap ita l    Su p er v is or y R ev i ew Pr oces s         D isc l os ur e
R equ ir em en t s


Th e P il lar 1 as se ss m en t i s a r i s k ba sed ca lcu l a tion w ith a p ar t ic u lar em ph a si s on cr ed it an d
op er a tion al r i s ks .

P il l ar 2 r eq u ir e s t h e So c ie t y t o u nd er t a k e an In t er na l C ap it al Ad e qu a c y A ss es s me n t
Pr o ce ss ( IC A AP ) w h i c h in v o l ve s th e ca lcu la t io n of ad d iti on a l cap i t al req u ir e m en ts ab o v e
P il l ar 1, f oll ow in g a d e ta iled c on s id er a t ion o f a l l the r is ks t o w h ich th e S oc i e t y m a y b e
ex p os ed . Th e F S A u n d er t a ke a su p er v is or y re v iew an d e v a lu a t ion p r oc ess on th e S oc i e t y
IC A A P a n d pr o vid e in di v idu al c ap i ta l gu id an ce on m in i mu m r e q uir em en ts ab ov e P ill ar 1.

Th is d ocu m en t rep r es en ts th e P i llar 3 d is closu r e in c om p lian ce w i th th e r equ ir em en ts o f
B IP R U C h ap ter 11 w it h in th e FS A H and b oo k . Th e d is cl os ur es m ad e r e fl e c t th e d i sc losu r e
po li c y o f t h e B oar d in r es p ec t o f th e con s id er a t ion s of m a t er ial it y and c on fid en t ia l it y as
per m i t te d b y B IP R U 11.

Th is d i sc losu r e d ocu m en t a pp l ies on l y t o Mar s d en B u i ld in g S ocie t y F S A N u m b er F R N
20 6 05 0 . A l l f i gu res w i th in th is d o cu m en t ar e c or rec t a s a t 3 1 D e c e m b e r 2 0 1 1 un le ss
oth er w is e s t a te d. F u tu r e d i sc losu r e s w il l b e is s ued on an a n n u a l b as is an d p ub lish ed as
soon as p r a ct ic ab le a f t er th e p u b l ic a t ion o f th e A nn u a l R epor t & A cc oun ts .

Sc ope of Application of Directive Requirements

Th e Dir e ct iv e ap p l i es t o M ar sden Bu ild in g S oci e t y.

Locati on and Verification

Th e se d is cl osu r e s h av e b e en r ev iew ed b y th e S o cie t y ’ s B oar d and ar e p u b l ish ed on th e
S oc ie t y W eb sit e ( w ww . th e m ar sd en .c o.u k) . Th es e d is cl o su res ar e n o t su b jec t to ex t er na l
au d it ex cep t w h er e th e y ar e eq u iv a le n t t o th os e pr e p ar ed u nd er a c cou n t in g r e qu ir em en t s
f or in c lu s i on w i th in th e An n u a l A cc ou n t s.




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2.       STRUCTU RE AND ORGANISATION OF RISK MANAGEMENT

Th e Bo ar d r e t ain s u l tim at e r es p on s ib i li ty for en su r in g th a t th e S o ci et y op er a t es w i th in a
fr a me w or k of pr u d en t an d ef f e ct iv e con tr o ls wh i ch ena b l es r is k t o b e as s ess ed an d
man aged . Th e S oc ie ty h as a d o cu m en t ed f r am ew or k for th e m a n ag e men t o f r is k. Th e
B oar d Ri s k A p p e t i te is d ocu m en ted w ith in in d i v id u a l r is k m an a gem en t po l ic y s t a te m en ts .
Man age m en t w ith in ea ch bu s in es s ar e a h as d a y t o d a y r e sp on s ib i li t y f or t h e mo n it or in g o f
ris k w i th in th e fr a mew o rk and p ol ici es s e t b y t h e B oar d .

Th e r is k f r am ew or k i ncl u de s a n u mb er of co m m it t e es w h ich h a ve r is k m an ag e men t
resp o n s ib ili t ie s i nc lu d i n g th e B oar d Au d i t, R is k an d C o mp l ian c e C om m it t ee , t h e B oar d
As se t s an d L iab il it i es C om m i t te e , t h e R is k M an a ge m en t C om m i t te e an d th e Sen ior
Man age m en t T ea m . O v er si gh t o f th e r is k man a ge m en t f ra m ew or k is p er f or m ed by th e
B oar d w h ich r ec e ive s t he m in u te s o f e ach of t h es e com m it t ee m ee t in gs .

An o v er v ie w o f th e R is k M an ag e men t S tr u c tu r e is d e ta iled b el ow :

                                                             Board




     Board Assets &                 Audit,Risk &
       Liabilities                  Compliance
       Commi ttee                    Commi ttee
           ALCO)
        (B ALCO)                          ARCC
                                       (B ARCC )


                                                       Risk Management
                                                       Committee (RMC)




                                                       Senior Management
                                                       Team (SMT)




Th e B oar d is co m m i t te d t o th e con t in u ed d ev elop m en t o f th e R i s k M an a g em en t Fr a m ew or k
co m m en su ra t e w i th th e na tu r e , sc a le a nd co m p lex i t y o f th e S oc i et y ’ s b us in ess .

Th e R i s k M a n a g e m e n t C o m m i t t e e m ee t s q u art er l y an d c on s id er s rep or ts on k e y bu s in e s s
ris k ar ea s, cur r en tl y m or t gag e cr ed i t an d c on cen tr a t ion ri s k an d op er a t ion a l r is k ( in c lu d in g
regu lat or y ris k ). M an a ge m en t In for ma t i on o n M or t g age C r ed i t an d C on cen tr a tion R is k
in c lu d es th e P r of ile of N ew L en d in g, A n a l ys is of the M or t ga g e B oo k t o In de xed V a lu a t ion s ,
H ou s e Pr i ce In d ic es, A rr ear s P erf or m an ce , E x p osu r e L im its , G e ogr a ph i c C o n c en tr at ion an d
Lar g e E xp osu r e s. R ep or t s on R i s k M an ag e m en t i n c lu d e a R is k M a n ag e men t Up d a te , R is k
Pr o f ile S u m m ar y , Op er a tion al L os s Da ta an d Ex tr a c t R is k R e gis ter s. Th e C om m it te e a lso
con s ider s th e s ta tu s o f ac t i on s fr o m pr e vi ous in ter n a l au di t s. T h e C o mm it t ee is a lso
resp o n s ib le for m on it or in g IC A A P s ign if ica n t r is k s, r ec e iv in g r ela ted s tr e ss te s ts and
sc en ar io an a ly s es an d ma k in g r ec om m en d at io n s t o th e B o ard on ch an g es t o th e IC A A P as
ap p r op r iat e. Th e c om p os i t ion of th e C om m i t t ee a t 3 1 Dec em b er 2 0 11 w as f i v e me mb er s o f
Se n ior Man a ge m en t an d tw o N on- e xe cu t ive Di r ec tors in a t te n dan c e.




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Th e S e n i o r M a n a g e m e n t T e a m m ee t s m on th ly . In re sp ec t of cr ed it an d c on c en tr a t i on r i s k
th e C o m mi t t e e c on s id e r s r eco m men d at i on s o n th e an n u a l an d in t er i m h a lf y ear l y r e v iew of
th e cr ed i t r is k m an a ge m en t p o li c y. Ar r ear s p er f or m an c e i s mo n it or ed m on th ly . Th e
C om m it t ee a ls o con s id er s app li c a tion s for cr ed it w i th in th e m an d a te s e t b y th e B oar d
pr in cip all y r e la ti n g t o n on - r e sid en t ia l app lic a t ion s . Th e co m p os i t ion of t he C o m m it t ee a s a t
31 De ce mb er 20 11 w as f iv e m em ber s of t h e S en ior M ana g em en t Tea m an d on e N on -
ex ecu t i v e Dir ec t or i n at t en d a n c e.

Th e B o a r d A u d i t , R i s k a n d C o m p l i a n c e C o m m i t t e e me e ts a t l ea s t f ou r t im es p er an n u m
an d con s id er s al l ma t t er s r e la t in g t o In t er n a l C on tr o l an d R is k M an ag em en t S y s te ms an d
R egu l a tor y C om p l ian c e . The C o m m i t te e r e ce iv es r e gu lar u pd a t es fr o m ou ts ou r c ed In t er na l
Au d i t, C om p l ian ce an d R is k M an a gem en t F u nc ti on s an d E x tern al A ud i t . Th e com p os i t ion
of th e c o mm i t t ee as a t 3 1 D ec em b er 2 011 w as t w o N on- ex e cu tiv e Dir e c tor s w i th fou r
me mb er s of t h e S en ior M an ag e men t T eam in a t ten d an ce .

Th e B o a r d A s s e t s a n d L i a b i l i t i e s C o m m i t t e e me e ts m on th ly an d c ons id er s all ma t t er s
rel a tin g t o th e E con o m ic En vir on m en t an d In t er es t R a te V iew , C ou n t er par t y C r ed i t R i s k ,
Liq u id it y R is k , In ter e st Ra t e R is k (i n c l. S tr u c tu ra l R is k ) an d Pr od uc t P r ic in g an d
De v elop me n t. Th e c om pos i t io n of t h e C om m i t t ee a t 31 De ce mb er 2 011 w as tw o Ex ec u ti v e
Dir e c t or s an d t wo N on - ex ec u tiv e Dir ect or s w ith th e r es t o f th e Se n i or Man a ge m en t in
at t en d an ce .




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3.        RISK MANAGEMENT OBJECTIVES AND POLICIES

Mar s den Bu i ld ing S o ci et y op er a t es a c or e b u sin es s o f t a k in g r e ta i l d ep os i ts an d le n di n g o n
mor t ga g e s ecur e d pr i mar ily on re s id en t i al p r oper t y . The se p r od u c t s gi ve r is e t o a f in an c ial
as s e t or liab ilit y an d ar e c oll ec t iv el y t er m ed fin an c ial in s tr u m en ts . A d d it i ona l ly , th e S oci e t y
use s w ho l es ale f in an c ial ins tr u m en ts t o in v e st in liq u id a ss e t ba l a n ce s an d r a i se a s m a ll
am oun t of w h ole sa le fu n d in g.            Th es e tr an s ac t ion s en ab le th e S oc ie t y to m an ag e th e
in ter es t r a te r is ks ari s i ng f ro m it s op er at ion s.

Th e m at er i a l ris k s t o t h e S oci e t y’ s op er at i on are id en t ifi ed a s bu s i n es s r is k , cr ed i t r i s k,
mar k e t r is k ( in c lu d in g in ter es t r a te ri s k) , l iq u id it y r is k , op era t ion al r i sk , c on c en tr a t ion r is k
an d p en s io n ob lig at ion ris k. A su m m ar y o f e a ch r is k an d th e p r oce s ses in p l ac e t o m an a g e
th em ar e su m m ar i sed b e low .

Business Risk

Bu s in es s r is k is th e r is k th a t t h e S oci e t y m ay n o t be ab le t o car r y o u t it s Bu s in es s P lan or
its d e sir ed s tr a te gy an d cou ld ma k e a tr a din g lo ss . The b u s in es s o f th e S oci e t y is f ocu s e d
ex clu s iv e ly on the U n i te d K in gd o m an d p r in c ip al ly th e p r op er t y mar k e t. The m acr o
ec on om i c en vir on m en t in th e UK h as a m a ter ia l im p ac t on th e su cc es s o f th e S o cie t y, th e
k ey dr i ver s a f fe c t in g t h e S oci e t y b ein g In t er es t Ra t es ( Ban k R a te an d 3 m on th L IB O R ) ,
Une m p lo y m en t an d th e H ou s in g Mar k e t ( H ou s e p r ic es an d th e nu m b er of tr an sa c t io n s) . Th e
cor e r e t ail s av in gs an d mor t ga ge bu s in e ss f ac es ch a l len ges f ro m ad ap t in g t o th e n ew
ec on om i c en vir on m en t o f lo w in ter e s t r a t es t hr ou gh a r e du c t i on in t h e n e t in ter e s t m ar gin .
Th e r equ ir e men t for b a n k s an d lar g er f in an c ia l in s t i tu t ion s t o r ed u c e wh o les al e fu n d in g an d
t ar ge t r e t ai l f u nd ing t o r ep la ce it h as, a n d w i ll c on t inu e t o in cr eas e r e t ail fu n d in g c o s ts.
Low er h ou s in g mar ke t ac t iv i t y to get h er w ith t h e ov er a l l f u n d in g po si t io n r ed u ce s m or tga ge
ac t i v i t y w i th a con se q u en t imp a c t on n on in t er es t in co m e th r ou gh r ed u c ed pr od u c t f ee s .
In cr eas in g u n e mp lo y m en t h a s the p ot en t ia l t o in cr e as e ar r e ar s le v e ls w h i ch in c on ju n c t ion
wi th t h e flu c tu a ti on in hou s e p r ic es u l t im at el y g i ve s r is e t o p r o vis ion in g ch ar ge s.

Th e pr in c ip a l r is k t o t h e So c ie t y i s th e con t in u a tion of t h e l ow in t er es t r a t e en v ir on men t in
t er m s of b o th b an k b as e ra t e an d m ar ke t r at es w h ich i s p l ac in g p r es su r e on the n e t
in ter es t r a t e mar gin . Th is h as ar i sen b ecau se th e r e la t i ons h ip b e t ween m ar k e t r a t es an d
S oc ie t y fu n d in g c o s ts h as d i ver ged . Th is p os i t ion w ill grad u a ll y im pr o v e as m ort g ag es
rep r ice an d in ter e s t r a t e sw ap s ex p ir e. W hi l s t hou s e p r ice s r em ain w el l be l ow th e p eak an d
un e mp l oy men t h a s r i s en , m or t g age ass e ts c on t in u e t o p er for m s tr on g ly w ith p r o vi s ion in g
req u ir e m en ts cu r r en t ly con f in ed t o a s m a ll n u m b er o f l on g s tan d in g co m mer ci al l oan s.

Th e S oc ie t y, in c om m on w i t h a ll dep os it t a k er s , is r eq u ir e d t o con tr ib u te t o th e F in an c ial
Ser v ices C o mp en sa t io n Sch e me . A n u mb er o f c lai m s h a v e b een m a d e a ga in s t t he F SC S in
rel a tion to th e f ailu r e o f d ep os i t ta k er s w ith th e p oten t i al f or fu r t h er cal ls to b e m ad e .
Wh i ls t th e So c ie t y co n t in u es t o ma k e pr o v is ion for p a y men t o f i ts sh ar e o f in ter es t on th e
sum s b or r ow ed fr o m F SC S it r e ma in s e xp os ed t o v ar ia t ion s in t h e bas i s f or a ll o ca t i on o f
le v i es a cros s d ep os i t t a ker s , th e ra te o f in t er es t ch ar g ed on its sh ar e o f th e l oan an d
co m p en s a t ion l e vi es f or rep a y men t of th e c ap ita l su m b or r ow ed , pl ac in g f ur th er pr ess u r e
on p r of it ab ili t y .

Th e s tr on g cap i t al b a se o f th e S oc ie t y m e an s tha t a su s t ain ed p er i od of be l ow a v er a g e
pr of i t ab ili t y t o add r e ss t h es e issu es c an b e ac co m m oda t ed . Th is w ill m in im is e im p a c t o n
th e f ran ch is e w h i ls t c on d i ti on s p er s is t an d se cu r e a l on g t er m f u t ur e for th e b en e f i t o f
me mb er s.

Credit risk

Th e S oc ie t y is ex p o se d to th e po t en tia l r is k th a t a cu s t om er or cou n ter p ar t y w il l no t b e
ab le t o me e t its ob l ig a tion s a s th e y fa l l du e. C r e d it r is k ar ise s p r im ar il y f ro m mor t ga g e
len din g t o in d i vid u a ls , co m m er cia l l en d in g to cor p or a te bo d ies an d l en d in g o f l iq u id a ss e ts
or en t er in g in t o in t er es t r at e sw ap s w i th f in an cia l in s t i tu t ion s .

C red i t r is k ar is in g fr om m or t g ag e a n d com m er c ia l len d in g is m an a ged th r ou g h a
co m pr eh en s iv e an aly sis o f b o th t h e cr e d itw or th in es s o f th e b or r o w er an d th e pr op os ed
se cu r i t y. L en din g M an d a te s ar e s t r ic t ly con t r olle d. A ll c om mer c ial loan app l ica t i on s ar e
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Pillar 3 Disclosure - 31 December 2011

rev ie w ed b y th e Sen ior Man a ge m en t Te am , w i th a de t a iled app r a is a l in su p por t. Th e B oar d
ap p r ov es th e C r ed i t R is k M an a g em en t P ol ic y an d a l l co m m er ci a l loan ap p l ic a t ion s. P os t
co m p l e tion , th e p er f or man c e o f a ll mor tg a ge s an d com m er c ia l l oan s is m on it or ed c lo se l y
an d ac t ion t ak en t o m an ag e th e col lec t i on a n d r ec o ver y pr o ce ss . A ll p or t fo li os ar e su bj e c t
t o p er i od ic s tr e ss t es t in g b as ed on a s ev er e b u t p lau s ib le e c ono m ic d ow n tu r n t o en su r e
th e y r em ain w it h in th e R is k P o lic y o f th e Bo ar d.

Mor t ga g e In d emn i t y G u aran t ee ( e xc es s o f los s) in su ran ce i s u sed t o mi t iga t e r is k t o th e
S oc ie t y as ap p r op r ia t e. R is k ar i sin g fr o m l end ing t o f in an c ia l in s t itu t ion s is m an a ged i n
ac cor d an c e w ith th e L iqu id i t y, F un d in g and Fin an ci al Ri s k Man a ge m en t Po l ic y th r ou g h
res t ri c tion of l en d in g p r im ar i ly to th os e c ou n t er p ar ties w i th ex t er n al cr ed it ra t in gs . Th is
in c lu d es a r e s tr ic ted lis t o f f in an c ia l in s tr u m en ts , a r e s tr ic te d l is t o f c ou n t er p ar ties an d
rel a ted ex p osu r e li m i ts a ss ess ed p ri mar i ly on F i tc h R a tin gs .

C red i t cr i teri a for r at e d b an ks an d b u ild in g so cie t ie s v ar y a c cor d in g t o th e in i t ial d u r a t io n
of th e in v es t men t as f ol low s:

•     3 m on th s or le ss – a m in im u m s h or t ter m r a t in g o f F3 , an d, eit h er a m in i mu m v iab ili t y
      rat in g of A- or a m in i m u m s up p or t r a t in g o f 3.
•     Gr ea ter th a n 3 m on th s an d les s th an 6 m on th s – a m in im u m sh or t te r m r at in g o f F 2 an d
      a m in i mu m l on g t er m ra tin g of A - t og e th er w i th e ith er a m in im u m v i ab ili t y r a tin g o f A - or
      a m ini mu m sup p or t ra t i n g of 3.
•     Gr ea ter t h an 6 m on th s an d 1 y ear or le ss – a min im u m s h or t t er m r at in g of F 1 an d a
      m ini mu m l on g t er m r a ti n g of A- tog e th er w ith eit h er a m in im u m v i ab ili t y r a t in g o f A - or a
      m ini mu m sup p or t r a t in g of 1.
•     Ov er 1 y ear in i t ial d u r a tion – a m in i mu m lon g t er m r a t in g of A tog e th er w ith ei th er a
      m in i mu m v iab il it y r a tin g o f A or a m in im u m su p por t r a t in g o f 1 .

Th e So c ie t y also h as a n app r ov e d lis t of cou nt er p ar ties f or U K B u i l din g S oc ie ti es an d UK
Loc a l Au th or i t ies . Len d in g t o u nr a t ed UK b u ild in g s oci e t ie s i s su b jec t t o sp ec if ic cr ed i t
as s es s men t a g ain s t d e f in e d cr it er ia .

Th e S oc ie t y m ea su r es its exp osu r e t o d eri v a ti v es u s in g th e C ou n t er par t y C r ed it R is k ( C C R )
Mar k t o M ar k et Me th od as d e t ai led a t B I P R U 1 3. 4. Th is in vo l ve s t a k in g th e cur r en t m ar k t o
mar k e t v alu a t ion , w h er e p os it i ve an d ad d in g a per c en ta g e o f t h e n oti on a l p r inc ip al of th e
con tr ac t d ep en d en t on it s r e m ain in g ter m .

Th e tab le b e low con f ir ms th e e xp o su r e of t h e So c iet y to d er i va t i v e s a s a t 31 Dec e mb er
20 1 1. Th e gr os s p os i tiv e f air va lu e o f der i v a t iv e c on tr ac ts is r epr e se n t ed b y ‘ Rep lac e men t
C os t ’. Th e d eri v a ti v e c r ed it e xp osu r e is re p r es en ted b y th e ‘ R is k W eigh t ed A m ou n t ’. T h e
S oc ie t y h as n o c on tr a c tu a l n e t tin g ar r ang em en ts in p la ce w ith d er i v a ti v e c ou n t er par ti es . I t
is th e c u r r en t p o lic y of th e So c ie t y n o t t o en t er in t o cr e di t su pp or t an n e xe s wh ich r eq u ir e
th e p os tin g of c ol la ter al d u e to th e bu r d en o f c o mp le xi t y , po t en t ial f or ca l ls o n liq u id it y on
th e S oc ie ty an d th e r e la t i v e s tr eng th o f th e d er iv a ti v e c ou n ter p ar t i es , al l of w h ich ha v e a
Fi tc h Su pp or t R a t in g of 1 . F u r th er d e t ail on F in a n c ia l In s tr u m en ts is d e ta i le d a t N o te 2 1 t o
th e A n nu a l R ep or t & A cc ou n ts .

Interest Rate Contracts                                             £000
N oti on a l Pr in c ip a l A m o u nt                             94, 20 0
R is k We i gh t ed A m oun t                                           72
R epl a ce m en t C os t of Der iva t i v es 1                            4

R esp on s ib i li t y for d a y t o d a y m an a g em en t o f th is asp e c t o f cr ed i t r is k w it hin t h e F in an c ial
R is k M ana g e men t P o l ic y lies w i th th e H ea d o f Tr e asu r y wh o r epor ts d ir e c t l y t o th e F in an c e
Dir e c t or and S ecr e t ar y. Th e BAL C O m on it or s t h e cr ed i t r a t in g of cou n t er p ar ti es , ad h er en ce
t o ex po su r e l im its an d ma k es r e co m me n d a t io n s f or ch an g e w h e re app r opr ia t e t o th e
B oar d . A t t h e b a la n c e sh e e t da t e th e S oc ie ty had n o exp os u r e to E u r oz on e S o ver e i gn Deb t
or Eu r o z one B an k in g I ns titu t i on s . A l l c ou n t er p art y exp os ur es w er e t o c ou n ter p ar t ies b o th
do mi c il ed an d au th or is ed in th e Un it ed Kin gd om or to th e B an k of E n g lan d .


1
    This represents po sitive m ark to market valuations only
                                                        Pa g e 6 o f 1 8
Pillar 3 Disclosure - 31 December 2011

Market risk

Th e pr i m ar y m ar k e t r is k f ac ed b y th e S oc i e t y i s in ter es t r a te r is k . Th is is th e r is k th a t t h e
v alu e of , or in com e a ris in g fr o m as se t s an d liab i li ti es ch an g e pr i n cip a ll y a s a r e sul t o f
mo v e men t s in in t eres t r at es . Th e S oc ie t y i s ex p os ed t o th is r is k a s a r e ta iler o f f in a n c ia l
in s tr u men t s, m a in l y in th e f or m of m or t ga g e an d sa v in gs pr o d uc t s an d t h e in ve s tm en t o f
bo th l iq u id ass e ts an d w h o le sa l e b or row in g . The r is k i s m an ag ed e i th er on b ala n c e sh e e t
thr ou gh or th r ou gh a com b in a tion of in ter es t r a t e sw ap s an d op t ion s in a m an n er
con s is t en t w ith th e Bu ildi n g S o cie t ie s A c t 1 986 . O th er in ter es t r a t e r is k s in c lu d in g B as is
R is k ar e m on i t ored r eg ular ly .

R esp on s ib i li t y for d a y t o da y m an age m en t o f th is r is k w i th in th e L iq u id i t y , F u n d in g an d
Fin anc i al R is k M an a g e men t P o lic y li es w i th t h e H e ad of Tr eas ur y w ho r ep or t s d ir ec t l y t o
th e F in an ce Dire c t or and S e cr e tar y. Th e B AL C O m e et s mon th l y t o m on i tor t h is r is k . A
de ta i le d ana l ys i s of th e S oc i et y ’s in ter e s t r a t e ri s k ex p osu r e is d is c lo se d in N ot e 2 1 t o th e
An n u al Re p or t & A cc ou nt s .

Liquidity risk

Liq u id it y r is k is th e r is k th a t th e S oc i e t y, th ou gh sol v en t, e i th er doe s no t ha v e su f f ic ien t
f in an c ia l r es ou r ce s a va ilab l e t o m e et i ts ob l ig a ti on s w h en th ey fa l l d ue, or c an on ly s e cu r e
th em at ex ce ss i ve c os t . Th es e obl i ga t i on s in c lu d e shar e an d d ep os i t b al an c es an d
mor t ga g e len d in g c om mi t m en ts . Th e S oc ie t y m an ag es th is r i sk th r ou gh c on tin u al
f or ec as t in g of ca sh f lo w r eq uir e m en ts an d a n ass es s m en t of r e ta il an d w h ol es a le f un d in g
ris k. Th e r eq u ir ed am o u n t , qu a l it y an d t yp e of l iqu id a ss e ts r equ ir ed to en su r e ob li g a tion s
can b e m e t at a l l tim es i s m ain ta in ed in acc or da n c e w i th th e L iqu idi t y , F un d in g an d
Fin anc i al Ri s k Man a g em en t P o lic y. Per i od ic s tr ess te s ti n g is per f or m ed t o en s u r e
ob li g a tion s can b e m e t in b o th n or m a l an d s t r ess ed c ir cu m s t an ce s.

R esp on s ib i li t y f or d ay to d a y m an ag em en t of r i s k w ith in t he L iqu id i t y, F u n d in g an d
Fin anc i al R is k M an a g e men t P o lic y li es w i th t h e H e ad of Tr eas ur y w ho r ep or t s d ir ec t l y t o
th e Fin an ce Dir ec t or an d Se cr e t ar y . De t ai ls of th e r oll in g a ss es s m en t o f l iq u id i t y
req u ir e m en ts an d th e s t at us o f k e y l iqu id i t y a n d f un d in g r is k in d ic a t or s is c ir cu l a ted we e k l y
t o S en i or M an age m en t an d th e B oar d . Th e B A L C O m ee t s mon t h ly t o m o ni t or th is r is k. O ver
91 % of S oc ie t y sh ar es an d b or row in gs com e s f r om s h ar eh old in g m em b er s an d dep os i t or s
rep r es en tin g o ver 1 14 % o f mor t ga ge l oan s. Th e S oc i e t y h a s b e e n su c ce ss fu l d u r in g th e
y ear in e x ten d in g th e d u rat i on o f f un d in g an d p lan s t o c on tin u e to d o so. In res p on s e t o
un cer t ain m ar k e t c on d i t ion s th e S oc ie t y c on t in u es to h o ld b o th a n ap pr op r ia t e le v el o f
liqu idi t y in a con ser va t i ve m ix o f h igh qu al it y an d r e ad ily a cc es sib l e a ss e ts re l a tiv e t o i ts
per c eiv ed r eq u ir e men t .

Operational risk

Op er a t io n a l r is k is th e r isk o f los s r esu lt in g fr o m i n ad eq u a te or f ai led in t er n al pr o ce ss es ,
ac t i on s o f in d i v idu als an d/ or sy s te m s or fr o m e x ter n a l e ven t s. Th e S o cie t y a ls o in c lu d e s
regu lat or y r i s k w i th in th e op er a ti on a l r i s k d ef in i t ion . O per a ti on al l os se s can r esu l t fr om
fr aud , er r or s b y e m p l o ye es , f a ilu r e t o c o m p l y w i th r e gu la t or y re q u ir e m en ts , eq u ip men t
f ailu r es or n a tu r a l d is a st er s .

Th e p r in c ip al op era ti o n al r is k s f a cin g th e S oc i e t y ar e f rau d , u n au th or ised d is c losu r e o f
cu s t o mer d a t a, m e di a tion a c t iv it y an d c om p li an ce w i th r egu l a tion . M ana g em en t i s
resp o n s ib le f or id en t i fic a ti on , as s es s men t and man a gem e n t o f op er ati on al r is k i n
ac cor d an c e w it h th e R is k M an a g em en t F r am ewor k. R i s ks an d con tr o ls ar e r e v iew e d
qu ar t er ly w i th a r e por t t o b oth th e R is k M an ag e men t an d B oar d Au di t, R is k & C om p lian ce
co m m it te es . In r es pe c t of r e gu la t ory r i s k th e S o cie t y h as an in ter n al co mp lian c e fu n c t ion
wh i ch mo ni t or s c om p l ian ce w it h ex is t in g l egis l a t ion . C on t ro ls im p le m en ted t o en su r e
co m p l ian c e a t th e im p ac t o f n ew req u ir e m en t s. Th e mo n i t or in g u n d ert a k en b y b oth th e
co m p l ian c e f un c t i on an d in t er na l a u d it is c o -or d in a t ed t o en su r e a p pr opr i a te c o ver a ge o f
th e p r inc ip a l r i s ks h igh lig h ted is a ch ie v ed .




                                                          Pa g e 7 o f 1 8
Pillar 3 Disclosure - 31 December 2011

Concentrati on Risk

A hi gh l e ve l e xp osur e to a s in gle b or r ow er or a par t icu lar t yp e o f loan m a y cr ea t e a
con c en tr at ion r is k . T h e S oc i et y ’s len d in g p or t f o li o i s h ea v il y co n c en tra te d on tr a d it i ona l
resi d en t i al m or t g ages r epr es en tin g a p r odu c t con c en tr at ion r is k . C on c en tr a t i on s in low er
qu a li t y m or tg a ge a ss e t s ar e a t a m od es t le ve l .

C on c en tr a t ion is m on i t or ed q u ar t er ly th rou g h i nf or m a t io n su b m i t ted to t h e R is k
Man age m en t C om m it t ee. Th e M ar sd en is a r egion a l S oc ie t y b u t e n su r es th a t len d in g is
spr ea d a cr o ss E n gl and an d W ales to a v oid a ny h i gh le v el l oca l con cen tr a t ion s . A d e ta i le d
an a l ys i s of le n d in g b y r egi on is s et ou t a t S e ct io n 6.

Pensi on Obli gati on Risk

Th e S oc ie ty op er a te s a d e f in ed con tr ib u t io n gr ou p p er son a l p en si on s ch e m e wh i ch is
av a ilab l e t o a l l e lig ib le em p l oy ees . Th e S oci e t y h a s an o bl iga t i on u n der an e ar l ier s ch e m e
rel a tin g to e igh t f or m er e m p loy ees .




                                                        Pa g e 8 o f 1 8
Pillar 3 Disclosure - 31 December 2011

4.       CAPITAL RESOU RCES

Th e c ap i ta l r es ou r ce s of t h e S oc ie t y ar e c a lc u la t ed in a cc or d an ce w i th t h e r e q uir em en ts o f
GE N P R U 2 w i th in th e F S A H an d b oo k.

Th e c ap it al r es ou r c es con s is t o f :

•    Gen er al R e ser v e s ac cu m u la t ed , r epr e se n tin g Tier 1 C ap ita l
•    R ev a lu a t i on R es er v es an d G e ner a l M or tg age P rov is i on s , re p r es en t in g T ier 2 C a pi t a l

A b r ea kd ow n o f Ca p i t al R es ou r c es is d e t ai led b el ow :

                                                     Tier 1 (£m)                       Tier 2 (£m)                  Total (£m)
Gr oss                                                    30 . 99 3                          0. 627                    31 . 62 0
Dedu c t ion s                                            (0 .0 55)                               -                    ( 0. 05 5 )
Net                                                      30. 938                             0. 627                    31.565
Li mi t s                                                         -                               -                             -
Total Capital Resources                                  30. 938                             0. 627                    31.565

N ote s:
• Th e So c ie t y d oe s n o t h a ve an y ‘ inn o va t i v e Tie r 1 ca pi t a l r es ou r ce s’
• Th e So c ie t y d oe s n o t h a ve an y T ier 3 C ap it a l R es our ce s
• Dedu c t ion s r e l at e t o in t an gib l e as se t s ( un - a m or t is ed c ash ba c ks )




                                                        Pa g e 9 o f 1 8
Pillar 3 Disclosure - 31 December 2011

5.       CAPITAL ADEQUACY

In t er na l cap i t al is h e ld t o p r ote c t th e s ol v en cy o f th e S oc i e t y. C ap i ta l is r eq u ir e d n o t on l y
t o me e t th e S o ci et y ’ s b u sin e ss r eq u ir em en t s , c ov er un e xp ec t ed an d p os s ib le lo ss es b u t
al so t o ens ur e t h a t su f f i cien t r e gu la t or y c ap i ta l is a va i lab le to sa t is f y th e So c iet y ’s
ob li g a tion s. Ac c or d in gl y , th e S oci e t y n e eds t o g en er a te an d r e t a in a s u f f ic i en t pr o fi t to
ad d t o th e Ge n er a l R es erv e w h i ch b e co m es th e ma in s ou rc e o f ca p it al .

Strategy and Planning

Th e S o cie t y u t il i se s a th r e e y ear Bu s in ess P lan , th e con t en t o f w h i ch is r e v ie w ed an n u a ll y
by th e B oar d , ta k in g a cc oun t o f ch an ges in t h e bu s ine ss an d ec on om ic en v ir on men t . Th e
pl an es t ab l ish e s s tr a t e gic an d b u s ine ss ob jec t i ve s. I t is a n e ss en t ia l p art o f th i s p ro ce ss to
en su r e tha t th e S oci e t y h as su f f ic ien t f in an c ial an d n o n f in an cia l r e sou r ces to m e et th e se
ob je c t iv es .

Internal Capital Adequacy Assessment Pr ocess (ICAAP)

Th e So c ie t y ’ s In t er na l C ap i ta l A d eq u a c y As ses s men t Pr oc es s ( IC A A P) en su r es t ha t t h e
cap i t al r es ou r c es of th e S o c ie t y ar e su f f i cien t t o su p por t its Bu si ne ss P lan b o th in n or m a l
an d s tr es se d con d it i on s.

Th e pr o ce ss r ev iew s ob jec t i ve s an d pr oj ec ts th e cap i t al r equ ire m en t f or a ll m a t eri a l r i s ks ,
bo th in n or m a l an d s t r ess ed c on d iti on s , o v e r th e p lan n in g p er iod . Thi s en su r es th a t th e
po te n tia l r is k an d as so cia t ed cap i t al r eq u ir e m en ts ar e c ons i s ten t w it h t h e c ap i ta l r es ou r ce s
av a ilab l e. Th e IC A A P i s su b m it ted t o t h e Bo a r d f or a p pr o v al w i th th e n e ce ss ar y su pp or t in g
str ess te s ti ng . H a vin g r egar d to th e p ro je c t ed cap it al r eq u ir e me n t w it h in th e IC A A P an d
In d i v idu a l C api t a l G u id an c e pr o v id ed b y th e F in a nc ia l S er v ic es A u th o r it y , th e B oar d s e ts an
in ter n al l i mi t f or t h e m in imu m am ou n t o f r eg u lat or y c ap i ta l. Th is l im it is in ex ce ss of th e
le v e l req u ir ed b y th e F in an c i al Ser v ic es Au t h or i t y p r ov id in g a fu r t h er am ou n t of cap it al
ab o v e t h e r equ ir ed l e v el.

Th e B oar d h a s r ev i ew ed t h e r eq u ir e me n ts to im pl e men t th e In t er na l R a t ing s B as e d
ap p r oach to cr e di t r is k . A f ter car ef u l con s id e r at i on a vi ew w as t ak e n b y th e Bo ar d th a t th e
co s t t o th e S o cie t y o f co mp ly in g wi th th e r eq u ir e m en t s cu r r en tly ex ce ed s a ny p os si bl e
ben e f i t . Th e S oc i e t y h as , ther e f or e , op ted to u se t h e s tand ar d ise d ap pr o ac h to c al cu la t e
ris k w e igh t in gs .

Credit Risk Capital Requirement

C red i t r is k u s in g th e s t an d ar d is ed ap p r oa ch i s ass es se d u sin g th e f oll ow in g f or m u la :

C red i t r i s k c ap i ta l r eq u ir e men t = ex p os ur e v alu e x th e r is k w eigh t ( dep en d in g on t yp e o f
as s e t , c oun ter p ar t y , m a tur i t y, s e cu r i t y an d L TV ) x 8 %. Th e t ab le over le a f sh ow s th e
m in i mu m c ap ita l r eq u ir em en t f or cr ed i t r is k b y ex po su r e c la ss .




                                                        Pa g e 10 o f 18
Pillar 3 Disclosure - 31 December 2011

Exposure Class                                                             Asset        Risk Wei ghte d                  Capital
                                                                            (£m)            Asset (£m)                     (£m)
On Balance Sheet:
Treasury Assets
C en tr a l G ov er n men t / C en tr a l B an ks                         20 . 439                          -                     -
R egi ona l G o v er nm en ts / L oc a l                                         -                          -                     -
Au th or i t ie s
In s t it u t i ons                                                      68 . 206                  17 . 773                1. 422
Total Treasury Assets                                                    88. 645                   17. 773                 1. 422

Real Estate, Retail and Past Due
Assets
R es id e n tia l R ea l E s ta t e - P er f or m in g                  22 2 .5 76                  78 . 034                6. 243
R e ta il    (S ecu r ed       by     Re al       E s t a te               3. 5 89                   2. 692                 0. 215
C ol la ter al )
R es id e n tia l R ea l E s ta t e - P as t Du e                        0. 5 40                    0. 540                 0. 043
C om m er c ia l R e al E s t a t e – P er f or m in g                   5. 1 51                    5. 151                 0. 412
C om m er c ia l R e al E s t a t e – P as t Du e                        0. 0 00                    0. 000                 0. 000
Total Real Estate, Retail and Past                                     231.856                     86. 417                 6. 913
D u e A s s e t s *1

Other Assets
Oth er It em s                                                             2. 7 95                   2. 7 95               0. 224
Total Other Assets                                                         2. 795                    2. 795                0. 224

Total On Balance Sheet                                                 323.296                   106.985                   8. 559

Off Balance Sheet:
In s t it u t i ons ( Der iv at i ve s )                                  0. 3 62                    0. 136                0. 011
Se cu red on R ea l E s ta t e (P ip e lin e)                            12 . 594                    0. 132                0. 010
Total Off Balance Sheet                                                  12. 956                     0. 268                0. 021

Total Exposure Value                                                336.252             107.253                            8. 580
*1A s se t s ar e gro ss of gen er a l l os s p r ov i si on s o f £ 0. 2 50 m at 31 Dec em b er 2 01 1

Operational Risk Capital Requirement
Th e So c ie t y u s es th e B as ic In d ic a tor Ap pr oa ch ( B IA ) for t h e c alcu la t io n of c ap it al r equ ired
t o c ov er O p er a t i ona l R is k u n d er P il lar 1. O p er a t io n a l R is k C ap it al R eq u ir e m en t = N e t
In t er es t an d N et N on In t er es t in c o me ov er th e p as t th r ee ac cou n tin g p er i od s x 15 % x 8 %.
Th e S o cie t y’ s mi n im u m cap it al req u ir e m en t f or O p er a t ion a l R is k u n der th e b a sic in d ic a t or
ap p r oach is :

                                            Capital Resources Requirement – Operational Risk (£m)
Basic Indicator Appr oach                                                                       0. 781

Pillar 1 Ca pital Resource Require ment

Th e min i mu m ca p it a l r esou r ce r eq u ir e men t u nd er P ill ar 1 is d e t e r min ed b y ad d in g th e
cr ed it r is k c ap i ta l r equ ir e men t t o th e op er a t ion a l r is k cap i t a l r eq u ir em en t de t a i led a b o v e.
Th e f oll ow in g ta bl e sh ow s th e m in i mu m P ill a r 1 C ap ita l R es ou r c e R eq u ir em en t r el a ti v e t o
C ap i ta l R es ou r c es a t 3 1 D ece m b er 20 11

Pillar 1 Ca pital Resource Require ment                                                                                     (£m)
C red i t Ris k                                                                                                           8. 580
Op er a t io n a l R is k                                                                                                 0. 781
Mar k e t R is k                                                                                                                 -
Total Pillar 1 Capital Res ource Re quirement                                                                             9. 361
C ap i ta l R es ou r c es                                                                                               31 . 56 5
Capital Resources above the Pillar 1 Capital Resource Requirement                                                        22.204


                                                           Pa g e 11 o f 18
Pillar 3 Disclosure - 31 December 2011

6.       CREDIT RISK

C red i t r i s k, th e r is k o f lo ss ar is in g fr om th e f ailu r e o f cu s t o mer s or cou n t er p ar t ie s t o me e t
th eir ob l iga t i on s to th e S o ci e t y, is of par am ou n t i mp or tan ce .

Th e to t a l cr ed it r i s k e xpo su r e is £ 3 36. 25 2 m . Th is r e c onc i le s t o t h e An n u al Rep or t an d
Ac c ou n ts a s f ollow s:

                                                                                                                          £m
Exposure Amount as per Basel II                                                                                      336.252
Les s:
Of f B a lan c e S h ee t Der i v a tiv es                                                                             (0 .3 6 2)
Of f B a lan c e S h ee t P ip e lin e                                                                               ( 12. 5 94)

On-balance sheet exposure as per Basel II                                                                            323.296
Les s:
Gen er al M or t ga ge L os s Pr o vis ion s                                                                           (0 .2 5 0)

Total Society Assets as at 31 December 2011                                                                          323.046

Th e e xp osu r e s in each as se t c la ss a s a t 31 D ec e mb er 20 1 1 an d a ve r age e xp osu r es h el d in
ea ch as se t c l as s d u r in g th e f in an c ial ye ar is de ta i le d b e low .

Exposure Class                                                                            Total Asset                Average
                                                                                                 (£m)                  Asset
                                                                                                                        (£m)
On Balance Sheet:
Treasury Assets
C en tr a l G ov er n men t / C en tr a l B an ks                                               20 . 439               19. 50 1
R egi ona l G o v er nm en ts / L oc a l A u th or i t ies                                             -                      -
In s t it u t i ons                                                                             68 . 206               67. 42 6
Total Treasury Assets                                                                           88. 645                86. 927

Real Estate, Retail and Past Due Assets
R es id e n tia l R ea l E s ta t e - P er f or m in g                                        222 .5 76              22 8.8 6 0
R e ta il (S e cu r ed b y R ea l E s t a t e C oll a ter al )                                  3. 5 89                 2. 7 26
R es id e n tia l R ea l E s ta t e - P as t Du e                                               0. 5 40                 0. 8 47
C om m er c ia l R e al E s t a t e – P er f or m in g                                          5. 1 51                 5. 1 83
C om m er c ia l R e al E s t a t e – P as t Du e                                               0. 0 00                 0. 0 00
Total Real Estate, Retail and Past Due Assets                                                 231.856                237.616

Other Assets
Oth er It em s                                                                                    2. 7 95               2. 9 00
Total Other Assets                                                                                2. 795                2.900

Total On Balance Sheet                                                                        323.296                327.443

Off Balance Sheet:
In s t it u t i ons ( Der iv at i ve s )                                                         0. 3 62                0. 4 81
Se cu red on R ea l E s ta t e (P ip e lin e)                                                   12 . 594                6. 2 66
Total Off Balance Sheet                                                                         12. 956                 6.747

Total Exposure Value                                                                          336.252                334.190




                                                        Pa g e 12 o f 18
Pillar 3 Disclosure - 31 December 2011

External Credit Assessment Instituti ons

Th e S o cie t y h as n om in a ted F it ch R a t in gs a s it s E x t er n al C r ed i t A s se ss me n t In s t i tu t ion
(EC A I) .

Fi tc h R a tin gs ar e ap p l ied t o t h e fo llow in g s tan d ar di se d cr ed i t r is k ex po su r e c la ss es :

•   C en tr a l G ov er n men t / C en tr a l B an ks
•   R egi ona l G o v er nm en ts / L oc a l A u th or i t ies
•   In s t it u t i ons

R is k w e igh t ed as se t v alu es u n d er th e s tan d ar d ised ap p r oa ch ar e ca l cu la t ed b y r e f er en c e
t o s ix cr ed i t q u a li t y s t ep s u n d er B I P R U 3 a c cor d in g t o c ou n t er p ar t y t yp e. Th e se s t ep s ar e
ma pp ed to th e cr ed i t qu a l it y as s es s men t sc a le p u b l ish ed b y t h e F in an c i al Ser vi c e s
Au th or i t y in ac cor d an c e w i th t he C ap it a l R eq u ir e men t s R e gu la t ion s 20 0 6.

A su m m ar y o f th e cr e d it r is k ex p osu r e a t 3 1 Dec e mb er 201 1, in c lu d in g bo th on an d of f
ba lan ce sh ee t exp osu r es , as s oc ia t ed w i th ea ch o f th e s ix cr ed i t q u ali t y s t ep s is de t a iled
be low :

Credit        Fitch Rating                  Central               Local                Banks             Building               Total
Quality                                 Government           Authorities                                Societies
Step                                           (£m)                (£m)                 (£m)                 (£m)              (£m)
1             A A A t o A A-                20 . 43 9                  -               0. 6 76                   -           21. 11 5
2             A+ to A-                              -                  -              55. 85 0             2. 0 10           57. 86 0
3             BBB+ to BBB-                          -                  -                     -                   -                  -
4             BB+ to BB-                            -                  -                     -                   -                  -
5             B+ to B-                              -                  -                     -                   -                  -
6             C C C + a n d b el o w                -                  -                     -                   -                  -
Unr a ted     -                                     -                  -                     -            10. 03 2           10. 03 2
Total                                       20. 439                    -              56. 526             12. 042            89.007

Th e S o ci e t y h as n o cr ed it q u ali t y ex p o su res wi th in cr ed it q u a li t y st ep s 3 to 6. Unr a te d
ex p osu r es ar e li m i ted t o u n r a ted UK b u i ld ing so ci et ie s.

Geographic Distribution of Exposures

Treasury Assets

Th e d is tr i bu ti on o f Tr e asu r y As s et s b y e xp os u r e c lass a s a t 3 1 De c em b er 20 1 1 is d e ta i led
be low :

Geographical Area                               Central              Re gi onal            Institutions                     Total
                                           Government/            Government/
                                                Central                  Local
                                                 Banks             Authorities
                                                  (£m)                    (£m)                      (£m)                     (£m)
Uni t ed K ing d om                             20. 43 9                      -                   68. 29 6                88 . 73 5
Eu r op ea n Un ion ( ex cl . UK)                      -                      -                          -                        -
N on E u ro p e an Un ion 2                            -                      -                    0. 2 72                 0. 272
Total                                           20.439                        -                   68. 568                 89.007

Mortgage Assets

Th e g e ogr a p hi c d is tr ib u t i on o f a ss e ts s ecu r e d b y re al e s ta t e as a t 3 1 De ce mb er 2 011 ,
sep ar a t ed b y m a ter ia l in du s tr y t ype an d i n cl u di n g de t a ils of m or t g ages pa s t du e, i s
de ta i le d be l ow. A loan is p as t d u e w h en it 3 m on th s or mor e in ar r ear . Th er e w er e n o
mor t ga g e loan s as a t 3 1 De ce mb er 20 1 1 wh i c h wer e im p a ir ed bu t n o t p a s t du e .



2
  Expo sures classified as N on European Union are to counterpar ties both authorised and do miciled in the
United Kingdom which have a parent entity which is authorise d and domiciled outs ide the Eur opean Uni on.
                                                       Pa g e 13 o f 18
Pillar 3 Disclosure - 31 December 2011

Loans Secured on Re sidential Pr operty

Geographical Area                     Performing (£000)             Past Due (£000)               Total (£000)
N or th                                           10, 46 7                                   -                      1 0, 467
Yor ksh ir e & H u m b er s id e                  2 0, 2 54                                 39                      2 0, 293
N or th W e s t                                   6 3, 0 31                               2 50                      6 3, 281
Ea s t M id lan d s                               1 3, 8 64                                  -                      1 3, 864
Wes t M id la nd s                                1 6, 9 68                                 42                      1 7, 010
Ea s t A n g lia                                    8, 9 22                                  -                        8, 922
S ou th W es t                                    2 0, 7 03                                  -                      2 0, 703
S ou th E as t                                    4 5, 6 06                               1 40                      4 5, 746
Gr ea ter L on d on                               19, 45 6                                  69                      1 9, 525
Wal es                                              6, 8 90                                  -                        6, 890
Sc o t la n d                                             4                                  -                              4
N or th er n Ir e lan d                                   -                                  -                              -
UK                                              2 2 6, 16 5                               5 40                    2 2 6, 70 5

Loans Secured on Commercial Real Estate

Geographical Area                     Performing (£000)             Past Due (£000)               Total (£000)
N or th                                               67 8                                    -                         67 8
Yor ksh ir e & H u m b er s id e                      33 8                                    -                         33 8
N or th W e s t                                    4, 1 35                                    -                      4, 135
Ea s t M id lan d s                                      -                                    -                            -
Wes t M id la nd s                                       -                                    -                            -
Ea s t A n g lia                                         -                                    -                            -
S ou th W es t                                           -                                    -                            -
S ou th E as t                                           -                                    -                            -
Gr ea ter L on d on                                      -                                    -                            -
Wal es                                                   -                                    -                            -
Sc o t la n d                                            -                                    -                            -
N or th er n Ir e lan d                                  -                                    -                            -
UK                                                 5, 1 51                                    -                      5, 151

Maturity Analysis

A r es id u a l m a tu r i t y b r e a kd o wn o f exp osu r es t o C red i t In s t itu t ion s a s at 3 1 Dec e m ber 2011
is d e t a iled b el ow :

                                                                                                                      (£m)
Ac cr ued In ter es t                                                                                               0. 218
R epa y ab le o n De man d                                                                                         36 . 48 8
In n ot m or e t ha n 3 m o n th s                                                                                 22 . 50 0
In m or e th an 3 m on t h s b u t n ot mor e th an on e y ear                                                      9. 000
Total                                                                                                              68.206


A r es id u a l m a tu r i t y b r e a kd o wn o f com b in ed e xp o su res t o loan s se c u r ed on r ea l e s ta t e an d
pas t d u e lo an s as a t 3 1 De ce mb er 20 1 1 is d e t ail ed b e low :

                                                                                                                      (£m)
R epa y ab le o n ca ll an d at sh or t n o t ic e                                                                   0. 580
In n ot m or e t ha n 3 m o n th s                                                                                   2. 361
In m or e th an 3 m on t h s b u t n ot mor e th an on e y ear                                                       8. 705
In m or e th an 1 y ear b u t n o t mor e th an 5 y ear s                                                         45 . 31 5
In m or e th an 5 y ear s                                                                                        17 5 .60 2
                                                                                                                 232.563
Les s: pr o v is io n s                                                                                           ( 0.9 5 7)
Total                                                                                                            231.606



                                                     Pa g e 14 o f 18
Pillar 3 Disclosure - 31 December 2011

Provisions

Pr o v is i on s for los se s a r e b a se d u p on an a p pr ai sa l of lo an s , ad v a nc e s an d o th er a ss e ts .

                                        Loans Secured on               Other Loans Full y                               Total
                                              Residential              Secured on Land
                                            Property (£m)                          (£m)                                     (£m)
At 01 January 2011
Gen er al P r ov is ion                                   0. 1 00                       0. 150                         0. 250
Sp ec i f ic Pr o vis ion                                 0. 1 40                       0. 568                         0. 708
Total                                                     0.240                         0. 718                         0. 958

Written Off
Gen er al P r ov is ion                                         -                              -                            -
Sp ec i f ic Pr o vis ion                                 0. 0 01                              -                       0. 001
Total                                                     0.001                                -                       0. 001

Movement
Gen er al P r ov is ion                                   0. 1 00                      ( 0.1 0 0)                              -
Sp ec i f ic Pr o vis ion                               (0 .0 0 2)                              -                     ( 0.0 0 2)
Total                                                    0.098                        (0.100)                        (0.002)

At 31 December 2011
Gen er al P r ov is ion                                   0. 200                        0. 050                         0. 250
Sp ec i f ic Pr o vis ion                                 0. 139                        0. 568                         0. 707
Total                                                     0.339                         0. 618                         0. 957

Sp ec i f ic p r ov isi ons o f £0 . 707 m an d in t er es t s usp en d ed o f £0.1 0 5 m h a v e be en u t i li sed t o
ad jus t dow n war d s th e v alu e o f t he e xp osu r e used in cap i t al ca l cul a t io n s.

Pr o v is i on s ar e m a de t o r ed u ce t he v alu e o f lo an s an d ad v an c es to th e a m ou n t w h i ch th e
Dir e c t or s con s id er i s l ik el y u l tim a te l y t o b e r ece i ve d .

Th e S p e cif i c p r o v is ion s ar e m ad e as ap pr o pr ia t e f ol l ow ing a y ear en d a p pr a is a l o f al l
ad van c es wh er e r ep a y men t s ar e th r e e m on th s or m or e in ar r ear s o r w h er e th e mor t ga ge d
pr oper t y h a s b een t a k en in to p os se ss ion . In r espe c t of l oan s w h i ch are fu ll y s ecu r ed on
resi d en t i al p r oper t y a n d ow n er oc cu p ied pr op er t ie s w h ich ar e t hr ee m on th s or m or e in
ar r ear s bu t w h er e th e p r oper t y h a s n o t b e en ta k en in to p o ss es si on , t h e Dir e c t or s, in
ac cor d an c e w i th re co m m end ed p r a ct ic e, ap p ly a f a c tor to t a k e a ccou n t o f th e p r ob ab ilit y
of th e ca se s r esu l t in g in r epos se ss i on w h en c al cu la t in g th e s p ec if ic p rov i si on t o be t a ke n.
In al l ca se s a cc ou n t is t a ken o f th e am oun t r ec ov er ab le on m or t ga g e in de m n i t y c ov er an d
ad d iti on a l se cur i t y . In t er es t in r es pe c t of al l loan s is cr ed it e d t o th e in com e an d
ex p en d itu r e ac c oun t a s it be co m es r e c ei v ab le , ex cep t in r esp ec t o f ad v an ce s w h er e th e
pr oper t y h as b een t a ken in t o p o ss es si on an d w h er e th e in t er es t i s con s ider e d
ir r ec ov er ab l e. Su ch in t er es t is cr e di t ed to an in ter e s t su sp en se a cc ou n t . Th e p r ov isi on s
ch ar ged t o th e in c o m e an d e xp en d it u r e a c c ou n t com pr is e th e in cr eas e in th e p r ov is i on s
t og e th er w i th l oss es wr i t ten of f in t h e y ear .

A s pe c if ic pr o v is ion is a ls o mad e w h er e an ac cou n t ma y n o t b e in arr ear bu t th e S oc ie t y
has ex er c is ed f or b e aran c e in th e c on du c t o f th e acc ou n t . An y p r ov is i on is b a sed on a
man age m en t a ss es sm en t of th e p r op en s it y f or t h e acc ou n t t o re al ise a lo ss h a d
f or b e ar an ce n o t b e en sh o wn ta k in g ac c ou n t o f th e a mou n t r ec o ver a b le on m or t ga g e
in d em n it y co ver an d a d d it ion al se cu r it y .

Th e g en er a l p ro v i si on h as b een m ade t o co v e r los se s th a t h a ve n o t y e t b e en id en t i f ie d. I t is
kn ow n fr om e xper ien ce th a t su c h los se s e xi s t w ith in t h e S oc iet y ’s lo an por t f ol ios th a t h av e
no t b e en in clu d ed w i th in sp ec if ic p r ov is i ons .

Pr o v is i on s f or r es id en t ia l and c o mm er c ia l m or t g ag es ar e s e t and su b s equ en tly r e view ed
ea ch m on th .



                                                      Pa g e 15 o f 18
Pillar 3 Disclosure - 31 December 2011

7.       Interest Rate Risk

Se c t io n 3 o f th i s d is c l osu re con t a ins a su m mar y of M ar k e t R i s k w h i ch ref ers t o In t er e st
R a te Ris k .

Th e m a in ac t i vi t ies u n d er t a k en b y th e S oc i e t y w h i ch gi v e ris e t o in t er es t r a t e r is k ar e a s
f ol l ow s :

•    Fix ed   r at e s a vin g s p r od u c ts
•    Fix ed   R a t e or L I BO R L in k ed fu n din g b y t h e Tr ea su r y F u n c ti on
•    Fix ed   r at e an d B an k R a te or L IBO R L in k ed m or t g age len d in g w i th In t er es t Ra t e C ap s
•    Fix ed   r at e or L IB O R or B an k R at e L in ked in ve st m en ts b y th e Tr e asu r y F un c t i on .

In t er es t r a te r is k i s m a n aged on b al an c es s h ee t or th r ou gh a co m b in at i on o f In t er es t Ra t e
Sw aps an d op t ion s in a ma n n er c on s is t en t w ith th e Bu ild in g S o ci e t ie s A c t 19 8 6.

Th e i n ter es t r a t e r is k ar is in g is mon i t or ed o n a m on th l y b as is in t er m s o f b a lan c e sh ee t
co m p os i t io n , b as is r is k m is m at ch and th e r is k t o b ot h e c on o m i c va lu e an d e ar n in g s.
H ed g in g a c tiv it y i s u n d er t a ken t o ma n a ge r is k w i th in th e lim i ts s e t b y th e b oar d .

Th e S oc ie t y B al an ce Sh ee t is te s ted m on t h l y f or th e imp a c t of a +/ - 1 %, 2 % an d 3 %
par a lle l shi f t i n in ter es t r a te s t o t h e y ie ld cu r v e in r e sp ec t of econ o m ic v alu e an d a + /- 1 %,
2% an d 3 % sh if t in in t er es t ra t es in r e sp ec t o f e ar n in gs r e la t iv e t o l im its se t b y the B oar d .




                                                       Pa g e 16 o f 18
Pillar 3 Disclosure - 31 December 2011

8.                 Remuneration Policies and Practices

A r is k ar is es i f th e So c i et y ’s r e mu n er a t ion p ol ici es a n d p r ac t ic es cou ld r esu lt in s t a f f b e in g
rew ar d ed f or d e c is io ns in c on s is t en t w it h th e B oar d ’ s r is k ap p e t ite . I t i s th ere f or e th e
S oc ie t y ’s p oli c y on r e mu n era ti on to s ee k t o en su r e th a t its re m u ner a ti on d e c is i on s ar e in
lin e w i th e f fe c ti v e r is k m an age m en t.

Th e So c ie t y s ee k s t o e n sur e th a t i t s r e mu n er a t io n d ec i si on s ar e in lin e w i th it s bu s in e ss
str at eg y an d lon g t er m ob j ec t iv es, an d c on s is t en t w i th th e So c ie t y ’s cu r r en t f in an c ia l
con d it i on an d fu tu r e pr osp ec t s. It a ls o se e ks t o es t ab lis h an ap pr op r ia te b a lan c e b et w e en
th e f ix ed an d v ar iab le el em en t s of r emu n era t i on. Th e l e ve l of v ar iab le r e mu n er a t ion p aid is
bas ed on cr i ter ia s e t b y t h e Bo ar d each y ear l in ke d t o th e ov era ll p er f or m an c e o f th e
S oc ie t y in c lu d in g b o th b u sin e ss an d r is k m an ag e men t o b je c ti v es . G u aran t eed in c en t iv e
pa ym en t s d o n o t for m p art of an y r em u n er a t i on p a c ka ge an d a ll inc en ti v e sc h e me s ar e n on
con tr ac tu al.

In f or ma t ion c on cer n in g th e m an d a te of th e R e mu n era ti on C om m i t te e an d th e d ec is ion -
ma k in g p r oc es s i t u s es in d e ter min in g th e r em u n era t ion p o lic y f or th e e xe cu t iv e dir ect or s
an d th e r es t o f th e Sen ior M an ag e men t T e am (S M T) , an d , in for ma t i on on th e lin k b et w een
pa y an d per f or m an c e, i s con t a in ed in th e Dir e c tor s ’ R e m un er a t ion R ep or t in th e S oc iet y ’s
An n u al Re p or t an d Ac c ou n ts 20 11.

Fr om 1 Jan u ar y 201 1, th e S oc ie t y cam e w ith i n t he s co p e of th e F S A R e m un er a ti on C o d e,
as s e t ou t in S Y SC 19 A. O n th e s am e d a t e, B IP R U 1 1 w as am en d e d to r eq u ir e th e
pu b li ca t ion o f aggr e g a t e r em u n er a t ion d a ta fo r sen ior m an ag er s an d m e mb er s of s ta f f
wh os e a c tion s h a ve a ma t er i a l i mp a c t on th e r is k p r ofi l e of th e S o ci e t y ( C od e S ta f f ) . Th is
in c lu d es ex ecu t ive an d n on - e xe cu t iv e d ir ec t or s.

Th e fo l low in g tab l e se t s ou t th e a ggr e g a te qu an tit a t i ve r e mu n er a tion f or cod e s t a f f f or the
per i od 1 Jan u ar y 20 1 1 t o 3 1 De ce mb er 20 11 and th e n u m b er o f ben e fi ciar ie s.

Staff Type                                             Number                 Fixed                          Variable                         Total
                                                                           Remuneration                    Remuneration                    Remuneration
                                                                               (£)                             (£)                             (£)
N on ex ec u tiv e Dir ec t or s*1                          5                   10 4 ,8 19                              -                       10 4 ,81 9
Ex ecu t iv e Dir ec t or s*2                               3                   32 0 ,0 66                              -                       32 0 ,06 6
Oth er SM T                                                  5                  34 0, 727                          6, 124                       34 6 ,85 1
To t a l                                                    13                  76 5, 612                          6, 124                       77 1 ,73 6
* 1 = T h i s i n cl u d e s o n e N o n - ex e c u t i v e D i r e c t o r , w h o r e t i r ed d u ri n g t h e y e a r . N o n e x e c u t i v e
Di r e c t o rs a r e n o t e l i gi b l e f o r v a r i a b l e r e m u n e r a t i o n .
* 2 = T h i s i n cl u d e s o n e E x e c u t i v e D i r e c t o r , w h o r e t i r ed d u r i n g t h e y e a r . T h e E x e c u t i v e D i r e c t o rs
w ai v e d t h e i r ri g h t t o t h e v a ri a bl e b o n u s p a y a b l e i n r es p e c t o f 2 0 1 1 .

In t h e c as e of th e E xe c u t iv e Dir e c tor s an d o th er m e mb er s o f th e S M T, f ixe d r e mu n er a t ion
in c lu d es p ens i on con tr i bu t i on s m ad e b y th e S oc i et y on b eh alf of th e em pl o ye es , an d th e
v alu e o f ta xab le b en ef it s.




                                                                      Pa g e 17 o f 18
Pillar 3 Disclosure - 31 December 2011

9.       Contacts

Sh ou l d y ou h av e a n y q u es t ion s p le as e c on t act N ea l W a lker , F in anc e Dir e c t or an d S e cr e tar y
at n . wa l k er @th e mar sd e n. co.u k .




                                                     Pa g e 18 o f 18

				
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