OUR APPROACH TO RISK

The Lloyds TSB approach to risk is founded on strong corporate governance practices whereby the board takes the lead in establishing the tone at the 'top' and approving professional standards and corporate values for itself, senior management and other colleagues. The board ensures that senior management implements strategic policies and procedures designed to promote professional behaviour and integrity. The board also ensures that senior management implements risk policies and risk appetites that prohibit and, where appropriate, limit activities, relationships, and situations, that might diminish the quality of corporate governance. All colleagues from the group chief executive down are assessed against a balanced scorecard that explicitly addresses their risk performance.

This board-level engagement, coupled with the direct involvement of senior management in group-wide risk issues at group executive committee level, ensures that issues are escalated on a timely basis and appropriate remediation plans are put in place. The interaction of the executive and non-executive governance structures relies upon a culture of transparency and openness that is encouraged by senior management. Key decisions are always taken by more than one person. Within Lloyds TSB there is a strong culture of command and control from the centre with short lines of communication between divisions and functions.

The group business risk committee and the group asset and liability committee are chaired by the group chief executive and include all members of the group executive committee. The aggregate group-wide risk profile and portfolio appetite are discussed at their respective monthly meetings. This is a key component of the Lloyds TSB approach to risk management and provides oversight on behalf of the board to line management in specific business areas and activities. It is supported by the chief risk officer being a full member of the group executive committee and reporting to the group chief executive with direct access to the chairman and the risk oversight committee.

Table 1.1 sets out the role of the second line of defence and in particular that of the risk oversight committee and its interaction with the chief risk officer, the group risk directors and the divisional risk officers. This structure which has been in place for a number of years, has evolved with the risk oversight committee reviewing regular reports on the Group's risk exposures as well as taking a keen interest in the adequacy and capability of resources within the risk functions.

Lloyds TSB has a conservative business model and risk culture. The focus has been and remains on building and maintaining long-term relationships with customers. This involves taking a 'through the cycle' view whereby the sustainability of a relationship through good and bad economic times is taken into account. The approach is supported by a 'through the cycle' approach to risk with strong central control and monitoring.

There is a matrix approach to risk management which includes group risk directors being responsible for individual risk types in aggregate across the Group and divisional risk officers being responsible for the aggregate risk profile within their respective divisions. The group risk directors and divisional risk officers all have a direct reporting line to the chief risk officer. This matrix approach enables the group executive committee members to fulfil their accountabilities for risk management and enables the chief risk officer to inform the risk oversight committee of the aggregate risk profile of the Group.

The sections that follow set out the risk management policies, practices and structures that applied during the past year to Lloyds TSB Group plc. These policies, practices and structures were adopted by Lloyds Banking Group from the date of completion of the HBOS plc transaction.