Pillar 3 Disclosure-Basle II

15th Oct 2008 12:18

West Bromwich Building Society Basel II Pillar 3 Disclosures for the year ended 31st March 2008

 

1. Overview

Background

The Capital Requirements Directive (Basel II), which was introduced on 1 January 2007, set out new disclosure requirements for banks and building societies. The disclosure requirements 'Pillar 3' aim to complement the minimum capital requirements (Pillar 1) and the supervisory review process 'Pillar 2' and aim to encourage market discipline by allowing market participants to assess key pieces of information on risk exposures and the risk assessment processes of the firm.

Basis of Disclosures

The disclosures in this report have been prepared for the West Bromwich Building Society. These disclosures meet the Pillar 3 quantitative and qualitative disclosure requirements.

Frequency

This report will be made on an annual basis as at the Accounting Reference Date (ARD), i.e. as at 31 March, and in future will be published within four months of the ARD. The Society will aim, however, to make the disclosures shortly after the publication of the Annual Report & Accounts.

Location and verification

This report will be published on the West Bromwich Building Society website (www.westbrom.co.uk) and will not be subject to external audit, except to the extent that any disclosures are equivalent to those made under accounting requirements. 

The Pillar 3 disclosures have been prepared purely for explanation of the basis on which the Group has prepared and disclosed certain capital requirements and information about the management of certain risks and for no other purpose. They do not constitute any form of financial statement and must not be relied upon in making any judgement on the Group.

  

2. Scope 

For accounting purposes, the Society's consolidation group comprises the Society itself and a number of subsidiary and quasi subsidiary bodies (see table 1 below).

For prudential and Pillar 3 Reporting purposes, the Society solo consolidates certain of its subsidiaries and the investment in the Special Purpose Vehicles (SPV's) are deducted from capital resources. The subsidiaries included in the solo consolidated group are noted in the Simplified legal Structure below. 

There are no current or foreseen material practical or legal impediments to the prompt transfer of capital resources or repayment of liabilities among the parent undertaking and its subsidiary undertakings.

Simplified legal structure of the West Bromwich Group

(showing % ownership/interest)

 

http://www.rns-pdf.londonstockexchange.com/rns/8826F_1-2008-10-15.pdf

 

3. Risk Management Objectives and Policies 

 

The Group's risk management governance structure is composed of several committees that have responsibility for key risk management areas. Each committee has defined Terms of Reference allocating their accountability and responsibilities. An illustration of how these committees feed up to the Group Board is provided below:

 

 

http://www.rns-pdf.londonstockexchange.com/rns/8826F_2-2008-10-15.pdf

 

The main roles of the committees are as follows:

Audit & Risk Committee (ARCO)

ARCO, which is a Board Sub Committee, considers and approves, on behalf of the Group Board, the Group's risk management and the control framework, reviews the Group's financial statements prior to Board approval, manages the relationship with the Group's external auditors, reviews reports on the operation of internal controls and monitors control issues of major significance to the Group. 

The Committee also monitors key risk management information. The Chairman of ARCO reports to the Group Board on the Committee's activities quarterly.

Board Credit Committee (BCC)

BCC, which is a Board Sub Committee, monitors lending policies, and approves changes to lending policies which lie outside GCPC's remit. 

Group Credit Policy Committee (GCPC)

GCPC, which is an Executive Committee, is a review and validation committee that considers changes in the Group's lending policies.

Assets and Liabilities Management Review Committee (ALMaR)

ALMaR, which is a Board Sub Committee, reviews policies and decisions made by ALCO, ensures the quality of Treasury staff is appropriate, and reviews Treasury performance generally.

Assets and Liabilities Committee (ALCO)

ALCO, which is an Executive Committee, recommends Group policy in relation to liquidity and funding, market risk, treasury policy and treasury delegations and monitors compliance with these policies. ALCO is also responsible for considering the Group's capital structure.

ICAAP Executive Committee (ICAAPEC)

ICAAPEC, which is an Executive Committee, considers and recommends to the Board measures to develop and control the Society's Internal Capital Adequacy Assessment Process (ICAAP). It additionally monitors the Capital Management Policy, and recommends such changes to this policy as necessary to implement the Society's strategic objectives. 

  3. Risk Management Objectives and Policies (continued)

The most significant risk types to which the Group is exposed are discussed below:

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes and information systems, from misconduct by people or from unforeseen external events. 

The operational risk management framework for the Group is implemented by the Group's Risk Division. The Group's integrated risk management framework ensures that there is oversight of the key risk exposures facing the Group. The Group sub-divides the key operational risk exposures into the following risk categories:

Compliance

Control

Customer

Disaster

Environment

Human Resource

Investment 

Insurance 

Legal

Procedure

Product

Reputation

Strategy

Subsidiary

Systems

Technology Development

The responsibility for each key risk is allocated to an owner, all of whom are Executives reporting to an Executive Director. Risk self assessment is undertaken by each Executive owner, specifying the financial impact and likelihood of a specific operational risk event analysed by risk category. Output from this process is used to assess the Group's additional capital requirement for operational risk. Risks are monitored through control risk self assessments (CRSAs), use of key risk indicators and analysis of loss and potential loss data.

Oversight and governance arrangements for the setting and management of a robust operational risk management policy and culture are the responsibility of the Board and the Audit & Risk Committee. 

An independent Operational Risk department within the Risk Division has the overall responsibility for ensuring effective operation of the framework, within which operational risk is managed, and for its consistent application across the Group.

The effectiveness of the risk management system is regularly reviewed and reported by ARCO, and updates are regularly provided on the Group's operational risk position to the Board.

Both the Board and ARCO assess changes in the business environment, product developments, the internal management environment and external developments when reviewing and setting the risk management control framework.

The Group has adopted the standardised approach (TSA) to operational risk for calculating Pillar 1 capital requirements, and applies a percentage to the average gross income within each business line over the preceding 3 years.

  

Credit Risk

Credit risk refers to the risk that a customer/ counterparty to a contract will not be able to meet its obligations as they fall due. For the purposes of the Group, this normally means the risk that a borrower will not repay their mortgage loan, or that a financial institution will not repay funds invested by the Society in that institution.

Credit risk is actively managed by assessing, at a Group level, the amount of risk accepted in respect of specific borrower profiles. Limits are then placed on such lending, depending on the overall risk position of the Group. This helps to form the Board's approved lending policy. 

Credit risk exposures relating to advances secured on commercial property are managed through the loan advance approval process and lending limits set by the Board Credit Committee (BCC) and/or the Board. Any proposed transactions involving significant advances are reviewed by the BCC which assesses all such new loans and monitors existing loans. This Committee, which is chaired by a Non Executive Director, also maintains the Commercial Lending Policy and sets limits in respect of credit risk exposure relating to commercial undertakings.

Additionally, credit risk can occur within treasury transactions (used to meet liquidity requirements and those hedging instruments used for interest rate risk purposes). Exposure to this type of credit risk is managed by the Treasury Middle Office team who are part of the Group Risk division. The Assets & Liabilities Committee (ALCO) reviews the Treasury Policy and limits, with the Treasury teams being required to report to ALCO on a monthly basis confirming compliance with such policy/ limits.

Market Risk

Market risk relates to the possible changes in value of or income arising from the Group's assets and liabilities as a result of changes in interest/exchange rates. The Society manages this exposure through the Group Treasury department. This department is responsible for managing the Group's exposure to all aspects of market risk within parameters set by the Board. The Assets and Liabilities Management Review Committee (ALMaR) reviews and approves the Treasury Policy, and ensures that regular reports on all aspects of market risk (including interest rate risk and foreign currency risk) are assessed and reported to the Board.

Although the Treasury department uses derivative instruments in managing such risks, their use is only permitted in accordance with the provisions of the Building Societies Act 1986, which places restrictions on the use of derivatives (i.e. to reduce the risk of loss arising from interest rate changes, foreign exchange rate changes or other prescribed factors which affect the business).

Interest Rate Risk

Interest rate risk arises from the mortgage, savings and other financial services products that the Group offers. The varying interest rate features and maturities on these products and the need to raise wholesale funds to fund these products create interest rate risk exposures. These primarily arise from the imperfect matching of interest rates between different financial instruments and the timing differences on the re-pricing of assets and liabilities. This risk is managed on a continuous basis, within limits set by the Board, through the use of appropriate financial instruments, including derivatives. 

The Group monitors risk using a risk management system and operates within limits set down by ALCO. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates.

Liquidity Risk

Liquidity risk is the risk that the Group does not have sufficient financial resources available to meet its obligations as they fall due, or that the Group is unable to meet regulatory prudential liquidity ratios. It is Group policy to ensure that sufficient liquid assets are at all times available to meet the Group's obligations, after taking into account withdrawals of customer deposits, draw-down of customer facilities and growth in the balance sheet. The management of the Group's liquidity is the responsibility of Treasury, which provides funding to and takes surplus funds from each of the Group's businesses as required, and also holds liquid assets to cover any liquidity shortfall. Daily monitoring of liquidity limits is performed by the Treasury Middle Office (a part of Business Risk). Liquidity policy is approved by ALCO and ratified by the Group Board.

The Group performs liquidity stress testing based on a range of adverse scenarios, and has a liquidity contingency funding plan which is maintained in order to ensure that the Group has access to sufficient resources to meet obligations as they fall due if these scenarios occur.

Stressed liquidity profiles, covering a wide range of scenarios, are reported to ALCO at least quarterly.

Foreign Exchange Risk

The Group's policy is to have no material open foreign currency positions. As an occasional part of its operations, Treasury borrows and invests funds in currencies other than Sterling. The foreign exchange risks of these activities are hedged within Treasury's limits. 

Equity Risk

The Group's policy is to have no material exposure to equity risk. The Group sells stock market linked bonds which are hedged externally. Positions may arise in the management of such bonds due to mismatches between the hedging contracts and the underlying customer liabilities. Procedures are established to minimise these positions. The Group has no material net exposure to equity risk and has therefore not included non-trading book equities disclosures.

Concentration Risk

Concentration risk is the risk arising from lack of diversification in the Group's business. As a building society, the business of WBBS is by nature concentrated in residential mortgage lending funded by retail savings. Historically the residential loans have been predominantly concentrated in the heartlands of the West Midlands as the branch network was traditionally the main source of business. More recently, mortgage lending has been expanded to other parts of England, Wales, Scotland and Northern Ireland as greater reliance has been placed on the intermediary mortgage market. This has removed much of the historic regional bias. The Group currently has no international mortgage exposures. Geographical exposure is monitored by the BCC. 

It is also recognised by the Group that there is some concentration in Buy to Let loans within the lending portfolio. Although the Group has found that BTL continues to experience arrears rates that are lower than traditional residential mortgages the Group has decided to hold more capital to offset the possibility of greater risk. Arrears performance is closely monitored and reported to the Group's Board on a monthly basis. 

 

4. Capital Resources 

The table below summarises the composition of regulatory capital for the Group as at 31 March 2008. During the year ended 31 March 2008, the individual entities within the Group and the Group itself complied with all of the externally imposed capital requirements to which they are subject.

				Notes		As at 31.3.08 £m
Core Tier 1 capital
	Retained earnings and other reserves			1		330.0
	Permanent interest bearing shares			2		77.1
						407.1
Deductions from Tier 1 capital
	Intangible assets			3		(11.5)
Tier 1 capital after deductions						395.6
Tier 2 capital
	Subordinated debt			4		184.3
	Revaluation reserve					6.1
	Collective provisions					2.8
						193.2
Deductions from Tier 2 capital						0.0
Tier 2 capital after deductions						193.2
Deductions from total Tier 1 and Tier 2 capital				5		(33.9)
Total capital resources						554.9

Notes:

 

1. Retained earnings and other reserves exclude gains or losses on cashflow hedges and available-for-sale assets. The regulatory capital rules allow the pension scheme deficit to be added back to regulatory capital and a deduction taken for an estimate of the additional contributions to be made in the next 5 years, less associated deferred tax. When the scheme is in surplus, the pension fund asset is not included within capital. This adjustment is reflected in the reserves number.

2. On 29 July 2005, West Bromwich Building Society issued £75m of fixed rate non-cumulative callable Permanent Interest Bearing Shares (PIBS). The PIBS entitle the holders to a discretionary fixed non-cumulative dividend of 6.15% per annum payable half yearly from 5 April 2008 until 5 April 2021 and half yearly thereafter at a rate of 2.80% per annum above the benchmark gilt. The PIBS are redeemable at the option of West Bromwich Building Society on 5 April 2021 or on each half years dividend payment date thereafter. No such redemption may be made without the consent of the Financial Services Authority.

The PIBS capital of £77.1m is after adding back £2.2m of fair value adjustment. The capital value includes £2.2m of accrued interest.

3. Intangible assets include capitalised software and goodwill.

 

4. The subordinated debt was raised in order to increase the capital base of the Society. The capital value includes £2.1m of accrued interest.

 

5. Subordinated and start-up loans to securitisation vehicles.

4. Capital Resources (continued)

In accordance with FSA guidance, in the last five years to maturity, the subordinated debt will be amortised on a straight line basis.

					Interest rate %		Value as at 31.03.08
							£m
Subordinated notes
Floating rate subordinated loan 2013					n/a		5.1
Fixed rate notes due 2013					6.956		7.8
Fixed rate notes due 2013					6.925		7.8
Fixed rate notes due 2019					6.733		10.3
Fixed rate notes due 2036					8.030		10.7
Fixed rate notes due 2034					6.960		5.6
Fixed rate notes due 2035					6.960		5.6
Fixed rate notes due 2031					6.410		16.0
Fixed rate notes due 2031					6.320		8.0
Floating rate subordinated loan 2014					n/a		10.1
Fixed rate notes due 2025					5.660		25.2
Fixed rate notes due 2017					6.196		50.4
Fixed rate notes due 2017					6.641		25.5
Total subordinated liabilities							188.1
Less: Fair value adjustments							(3.8)
Total							184.3

The interest rate on both the floating rate subordinated loans 2013 and 2014 is reset half yearly, at premia of respectively 1.25% and 1.60% over LIBOR. The rights of repayment of the holders of subordinated debt are subordinated to the claims of depositors, all creditors, and members holding shares in the Society, as regards the principal of their shares and interest due to them.

The Group has not had any defaults of principal, interest or other breaches with respect to all liabilities during the period.

 

5 Capital Adequacy

In order to protect the solvency of the Group, internal capital is held to provide a cushion for unexpected losses. In assessing the adequacy of its capital, the Group considers its risk appetite, the material risks to which the Group is exposed and the appropriate management strategies for each of the Group's material risks, including whether or not capital provides an appropriate mitigant. 

In addition to capital adequacy reporting to the FSA, the Groups Internal Capital Adequacy Assessment Process (ICAAP) document is updated on a quarterly basis, in order to assess the Group's capital adequacy and to determine the levels of capital required going forward to support the current and future risks in the business. In addition to the quarterly Board review of the ICAAP, the main elements within the ICAAP affecting capital planning and capital usage are reviewed monthly by senior management.

Finance is responsible for producing budgets to identify expected future capital requirements resulting from changes to business volumes and mix of assets and activities. 

The amount and composition of the Group's capital requirement is determined by assessing the minimum capital requirement under Pillar 1 based upon the Capital Requirements Directive (CRD), the impact of stress and scenario tests, the Group's Individual Capital Guidance from the FSA and the capital requirement that is consistent with the Group's target external rating.

The following table shows the Group's Pillar 1 capital requirement by asset class:

	Notes	As at 31.03.08£m
Central governments or central banks		-
Regional governments or local authoritites		0.1
Administrative bodies and non-commercial undertakings		-
Multilateral development banks		-
International organisations		-
Institutions		5.5
Corporates		-
Retail		11.1
Secured on real estate property		230.6
Past due items		5.6
Items belonging to regulatory high risk categories		-
Covered bonds		-
Securitisation positions		3.9
Short term claims on institutions and corporates	1	25.3
Collective investment undertakings		-
Other items		16.8
		298.9
Operational Risk - Standardised Approach		11.9
Counterparty credit risk - Standardised Approach		1.3
Total Pillar 1 capital requirement		312.1

Notes:

 

1. Represents treasury assets with residual maturity of less than 3 months.  6 Counterparty Credit Risk

Counterparty Credit Risk (CCR) in the context of this disclosure is the risk that the counterparty to a derivative transaction posted to the Banking Book could default before the final settlement of the transaction's cash flows. The duration of the derivative and the credit quality of the counterparty are both factored into the internal capital and credit limits for counterparty credit exposures.

Credit Support Annexes (CSA) exist for collateralising derivative transactions with counterparties to which the Group has its largest derivative exposures in order to mitigate the risk of loss on default. Although these CSAs are taken into consideration when setting the internal credit risk limits for derivative counterparties, they are not recognised as credit risk mitigation for reducing the exposure on the derivative transactions in the Pillar 1 regulatory capital calculations. Netting is ignored for counterparty risk calculation.

The Group measures exposure value on counterparty credit exposures under the CCR mark to market method. This exposure value is derived by adding the gross positive fair value of the contract (replacement cost) to the contracts potential credit exposure, which is derived by applying a multiple based on the contracts residual maturity to the notional value of the contract.

The following table includes interest rate and foreign currency derivative contracts:

			Gross Positive Fair values of contracts	Potential Credit Exposure	Total Derivative Credit Exposure
			(A)	(B)	(C) = (A)+(B)
			£m	£m	£m
Banking Book			30.1	38.5	68.6

Types of derivatives

The principal derivatives used by the Group are interest rate swaps, cross currency interest rate swaps and index linked swaps that are used to hedge Group Balance Sheet exposures. 

The following table describes the significant activities undertaken by the Group, the related risks associated with such activities and the type of derivatives which are typically used in managing such risks. Such risks may also be managed using balance sheet instruments as part of an integrated approach to risk management.

Activity	Risk	Managed by
Management of the investment of reserves and other non-interest bearing liabilities	Sensitivity to changes in interest rates	Matching against fixed rate assets
Fixed rate mortgage lending and other assets	Sensitivity to rises in interest rates	Pay fixed rate interest rate swaps and swaptions, matching against fixed rate receipts
Fixed rate savings products and funding	Sensitivity to falls in interest rates	Receive fixed rate interest rate swaps and swaptions, matching against fixed rate liabilities
Investments, funding or products denominated in foreign currencies	Sensitivity to changes in interest rates and currency exchange rates	Cross currency interest rate basis swaps
Equity linked investment products	Sensitivity to changes in equity indices	Equity linked swaps and options
Cap, collared or floored products	Sensitivity to changes in interest rates	Matching against appropriate cap, collar or floor derivatives or suitable balance sheet items

6 Counterparty Credit Risk (continued)

Derivative financial instruments - Notional value of Swaps

A description of the derivative financial instruments used by the Group for hedging purposes is given in the financial risk management report within the Annual Report and Accounts.

					Notional principal amount £m
Solo Consolidated Group - 2008
Derivatives held for hedging
	derivatives designated as fair value hedges				836.8
	derivatives designated as cashflow hedges				40.8
	other derivatives held for hedging				1,652.6
Total derivative assets/liabilities held for hedging					2,530.2

  7 Credit Risk and Dilution Risk

Impairment of mortgage loans and advances 

A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. Objective evidence of impairment can be defined as one or more events occurring after the initial recognition of the asset (a 'loss event') and that loss event has an impact on the estimated future cashflows of the financial asset or group of financial assets. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events:

• significant financial difficulty of the issuer or obligor;

• a breach of contract, such as default or delinquency in interest or principal repayments;

• the Group, for economic or legal reasons relating to the borrower's financial difficulty, granting to the borrower a concession that the Group would not otherwise consider;

• it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

• the disappearance of an active market for that financial asset because of financial difficulties; or

• observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including: 

- adverse changes of the payment status of borrowers in the group; or

- national or local economic conditions that correlate with defaults on the assets in the group.

The Group first assesses whether objective evidence of impairment exists for financial assets. Residential and commercial lending are initially assessed individually for impairment. Mortgages not individually impaired are then assessed collectively. Available-for-sale and held-to-maturity assets are assessed for impairment on a case by case basis. 

If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment, and for which an impairment loss is or continues to be recognised, are not included in a collective assessment of impairment.

If there is objective evidence of an impairment of loans and receivables or held-to-maturity investments, carried at amortised cost, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Income Statement.

If there is objective evidence of impairment for financial assets classified as available-for-sale, the cumulative fair value loss on the instrument is removed from equity and recognised in the Income Statement.

Financial assets are written off when it is reasonably certain that receivables are irrecoverable.

Past due and impaired loans

Past due is defined as loans where the borrowers contracted payments have not been received by the due date.

The Group is managed as follows, in segments determined according to similar economic characteristics and customer base:

 - Retail lending - incorporating Core Society lending and that of its subsidiaries, private customer savings, financial services; 

 - Commercial - incorporating commercial lending; and

 - Property - incorporating residential property held by the group for rental purposes.

The following tables provide an analysis of impaired and past due loans for the Retail lending and Commercial. There was no impairment within Property. The Group does not consider the geographical spread of impaired exposures to be significant.

  7 Credit Risk and Dilution Risk (continued)

The figures in the following tables include all group companies but exclude the assets of the securitisation entities as these are considered off balance sheet for regulatory purposes.

Retail lending - Payment due status		2008	2008
		£m	%
Loans neither past due or impaired		5,170.7	96.13
Past due but not impaired
- Past due 1 to 3 months		48.5	0.90
- Past due 3 to 6 months		12.5	0.23
- Past due 6 to 12 months		0.4	0.01
Impaired
- Past due 1 to 3 months		85.0	1.58
- Past due 3 to 6 months		35.0	0.65
- Past due 6 to 12 months		8.0	0.15
- Past due over 12 months		2.3	0.04
- Possessions		16.5	0.31
		5,378.9	100.00

£3m (2007: £2m) of loans that would be past due or impaired have had their terms renegotiated. 

The carrying value of the repossessed stock was £17.7m. 

Commercial - Payment due status		2008	2008
		£m	%
Loans neither past due or impaired		1,011.5	99.58
Past due but not impaired
- Past due up to 3 months		0.1	0.01
- Past due 3 to 6 months		0.6	0.06
Impaired
- Past due up to 3 months		1.5	0.15
- Past due 3 to 6 months		1.1	0.11
- Possessions		1.0	0.10
		1,015.8	100.00

The carrying value of the repossessed stock was £0.6m. 

  7 Credit Risk and Dilution Risk (continued)

Impairment losses

		Retail Lending		Commercial		Total
		Individual	Collective	Individual	Collective	Individual	Collective	Total
		£m	£m	£m	£m	£m	£m	£m
At 1st April 2007		15.6	1.6	0.7	1.3	16.3	2.9	19.2
Amounts written off		(1.0)	(0.6)	(0.1)	-	(1.1)	(0.6)	(1.7)
Discount unwind		0.8	-	-	-	0.8	-	0.8
Charge for the Year comprises:
	Provision for loan impairment	5.2	0.4	0.4	0.1	5.6	0.5	6.1
	Adjustments to provisions
	resulting from recoveries	(1.3)	-	-	-	(1.3)	-	(1.3)
Charge for the year		3.9	0.4	0.4	0.1	4.3	0.5	4.8
As at 31st March 2008		19.3	1.4	1.0	1.4	20.3	2.8	23.1

All impairments were against UK assets. There were no impairment losses in Property. All residential and commercial mortgage loans were against UK assets.

Analysis of Treasury credit risk exposures

The tables below analyse the Group's regulatory credit risk exposures to Treasury counterparties as at 31 March 2008. These exposures include on balance sheet exposures and off-balance sheet exposures after credit conversion factors (CCF) have been applied. The Group continues to have no exposure of any kind to the emerging markets or any mortgage market other than the UK.

	2008
	£m
Concentration by credit grading
AAA to AA-	1,574.9
A+ to A-	282.7
Building Societies	239.4
Other	15.6
	2,112.6
Concentration by sector
Financial institutions	1,864.1
Local authorities	7.2
Asset backed securities	241.3
	2,112.6
Concentration by region
UK	1,016.2
Europe (excluding UK)	890.0
North America	206.4
	2,112.6

  7 Credit Risk and Dilution Risk (continued)

Residual maturity breakdown of exposures by asset class

The following table shows the residual maturity of exposures stated on a contractual rather than an expected basis, and does not take into account the cash flows payable or receivable over the life of the exposure. For example, if an instrument has a remaining maturity of over 5 years, the whole of the exposure will be shown in the over 5 year category. These exposures include on balance sheet exposures and off-balance sheet exposures after credit conversion factors (CCF) have been applied.

An analysis of the maturity of the exposures for liquidity purposes can be found in Note 2 in the Annual Report & Accounts.

Residual breakdown of exposures by asset class		< 1 year	1 - 5 years	> 5 years	Total
	Notes	£m	£m	£m	£m
Financial institutions		1,656.1	180.3	27.7	1,864.1
Local authorities				7.2	7.2
Residential mortgage backed securities	1		195.8	45.5	241.3
		1,656.1	376.1	80.4	2,112.6

Notes:

1. The residential mortgage backed securities are all rated AAA and relate to property located in the United Kingdom. 

  

8 Credit Risk: Standardised Approach

The Group uses external credit assessments provided by Moody's, Standard & Poor's and Fitch. These are all recognised by the FSA as eligible external credit assessment institutions (ECAI) for the purpose of calculating credit risk requirements under the standardised approach. 

The following table details the ECAIs used for the standardised credit risk exposure classes.

Asset Class		ECAI
Central governments or central banks		Standard & Poor's, Moody's, Fitch
Regional governments or local authoritites		Standard & Poor's, Moody's, Fitch
Institutions		Standard & Poor's, Moody's, Fitch
Securitisation positions		Standard & Poor's, Moody's, Fitch
Institutions
Credit Quality Step	Risk Weight %	Exposure  £m
1	20	123.0
2	50	26.9
3	50	-
4	100	-
5	100	-
6	150	-
Unrated	50	61.9
Total		211.8
Short Term Clams on Institutions (Note 1)
Credit Quality Step	Risk Weight %	Exposure  £m
1	20	1,156.1
2	20	328.0
3	20	-
4	50	-
5	50	-
6	150	-
Unrated	20	99.5
Total		1,583.6
Securitisation positions
Credit Quality Step	Risk Weight %	Exposure  £m
1	20	241.4
2	50	-
3	50	-
4	100	-
5	100	-
6	150	-
Unrated	50	-
Total		241.4

Notes:

1. Represents treasury assets with residual maturity of less than 3 months   8 Credit Risk: Standardised Approach (continued)

Regional Governments or Local Authorities
Credit Quality Step	Risk Weight %	Exposure  £m
1	20	7.2
2	50	-
3	100	-
4	100	-
5	150	-
6	150	-
Unrated	100	-
Total		7.2
Central Governments or Central Banks
Credit Quality Step	Risk Weight %	Exposure  £m
1	0	10.6
2	20	-
3	50	-
4	100	-
5	100	-
6	150	-
Unrated	100	-
Total		10.6

In addition, the Group calculates credit risk for exposures secured by mortgages on residential real estate and commercial real estate using the standardised approach. 

	Exposure value £m		Average risk  weight %
Secured on Residential Real Estate Property*	5,319		36.9%
Secured on Commercial Real Estate Property*	1,129		100%
Unsecured loans	0.2		100%

* The exposure value and average risk weight figures above include past due items.

  9 Exposures to interest rate risk in the non-trading book

Consideration of the Group's interest rate risk is included within Section 3: Risk management objectives and policies.

The following table shows the change in the market value of the Group given a 200bps shift in interest rates. There is no breakdown by currency as the Groups net exposure to currencies other than Sterling is negligible (

	Increase / (decrease) in market value
	+200 Basis points shift in yield curve £m	-200 Basis points shift in yield curve £m
Total	(9.1)	9.1

  10 Securitisation

West Bromwich Building Society has established a number of securitisation structures to raise funding for the Group. Special Purpose Vehicles ("SPVs") have purchased beneficial interests in portfolios of commercial and residential mortgages that are funded by floating rate mortgage backed securities ("Notes"). The assets and liabilities of the SPVs are consolidated at Group level, as West Bromwich Building Society controls the SPVs.

West Bromwich Building Society Group, via its subsidiary companies, West Bromwich Commercial Limited ("WBCL") and West Bromwich Mortgage Company Limited ("WBMC"), provide subordinated and start-up loans to its securitisation structures as follows:

31.3.08

Subordinated loans:

Sandwell Commercial Finance No 1 Plc -  £2.7m

Sandwell Commercial Finance No 2 Plc- £5.3m

Hawthorn Asset Co Limited -  £24m

Start-up loans:

Sandwell Commercial Finance No 1 Plc -  £0.8m

Sandwell Commercial Finance No 2 Plc-  £1.0m

The Notes are serviceable firstly from cash flows generated by the mortgage assets and thereafter from the proceeds of the subordinated loans. The Group receives the excess spread on the transactions as deferred consideration, after the SPVs have met their liabilities. The Group's exposure as at 31 March 2008 (including subordinated and start-up loans) to the credit risk of the securitised mortgages was £33.9m. 

Sandwell Commercial Finance No1 Plc

In May 2004, WBCL sold £250m of commercial mortgage assets to Sandwell Commercial Finance No1 Plc. Sandwell Commercial Finance No1 Plc issued Notes to finance the purchase of a portfolio of loans. 

Sandwell Commercial Finance No2 Plc

In September 2005, WBCL sold £350m of commercial mortgage assets to Sandwell Commercial Finance No2 Plc. Sandwell Commercial Finance No2 Plc issued Notes to finance the purchase of a portfolio of loans.

Hawthorn Asset Co Limited

In December 2006, WBMC sold £320m of residential buy-to-let mortgage assets to Hawthorn Asset Co Limited. Hawthorn Asset Co Limited issued a Variable Funding Note to finance the purchase of a portfolio of loans. In March 2007, WBMC sold a further £291m of residential buy-to-let mortgage assets to Hawthorn Asset Co Limited. Hawthorn Asset Co Limited increased the Variable Funding Note to £600m to finance the second portfolio of loans. 

The balances of assets subject to securitisation and Notes in issue as at 31 March 2008 are as follows:

Securitisation Company	Type	Date of Securitisation	Gross Assets securitised £m	External Notes in Issue £m
Sandwell Commercial Finance No1 Plc	Commercial mortgage securitisation	19 May 2004	155.3	154.6
Sandwell Commercial Finance No2 Plc	Commercial mortgage securitisation	23 September 2005	267.9	264.4
Hawthorn Asset Co Limited	Residential mortgage warehouse	15 December 2006 and 7 March 2007	447.7	447.4
Total			870.9	866.4

Treatment of securitisations in capital calculations

The risk has been transferred to the investors, and hence, there are no risk weighted exposures included in the capital calculation for the exposures that have been securitised. However, the subordinated loans and start-up loans to the securitisation structures are deducted from the Group's capital. 

Securitisation positions retained or purchased

The Group also invests in Residential Mortgage Backed Securities. The treatment of the Group's investment in Residential Mortgage Backed Securities is covered under Section 8 Credit risk :Standardised Approach. 

  11 Credit Risk Mitigation

Treasury

Credit Support Annexes (CSA) exist for collateralising derivative transactions with counterparties to which the Group has its largest derivative exposures in order to mitigate the risk of loss on default. The Credit Support Annexes allow margin calls to be made on the net mark to market value of derivative exposures with a particular counterparty. Although these CSAs are taken into consideration when setting the internal credit risk limits for derivative counterparties, the Group does not currently recognise the risk mitigating effect of these CSAs in its Pillar 1 capital calculations.

A downgrade in the Group's credit rating below BBB+ would have the effect of reducing the market value triggers for margin calls on some of the CSAs resulting in a potential increase in the amount of collateral the Group would have to provide against the derivatives within the CSAs. However, due to the small number of CSAs with downgrade triggers, this is not deemed a significant risk for the Group.

A one notch short term rating downgrade would result in the Group being required to arrange for an alternate swap counterparty to take responsibility for the swaps that the Group provides to certain securitisation vehicles.

  12 Contacts 

Should you have any queries please contact :-

 

Stuart Hislop Treasurer

Tom Lynch Divisional Director - Finance

West Bromwich Building Society. Principal Office: 374 High Street, West Bromwich, West Midlands, B70 8LR. 

Registered Number: 651B

ENDMSCGUGUPUUPRUBA

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