pillar iii disclosure 31 december 2008 · credit risk meaurement, mitigation and ... bamburgh...

Pillar III Disclosure 31 December 2008

Pillar III Disclosure

Index

1 Overview Page

3

2 Scope 4

3 Risk Management

4 Capital Resources 13

5 Capital Adequacy 14

6 Credit Risk Meaurement Mitigation and Reporting 17

7 Securitisation 23

8 Operational Risk 24

9 Market Risk 25

Contact Angela Russell ndash Deputy Finance Director and Group Risk Executive AngelaRussellNewcastlecouk 0191 244 1816 Newcastle Building Society Portland House Newbridge Street Newcastle NE1 8AL

2


1 Overview Background The European Union Capital Requirements Directive (CRD) commonly referred to as Basel II (named after the Basel Committee on Banking Supervision) was introduced on 1 January 2007 Implementation of the CRD in the UK was by way of rules introduced by the Financial Services Authority (ldquothe FSArdquo) in the FSA Handbook Among them are disclosure requirements for banks and building societies operating under the revised capital adequacy framework which are known as Pillar III and are designed to promote market discipline by providing market participants with key information on a firmrsquos risk exposures and risk management processes They aim to complement the minimum capital requirements described under Pillar I as well as the supervisory review process of Pillar II

Basis This disclosure document has been prepared by Newcastle Building Society (ldquoNewcastlerdquo) in accordance with the requirements of Pillar III set out in BIPRU chapter 11 of the FSA Handbook

Newcastle Building Society has adopted the standardised approach to credit risk and operational risk from 1 January 2008 it also became subject to Pillars 2 and 3 from that date The Society has been reviewing the necessary changes required to move to the Internal Ratings Based (ldquoIRBrdquo) approach to retail credit risk and capital management This would allow the Society to use its own estimates of risk rather than values prescribed by the FSA after certain conditions have been satisfied The Society expects to move to an IRB approach longer term as part of ongoing enhancements to the Societyrsquos risk management processes

These disclosures are on a standardised basis and unless otherwise stated all figures are as at 31 December 2008 and based on the most recently published Annual Report and Accounts

Frequency and location This report will be prepared on an annual basis and will be published on the Newcastle Building Society website (wwwnewcastlecouk) as soon as is practicable after publication of the Annual Report and Accounts

Verification These disclosures are not subject to external audit except where they are equivalent to those prepared under accounting requirements for inclusion in the Grouprsquos audited Annual Report and Accounts These disclosures do not constitute any form of financial statement and must not be relied upon in making any judgement on Newcastle Building Society or the Group (as defined below)

3


2 Scope The Basel II framework applies to Newcastle and its subsidiary undertakings (hereby know as the ldquoGrouprdquo)

The Societyrsquos consolidation group for accounting purposes comprises the Society itself and the following subsidiaries

Kings Manor Properties Limited Newcastle Building Society Covered Bonds LLP Newcastle Commercial Lending Limited Newcastle Financial Services Limited Newcastle Mortgage Loans (Jersey) Limited Newcastle Mortgage Services Limited Newcastle Portland House Limited Newcastle Strategic Solutions Limited Newton Facilities Management Limited Newton Facilities Computer Purchasing Limited Purchase Newton Facilities Computer Leasing Limited

All of the above subsidiary undertakings except for Newcastle Mortgage Loans (Jersey) Limited which is incorporated and operates in Jersey are incorporated in England and Wales and operate in the United Kingdom

Under International Accounting Standard 27 the assets liabilities and profit and loss account of the Special Purpose Vehicle (ldquoSPVrdquo) used for securitisation (comprising the following quasi subsidiaries Bamburgh Holdings Limited Bamburgh Finance No 1 PLC and Bamburgh Mortgage Trustees Limited) are brought back into the Societyrsquos financial statements Securitisation is discussed further in section 7

For prudential and Pillar III reporting purposes the Society solo consolidates Newcastle Mortgage Loans (Jersey) Limited and the investment in the Bamburgh SPV There are no current or foreseen legal impediments to the transfer of capital resources or the repayment of liabilities within the Group

Further details of Group consolidation policies and the Group structure are given in notes 1 and 13 of the Grouprsquos audited Annual Report and Accounts

4


3 Risk Management

31 Background The Society and Group risk management framework operates under the lsquothree lines of defencersquo principle The first line of defence is within departments business units and subsidiaries where executives managers and staff have primary responsibility for risk management and ensuring adequate controls are in place to mitigate risk The second line of defence is provided by the Group Risk Committee and supporting sub-committees together with oversight by the Group Risk departments The third line of defence is provided by Internal Audit and the Audit Committee which are responsible for reviewing the effectiveness of the first and second lines of defence The Board has been reviewing the Societyrsquos risk governance structure with a view to adopting a more holistic basis for the oversight of risk across the Group in 2009 This has involved establishing a Group Risk Committee with three new sub-committees in place to cover credit risk market and liquidity risk and operational risk (see further details of new structure given below in paragraph 33)

The Group has detailed risk management policies setting out how risk is managed across the Group including specific risk appetite statements The risk appetite statement sets out for each risk area the various limits and key criteria that must be followed in order to mitigate risk exposures The various limits and criteria are embedded into daily weekly and monthly management and board reporting in order to monitor compliance and risk profile All new projects and initiatives require a full risk and capital requirements assessment to assess the adequacy of the return for the risk being taken and resultant capital required

32 Principal Types of Risk

Credit Risk Credit risk is the risk that a treasury counterparty debtor or borrower will not be able to meet their obligations as they fall due Credit risk arises primarily on retail and commercial loans and on treasury assets held for liquidity purposes The Group has comprehensive policies in place covering all aspects of credit risk management that set out strict criteria that must be followed before funds are advanced and also incorporate limits for concentration risk arising from inter alia large exposures geographical areas and sectors Return on Capital Employed benchmarks are set for all areas of lending which incorporate Pillar I and Pillar II capital requirements thus ensuring reward is commensurate with the risk taken For retail lending the Group operates manual underwriting procedures to prudent policy criteria including restrictions on loan to value and maximum income multiplesrental cover and affordability criteria The Group does not undertake sub-prime or self-certification lending The level of Buy to Let (BTL) lending has been capped via the application of portfolio limits that reflect the risk appetite for this type of lending The Group no longer undertakes commercial lending but the Commercial Risk Division will continue to assess the credit risk of new loans to housing associations and monitor the performance of the commercial and residential investment portfolios through annual reviews and key risk management information including tenant and borrower watchlists arrears trends breach reports and general market and sector specific information During 2008 a new collections division was established within the Group Risk Division reflecting the difficult economic circumstances This division has a more targeted approach to collections and recovery for commercial and BTL portfolio borrowers featuring a rapid response where difficulties are identified such as late payments tenant failure ratings downgrades and general negative market news

5


Credit risk on liquid assets is controlled via the operation of counterparty and country limits for treasury assets Historically counterparty limits were set primarily with regard to external ratings agency assessments with the Society investing only in highly rated financial institutions or other building societies The Society has developed more extensive credit assessment procedures for counterparty limits following the ratings agency failures to predict banking defaults in particular for the Icelandic banks Treasury counterparty risk is monitored within Treasury Middle Office in accordance with the Financial Risk Policy

Liquidity Risk Liquidity risk is the risk of loss caused by the Group being unable to meet its liabilities or commitments as they fall due or to be able to do so only at excessive cost The nature of the business of a building society is to lend longer term (typically 25 years) and fund with short term savings accounts This leads to a maturity mismatch between assets and liabilities

The Grouprsquos liquidity policy is to maintain sufficient liquid resources to cover cash flow imbalances and fluctuations in funding and enable the Group to meet its financial obligations as and when they fall due This is achieved by maintaining a prudent level of liquid assets (including considering the impact where assets have become less liquid) and ensuring that funding and lending plans are always in balance Following the continued turbulence in markets in 2008 the Board concluded that in order to manage down still further the Societys liquidity risk and ensure that it was well positioned to deal with liabilities that mature in 2009 it would

Scale back lending operations for the second half of 2008 and all of 2009 specifically exiting the commercial lending market

Target a reduction in wholesale funding of around 30 over 2009 whilst holding the level of retail savings broadly unchanged The objective is to reduce wholesale funding to around 10

Launch a Covered Bond programme (delivered in January 2009) firstly to position the Society such that it has access to high quality funding lines should the market for the more secure paper return whilst at the same time holding paper that would be eligible for a range of Bank of England initiatives to ease liquidity in the market and

Establish the Societyrsquos eligibility for the Governments Credit Guarantee Scheme (as detailed on the website of the Debt Management Office)

By implementing the above the Board considers that it has acted to minimise the risk of the wholesale markets suffering further tightening in 2009

In terms of the instruments held in the Societyrsquos liquidity portfolio the Board has again considered the impact of the continuing market difficulties This has resulted in the Society moving to very high quality liquid instruments over the year despite the impact on margin Further details are given in the Risk Management Report in the Group Annual Report and Accounts

6


Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes people and systems or from external events For the Group this definition includes legal risk strategic risk and reputation risk

The Group has a well established operational risk framework with a detailed Operational Risk Policy that sets out the framework for operational risk including the measurement and management of risk risk appetite managing project risk capital adequacy requirements tracking of risk events and operational losses timescales for implementation of action plans and escalation procedures for more serious risk events that require immediate action to mitigate loss

A key feature of the Grouprsquos operational risk framework is that key risks and controls are identified for all areas of the business ranging from the high level risks discussed at Board level down to the risks within individual departments Risk assessments remain the responsibility of the relevant departmental managers and executives and are updated monthly for new risks the results of risk events and following internal audit reviews All risks are scored in terms of the impact and probability of the risk arising and are scored before and after considering the impact of controls The operational risk system is also fully utilised by internal audit with the audit inspection plan based on high scoring risk areas or where there is significant reliance on key controls to mitigate the impact of catastrophic and major risks The Group Corporate Insurance policies are also negotiated with full regard to the key risks within the Group requiring greater mitigation

Market Risk The principal market risk to which the Group is exposed is interest rate risk The Group has no exposure to foreign currency and only a very moderate direct net exposure to equities through a small shareholding in Standard Life arising from the demutualisation of the insurance company in 2006 The Group has an indirect exposure to the performance of equities through its defined benefit pension schemes Interest Rate Risk arises on mortgages savings and treasury instruments due to timing differences on re-pricing of assets and liabilities and the imperfect matching of interest rates between different asset and liability types This risk is managed using financial instruments including derivatives Natural hedging strategies are also utilised eg matching two year fixed rate mortgages with two year fixed rate bonds The Grouprsquos risk appetite for interest rate risk is documented in the Financial Risk Policy Statement and includes limits for the maximum adverse impact on net interest margin maximum value at risk as well as limits to minimise gaps in specific time buckets Further details are given in the Risk Management Report in the Group Annual Report and Accounts

Concentration risk Concentration risk is the risk arising from a single exposure or group of exposures with the potential to produce losses large enough to threaten the financial stability of the Group or its ability to maintain core business activities Concentration risk arises from operating in a particular geographical location a particular industry sector or from large exposures in the form of large loans to single borrowers The Society whilst being a regional building society has a geographic concentration within the North East of England of less than a quarter of its residential mortgage book

The Group has a comprehensive range of limits and controls in place which enable the Board and related sub-committees to measure and monitor concentration risk across the Societyrsquos business and at a Group consolidated level In the first instance concentrations are monitored to ensure

7


compliance with Board exposure limits The Group Risk Committee has oversight of all relevant management information and is able to provide assurance and recommendations to the Board in relation to the management of any significant emerging risks

Pension obligation risk Pension liability risk is the risk that the Society has to make good a shortfall between assets and liabilities in its defined benefit pension schemes in order to ensure that the schemes can meet their obligations for pension benefits due to current and former employees The Group has defined benefit schemes which are closed to new members The possibility exists of an impact on Group profitability from increased longevity increasing scheme liabilities a fall in asset values or returns changes to discount factors used to value future pension liabilities or from changes in accounting rules or policy leading to the requirement for extra contributions Closing the defined benefit scheme to new members has not capped exposure to this risk but it has reduced total risk

Solutions Business Risk The Society established the Strategic Solutions division in 1997 whereby the Society provides outsourced services such as internet banking and account administration to other financial institutions This includes savings management mortgage processing outsourced systems to several organisations and operating as lsquoissuing bankrsquo for over 150 prepaid card schemes There are various operational and strategic risks arising from this business area including inter alia-

Cumulative contract liability to third parties Breach of information securityData Protection Act Systems failures (mainframe internet and telephony) Failure of Societyrsquos employees to follow third party proceduresbasic human error and Poor Service ndash resulting in failure to meet Service Level Agreements

In addition as part of the update of the Grouprsquos 2007 Internal Capital Adequacy Assessment Process (ldquoICAAPrdquo) a concentration risk was identified in relation to the Icesave contract this being one of the Grouprsquos largest third party contracts and specific capital was allocated at Pillar II to cover this risk based on the loss of the contract via a termination event The loss of the Icesave contract has therefore had no impact on the Grouprsquos overall capital adequacy calculations as the Pillar II add on has been removed following the loss of the contract

The Society has robust systems and controls in place to address the risks in the Solutions area including dedicated teams in IT Finance Compliance Financial Crime Unit Technical departments and dedicated relationship and service managers A separate Solutions Board exists to oversee third party contract risks financial performance and operational matters

8


33 Risk Governance The Society has a well developed risk and compliance structure with the credit risk financial risk and operational risk departments supported by separate compliance internal audit and financial crime units The Society has extensive policies and procedures covering financial risk credit risk and operational risk which are approved by the Board via sub-committees as appropriate

In 2009 a new Group Risk Committee has been established that is supported by sub-committees covering the key risk areas to which the Group is exposed ie credit risk operational risk market and liquidity risk Previously operational risk reported directly to the Audit Committee and other risk areas were overseen by the Financial Risk Committee

RISK GOVERNANCE STRUCTURE

Board

Group Risk Committee Audit Committee

Retail and Commercial Operational Risk Assets amp Liabilities Credit Committee Committee Committee

The Group Risk Committee is a Board Committee that has responsibility under its detailed terms of reference for considering and co-ordinating the approach to risk management across the group in the following key areas-

Approval of all risk policy statements at least on an annual basis Approval of corporate insurance policy statement Oversight of the Retail amp Commercial Credit Committee Oversight of the Operational Risk Committee Oversight of the Assets amp Liabilities Committee Review and assessment of the adequacy of risk management information to monitor and

control risks Consideration and assessment of new initiatives and projects including risks to which the

Group is exposed and the amount of capital required to cover those risks Consideration of the top risks for the Society and Group including low likelihood high

impact risks Approval and recommendation to the Board of the Internal Capital Adequacy Assessment

Process and Consideration and approval of stress testing scenarios including reverse stress tests

The Group Risk Committee is supported by three executive committees that meet on a monthly basis as follows-

9


The Retail amp Commercial Credit Committee is responsible for credit risk across the Group mortgage portfolio as follows-

Review of lending policy statements and compliance therewith Review of risk dashboards for all areas of the mortgage portfolio Review and approval of arrears and possessions policy (including breach policies) and

compliance therewith Monitor compliance with controls and limits set out in the lending policy statements and

in particular those covering specific risk appetite limits such as product and sector concentration limits

Sanction of larger loans in accordance with the lending policy statement and limits set on large lending

Review and approval of new types of mortgage products including ensuring return on capital employed meets internal benchmarks

Performance review of underwriters panel managers and brokers Review of credit risk profile of existing mortgage book including trends on arrears losses

and capital requirements Review of arrears and possessions reports including causal factors and lessons learned

This includes review of tenant and borrower watch-lists and sector specific issues Review of MIG policy arrangements and Review and approval of sections of the ICAAP relating to mortgage credit risk

The Operational Risk Committee is responsible for operational risk across the Group as follows-

Review of operational risk policy statement and compliance therewith Review of risk indicators in operational risk dashboard including risk events trends across

the business actions being taken on significant risk events changes to top risks and status of project risks

Review of compliance risk indicators including in relation to MCOB TCF Complaints Information Security and Fraud Risk Policy compliance

Review of risk dashboards covering all aspects of operational and compliance risk Approval of corporate insurance policy statement status of claims and effectiveness of

policies at mitigating operational risk Review of business continuity policy disaster scenarios and results of annual disaster

recovery test and Review and approval of sections of the ICAAP relating to operational risk

The Assets and Liabilities Committee is responsible for all aspects of financial risk management including liquidity risk market risk treasury counterparty credit risk and balance sheet management The ALCO terms of reference covers the following areas

Review of Financial Risk Policy Statement and compliance therewith Review of treasury dealing strategy and compliance with risk appetite statement Management of balance sheet assets and liabilities including impact of pension scheme

liabilities Review of risk dashboards covering all aspects of treasury liquidity funding and interest

rate risk Monitoring of interest rate risk and hedging activity including profit performance

10


Review of treasury counterparty limits and country limits Review of funding including sources mix and compliance with limits Review of liquidity requirements and limits and results of liquidity stress testing

scenarios Review and approval of sections of the ICAAP relating to liquidity and market risk and Review and approval of product pricing including rate changes mix of new business and

maturity defence strategy

The Group has detailed risk management policies setting out how risk is managed across the Group including specific risk appetite statements The risk appetite statement sets out for each risk area the various limits and key criteria that must be followed in order to mitigate risk exposures The various limits and criteria are embedded into daily weekly and monthly management and board reporting in order to monitor compliance and risk profile

34 Other Governance

The Board The Board has responsibility for monitoring operational and financial performance in pursuit of its strategy and for the setting of the Group strategy It also approves annual budgets financial policy risk management strategy adequacy of capital plans and major capital expenditure as well as the issue of annual and interim accounts

Remuneration Committee This Committee considers and makes recommendations on executive emoluments and contracts of employment as well as on the level of non-executive fees and pension arrangements Its report is included on pages 16 amp 17 of the Annual Report and Accounts

Nominations Committee This Committee advises on the structure of the Board on nominations to it and the re-election of Board members retiring by rotation The Committee consists of the entire Board

Solutions Committee This Committee oversees B2B third party contract risks financial performance and operational matters In addition it sanctions new third party contracts after considering the relevant financial model contract obligations and full project risk assessment

Audit Committee The Audit Committee has responsibility for reviewing and assessing the effectiveness of internal audit The committeersquos terms of reference with regard to internal audit and internal control and risk management include the following-

Internal audit To review the operation of the Grouprsquos third line of defence ie internal audit and assess

its effectiveness at reviewing the second and third lines of defence To review the effectiveness of the Grouprsquos first and second lines of defence to review the internal audit programme and ensure that the internal audit function is

adequately resourced and has appropriate standing within the Group to ensure that the internal auditor has direct access to the board chairman and the audit

committee and is accountable to the audit committee to receive a report on the results of the internal auditorrsquos work on a periodic basis

11


to monitor and assess the role and effectiveness of the internal audit function in the overall context of the Grouprsquos risk management system

to approve the appointment or dismissal of the head of internal audit

Internal control and risk management to review the companyrsquos procedures for detecting fraud and whistle blowing and ensure

that arrangements are in place by which staff may in confidence raise concerns about possible improprieties in matters of financial reporting financial control or any other matters

to review managementrsquos and the internal auditorrsquos reports on the effectiveness of systems for internal financial control financial reporting and risk management including all aspects of the first and second lines of defence including the operation of the Group Risk Committee

to monitor the integrity of the Grouprsquos internal financial controls to assess the scope and effectiveness of the systems established by management to

identify assess manage and monitor financial and non financial risks (the board retains responsibility for the review of the effectiveness of the system of internal control and must form its own opinion despite aspects of that review being delegated to the Audit Committee)

to review the minutes of the Group Risk Committee to review Group Risk Dashboards that summarise risk exposures for the Group and to review the annual Money Laundering Reporting Officerrsquos report

The Audit Committee also has additional responsibilities in relation to Financial Reporting and External Audit

34 Risk Appetite The Group is committed to remaining a financially strong dynamic and independent mutual organisation that operates for the long term benefit of its members The Grouprsquos risk appetite has been developed with this focus and is ldquoTo manage the Group in a prudent manner so that the risks undertaken by the business are well controlled and commensurate with the return achievedrdquo

This manifests itself in detailed policies across the business including Tranche limits for new products Geographic product and large exposure limits Lending limits for LTV and income multiples Maturity and gap limits Hedging strategies Limits on instrument use and counterparty exposures Liquidity and funding limits Interest rate risk limits in terms of balance sheet and net income impact Operational risk policy and Tax risk policy

The Group acknowledges that the risk appetites across the business may change depending on the economic cycle and market conditions The overall risk appetite in terms of capital and profit put at risk will remain the same but as an adverse cycle approaches the detailed risk appetites will be adapted to achieve the overall risk appetite objectives

12


40 Capital Resources Throughout the year the Society and Group complied with the capital requirements set by the FSA in its Interim Individual Capital Guidance

Total Capital Available An analysis of total capital available (TCA) as at 31 December 2008 is set out in the following table

Tier 1 capital Profit and loss account reserves Permanent Interest Bearing Shares Pension Deficit Adjustment

Group poundm

1833 299

17 Total tier one capital 2149

Tier 2 capital Revaluation reserves Generalcollective provisions Fixed term subordinated debt

-24

608 Total tier two capital 632

Total Capital Available 2781

The TCA of the Society on a solo consolidation basis is not materially different to that on a Group basis so only Group figures have been disclosed

Tier 1 Capital Tier 1 capital comprises profit and loss reserves being the accumulation of retained profits and permanent interest bearing shares (PIBS) PIBS are unsecured deferred shares and rank behind the claims of all subordinated note holders depositors creditors and investing members of Newcastle Building Society Further details on PIBS are given in note 26 of the Annual Report and Accounts Core Tier 1 capital comprises profit and loss account reserves

An adjustment is made to Tier 1 capital in respect of the Grouprsquos pension obligations For accounting purposes the present value of obligations less the fair value of plan assets in respect of the Group pension funds (as disclosed in Note 30 of the Annual Report and Accounts) are included as a liability and deducted from the profit and loss reserves For capital purposes this amount is added back to the Grouprsquos capital and instead a deduction is made for the additional funding that is expected to be paid to the pension funds over the next 5 years

Tier 2 Capital Tier 2 capital comprises reserves created on property revaluations (in this case the reserve is a small deficit of pound11k) and collective provisions against the mortgage book

Fixed term subordinated debt is unsecured and ranks behind the claims of all subordinated note holders depositors creditors and investing members of Newcastle Building Society Further details on subordinated notes are given in note 25 of the Annual Report and Accounts

Under FSA Rules qualifying subordinated notes cannot exceed 50 of the total of Tier 1 capital and Tier 2 capital cannot exceed Tier 1 capital

13


50 Capital Adequacy The Group has adopted the standardised approach to both credit and operational risk since 1 January 2008 in order to calculate the Basel II Pillar I minimum capital requirements

Pillar I capital is reported to the Board each month and to the FSA on a quarterly basis

Internal Capital Adequacy Assessment Process (ldquoICAAPrdquo) The Society and Group ICAAP is updated on a six monthly basis or more frequently where there is a significant change to the business strategy or a major change to the economic environment The ICAAP is updated in conjunction with the update to the Societyrsquos three year strategic plan so that strategy and capital are always in alignment and that the risks arising in pursuit of the Societyrsquos strategy are always fully incorporated into capital requirements

The ICAAP process is presented to and approved by the Board via the Group Risk Committee The last ICAAP was approved by the Board in March 2009 in respect of the year ended 31 December 2008 and covered the capital plan to 31 December 2011 These disclosures include extracts from the Board approved ICAAP and are based on the final financial results of the Society and Group contained in the Annual Report and Accounts

In 2007 whilst the ICAAP was being developed a dedicated Basel Sub-Committee of the Board was established that included as its members the Chairman of Financial Risk Committee The Chairman of the Audit Committee and his successor in 2008 the Chairman of the Society and the Societyrsquos Chief Executive This Sub-Committee was established to debate and discuss the contents of the ICAAP and in particular the capital add-ons required for Pillar II risks This Committee was also responsible for considering and agreeing the scope of stress tests utilising external advisors where appropriate and challenging the executives involved in the detailed process The Group Risk Committee is now responsible for the review and challenge of the ICAAP on a six monthly basis

The ICAAP covers all material risks to determine the capital requirement over a three-year horizon and includes stressed scenarios to satisfy regulatory requirements Where Pillar I capital is deemed insufficient to cover stressed losses a supplementary Pillar II add-on is applied

The Society and Group ICAAP has been subject to review by internal audit and external advisors in order to confirm that the Societyrsquos approach to the ICAAP was robust and fully compliant with the requirements of the FSA Handbook

The ICAAP methodology is being cascaded down through the business as follows

Training The Group has an established training program for risk management which has been in place since 2001 This has been updated for key ICAAP concepts and in particular the need to link strategy risk and capital A mandatory training program covering senior managers staff and new recruits to the business is also in place

Embedding into project methodology The Grouprsquos project management methodology already reflected the need to consider the financial impact of a new project and complete a detailed risk assessment in accordance with the Grouprsquos operational risk policy This has been updated to reflect the specific requirement to consider capital requirements at the planning stage of a project A capital

14


requirements model has been developed that accompanies new projects and initiatives presented to the Board

Embedding into product pricing The ICAAP methodology of considering both Pillar I and Pillar II capital requirements has been incorporated into the product pricing methodology for lending This involves quantifying the Pillar I capital requirements for both credit and operational risk based on the expected balances average LTV of the product expected level of arrears for the risk profile of the product and the net income Specific risks for Pillar II are also incorporated and include consideration of capital requirements for a product concentration risk add-on and pro-cyclicality risk

Any new projects or products representing a material deviation to the three year strategic plan upon which the ICAAP is based will require a formal capital requirements assessment to be approved by the Board in advance of commencement

Minimum Capital Regulatory Requirement Pillar I The table below shows the Grouprsquos Pillar I capital regulatory requirement (ldquoCRRrdquo) for each key risk area under the standardised approach (expressed as 8 of the risk weighted exposure amounts for each of the applicable standardised credit risk exposure classes) at 31 December 2008

Group Pillar I poundm

Risk Weighted

Assets Capital 8 Mortgage Credit Risk

Liquidity Credit Risk

Other Assets

Hedging Instruments

Mortgage commitments

18936

2097

800

410

204

1515

168

64

33

16

Total Credit Risk (standardised) 22447 1796

Operational Risk (standardised) 907 72

Total Pillar I CRR 23354 1868

15


Risk weighted assets and capital are analysed at 31 December 2008 by exposure class as defined in chapter 3 BIPRU of the FSA Handbook as follows

Exposure Class Capital 8 poundm

Retail Exposures Residential Lending 979 Other secured lending 61 Past Due Items 41

Commercial Exposures Commercial Lending 452 Past Due Items -

Other Exposure Classes Deposits with central governments or central banks -Corporate 07 Institutions 193

Other Fixed and other assets 63

Operational Risk (standardised) 72

Total Pillar I CRR 1868

There is no Pillar I requirement in respect of market risk as the Society and Group does not have a trading book Interest Rate Risk in the Banking Book on the non-trading book is dealt with as a capital add-on at Pillar II based on the risk appetite set by the Board for a 200bp parallel shift in interest rates

At 31 December 2008 the Group held excess capital over and above the Pillar I minimum regulatory requirement of pound913m

The capital requirements of the Society on a solo consolidation basis are not materially different to that on a Group basis so only Group figures have been disclosed

16


6 Credit Risk Measurement Mitigation and Reporting For the purposes of Pillar III disclosure credit risk is sub-divided into residential mortgages other secured lending commercial lending and treasury credit risks Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent across most of the Grouprsquos activities Adverse changes in the credit quality of borrowers or a general deterioration in UK economic conditions could affect the recoverability and value of the Grouprsquos assets and therefore its financial performance Comprehensive risk management methods and processes have been established as part of its overall governance framework to measure mitigate and manage credit risk within the Grouprsquos Risk Appetite

Exposures The gross credit risk exposure (based on the definitions for regulatory capital purposes before credit risk mitigation) and the average for the year is summarised below

Mortgage Assets

Average to December 2008

poundm

As at December 2008

poundm Residential Mortgages 31925 32052 Other secured lending 827 757 Commercial Loans 5445 5779

38197 38588 Treasury Deposits with central governments or central banks 1072 2000 Corporate 509 477 Institutions 8398 8254

9979 10731 48176 49319

Commercial Loan balances include securitised commercial assets Further details are given in section 7 of these disclosures

17


Retail Credit Risk The Group has comprehensive policies in place covering all aspects of credit risk management that set out strict criteria that must be followed before funds are advanced and also incorporate limits for concentration risk arising from inter alia larger loans higher LTV and higher income multiple lending and geographical limits These various limits combined with formal governance and policies reflect the Grouprsquos view and appetite for risk in the retail mortgage portfolio The Group operates manual underwriting procedures and does not use auto accept rules

The key areas covered in lending policy are

Formal approval process Only certain types of property are acceptable security Valuation requirements including use of approved valuers Limits on minimum and maximum advances LTV and income multiples Exposure limits Underwriting criteria Restricted criteria for interest only mortgages Separate criteria and policies for buy to let lending Mandates and delegation of authorities Consideration of affordability Monthly credit risk dashboard with key indicators including arrears possessions

and dynamic delinquency Ongoing monitoring including credit control and complaints and Robust and fair arrears management processes which comply with TCF

principles

In addition all mortgage products are strictly controlled through ALCO approval and subject to minimum benchmarks for Return on Capital requirements where full account is taken of capital requirements at Pillar I and Pillar II

All limits and policies are reviewed annually by the Board and Group Risk Committee and in between reviews the profile and profitability of mortgage completions and mortgage pipeline is reviewed in the context of underlying credit risk profile A full investigation is always carried out in the event a loan defaults within the first 12 months of completion to identify causal factors and inform policy generally

The Group does not offer and has never offered sub-prime or self certified mortgages The predecessor Society Universal acquired mortgage books containing small amounts of sub-prime and self certification mortgage assets However less than pound5m of such balances remain and they are currently redeeming at a rate of between 25 - 33 per annum They comprise just over 01 of the overall loan portfolio and are therefore not separately analysed

Credit risk under Pillar 1 is calculated using the Standardised methodology in line with BIPRU 34 Non-defaulted retail mortgage assets up to 80 LTV attract a 35 risk weighting whilst the proportion above 80 LTV attracts a 75 risk weighting Mortgages in default attract a risk weighting of 100 if no provisions are held and LTV is less than or equal to 80 and 150 where the LTV is greater than 80 and no provisions are held

18


Other secured lending The Society has a small portfolio of loans secured on traded endowment policies which is reducing over time The Society is not undertaking any new lending of this type and balances are falling between 15 - 20 per annum currently due to maturities and redemptions Loss experience on the portfolio has been low since this area of business commenced in 2001 A separate lending policy statement covered this lending with the key criteria being lending restricted to 65 to 80 of policy surrender value depending on the type of policy

Commercial Credit Risk Commercial lending activity is split between lending to private sector landlords property investors and Registered Social Landlords (ldquoRSLrsquosrdquo) An analysis of loans within the commercial lending book is given in note 11 of the Annual Report and Accounts

The Group has limits in place to restrict the maximum amount of commercial buy to let and RSL lending undertaken as a proportion of the overall mortgage portfolio

All commercial loans were underwritten individually in accordance with strict criteria set out in a Board approved commercial lending policy statement A formal Credit Committee existed for the sanctioning of new loans which comprised senior members of the Executive team and external commercial lending experts All loans were assessed based on the strength of the borrower tenant quality and location of the underlying property with a Risk Grade Score allocated based on the degree of risk within the loan The entire portfolio is risk graded Return on Capital Employed Benchmarks were utilised which incorporated the need for Pillar I and Pillar II capital including any additional requirement due to concentration risk

The Group no longer undertakes commercial lending but the Commercial Risk Division continues to assess the credit risk of new loans to housing associations and monitor the performance of the commercial and residential investment portfolios through annual reviews and key risk management information including tenant and borrower watchlists arrears trends and breach reports During 2008 a new collections division was established within the Group Risk Division reflecting the difficult economic circumstances This division has a more targeted approach to collections and recovery for commercial and BTL portfolio borrowers featuring a rapid response where difficulties are identified such as late payments tenant failure ratings downgrades and general negative market news A more pro-active commercial stance is taken than with residential owner occupied borrowers

Credit risk capital for the Societyrsquos commercial lending under Pillar 1 is determined by reference to the Standardised methodology Risk weights of 100 are applied to lending secured on commercial property and risk weights of 35 or 100 depending on LTV are applied to residential lending Exposures to registered social landlords are risk weighted at 35 or 100 depending on LTV

19


Geographical Distribution The geographical distribution of mortgage assets at 31st December 2008 is as follows-

Mortgages Residential Mortgages

poundm

Other Secured Lending

poundm

Commercial Mortgages

poundm

Total Balances

poundm UK Channel Islands (Jersey) Other European Countries (Gibraltar) Rest of the World

31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588

Commercial Mortgage balances include securitised commercial assets Further details are given in section 7 of these disclosures

Residual Maturity of exposures by asset class The following table shows residual maturity of exposures on a contractual basis as opposed to an expected basis Where a loan is repayable by instalment each instalment has been treated as a separate repayment in the maturity analysis set out below The Grouprsquos experience is that in many cases mortgages are redeemed before their schedules maturity date As a consequence the maturity analysis illustrated below may not reflect actual experience

Residual Maturity of mortgage exposures

On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588

Treasury Credit Risk The Group has exposures to banks building societies and sovereigns in its non-trading book treasury portfolio The Group does not operate a trading book Exposures in the treasury portfolio are held for liquidity purposes or in the case of fair value exposures on derivatives for hedging purposes The Grouprsquos policy is to carry an amount of liquid assets equivalent to between 20 and 275 of savings deposits and loans

The Boardrsquos policy on managing credit risk relating to treasury exposures is set out in detail within the Financial Risk Policy Statement Credit limits are set for individual counterparties partly based on external credit ratings (Moodyrsquos Fitch and Standard amp Poors) Institutions including building societies which do not have external ratings are individually assessed and approved by the Board The Society also uses market information and Credit Default Swap spreads to inform treasury dealing decisions and keep up to date on treasury counterparty and country credit risk Limits are also in place for instrument type and country to mitigate against concentration risk arising in the treasury portfolio

Where a counterparty is down-rated to a level below the acceptable rating then the counterparty and related limit is removed from the treasury dealing approved counterparty list If there is an existing investment a proposal must be taken to ALCO as to whether the investment should be sold or allowed to run to maturity All limits are monitored against the sum of on and off-balance exposures The risk of a default from a derivative counterparty is minimised as the majority of

20


derivative exposures are covered by Credit Support Agreementrsquos whereby in the event of a positive mark-to-market valuation the counterparty must post collateral to the Group

The Group uses external credit assessments provided by Standards amp Poors Fitch and Moodyrsquos These are recognised by the FSA as eligible external credit assessment institutions (ECAI) for the purpose of calculating credit risk requirements under the standardised approach For all credit exposures that are assessed the risk weight is dependent on the level of the assessment (ie the credit rating) An 8 capital requirement is then applied as per the standardised approach The table below shows the Grouprsquos credit risk exposures to Treasury counterparties as at 31st

December 2008

Exposure by credit grading

Risk Weighting (credit quality step)

SampP rating and Fitch IBCA

Moodys Rating poundm

0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-

100 (3) BBB+ or lower 50 (2) unrated

Aaa Aaa to Aa3 A1 to A3 Baa1 or

lower

2000 5570 2849

50 262

Concentration by sector 10731

poundm Financial Institutions Asset Backed Securities

10328 403

10731

The geographical distribution of treasury exposures at 31st December 2008 is as follows-

Treasury Exposures poundm UK 6260 Europe (excluding UK) 3496 North America 493 Rest of the World 482

10731

The residual maturity of these treasury exposures is as follows- Residual Maturity of exposures by Asset Class

lt 12 months 1-5 years 5-10 years gt 10 years Total poundm poundm poundm poundm poundm

Treasury Assets Financial Institutions 7806 2522 00 00 10328 Residential Mortgage Backed Securities 41 362 00 00 403

7847 2884 00 00 10731

21


Impairment Losses The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of assets is impaired Objective evidence can be defined as one or more events occurring after initial recognition of the asset that have a bearing on estimated future cash flows of the financial asset or group of assets Objective evidence may include indications that the borrower or group of borrowers are experiencing significant financial difficulty default or delinquency in interest or principal repayments

The Group first assesses whether objective evidence of impairment exists for financial assets Assets that are separately significant are considered individually and if there is no objective evidence of impairment are grouped together with assets of similar credit risk characteristic and collectively assessed Assets that are individually assessed for impairment and for which an impairment loss is recognised are not included in a collective assessment of impairment

Residential and commercial lending are assessed individually for impairment and those not individually impaired are assessed collectively in the light of national or local economic conditions that correlate with defaults on assets in the group

Note 1 of The Annual Report and Accounts shows the accounting policy adopted for impaired assets

Past Due and Impaired Loans Past due is defined as loans where the borrowers contracted payments have not been received by the due date ie are overdue by one day The amounts shown as past due represent the full amount of the loan outstanding and not just the amount that is past due

An analysis of prime residential specialist residential loans and commercial loans are shown in note 11 of the Annual Report and Accounts (page 33) The charge for impairments during the year to 31 December 2008 for the mortgage portfolio is summarised in note 11 of the Annual Report and Accounts (page 35)

Credit Risk Mitigation The Grouprsquos core credit risk mitigation is to perform a full assessment of the borrowerrsquos ability to service the mortgage and obtaining adequate security for the funds advanced

Residential mortgages Residential property is the Grouprsquos main source of collateral and means of mitigating credit risk inherent in its residential mortgage portfolio All mortgage lending activities are supported by an appropriate form of valuation from the Societyrsquos approved panel of valuers All residential property must be insured to cover property risks and this may be effected through a third party Additional protection is also afforded to borrowers through optional payment protection insurance

Commercial mortgages Commercial property is the Grouprsquos main source of collateral and means of mitigating credit risk inherent in its commercial mortgage portfolio Collateral for the majority of commercial loans comprises first legal charges over freehold and long leasehold property but guarantees may also be taken as security The Society will also seek assignment of rents from tenant covenants Guarantees and other off-balance sheet security are not used in the calculation of Pillar 1 capital requirements therefore the exposure values before and after credit risk mitigation are identical

22


For property-based lending supporting information such as professional valuations are an important tool to help determine the suitability of the property offered as security and in the case of investment lending generating the cash to cover interest and repay the advance All valuations are undertaken by members of an approved panel of valuers with specialist experience where required Insurance requirements are always fully considered as part of the application process and the Society ensures that appropriate insurance is taken out to protect the property

70 Securitisation In 2002 the society securitised a pound210m portfolio of commercial mortgage assets via a Special Purpose Vehicle (SPV) set up for this function The notes are due for repayment in 2038 although as loans in the Bamburgh mortgage portfolio have redeemed the Class A note balances have fallen The Society has not undertaken any other securitisation transactions since 2002

The purpose of the securitisation was to raise funding for further lending and also to mitigate the credit risk impact of commercial lending activities on the Group capital position

Newcastle Building Society controls the SPV therefore following the implementation of International Financial Reporting Standards in 2005 the Society was required to consolidate the Bamburgh subsidiaries within the Group financial statements ie the SPV was no longer treated as off balance sheet In May 2006 the Society agreed with the FSA that the Bamburgh loan assets could be treated as if they were still on balance sheet for the purposes of the Solvency calculation (for the purposes of the Societyrsquos funding and lending limits the assets and liabilities of Bamburgh continue to be excluded as permitted by statutory instrument 2004 No 3200)

The securitised commercial mortgage assets are risk weighted at 100 for the purposes of the Societyrsquos capital calculations The adequacy of the 100 risk weighting is assessed via stress testing for a 1 in 25 year event which showed no Pillar II add on was required There have been no losses on the Bamburgh loans since inception and there have been no arrears

As of 31 December 2008 the commercial loans within the SPV totalled pound119m The Societyrsquos maximum exposure to losses on the securitised commercial loans is a first loss fund of pound84m and the Societyrsquos holding in Class E notes of pound67m ie total losses cannot exceed pound151m regardless of the stressed scenario encountered The Class E notes were taken up by the Society at the time of the securitisation transaction and were effectively a credit enhancement

Fitch and Standard amp Poors both recognised ECAIrsquos rate the notes under the securitisation

No new loans are being added to the Bamburgh portfolio as the ability to substitute loans into the pool to cover redemptions ceased in 2005 No further securitisations are planned

23


80 Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes people and systems or from external events For the Group this definition includes legal risk strategic risk and reputation risk


A key feature of the Grouprsquos operational risk framework is that key risks and controls are identified for all areas of the business ranging from the high level risks discussed at Board level down to the risks within individual departments Risk assessments remain the responsibility of the relevant departmental managers and executives and are updated monthly for new risks the results of risk events and following internal audit reviews All risks are scored in terms of the impact and probability of the risk arising and are scored before and after considering the impact of controls The operational risk system is also fully utilised by internal audit with the audit inspection plan based on high scoring risk areas or where there is significant reliance on key controls to mitigate the impact of catastrophic and major risks

Comprehensive risk dashboards are produced for all key areas of operational risks and are reported to the Board on a monthly basis These include risk event trends operational loss tracking operational risk causal factors and key actions being implemented to mitigate risk and prevent risk events recurring

Capital Requirement The Group has adopted the standardised approach to operational risk under Pillar I which produces an overall operational risk capital requirement equating to 124 of net income at 31 December 2008 The Grouprsquos income has been split into 4 separate business lines and the operational risk percentage as set out in BIPRU 6415 applied to calculate the base Operational Risk Capital Requirement (ldquoORCRrdquo)

The ORCR provides the base for assessing the capital required for operational risk A full assessment of the risks facing the Society and Group has been completed for the purposes of Pillar II and add-ons identified where it is felt that the Pillar I capital requirement is insufficient The Group seeks to mitigate operational risk by implementing a strong control environment and ensuring adequate insurance cover is in place across all known high risk areas

24


90 Market Risk

Market Risk Overview

Market risk is the risk that the value of income arising from the Grouprsquos assets and liabilities varies as a result of changes in interest rates and typically arises from imperfect matching and different interest rate features re-pricing dates and maturities of mortgages savings and treasury assets and funding

The principal market risk to which the Group is exposed is interest rate risk The Group has no exposure to foreign currency

Interest rate risk Interest rate risk is the risk of loss resulting from adverse movements in market interest rates The various interest rate features and maturities on these products and the use of wholesale funds to support these products create interest rate risk exposures due to the imperfect matching of interest rates between different financial instruments and the timing differences on the re-pricing of assets and liabilities

Another significant form of interest rate risk arises from the imperfect correlation between re-pricing of interest rates on different assets and liabilities ndash often referred to as basis risk The basis risk on the Grouprsquos balance sheet arises from administered liabilities which are typically priced relative to base rate but are invested in money market assets earning a LIBOR return or where fixed rate mortgages or swapped to LIBOR rates

The Grouprsquos risk appetite for interest rate risk is documented in the Financial Risk Policy Statement and includes limits for the maximum adverse impact on net interest margin maximum value at risk as well as limits to minimise gaps in specific time buckets Further details are given in the Risk Management Report in the Group Annual Report and Accounts

Use of derivatives Derivatives are only used to limit the extent to which the Group will be affected by changes in interest rates or other indices which affect fair values or cash flows Derivatives are therefore used exclusively to hedge risk exposures The principal derivatives used by the Group are interest rate exchange contracts commonly known as interest rate swaps interest rate options and interest rate caps The Group uses derivatives in accordance with the Building Societies Act 1986 This means that such instruments are not used in trading activity or for speculative purposes and accordingly they are used exclusively to reduce the risk of loss arising from changes in interest rates

The Grouprsquos Financial Risk Policy Statement sets out processes and controls in place to manage interest rate risk including

Monthly discussion and agreement at ALCO of the Grouprsquos interest rate view to act as a basis for liquidity investment and hedging decisions for the coming month

Day to day review of exposures and market outlook by both the Treasury and Balance Sheet Risk teams and fine-tuning of ALCOrsquos view as appropriate with agreement from the Group Finance Director

25


All new mortgage and savings ranges are reviewed by the Balance Sheet Risk team to assess the impact on interest margin and determine appropriate hedging activity

Weekly treasury strategy meetings to review hedging activity and assess the impact on sensitivity (both in terms of 200bp shock and margin impact for current year)

monthly full review of interest rate risk exposures and hedging by the Balance Sheet Risk team to review actual outcomes against plans for the month and allow hedging proposals to be formed

In assessing interest rate risk exposure relating to fixed-rate mortgage assets it is necessary to make assessments of likely prepayment The risk of prepayment assumptions being inaccurate is mitigated if too low by additional unexpected early redemption charges and if too high through additional interest income These effects broadly offset each other although timing of cash flows differ (early repayment charges not received in year 1 will be offset by additional margin over several years)

The Group uses interest rate gap sensitivity analysis to assess exposure to interest rate risk This analysis shows the Grouprsquos exposure to interest rate risk in terms of the net risk after taking account of management action to hedge inherent exposures The Grouprsquos Balance Sheet Management department is responsible for reporting monthly the Grouprsquos interest rate risk exposure to ALCO

The Group has established a risk appetite for sensitivity to a 200bp parallel shift in interest rates both in terms of impact on reserves and net interest income

26


Index

1 Overview Page

3

2 Scope 4

3 Risk Management

4 Capital Resources 13

5 Capital Adequacy 14

6 Credit Risk Meaurement Mitigation and Reporting 17

7 Securitisation 23

8 Operational Risk 24

9 Market Risk 25

Contact Angela Russell ndash Deputy Finance Director and Group Risk Executive AngelaRussellNewcastlecouk 0191 244 1816 Newcastle Building Society Portland House Newbridge Street Newcastle NE1 8AL

2








3









4


3 Risk Management





5











6








7








8





Board










9






















10






34 Other Governance










11














12





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26








3









4


3 Risk Management





5











6








7








8





Board










9






















10






34 Other Governance










11














12





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26









4


3 Risk Management





5











6








7








8





Board










9






















10






34 Other Governance










11














12





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26


3 Risk Management





5











6








7








8





Board










9






















10






34 Other Governance










11














12





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26











6








7








8





Board










9






















10






34 Other Governance










11














12





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26








7








8





Board










9






















10






34 Other Governance










11














12





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26








8





Board










9






















10






34 Other Governance










11














12





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26





Board










9






















10






34 Other Governance










11














12





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26






















10






34 Other Governance










11














12





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26






34 Other Governance










11














12





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26














12





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26





Group poundm

1833 299



-24









13












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26












14







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26







Risk Weighted



Other Assets

Hedging Instruments


18936

2097

800

410

204

1515

168

64

33

16




15













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26













16




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26




Mortgage Assets


poundm

As at December 2008



9979 10731 48176 49319


17






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26






principles





18








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26








19




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26




poundm


poundm


poundm

Total Balances


31126

427 499

-

757

--

5779 ---

37662 427 499

-

32052 757 5779 38588




On demand poundm

lt 12 months poundm

1-5 years poundm

gt 5 years poundm

Total poundm

Mortgage Assets 222 1114 6089 31163 38588




20




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26




December 2008





0 (1) AAA 20 (1) AAA to AA-50 (2) A+ to A-



lower

2000 5570 2849

50 262



10328 403

10731



10731




7847 2884 00 00 10731

21











22










23








24


90 Market Risk











25








26











22










23








24


90 Market Risk











25








26










23








24


90 Market Risk











25








26








24


90 Market Risk











25








26


90 Market Risk











25








26








26

pillar iii disclosure 31 december 2008 · credit risk meaurement, mitigation and ... bamburgh...

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