Directors' report

Business review - Our strategy

Managing the principal risks

The Group is exposed to a number of risks arising from the nature of its business and the environment in which we operate. The most significant risk faced by the Group, and any organisation, is ensuring the strategy adopted is appropriate to the circumstances in which we operate. In order to manage this risk, one executive director has specific responsibility for matters of medium term strategic direction, including the forecast for our economic and market environment. The Group considers the key environmental factors affecting its strategy to be the strength and prospects for the UK economy including housing and mortgage markets, unemployment levels and interest rates. The Board devotes at least two meetings per annum to the consideration of strategic matters.

The implementation of the Group's strategy exposes the business to credit risk, financial risk (including market and liquidity) and operational risk. These risks are managed by a comprehensive framework of management committees and risk management specialists with clear roles and responsibilities.

Credit risk is the possibility that loans made by the Group, to individual customers in the form of mortgages and to other corporate institutions, will not be repaid when they fall due. Prudent underwriting policies and analytical reviews are applied to credit decision making to assess the likelihood that the Group could suffer loss as a function of its lending. Pricing levels are established to take this into account. In addition, limits are applied to differing types and classes of loan to ensure that risk is not too concentrated in any one area.

Financial risk, such as that arising from changes to interest and foreign currency rates, are managed by our Treasury function. They operate under a series of policies and limits to ensure the overall exposure is managed within agreed tolerance levels.

The risk that the Group cannot raise sufficient funds in order to repay its obligations as they fall due is known as liquidity risk. The Group's approach is to maintain a diverse range of sources of funding so as not to become dependent on any single market or route of supply. Furthermore, we adopt a policy of putting funding in place prior to committing to new lending obligations. Our funding and cashflow management activities are governed by a liquidity and funding policy that establishes minimum levels of available cash, or assets that can be converted into cash, in a short time period, in the event of the need to repay loans or provide funds to our depositors.

The Group is exposed to a number of operational risks that may arise in the event that processes fail to function as intended. The possibility of these risks resulting in loss is managed by the adoption of detailed controls across all functions of the business. These controls are set out in a series of Board policy documents and are implemented by For more information on the executive management of the Group.