these Board sub-committees and the
issues considered by them are described
in the Group’s 2023 Risk and Governance
Report.
Taking these risks into account, together
with the Group’s strategic objectives and
the prevailing market environment, the
Board approved the overall mandated
risk appetite frameworks for Investec plc.
The risk appetite frameworks set broad
parameters relating to the Board’s
expectations around performance,
business stability and risk management.
The Board considers that prudential risk
management is paramount in all it does.
Protection of depositors, customers’
interests, capital adequacy and
shareholder returns are key drivers.
To manage the Group’s risk appetite,
there are a number of detailed policy
statements and governance structures
in place. The Board ensures that there
are appropriate resources in place to
manage the risks arising from running the
business by having independent Risk
Management, Compliance, and Financial
Control functions. These are
supplemented by an Internal Audit
function that reports independently to a
Non-Executive Audit Committee Chair.
The Board believes that the risk
management systems and processes,
supported by the conclusions of the
Internal Audit function and the results of
their combined assurance coverage and
each assurance function, are adequate to
support the Group’s strategy and allow
the Group to operate within its risk
appetite framework. A review of the
Group’s performance/measurement
against its risk appetite framework is
provided at each DLC BRCC meeting and
at the main Board meetings.
In terms of the FCA and PRA
requirements, the Group is also required
to meet regulatory standards with
respect to capital and liquidity. In terms
of these requirements, the Group is
required to stress its capital and liquidity
positions under a number of severe
stress conditions. Investec’s stress
testing framework is well embedded in its
operations and is designed to identify
and regularly test the Group’s key
‘vulnerabilities under stress’.
In order to manage liquidity risk, liquidity
stress testing is performed for a range of
scenarios, each representing a different
set of assumptions. These include
market-wide, firm specific, and combined
scenarios (combination of the market-
wide and firm specific stresses). The
Group manages its liquidity risk appetite
in relation to combined stress parameters
which represent extreme but plausible
circumstances. The objective is to have
sufficient liquidity under a combined
stress scenario to continue to operate for
a minimum period as detailed in the
Board-approved risk appetite. In addition
to these stress scenarios, the Group’s risk
appetite also requires it to maintain
specified minimum levels for both the
liquidity coverage ratio and net stable
funding ratio, greater than those required
by the regulators; a minimum cash and
near cash to customer deposit ratio of
25%; and to maintain low reliance on
wholesale funding to fund core asset
growth. Each banking entity within the
Group is required to be fully self-funded.
The Group currently has £8.6 billion in
cash and near cash assets, representing
44.7% of customer deposits.
The Group develops annual capital plans
(refreshed after six months) that look
forward over a three-year period. The
capital plans are refreshed on an ad hoc
basis if a material event occurs or is likely
to occur. These plans are designed to
assess the capital adequacy of the
Group’s respective banking entities under
a range of economic and internal
conditions, with the impact on earnings,
asset growth, risk appetite and liquidity
considered. The output of capital
planning allows senior management and
the Board to make decisions to ensure
that the Group continues to hold
sufficient capital to meet internal and
regulatory capital targets over the
medium term (i.e. three years). The
Group targets a CET1 ratio in excess of
10%, a tier 1 ratio greater than 11%, a
minimum capital adequacy ratio of 14%
to 17%, and a leverage ratio in excess
of 6% for each of its banking entities.
The parameters used in the capital and
liquidity stresses are reviewed regularly,
taking into account the principal and
emerging risks facing the Group, changes
in the business environments and inputs
from business units. Scenarios are
designed considering macro-economic
downside risks, portfolio-specific risk
factors and business model
vulnerabilities. Multiple scenarios are
considered to account for the uncertain
forward-looking macro-economic
environment. The scenarios described
below were as at 31 March 2023, and we
have experienced an evolving macro-
economic environment since the financial
year-end which has resulted in higher
interest rates than were previously
assumed in the base case forecast
horizon. Nevertheless these scenarios are
still considered appropriate to assess the
ongoing viability of the Group given the
severity of the two downside scenarios.
•Base case: The UK economy recovers
from a period of weakness, a trajectory
which is followed by a number of other
western economies, while inflation falls
sharply. This is underpinned by the
absence of sharp energy price
increases and indeed UK natural gas
prices are expected to remain
materially lower than in 2022. The
expected recession over 2023 is
expected to be relatively short and
shallow with a peak to trough drop in
output of around 0.5%. The Bank rate
is 4.50% and falls later in 2023 as
inflation declines and the economy
remains weak. The unemployment rate
increases from a starting point below
4% to 5.3% as economic conditions are
unfavourable but also because the
decline in labour participation rates is
gradually reversed. The housing
market goes through a difficult period
in 2023. National house prices
experience a peak-to-trough decline
of 7% with no recovery before the end
of the year. Globally, the situation is
projected to be similar to that of the
UK with many economies struggling,
inflation pressures falling and with
some central banks easing monetary
policy this year.
•Inflation Entrenched: The entrenched
inflation scenario assumes that upside
inflation risks materialise, with core
inflation remaining persistent across
the forecast horizon, for example
inflation is expected to still average 4%
at the end of the forecast period. As
such central banks tighten policy
further and maintain high policy rates,
The Bank of England base rate is
4.50% and is maintained at that level
throughout the scenario horizon.
Amidst this high interest rate, high
inflation environment, a recession
ensues in the near term and remains
stagnant across the forecast period
as a whole
•BoE Annual Cyclical Scenario (ACS):
The Bank of England’s regulatory
scenario which encompasses a severe
global economic downturn, which both
at the domestic and global level is
more severe than the Global Financial
Crisis of 2008/09, with world GDP
assumed to fall 2.5%. The context of
the scenario is an economic shock
driven by energy and other cost
pressures which cause a sharp rise in
inflation, in turn prompting a sharp rise
in interest rates; the BoE’s Bank rate is
assumed to rise to 6%. In the UK a year
long recession ensues before a
recovery is witnessed, supported by an
easing in monetary policy. Notably
there are severe shocks across various
sectors, UK house prices are expected
to fall 30% for example, whilst global
financial markets witness a significant
repricing, equity indices such as the
