Barclays 2006 Annual Report Download - page 73

Barclays PLC
Annual Report 2006 69
Operating review
1
Barclays is also focused on the UK commercial property lending market,
where property yields in 2006 declined as financing costs have risen.
As a result, there has been further constriction of the available cash
flow margin to support higher valuations and increased debt levels.
Barclays therefore has increased hold levels and while the business has
expanded, none of the caps governing exposure in this sector has
been increased.
Overall, the contrast in credit conditions in the retail and wholesale
markets is reflected in the different trends of principal metrics. While
Risk Tendency and Non-Performing Loan balances both rose in the
retail sector, they fell or held steady in the wholesale portfolios.
The market risk environment in 2006 offered clients the opportunity to
benefit from market movements in a controlled manner through their
own risk management activities. Although Barclays Capital ran higher
levels of market risk as measured by daily value at risk (DVaR), this was
in line with Risk Appetite and the growth in trading revenues more than
kept pace with rising DVaR. The two principal areas where the risk
profile at Barclays Capital altered were commodities and interest rates.
The commodities business saw an increase in client demand for
structured products and risk management solutions, which led to a
strong trading performance in Barclays Capital and an increase in risk
positions arising from client business needs. In contrast, interest rate
markets were quieter, leading to a smaller requirement from clients to
hold such market risk positions on the books.
Market risks outside Barclays Capital, which mainly include interest rate
exposures within the various banking books and some Treasury risks,
remained very modest, consistent with the Group’s policy of hedging
these positions to a material degree.
Barclays defined benefit pension risks are also closely monitored.
The actuarial funding surplus of the UK pension scheme improved
on the back of strong asset returns and contributions from Barclays.
These factors, together with several market developments that led to
adjustments in accounting assumptions, also drove a reduction in the
IAS 19 deficit.
The challenges in operational risk management arise from the strong
growth in the transaction volumes contained within the business plans
and from the increasing internationalisation of operations. However,
Barclays has been successful in reducing the level of operational risk
through improving key end-to-end processes and increasing their
resilience and capacity to sustain the increasing demands of higher
business volumes.
Internet banking was an important focus of financial crime risk
management in 2006, with increasing numbers of fraud attacks in the
first quarter. These occurred through both attempted identity thefts
(‘phishing’) and the placing of electronic devices in systems to
extract personal data (‘trojans’). Such attempts are becoming more
sophisticated in nature but Barclays was able to stem and then
reverse the growth in net losses through the aggressive deployment
of additional controls, supported by extra resources within fraud
operations. The improved capacity for early detection of compromised
accounts meant that a recrudescence of fraud attacks later in the year
did not lead to any increase in losses.
In 2006 Barclays continued to strengthen its anti-money laundering
activities, to enhance the Group’s financial sanctions screening
capability and to implement more robust controls. These measures
enable it to comply with the ever more complex demands of the
international regulatory environment and to resist increasingly
sophisticated criminal operations. As such, Barclays believes that it
has further improved the management of financial crime risk globally,
an integral part of protecting its reputation and brand.
Basel II
The implementation of the new Basel II regulatory requirements is the
principal area of regulatory change ahead for the risk management area.
The main purpose of this is to promote a more sophisticated capital
assessment and risk management framework for the international
banking industry.
In October 2006 Barclays formally applied to the FSA to adopt the
advanced approaches for both Credit and Operational risk from
1st January 2008, and the FSA is expected to provide its decision by
30th June 2007. A positive consequence of the advanced approaches
is closer alignment between internal economic capital and regulatory
capital measures and processes, thus helping Barclays to manage its
capital ratios more effectively over time.
The successful implementation of the Basel II requirements has required
some data, model, and system changes in many of Barclays businesses.
The investment it has made in this area is part of the business strategy
to ensure that Barclays continues to be at the leading edge of risk
management and, as such, it continues to believe that achieving
advanced status is appropriate and realistic.
The Group commenced the parallel run process required to adopt
Basel II at the end of 2006. During 2007, the results of the parallel run
of the Group’s Basel II models will be an important consideration in the
management of its capital resources. A further requirement of Basel II
is enhanced market disclosure and to support this, Barclays is moving
towards an improved reporting capability.