Barclays 2009 Annual Report Download - page 130

128 Barclays PLC Annual Report 2009 www.barclays.com/annualreport09
Risk management
Capital risk management
continued
Notes
aCalculated using an adjusted average over the year and rounded to the nearest £50m for
presentation purposes. Economic capital demand excludes the economic capital calculated
for pension risk.
bAverage goodwill relates to purchased goodwill and intangible assets from business
acquisitions.
cTotal period end economic capital requirement as at 31st December 2009 stood at
£40,750m (31st December 2008: £39,200m).
Allocating capital in the Group’s strategic medium-term plan
Capital adequacy and returns on regulatory and economic capital form
a key part of the Group’s annual strategic medium-term planning process.
Amongst other strategic objectives, the Group seeks to optimise returns on
economic and regulatory capital through the planning process. To achieve
this, executive management consider returns on risk weighted assets and
economic capital when setting limits for business capital demand. Executive
management will also review the forecast capital ratios to ensure internal
targets continue to be met over the medium-term plan.
The Treasury Committee reviews the limits on capital demand on
a monthly basis taking into account actual performance.
Economic capital
Economic capital is an internal measure of the minimum equity and
preference capital required for the Group to maintain its credit rating based
upon its risk profile.
Barclays assesses capital requirements by measuring the Group’s risk
profile using both internally and externally developed models. The Group
assigns economic capital primarily within the following risk categories:
credit risk, market risk, operational risk, private equity and pension risk.
The Group regularly reviews its economic capital methodology and
benchmarks outputs to external reference points. The framework uses
default probabilities during average credit conditions, rather than those
prevailing at the balance sheet date, thus seeking to remove cyclicality from
the economic capital calculation. The economic capital framework takes
into consideration time horizon, correlation of risks and risk concentrations.
Economic capital is allocated on a consistent basis across all of Barclays
businesses and risk activities. A single cost of equity is applied to calculate
the cost of risk.
The total average economic capital required by the Group is compared
with the supply of economic capital to evaluate economic capital utilisation.
The supply of economic capital is based on the available shareholders’
equity adjusted for certain items (e.g. retirement benefit liability, cash flow
hedging reserve) and including preference shares.
Economic capital forms the basis of the Group’s submission for the
Basel II Internal Capital Adequacy Assessment Process (ICAAP).
Economic Capital Demanda
UK Retail Banking economic capital allocation decreased £200m to £3,750m
(2008: £3,950m) mainly reflecting a revised measurement of economic
capital for business risk. In addition, small reductions were seen in the
economic capital allocation for overdrafts and local businesses that were
offset by growth in mortgages and consumer lending.
Barclays Commercial Bank economic capital allocation decreased £50m
to £3,450m (2008: £3,500m) driven primarily by a reduction in exposure
offset by an increase in non-performing loans due to economic conditions.
Barclaycard economic capital allocation increased £650m to £3,350m
(2008: £2,700m), reflecting asset growth and appreciation of US Dollar
against Sterling in 2008 and modest asset growth in 2009.
GRCB – Western Europe economic capital allocation increased £600m
to £2,500m (2008: £1,900m), due to deteriorating wholesale credit
conditions, acquisition activity, additional fixed assets as a result of branch
expansion and exchange rate movements.
GRCB – Emerging Markets economic capital allocation increased
£100m to £1,200m (2008: £1,100m). This reflects asset growth in 2008
versus a relatively slower contraction in 2009.
GRCB – Absa economic capital allocation increased £100m to £1,200m
(2008: £1,100m), driven primarily by exchange rate movements offset by a
reduction in exposure.
Barclays Capital average economic capital allocation increased £2,500m
to £10,750m (2008: £8,250m). This primarily reflects deterioration in credit
quality that resulted in growth in the economic capital allocation towards
the end of 2008 and a further modest increase in 2009.
Barclays Global Investors investment economic capital allocation of
£1,000m (2008: £400m) includes BGI assets up to disposal on 1st December
2009, and BGI related exposures post-disposal, mainly the BlackRock, Inc
equity investment.
Barclays Wealth economic capital allocation increased £50m to £550m
(2008: £500m), reflecting growth in loans and advances and increased
measure of economic capital for other risk types.
Average economic capital Average year Average year
ended ended
31.12.09 31.12.08
£m £m
UK Retail Banking 3,750 3,950
Barclays Commercial Bank 3,450 3,500
Barclaycard 3,350 2,700
GRCB – Western Europe 2,500 1,900
GRCB – Emerging Markets 1,200 1,100
GRCB – Absa 1,200 1,100
Barclays Capital 10,750 8,250
Barclays Global Investors 1,000 400
Barclays Wealth 550 500
Head Office Functions and Other Operations 100 50
Economic capital requirement
(excluding goodwill) 27,850 23,450
Average historic goodwill and
intangible assetsb11,000 9,450
Total economic capital requirementc38,850 32,900