Barclays 2009 Annual Report Download - page 95

www.barclays.com/annualreport09 Barclays PLC Annual Report 2009 93
model owners set performance triggers and define appropriate actions for
their models in the event that a trigger level is breached.
In addition to regular monitoring, models are subject to an annual
validation process to ensure that they will continue to perform as expected,
and that assumptions used in model development are still appropriate. In
line with initial sign-off requirements, annual validations are also formally
reviewed at the appropriate technical committee.
Within Barclays Capital, where models are used to value positions
within the trading book, the positions are subject to regular independent
price testing which covers all trading positions. Prices are compared with
direct external market data where possible. When this is not possible, more
analytic techniques are used, such as industry consensus pricing services.
These services enable peer banks to compare structured products and
model-input parameters on an anonymous basis. The conclusions and any
exceptions to this exercise are communicated to senior levels of business
management.
Externally developed models are subject to the same governance
standards as internal models, and must be approved for use following the
validation and independent review process. External models are also subject
to the same standards for ongoing monitoring and annual validation
requirements.
Stress testing
A fundamental duty of risk management is to ensure that organisations do
not neglect to prepare for the worst event as they plan for success. Stress
testing helps Barclays to understand how its portfolios would react if
business conditions became significantly more challenging. We generate
specific forward-looking scenarios and analyse how well our profitability
would hold up, whether our levels of capital would be adequate and what
managers could do ahead of time to mitigate the risk.
Stress tests capture a wide range of macroeconomic variables that are
relevant to the current environment, such as:
– GDP;
– unemployment;
– asset prices; and
– interest rates.
The Board Risk Committee agrees the range of scenarios to be tested
and the independent Group Risk function co-ordinates the process, using
bottom-up analysis performed by the businesses. The results of the stress
tests are presented to the Executive Committee, the Board Risk Committee,
the Strategy Board and the UK Financial Services Authority (FSA).
In 2009, the range of stress scenarios included the stress test set out by
the FSA as part of its assessment of the Group’s resilience to stressed credit
risk, market risk and economic conditions over a five-year period. This stress
scenario took into account a wide range of factors, including:
– the Group’s revenue generation potential given stressed GDP and
interest rates assumptions;
– the probability of default and possible losses given default within its
loan book; and
– possible declines in the market value of assets held in the trading books.
Following this work and discussion with the FSA, the Group was able to
confirm that its capital position and resources, after exposure to the stress,
were expected to continue to meet the FSA’s capital requirements.
Barclays uses stress testing techniques at Group, portfolio and product
level and across a range of risk types. For example, portfolio management in
the US cards business employs stressed assumptions of unemployment to
determine profitability hurdles for new accounts. And in the UK mortgage
business, affordability thresholds incorporate stressed estimates of
interest rates.
In the Investment Banking division, global scenario testing is used to
gauge potential losses that could arise in conditions of extreme market
stress. Stress testing is also conducted on our positions in particular asset
classes, including interest rates, commodities, equities, credit and foreign
exchange.
Further details of the Group’s stress testing relating to liquidity risk is set
out on page 130.