Barclays 2012 Annual Report Download - page 320

Express business objectives, under ‘Plan’
and ‘Stressed’ conditions
Simulate risk performance under stress
conditions to losses (risk metrics) under
each scenario to be consistent with
business objectives
Set Mandate and Scale limits to help
ensure that maximum losses remain
within acceptable levels
Manage and monitor risk metrics as part
of tracking of forecasts throughout year,
and report to the Board. Implement strategic
changes if forecasts are outside of acceptable
range given current conditions
Risk Appetite
Risk appetite
Risk appetite is defined as the level of risk that Barclays is prepared to
sustain whilst pursuing its business strategy, recognising a range of
possible outcomes as business plans are implemented. Barclays
framework combines a top-down view of its capacity to take risk with
a bottom-up view of the business risk profile associated with each
business area’s medium-term plans. The appetite is ultimately
approved by the Board.
Barclays has run a risk appetite process since 2004. The process is
comprised of ‘Financial Volatility’ and ‘Mandate and Scale’. The strategy
and business activities are reflected in key performance metrics, which
are dependent in large part on risk performance.
Financial Volatility
Financial volatility is defined as the level of potential deviation from
expected financial performance that Barclays is prepared to sustain at
relevant points on the risk profile. When setting appetite, management
and the Board articulate the Group’s strategy and summarise objectives
in terms of key financial metrics. The Group’s risk profile is assessed via
a ‘bottom-up’ analysis of the Group’s business plans to establish the
volatility of the key metrics. If the projections entail too high a level of
risk (i.e. breach the top-down financial objectives at the through-the-
cycle, moderate or severe level), management will challenge each area
to re-balance the risk profile to bring the bottom-up risk appetite back
within top-down appetite. Performance against risk appetite usage is
measured and reported to the Executive Committee and the Board
regularly throughout the year. Our top-down appetite is quantified
through an array of financial performance and capital metrics which
are reviewed on an annual basis. For 2012, the strategic metrics in the
table below are set at three levels: budget, and stressed ‘one in seven’
and ‘one in twenty-five’.
To measure the risk entailed by the business plans, management
estimates potential earnings volatility from each business under
various scenarios:
 through-the-cycle: the average losses based on measurements over
many years;
 1 in 7 (moderate) loss: the worst level of losses out of a random
sample of 7 years; and
 1 in 25 (severe) loss: the worst level of losses out of a random sample
of 25 years.
These scenarios are defined more generically through a level of
probability of occurrence rather than through a specific set of
economic variables like in stress tests.
These potentially larger but increasingly less likely levels of loss are
illustrated in the risk appetite concepts chart below. Since the level of
loss at any given probability is dependent on the portfolio of exposures
in each business, the statistical measurement for each key risk category
gives the Group clearer sight and better control of risk-taking
throughout the enterprise. Specifically, this framework enables it to:
 improve management confidence and debate regarding the Group’s
risk profile;
 re-balance the risk profile of the MTP where breaches are indicated,
thereby achieving a superior risk-return profile;
 identify unused risk capacity, and thus highlight the need to identify
further profitable opportunities; and
 improve executive management control and co-ordination of
risk-taking across businesses.
Measure relevant
to strategy and risk
Link between strategy and risk profile
Profit before tax,
Return on Equity,
Return on RWAs
Fundamental economic and business
indicators, which best describe the focus of
our shareholders in terms of profitability and
ability to use capital resources efficiently.
Loan loss rate (LLR) Describes our credit risk profile and whether
impairment is within our appetite.
Core Tier 1 and
Leverage
Monitors our capital adequacy in relation to
our capital plan.
Cash Dividends Measures the risks of not being able to
continue paying appropriate cash dividends.
Extreme Stress
Mean
Loss
Severe Stress
Potential size of loss in one year
Moderate
Stress
Probability of loss
Expected
Loss
Risk appetite concepts (diagram not to scale)
barclays.com/annualreport318 I Barclays PLC Annual Report 2012
Risk management
Barclays risk management strategy continued