Barclays 2012 Annual Report Download - page 321

The strategic report Governance Risk review Financial review Financial statements Risk management Shareholder information
In summary, the stress levels represent the risk tolerance of Barclays in
terms of its key objectives. These objectives act as constraints on risk
performance and imply maximum levels of acceptable losses that are
tracked quarterly and reported to the Board. Any breaches must be
approved and remedial actions mandated.
Mandate and Scale
The second element to the setting of risk appetite in Barclays is an
extensive system of Mandate and Scale limits, which is a risk
management approach that seeks to formally review and control
business activities to ensure that they are within Barclays mandate (i.e.
aligned with expectations), and are of an appropriate scale (relative to
the risk and reward of the underlying activities). Barclays achieves this
by using limits and triggers to avoid concentrations which would be
out of line with external expectations, and which may lead to
unexpected losses of a scale that would be detrimental to the stability
of the relevant business line or the Group. These limits are set by the
independent risk function, formally monitored each month and subject
to Board-level oversight.
For example, in our commercial property finance and construction
portfolios, a comprehensive series of limits are in place to control
exposure within each business and geographic sector. To ensure that
limits are aligned to the underlying risk characteristics, the Mandate
and Scale limits differentiate between types of exposure. There are, for
example, individual limits for property investment and property
development, and for senior and subordinated lending.
Barclays uses the Mandate and Scale framework to:
 limit concentration risk;
 keep business activities within Group and individual business
mandate;
 ensure activities remain of an appropriate scale relative to the
underlying risk and reward; and
 ensure risk-taking is supported by appropriate expertise and
capabilities.
As well as Group-level Mandate & Scale limits, further limits are set by
risk managers within each business unit, covering particular portfolios.
Interaction of risk appetite with business strategy
The strategy and business activities are reflected in key performance
metrics, which are dependent in large part on risk performance. Risk
appetite, as described above, helps to ensure that the strategy is
adaptable to various degrees of financial stress.
Each year, our MTP process ensures that our appetite takes account of
the strategy (detailed on page 314).
For further information on Risk Factors and the Operating and Business
Environment, refer to pages 108-115.
Stress testing
Group-wide stress tests are an integral part of the annual MTP process
and annual review of risk appetite to ensure that the Group’s financial
position and risk profile provide sufficient resilience to withstand the
impact of severe economic stress.
The Board Risk Committee agrees the range of scenarios to be tested
and the independent Group Risk function leads the process.
Macroeconomic stress test scenarios are designed to be both severe
and plausible and are tested against the FSA’s scenario framework to
ensure that they are appropriately conservative.
The following diagram summarises the process for designing and
agreeing the scenarios to be run. The process includes Group Risk
consultation with economists in the businesses. This ensures relevance
of scenarios to our businesses and a consistent interpretation of the
scenarios across the Group.
At the Group level, stress test scenarios capture a wide range of
macroeconomic variables that are relevant to assess the impact of the
stress scenario on our portfolios. This includes for example, GDP,
unemployment, asset prices, foreign exchange rates and interest rates.
Economic parameters are set using expert judgement and historical
and quantitative analysis to ensure coherence and appropriate severity.
The stress testing process is detailed and comprehensive using
bottom-up analysis performed by each of Barclays businesses. It
includes all aspects of the Group’s balance sheet across all risk types
and is forward looking over a five year period. Our stress testing
approach combines running statistical models with expert judgement
to ensure the results accurately reflect the impact of the stress.
The businesses’ stress test methodologies and results are subject to a
detailed review and challenge both within the businesses (including
review and sign-off by business Chief Risk Officers) and by Head Office
Functions. The stress test results are presented for review by the
Executive Committee and Board Risk Committee, and are also shared
with the Board and the FSA. The results of our H2 2012 internal
Group-wide stress test exercise show that the Group’s profit before tax
remains positive under the modelled severe global stress scenario, with
the Group remaining well capitalised above the required regulatory
minimum level.
A key objective of the Group-wide stress test process is to identify and
document management actions that would be taken to mitigate the
impact of stress. The bottom-up process ensures all levels of
management are informed of the impact of the stress scenarios and
are aware of appropriate management actions to be taken when a
stress event occurs.
In addition, the framework also includes reverse stress testing
techniques which aim to identify the circumstances under which our
business model would become no longer viable, leading to a significant
change in business strategy. Examples include extreme
macroeconomic downturn scenarios (such as a break-up of the Euro
area) or specific idiosyncratic events.
Group Risk develops
scenario themes in
consultation with
economists within
the businesses
Board Risk Committee
provides input and
agrees on scenario
themes
Economic parameters
set by Group Risk
Economic parameters
reviewed by economists
within the businesses
Stress test scenarios
and economic
parameters issued
by Group Risk
Stress Testing
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