Barclays 2012 Annual Report Download - page 338

Risk control
Market risk is controlled through the use of an appropriate limit
framework. Limits are set at the total Investment Bank portfolio level,
risk factor level (e.g. interest rate risk) and business line level (e.g.
Emerging Markets). Stress limits and many book limits, such as foreign
exchange and interest rate sensitivity limits, are also used to control
risk appetite.
The total DVaR, risk factor DVaR, primary and secondary stress limits
are approved by Board Risk Committee (‘BRC’). The more granular limit
framework is set by risk managers to comply with the overall risk
appetite and anticipated business opportunities. Compliance with
limits is monitored by the independent Risk department in the
Investment Bank with oversight provided by Group Market Risk.
Throughout 2012, Group Market Risk continued its ongoing
programme of conformance tests on the Investment Bank’s market risk
management practices. These visits review the current market risk
profile and potential market risk developments, as well as verifying
conformance with Barclays Market Risk Control Framework.
Risk reporting
Barclays Investment Bank’s market risk managers produce a number of
detailed and summary market risk reports daily, weekly, fortnightly and
monthly for business and risk managers. These are also sent to Group
Market Risk for review, a risk summary is presented at the Market Risk
Committee and the Investment Bank’s Traded Positions Risk Review.
Non-traded interest rate risk
Non-traded interest rate risk arises from the provision of retail and
wholesale (non-traded) banking products and services, when the
interest rate repricing date for loans (assets) is different to the repricing
date for deposits (liabilities). This includes current accounts and equity
balances which do not have a defined maturity date and an interest
rate that does not change in line with Base rate changes. The risk
resides mainly in Retail and Business Banking, Corporate Banking and
Group Treasury. Barclays objective is to minimise non-traded interest
rate risk and this is achieved by transferring interest rate risk from the
business to a local or Group Treasury, which in turn hedges the net
exposure via Investment Bank with the external market. Limits exist to
ensure no material risk is retained within any business or product area.
Trading activity is not permitted outside Investment Bank.
Risk measurement
The risk in each business is measured and controlled using both an
income metric (Annual Earnings at Risk) and value metrics (Economic
Value of Equity, Economic Capital, DVaR, risk factor stress testing,
scenario stress testing).
Annual Earnings at Risk (AEaR) measures the sensitivity of net interest
income over the next 12-month period. It is calculated as the difference
between the estimated income using the current yield curve and the
lowest estimated income following a parallel increase or decrease in
interest rates, subject to a minimum interest rate of 0%.
The main model assumptions are:
 The balance sheet is kept at the current level i.e. no growth is
assumed; and
 Balances are adjusted for an assumed behavioural profile. This
includes the treatment of fixed rate loans including mortgages.
Economic Value of Equity (EVE) calculates the change in the present
value of the banking book for a parallel upward and downward rate
shock. This calculation is a present value sensitivity while AEaR is an
income sensitivity.
Economic Capital (EC) consistent models are used to measure:
recruitment risk, the risk from customers not taking up their fixed rate
loan offer; and prepayment risk, the risk of a customer deciding not to
carry on with their fixed rate loan. Behavioural profiles are also used
when modelling the balance sheet.
A combination of DVaR, stress limits, net open position and specific
currency or tenor limits are in place for all local Treasury activities.
Risk control
Non-traded market risk is controlled through the use of limits on the
above risk measures. Limits are set at the total business level and then
cascaded down. The total business level limits for AEaR, EVE, EC, DVaR
and stress are agreed by the Group Market Risk Committee.
Compliance with limits is monitored by the respective business market
risk team with oversight provided by Group Market Risk.
The interest rate risk for balances with no defined maturity date and an
interest rate that is not linked to the base rate is managed by Group
Treasury. A series of continuous rolling hedges are used to mitigate the
interest rate risk in the banking book.
Risk reporting
Each business area is responsible for their respective market risk
reports. A combination of daily and monthly risk reports are produced
and used by the business. These are also sent to Group Market Risk for
review and inclusion in the Group Daily Market Risk Report. A risk
summary is also presented at Market Risk Committee and respective
Asset and Liability Committees.
barclays.com/annualreport336 I Barclays PLC Annual Report 2012
Risk management
Market risk management continued