Barclays 2014 Annual Report Download - page 132

130 I Barclays PLC Annual Report 2014 barclays.com/annualreport
Risk review
Risk management
Market risk management
Overview
Traded market risk
Traded market risk arises primarily as a result of client facilitation in
wholesale markets, involving market making activities, risk
management solutions and execution of syndications. Upon execution
of a trade with a client, the Group will look to hedge against the risk of
the trade moving in an adverse direction. Mismatches between client
transactions and hedges result in market risk due to changes in asset
prices.
Non-traded market risk
Banking book operations generate non-traded market risk, primarily
through interest rate risk arising from the sensitivity of net interest
margins to changes in interest rates. The principal banking business
PCB engages in internal derivative trades with Treasury to manage this
interest rate risk to within its defined risk appetite, however, the
businesses remain susceptible to market risk from four key sources:
Q Prepayment risk: Balance run-off may be faster or slower than
expected due to customer behaviour in response to general
economic conditions or interest rates. This can lead to a mismatch
between the actual balance of products and the hedges executed
with Treasury based on initial expectations
Q Recruitment risk: The volume of new business may be lower or
higher than expected requiring the business to unwind or execute
hedging transactions with Treasury at different rates than expected
Q Residual risk and margin compression: The business may retain a
small element of interest rate risk to facilitate the day-to-day
management of customer business. Additionally, in the current low
rate environment, deposits on which the Group sets the interest rate
are exposed to margin compression. This is because for any further
fall in base rate the Group must absorb an increasing amount of the
rate move in its margin
Q Lag risk: The risk of being unable to re-price products immediately
after a change in interest rates due to mandatory notification
periods. This is highly prevalent in managed rates saving products
(e.g. Every Day Saver) where customers must be informed in writing
of any planned reduction in their savings rate
Organisation and structure
Traded market risk in the business resides primarily in Investment Bank,
Group Treasury, Africa Banking and Non-Core. These businesses have
the mandate to incur traded market risk. Non-traded market risk is
mostly incurred in PCB and Barclaycard.
Pension risk
The Group maintains a number of defined benefit pension schemes for
past and current employees. The ability of the pension fund to meet the
projected pension payments is maintained principally through
investments.
Pension risk arises because the estimated market value of the pension
fund assets might decline; or their investment returns might reduce; or
the estimated value of the pension liabilities might increase. The Group
monitors the market risks arising from its defined benefit pension
schemes, and works with the trustees to address shortfalls. In these
circumstances, the Group could be required or might choose to make
extra contributions to the pension fund. The Group’s main defined
benefit scheme was closed to new entrants in 2012.
Insurance risk
Insurance risk is solely managed within Africa Banking where four
categories of insurance risk are recognised, namely short-term
insurance underwriting risk, life insurance underwriting risk, life
insurance mismatch risk and life and insurance investment risk.
Insurance risk arises when:
Q Aggregate insurance premiums received from policyholders under a
portfolio of insurance contracts are inadequate to cover the claims
arising from those policies and the expenses associated with the
management of the portfolio of policies and claims;
Q Premiums are not invested to adequately match the duration, timing
and size of expected claims; or
Q Unexpected fluctuations in claims arise or when excessive exposure
(e.g. in individual or aggregate exposures) relative to capacity is
retained in the entity.
Insurance entities also incur market risk (on the investment of
accumulated premiums and shareholder capital), credit risk
(counterparty exposure on investments and reinsurance transactions),
liquidity risk and operational risk from their investments and financial
operations.
Financial Risk Committee
Board Financial Risk Committee
Market Risk Committee
■ Chaired by the Group Financial Risk Director
■ Oversees the management of the Group’s market risk profile
■ Approves Market Risk Key Risk Frameworks
■ Reviews arising market or regulatory issues
■ Proposes risk appetite levels to the Board
Market risk
The risk of a reduction to earnings or capital due to
volatility of the trading book positions or an inability to
hedge the banking book balance sheet.