Barclays 2003 Annual Report Download - page 41

Barclays PLC Annual Report 2003 39
Risk Management
Risk management in the businesses is the responsibility of business
management, who are advised and supported by Business Risk Directors
who also have a functional reporting line to the Group Risk Director.
The key role of Business Risk Directors and their teams is to assist the
businesses to maximise value by:
• performing high quality risk analyses;
• ensuring that risks are properly controlled, consistent with agreed
risk appetite;
• evaluating economic trade-offs between risk and return;
• designing cost-effective ways of mitigating and transferring risks;
• generating alternative risk strategies; and
• ensuring that Group level policies are properly implemented in their
business line.
Specialist risk teams led by Group Risk Type Heads and other risk
specialists report to the Group Risk Director.
Their role is to:
• create and maintain the Group’s risk management and control
framework;
• measure aggregate risk by type;
• set high level policies and controls within the overall risk governance
framework;
• perform research, development and quality assurance;
• provide analytical support to businesses;
• provide comprehensive reports to all levels of management and the
Board to enable them to make effective risk management decisions;
and
•operate risk limit setting systems and, in the case of certain risks such as
credit, provide independent input to material risk acceptance decisions.
Risk Measurement and Economic Capital
The Group assesses internal capital requirements by using its own risk-
based methodologies. These are used in performance assessment and for
risk management decision making. The Group computes and assigns this
‘economic’ capital to all operating units. This enables the Group to apply
a common, consistent metric to ensure that returns throughout the
Group are commensurate with the associated risks. Economic capital is
assigned primarily within the six risk categories summarised below:
Credit Risk – The Group estimates the losses expected from its credit
portfolio and sets aside appropriate provisions. Capital is required in the
event that losses substantially exceed the expected level. The amount is
estimated by statistical analysis of the historical loan loss volatility in the
various product categories.
Within wholesale and retail businesses, capital allocation is differentiated
by segment and customer grade. Off-balance sheet exposures are
converted to loan equivalent amounts based on their probability of
being drawn, before applying capital factors. See page 41 for further
information on credit risk measurement.
Market Risk – The required economic capital is primarily based on Daily
Value at Risk (DVaR) measurements. Where risks are not measured using
DVaR, the capital requirement is based on stress test analysis. Market
risk measurement is further discussed on page 60.
Business and Operational Risk – A combined economic capital
allocation for operational risk and business risk is derived through an
equation including variables such as cost base, historic profit volatility
and comparable external benchmarks. These risks are discussed on
page 70.
Insurance Risk – Economic capital is estimated through benchmark
analysis of the free asset ratio of similarly rated insurance companies.
Fixed Assets – Economic capital is also estimated through benchmark
analysis of relevant companies.
Private Equity – Economic capital is allocated using an equation based
on the amount of equity investment and comparable benchmark
capitalisation.
Barclays estimates the correlation between risk types and calculates a
diversification benefit which results in a reduction in allocated economic
capital for the Group.
The total economic capital required by the Group, as determined by its
internal risk assessment models and after considering the Group’s
estimated diversification benefits, is compared with available common
shareholders’ funds to evaluate overall capital utilisation.
Average economic capital by business and risk type are shown in the
following charts and shown by business in the table on page 40.
Average economic capital allocation by business during 2003
Average economic capital allocation by risk type during 2003
Credit 67%
Business & Operational 9%
Property & Equipment 6%
Other 5%
Market 4%
Unallocated (Capital at Group Centre) 9%
Business Banking 24%
Personal Financial Services 20%
Barclays Capital 17%
Barclaycard 15%
Capital held at Group Centre 9%
Barclays Private Clients 6%
Discontinued and Other Operations 6%
Barclays Africa 2%
Barclays Global Investors 1%