Barclays 2004 Annual Report Download - page 65

63
Barclays PLC Annual Report 2004
Outside Barclays Capital, stress testing is carried out by the business
centres and is reviewed by the senior management and business-level
asset and liability committees. The stress testing is tailored to the
business and is typically scenario analysis and historical stress
movements applied to respective portfolios.
Annual Earnings at Risk (AEaR)
AEaR measures the sensitivity of annual earnings to shocks in
market rates at the 99th percentile for change over a one year period.
This shock is consistent with the standardised interest rate shock
recommended by the Basel II framework for assessing banking book
interest rate risk.
AEaR is used to measure structural interest rate market risk and Asset
Management structural risk (see the Other Market Risks section (page
64) for more details).
Economic Capital
Economic capital methodologies are used to calculate risk sensitive
capital allocations for businesses incurring market risk. Consequently,
the businesses incur capital charges related to their market risk.
Barclays Capital DVaR: Summary table for 2004 and 2003
Twelve months to Twelve months to
31st December 2004 31st December 2003
Average High(a) Low(a) Average High(a) Low(a)
£m £m £m £m £m £m
Interest rate risk 25.0 53.6 15.1 21.0 34.1 13.6
Credit spread risk 22.6 32.9 16.0 16.2 29.2 8.9
Foreign exchange risk 2.4 7.4 0.9 2.3 5.0 1.0
Equities risk 4.2 7.9 2.2 2.6 4.9 1.5
Commodities risk 6.0 14.4 2.2 4.4 7.0 2.2
Diversification effect (25.9) n/a n/a (20.6) n/a n/a
Total DVaR(b) 34.3 46.8 24.0 25.9 38.6 17.6
Notes
(a) The high (and low) DVaR figures reported for each category did not necessarily occur on the same day as the high (and low) DVaR reported as a whole.
Consequently, a diversification effect number for the high (and low) DVaR figures would not be meaningful and is therefore omitted from the table.
(b) The year-end Total DVaR for 2004 was £31.9m (2003: £37.2m).
Trading Market Risk
The Group’s policy is to concentrate trading activities in Barclays
Capital. This includes transactions where Barclays Capital acts as
principal with clients or with the market. For maximum efficiency,
Barclays manages client and market activities together. In Barclays
Capital, trading risk occurs in both the trading book and the banking
book as defined for regulatory purposes.
In anticipation of future customer demand, the Group maintains
access to market liquidity by quoting bid and offer prices with
other market makers and carries an inventory of capital market and
treasury instruments, including a broad range of cash, securities and
derivatives. Trading positions and any offsetting hedges are established
as appropriate to accommodate customer or Group requirements.
Derivatives entered into for trading purposes include swaps, forward
rate agreements, futures, credit derivatives, options and combinations
of these instruments. For a description of the nature of derivative
instruments, see page 71.
Analysis of Trading Market Risk Exposures
The table below shows the DVaR statistics for Barclays Capital’s trading
activities (trading book and banking book).