Barclays 2006 Annual Report Download - page 72

Risk management
Introduction
Barclays approach to risk management
Risk management is a fundamental part of Barclays business activity
and an essential component of its planning process. This is achieved by
keeping risk management at the centre of the executive agenda and
by building a culture in which risk management is embedded in the
everyday management of the business. Barclays ensures that it has the
functional capability to manage the risk in new and existing businesses,
and that business plans are consistent with risk appetite.
Risk appetite is the level of risk that Barclays is willing to accept in
fulfilling business objectives. To determine this acceptable level of risk,
potential earnings volatility against financial objectives are considered
first. As part of the planning process, management estimates the
potential earnings volatility from different businesses under various
scenarios. Barclays estimates the capacity to absorb unexpected losses
in terms of the tolerable level of variance from financial targets, by
considering the ability to support business growth, desired dividend
payout levels and capital ratio targets. If the projections entail too high
a level of risk, management will challenge each area to find new ways
to rebalance the business mix to incur less risk on a diversified basis.
Barclays believes that this enables it to improve risk and return
characteristics across the business and help meet growth targets
within an overall risk appetite.
Across Barclays, every business manager is accountable for managing
risk in his or her business area; they must understand and control the
key risks inherent in the business undertaken. Each business area also
employs risk specialists to provide an independent control function and
to support the development of a strong risk management environment.
This functional approach to risk management is built on formal control
processes that rely on individual responsibility and independent
oversight, as well as challenge through peer reviews. Barclays continues
to use and develop advanced analysis, with comprehensive reporting
of risk positions against their key risk factors and against risk appetite.
To support expanded risk taking, Barclays has continued to strengthen
the independent and specialised risk teams in each of its businesses,
supported by matching teams at Group level, acting in both a
consultancy and oversight capacity. It has made the recruitment,
development and retention of risk professionals a priority because it is
believed that it is a prerequisite to business growth plans. Barclays also
continues to make significant investment in the infrastructure to
identify, measure and report risk positions.
Barclays remains committed to the objective of increasing shareholder
value by developing and growing business that is consistent with risk
appetite, and through building more effective risk management
capabilities. Responsibility for risk management resides at all levels
within the Group, from the Executive down through the organisation
to each business manager and risk specialist. We are seeking an
appropriate balance in our business, and continuing to build the risk
management capabilities that will help us to deliver our growth plans
in a controlled environment.
2006 developments
In broad terms, Risk Appetite increased by about 20% during 2006,
in conjunction with increased and more diversified earnings and a
continued strong capital base. Barclays will continue to deploy this
expanded appetite across many businesses and risk types. During 2006
it expanded the range and level of credit risk it runs across geographies
and products, and this will continue as part of its developing business
plans. Traded market risk levels grew at a slower level than trading
revenues; these and the other risk types are addressed below.
The risk environment in 2006 had very different characteristics across
the risk types, with continued benign conditions in wholesale and
corporate credit risk, a continued difficult environment in the UK
unsecured retail credit sector, stable operational risk, and periods of
moderate volatility in some areas of market risk. The UK unsecured retail
credit market experienced a continuation of recent trends, arising from
a high level of household debt and continued strain on the discretionary
cash flow in some parts of the retail customer population. Higher
interest rates, energy costs and some higher taxation have put strain on
UK consumer portfolios, which has been exacerbated by increasing
levels of personal bankruptcy and Individual Voluntary Arrangements.
This deterioration in consumer credit quality, coupled with the changing
social attitudes to bankruptcy and debt default in general, contributed
to a higher impairment charge in our UK credit card and unsecured
loan portfolios.
Notwithstanding the difficult conditions in the UK credit environment,
Barclays experience shows that the actions taken in Barclaycard,
including revised underwriting rules, tighter limit assignment and line
management, and improved collections have had a positive effect. The
quality of new accounts, as measured by average credit scores, has
consistently improved since 2005, while in our UK cards and unsecured
loan portfolios the flows into early stage and later cycle delinquency as
well as arrears balances decreased in the second half of 2006.
Barclays has been alert to contagion from the retail sector influencing
the Local Business portfolio and although increasing credit delinquency
has been anticipated and experienced, management actions have been
taken to mitigate the impact. Conditions in this area have been more
directly affected by the conditions prevailing in the retail market,
especially those sectors closer to the consumer. All of these businesses
are dependent on the UK economy and it is expected that the outlook
for economic growth in 2007 will be similar to that experienced in 2006.
Some important changes to the retail risk profile in 2006 were volume
related. In the UK, the size of the card portfolio reduced as a result of the
management actions in Barclaycard outlined above, while international
activities in the USA, Europe and South Africa expanded.
Looking outside the UK, Barclaycard US has been growing its card
portfolio and Absa also operated in a growing market in South Africa.
The business model explicitly includes the benefits of risk diversification
of new products with new clients and in new geographies. Risk
diversification was therefore a significant factor in the decision to
acquire a majority stake in Absa in 2005, which provided strong
earnings in 2006 that are less correlated to the core UK business. The
same is true for Barclaycard US and the other areas of international
growth within existing businesses, such as Barclays Capital and BGI.
The credit environment in the larger corporate and wholesale sector
continued to benefit from relatively stable conditions, although there
was some evidence of slightly increasing corporate defaults. Overall
global credit conditions, based on economic growth, low inflation and
rising stock markets, have led to a very competitive market and credit
spreads are still at very low levels in most markets. Borrower quality has
remained good across the capital market corporate sector. There has
been continued market demand for credit assets resulting from strong
financial industry liquidity, which has been important in maintaining
the strong corporate credit environment.
Investors in the leveraged finance market displayed a continued strong
demand for assets in 2006. With so much liquidity in the market,
transaction leverage multiples have risen, maturities have lengthened
and amounts financed have increased. Barclays remained focused on
the structure of such deals and it declines transactions that are beyond
its appetite. It runs a distribution-led leveraged finance business in
Barclays Capital and has a strong track record of selling down
underwriting positions rather than holding larger positions in the credit
portfolio, and it is alert to any slowdown in the distribution performance
of the syndication markets. In the UK market for smaller transactions, it
has also maintained caps on risk positions in this business during 2006.
Barclays PLC
Annual Report 2006
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