Barclays 2006 Annual Report Download - page 95

Risk management
Group model policy and taxation risk management
Barclays PLC
Annual Report 2006 91
Operating review
1
Group model policy
Barclays has a large number of models in place across the Group,
covering all risk types, including Credit Risk, Market Risk, Operational
Risk, and Finance. To minimise the risk of loss through model failure,
a Group Policy for the Control of Model Risk has been developed.
The Policy helps reduce the potential for model failure by setting
minimum standards around the end-to-end model development and
implementation process. The Policy also sets the Group governance
processes for all models, which allows model risk to be monitored
across the Group, and seeks to identify and escalate any potential
problems at an early stage.
The key areas where minimum requirements are defined are:
Model materiality
To help ensure that sufficient management time is spent on the more
material models, there is a method of providing each model with a
materiality rating. The materiality rating for an individual model
depends on the assets for which the model is used and the Expected
Loss and Economic Capital associated with the assets. Models of
higher materiality are subject to higher levels of independent scrutiny
and challenge prior to implementation.
Model documentation
Documentation should be sufficiently detailed to allow an expert to
recreate the model from the original data sources. It must include a
description of the data used for model development, the methodology
used (and the rationale for choosing such a methodology), a description
of any assumptions used in the model, and details of where the model
works well, and areas that are known as model weaknesses.
Initial model validation
All models are subject to a validation and independent review process
before the model can be signed-off for implementation. The model
validation exercise must demonstrate that the model is fit for purpose
and provides accurate estimates. The independent review process will
also ensure that all aspects of the model development process have
been performed in a suitable manner.
Model sign-off
The rules for model sign-off are based on model materiality. The sign-off
process ensures that the model is technically fit for purpose as well as
ensuring that the model satisfies the business requirements and all the
relevant regulatory requirements. The most material models used
within the Group receive their final sign-off for implementation from
Group ExCo, while other models are usually signed-off by their
respective business risk committees.
Basel II models
Barclays has spent a considerable amount of time in developing and
upgrading a number of credit risk models across the Group moving
towards compliance with the Basel II advanced approach. As part of
this process all Basel credit risk models are assessed against the Basel II
minimum requirements prior to model sign-off to ensure that once
signed-off they are fit to be used for regulatory purposes. Basel II
models will also be used during the 2007 parallel run process in
anticipation of implementation from 1st January 2008 in accordance
with Basel requirements.
Ongoing model validation and monitoring
All models within the Group are subject to an annual review, to ensure
that the models are working well, and that assumptions used in model
development are still appropriate. All credit risk models can also be
subject to more frequent monitoring. Model performance monitoring
ensures that deficiencies in models are identified early, and remedial
action can be taken before the deficiency becomes serious and affects
the decision-making process.
Taxation risk
The Group is subject to the tax laws in all countries in which it operates.
A number of double taxation agreements entered between countries
also impact on the taxation of the Group. The Group is also subject to
European Community tax law.
Tax risk is the risk associated with changes in tax law or in the
interpretation of tax law. It also includes the risk of changes in tax
rates and the risk of failure to comply with procedures required by
tax authorities.
Failure to manage tax risks could lead to an additional tax charge.
It could also lead to a financial penalty for failure to comply with
required tax procedures or other aspects of tax law. If, as a result
of a particular tax risk materialising, the tax costs associated with
particular transactions are greater than anticipated, it could affect
the profitability of those transactions.
The Group takes a responsible and transparent approach to the
management and control of its tax affairs and related tax risk.
•tax risks are assessed as part of the Group’s formal governance
processes and are reviewed by the Executive Committee, Group
Finance Director and the Board Risk Committee;
•the tax charge is also reviewed by the Board Audit Committee.
•the tax risks of proposed transactions or new areas of business are
fully considered before proceeding;
•the Group takes appropriate advice from reputable professional
firms;
•the Group employs high-quality tax professionals and provides
ongoing technical training;
•the tax professionals understand and work closely with the different
areas of the business;
•the Group uses effective, well-documented and controlled processes
to ensure compliance with tax disclosure and filing obligations.
•where disputes arise with tax authorities with regard to the
interpretation and application of tax law, the Group is committed to
addressing the matter promptly and resolving the matter with the
tax authority in an open and constructive manner.