Barclays 2007 Annual Report Download - page 88

Risk management
Barclays approach to risk management
86 Barclays PLC Annual Report 2007
Local entity regulatory capital adequacy
The Group manages its capital resources to ensure that those
Group entities that are subject to local capital adequacy regulation in
individual jurisdictions meet their minimum capital requirements. Local
management manages compliance with subsidiary entity minimum
regulatory capital requirements with reporting to local Asset and Liability
Committees and to Treasury Committee, as required.
Injections of capital resources into Group subsidiary entities are controlled
under authorities delegated from the Group Executive Committee. The
Group’s policy is for profits generated in subsidiary entities to be
repatriated to Barclays Bank PLC in the form of dividends.
Annual risk appetite setting
Risk Appetite is the level of risk Barclays chooses to take in pursuit of its
strategic objectives, recognising a range of possible outcomes as business
plans are implemented. Barclays framework, approved by the Board Risk
Committee, combines a top-down view of its capacity to take risk with a
bottom-up view of the business risk profile requested and recommended
by each business area.
To determine this acceptable level of risk, management estimates the
potential earnings volatility from different businesses under various scenarios.
This annual setting of Risk Appetite considers the bank’s 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. Performance against Risk Appetite is measured and
reported to the Executive and Board regularly throughout the year.
Barclays believes that this framework enables it to:
– Improve risk and return characteristics across the business
– Help meet growth targets within an overall risk appetite and protect
the Group’s performance
– Improve management confidence and debate regarding our risk profile
– Improve executive management control and co-ordination of risk-
taking across businesses
– Enable unused risk capacity to be identified and thus profitable
opportunities to be highlighted.
The Risk Appetite framework considers credit, market and operational risk
and is applied using two perspectives: ‘financial volatility’ and ‘mandate
and scale’.
Financial Volatility is the level of potential deviation from expected financial
performance that Barclays is prepared to sustain at relevant points on the
risk profile. It is established with reference to the strategic objectives and
to the business plans of the Group, including the achievement of annual
financial targets, payment of dividends, funding of capital growth and
maintenance of acceptable capital ratios and our credit rating.
The portfolio is analysed in this way at four representative levels:
– Expected performance (including the average credit losses based
on measurements over many years)
– A level of loss that corresponds to moderate increases in market,
credit or operational risk from expected levels
– A more severe level of loss which is much less likely
– An extreme but highly improbable level of loss which is used to
determine the Group’s economic capital
These potentially larger but increasingly less likely levels of loss are
illustrated in the Risk Appetite concepts chart below.
The Mandate and Scale framework is a formal review and control of our
business activities to ensure that they are within our mandate (i.e. aligned
to the expectations of external stakeholders) and are of an appropriate
scale (relative to the risk and reward of the underlying activities).
Appropriate assurance is achieved by using limits and triggers to avoid
concentrations and operational risks which could lead to unexpected
losses of a scale that would result in a disproportionate fall in Barclays
market capitalisation.
Taken as a whole, the Risk Appetite framework provides a basis for the
allocation of risk capacity to each business. Since the level of loss at any
given probability is dependent on the portfolio of exposures in each business,
the statistical measurement for each key risk category gives the Group
clearer sight and better control of risk-taking throughout the enterprise.
Review of the Group’s strategic medium-term plan
Capital adequacy forms a critical part of the Group’s annual strategic
medium-term planning process. During the planning process, the Group
sets limits for business capital demand to ensure the capital management
objectives including meeting internal targets will continue to be met over
the medium-term period. Treasury Committee reviews the limits on a
monthly basis.
Extreme Stress
Mean
Loss
Severe Stress
Moderate
Stress
Economic capitalExpected
Loss
Potential size of loss in one year
Probability of loss
Risk Appetite concepts (diagram not to scale)