Barclays 2008 Annual Report Download - page 282

Notes to the accounts
For the year ended 31st December 2008
280 Barclays PLC Annual Report 2008 |Find out more at www.barclays.com/annualreport08
48 Market risk (continued)
Non-trading interest rate risk
Non-traded interest rate risk arises from the provision of retail and wholesale (non-traded) banking products and services.
Barclays objective is to minimise non-traded risk. This is achieved by transferring risk from the business to a local treasury or Group Treasury, who in turn
hedge the net exposure with the external market. Limits exist to ensure no material risk is retained within any business or product area. The majority of
exposures are within Global Retail and Commercial Banking .
Risk measurement and control
The techniques used to measure and control non-traded interest rate risk include Annual Earnings at Risk, DVaR and Stress Testing. Book limits such as
foreign exchange and interest position limits are also in place.
Annual Earnings at Risk (AEaR) measures the sensitivity of net interest income (NII) over the next 12 months. It is calculated as the difference between
the estimated income using the current yield curve and the lowest estimated income following a 100 basis points increase or decrease in interest rates.
DVaR is also used as a complementary tool to AEaR.
Stress testing is also carried out by the business centres and is reviewed by senior management and business-level asset and liability committees. The
stress testing is tailored to the business and typically incorporates scenario analysis and historical stress movements applied to respective portfolios.
Analysis of Net Interest Income sensitivity
The tables below show the pre-tax net interest income sensitivity for the non-trading financial assets and financial liabilities held at 31st December 2008.
The sensitivity has been measured using AEaR methodology as described above. The benchmark interest rate for each currency is set as at 31st December
2008. The figures include the effect of hedging instruments but exclude exposures held or issued by Barclays Capital as these are measured and
managed using DVaR.
Net interest income sensitivity(AEaR) by currency
+100 basis –100 basis +100 basis –100 basis
points points points points
2008 2008 2007 2007
£m £m £m £m
GBP 3 (273) 36 (37)
USD (25) 7 (3) 1
EUR (34) 30 (23) 23
ZAR 13 (13) 19 (19)
Others – (8) 4 (5)
Total (43) (257) 33 (37)
As percentage of net interest income (0.37%) (2.24%) 0.34% (0.39%)
Non-traded interest rate risk, as measured by AEaR, was £257m in 2008, an increase of £220m compared to 2007. This estimate takes into account the
rates in place as at 31st December 2008. The increase mainly reflects the reduced spread generated on retail and commercial banking liabilities in the
lower interest rate environment. If the interest rate hedges had not been in place then the AEaR risk for 2008 would have been £670m.
DVaR is also used to control market risk in GRCB – Western Europe, and Group Treasury. The indicative average DVaRs for 2008, using a simplified DVaR
approach, were £1.3m and £0.6m respectively.
Analysis of Equity sensitivity
+100 basis –100 basis +100 basis –100 basis
points points points points
2008 2008 2007 2007
£m £m £m £m
Net interest income (43) (257) 33 (37)
Taxation effects on the above 6 33 (9) 10
Effect on profit for the year (37) (224) 24 (27)
As percentage of net profit after tax (0.70%) (4.24%) 0.47% (0.53%)
Effect on profit for the year (per above) (37) (224) 24 (27)
Available for sale reserve (806) 806 (390) 390
Cash flow hedging reserve (473) 474 (476) 476
Taxation effects on the above 166 (166) 242 (242)
Effect on equity (1,150) 890 (600) 597
As a percentage of equity (2.43%) 1.88% (1.85%) 1.84%