Barclays 2008 Annual Report Download - page 80

Risk management
Barclays approach to risk management
Key elements
78 Barclays PLC Annual Report 2008 |Find out more at www.barclays.com/annualreport08
Principal Risks
The Board is responsible for the Group Internal Control and Assurance
Framework (‘GICAF’). As part of the GICAF, it approves the Principal Risks
Policy, which sets out responsibilities for the management of the Group’s
most significant risk exposures. The Board oversees the operating
effectiveness of the Principal Risks Policy through the regular review of
reports on the Group’s material risk exposures and controls.
The Group’s risk categorisation comprises 17 risk categories (‘Level
1’), 13 of which are known as Principal Risks. Each Principal Risk is owned
by a senior individual at the Group level, who liaises with Principal Risk
owners within Business Units and Group Centre Functions. The 17 risk
categories are shown in the panel below.
Each Group Principal Risk Owner (‘GPRO’) is responsible for setting
minimum control requirements for their risk and for overseeing the risk
and control performance across the Group. Group control requirements
(e.g. Group Policies/Processes/Committee oversight) for each of these
risks are defined, in consultation with Business Units, and communicated
and maintained by the GPRO.
Implementation of the control requirements for each Principal Risk
provides each Business Unit or Group Centre Function with the foundation
of its system of internal control for that particular risk. This will usually be
built upon in more detail, according to the circumstances of each Business
Unit, to provide a complete and appropriate system of internal control.
The specific controls for individual Principal Risks are supplemented
by generic risk management requirements. These requirements are
articulated as the Group’s Operational Risk Management Framework
(see page 130) and include policies on:
– Internal Risk Event Identification and Reporting
– Risk and Control Assessment
– Key Indicators
– Key Risk Scenarios
Business Unit and Group Centre Function Heads are responsible for
maintaining ongoing assurance that the controls they have put in place
to manage the risks to their business objectives are operating effectively.
They are required to undertake a formal six-monthly review of assurance
information. These reviews support the regulatory requirement for the
Group to make a statement about its system of internal control (the
‘Turnbull’ statement), in the Annual Report and Accounts.
Risk Appetite
Risk Appetite is the level of risk the Board of 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
– 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
– Identify unused risk capacity, and thus highlight profitable
opportunities.
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.
Retail Credit
Wholesale Credit
Market
Capital
Liquidity
Financial Crime
Operations
Technology
People
Regulatory
Financial Reporting
Legal
Taxation
Strategic
Change
Corporate Sustainability
Brand Management
Principal Risks
Other Level 1 Risks
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)