Barclays 2009 Annual Report Download - page 127

www.barclays.com/annualreport09 Barclays PLC Annual Report 2009 125
Non-traded interest rate risk
Non-traded interest rate risk arises from the provision of retail and wholesale
(non-traded) banking products and services, and resides mainly in Global
Retail and Commercial Banking, and Group Treasury.
Barclays objective is to minimise non-traded risk. This is achieved by
transferring interest rate risk from the business to a local treasury or Group
Treasury, which in turn hedges the net exposure with the external market.
Limits exist to ensure no material risk is retained within any business or
product area. Trading activity is not permitted outside Barclays Capital.
Risk measurement and control
The risk in each business is measured and controlled using both an income
metric (Annual Earnings at Risk) and a present value metric (Daily Value at
Risk or stress testing). In addition, scenario stress analysis is carried out by
the business and reviewed by senior management and business-level asset
and liability committees, when required.
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, subject to a minimum interest rate of 0%. Balances are
adjusted for an assumed behavioural profiles. This includes the treatment
of non-maturity deposits.
Daily Value at Risk and stress testing is calculated using a Barclays
Capital consistent approach. Both these metrics are calculated by each
respective business area with oversight provided by Group Market Risk.
Risk exposures are monitored by respective business risk managers
with oversight provided by Group Market Risk. The main business limits are
approved by Market Risk Committee. Book limits such as foreign exchange
and interest rate sensitivity limits are also in place where appropriate.
To further improve the market risk control framework, Group Market
Risk initiated an ongoing programme of conformance visits to non-traded
Treasury operations. These visits review both the current market risk profile
and potential market risk developments, as well as verifying conformance
with Barclays policies and standards as detailed in the Market Risk Control
Framework.
Analysis of Net Interest Income sensitivity
The table below shows the pre-tax net interest income sensitivity for the
non-trading financial assets and financial liabilities held at 31st December
2009 and 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 2009. 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.
Non-traded interest rate risk, as measured by AEaR, was £369m as at
31st December 2009, an increase of £112m compared to 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 for 2009
would have been £704m (2008: £670m).
DVaR is also used to control market risk in Global Retail and Commercial
Banking – Western Europe and in Group Treasury. The indicative average
2009 DVaRs for 2009 are £1.4m (2008: £1.3m) for Western Europe and
£1.0m (2008: £0.6m) for Group Treasury.
Other market risks
Barclays maintains a number of defined benefit pension schemes for past
and current employees. The ability of the Pension Fund to meet the
projected pension payments is maintained through investments and regular
bank contributions. Pension risk arises because the estimated market value
of the pension fund assets might decline; or their investment returns might
reduce; or the estimated value of the pension liabilities might increase. In
these circumstances, Barclays could be required or might choose to make
extra contributions to the pension fund.
During 2009 a risk reducing programme was conducted. This entailed
increasing the holding of index-linked gilts to better match the liabilities and
reducing the net exposure to equities. Financial details of the pension fund
are in Note 30.
Investment risk is the risk of financial volatility arising from changes in
the market value of investments, principally occurring in Barclays insurance
companies. A change in the fair value of these investments may give rise to
a liability which may have to be funded by the Group. It is Barclays policy to
hedge such exposures in line with a defined risk appetite.
Barclays policy is for foreign exchange traded risk to be concentrated
and managed in Barclays Capital. Some transactional foreign exchange risk
exposure arises outside Barclays Capital to support and facilitate client
activity. This is minimised in accordance with modest risk limits and was
not material as at 31st December 2009. Other non-Barclays capital foreign
exchange exposure is covered in Note 48.
Asset management structural risk arises where the fee and commission
income earned by asset management products and businesses is affected
by a change in market levels, primarily through the link between income and
the value of assets under management. It is Barclays policy that businesses
monitor and report this risk against a defined risk appetite and regularly
assess potential hedging strategies.
Net interest income sensitivity (AEaR) by currency
31st December 2009 31st December 2008
+100 basis -100 basis +100 basis -100 basis
points points points points
£m £m £m £m
GBP 30 (360) 3 (273)
USD (43) 14 (25) 7
EUR (34) – (34) 30
ZAR 29 (27) 13 (13)
Others (1) 4 – (8)
Total (19) (369) (43) (257)
As percentage of total
net interest income (0.16%) (3.10%) (0.37%) (2.24%)