Barclays 2010 Annual Report Download - page 72

Risk management
Barclays risk management strategy continued
These potentially larger but increasingly less likely levels of loss are
illustrated in the Risk Appetite concepts chart above. 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. Specifically, Barclays believes that this framework enables it to:
– Improve management confidence and debate regarding the Group’s
risk profile
– Re-balance the risk profile of the medium-term plan where breaches
are indicated, thereby achieving a superior risk-return profile
– Identify unused risk capacity, and thus highlight the need to identify
further profitable opportunities
– Improve executive management control and co-ordination of risk-taking
across businesses
Mandate & Scale
The second element to the setting of risk appetite in Barclays is an
extensive system of Mandate & Scale limits, which is a risk management
approach that seeks to formally review and control business activities to
ensure that they are within Barclays 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). Barclays
achieves this by using limits and triggers to avoid concentrations which
would be out of line with external expectations, and which may lead to
unexpected losses of a scale that would be detrimental to the stability
of the relevant business line or of the Group. These limits are set by the
independent Risk function, formally monitored each month and subject
to Board-level oversight.
For example, in our commercial property finance portfolios, a
comprehensive series of limits are in place to control exposure within
each business and geographic sector. To ensure that limits are aligned to
the underlying risk characteristics, the Mandate & Scale limits differentiate
between types of exposure. There are, for example, individual limits for
property investment and property development and for senior and
subordinated lending. Since the onset of the global economic downturn,
these limits have been reduced significantly and the frequency of review
has been increased. The Group’s exposure to Ireland has been restricted
through the recent reduction in Mandate & Scale limits.
Barclays uses the Mandate & Scale framework to:
– Limit concentration risk
– Keep business activities within Group and individual business mandate
– Ensure activities remain of an appropriate scale relative to the underlying
risk and reward
– Ensure risk-taking is supported by appropriate expertise and capabilities
As well as Group-level Mandate & Scale limits, further limits are set by risk
managers within each business unit, covering particular portfolios.
Risk Appetite and Stress Testing
Stress testing occurs throughout the Bank and it helps to ensure that our
medium term plan has sufficient flexibility to remain appropriate over a
multi-year time horizon during times of stress.
Stress testing allows us to analyse a specific potential economic scenario
or event using defined macro and market based parameters. The results of
a stress test, whether at a Group or business level, will produce an output
which could be compared to a point in the curve of our Financial Volatility
based statistical outcomes, although stress tests are scenario based and
as such are not calibrated to a specific confidence level.
Given that the stress testing, Risk Appetite, and medium term planning
timelines are all aligned, the outputs of stresses are used by risk functions
throughout the Group to inform Risk Appetite (particularly at a business
level). The outputs of stresses also feed into the setting of Mandate &
Scale limits. For example, via the use of primary and secondary stresses
in Market Risk, we identify and limit the scale of risks that DVaR would not
automatically capture.
Reverse stress testing also supports our Risk Appetite framework. Reverse
stress testing starts with defining a worst case set of metrics and deduces
a scenario that could theoretically cause that situation to occur. This will
help to ensure that we understand the tail risks across our books and
explain what would have to happen to generate a change in strategy.
Group reverse stress testing also identifies risks that in one business alone
would not have been sufficient to be a critical event, thereby complementing
the Financial Volatility and Mandate & Scale processes.
For further information on stress testing see page 72.
70 Barclays PLC Annual Report 2010 www.barclays.com/annualreport10