Barclays 2010 Annual Report Download - page 73

Modelling of risk
Barclays makes extensive use of quantitative estimates of the risks it
takes in the course of its business. Risk models are used in a wide range
of decisions, from credit grading, pricing and approval to portfolio
management, risk appetite setting, economic capital allocation and
regulatory capital calculations. The types of risks that are covered by
such models include credit, market and operational risks.
The Group has a wide range of models in use, covering estimations of
Probability of Default (PD), Exposure at Default (EAD) and Loss Given
Default, (LGD) as well as many other types of risk besides credit risk.
The models are developed and owned by each business unit. To minimise
the risk of loss through model failure, the Group Model Risk Policy (GMRP)
was developed. It is managed by the independent Group Risk function
and is reviewed annually.
The GMRP helps reduce the potential for model failure by setting Group
wide minimum standards for the model development and implementation
process. The GMRP also sets the governance processes for models across
the Group, which allows model performance and risk to be monitored, and
seeks to identify and escalate any potential problems at an early stage.
To ensure that the governance process is effective, and that management
time is focused on the more material models, each model is provided with
a materiality rating. The GMRP defines the materiality ranges for all model
types, based on an assessment of the impact to the Group in the event
of a model error. The final level of model sign-off is based on materiality,
with all of a business unit’s models initially being approved in business unit
committees. The more material models are also approved at the Group
Material Models Technical Committee, and the most material models
require further approval by the Executive Models Committee, a sub-
committee of Group Executive Committee. This process ensures that the
most significant models are subject to the most rigorous review, and that
senior management has a good understanding of the most material
models in the Group. Although the final level of model sign-off will vary,
depending on model materiality, the standards required by the GMRP
do not change with the materiality level.
The GMRP also sets detailed standards that a model must meet during
development and subsequent use. For new models, documentation must
be sufficiently detailed to allow an expert to understand all aspects of
model development such that they could reproduce the model. It must
include a description of the data used for model development, the
methodology used (and the rationale for choosing such a methodology),
a description of any assumptions made, and details of the strengths and
weaknesses of the model.
All new models are subject to validation and independent review before
they can be signed off for implementation. The model validation exercise
must demonstrate that the model is fit for purpose and provides accurate
estimates. The independent review ensures that the model development
has followed a robust process and that the standards of the GMRP have
been met, as well as ensuring that the model satisfies business and
regulatory requirements. In addition, the most material models are subject
to independent review by Group Risk. Once implemented, all models are
subject to post-implementation review. This confirms that the model has
been implemented correctly and behaves as predicted.
The GMRP also sets the requirements for ongoing performance
monitoring and the annual review process. Once implemented, all models
within the Group are subject to ongoing performance monitoring to
ensure that any deficiencies are identified early, and that remedial action
can be taken before the decision-making process is affected. As part of this
process, model owners set performance triggers and define appropriate
actions for their models in the event that a trigger level is breached.
In addition to regular monitoring, models are subject to an annual
validation process to ensure that they will continue to perform as expected,
and that assumptions used in model development are still appropriate. In
line with initial sign-off requirements, annual validations are also formally
reviewed at the appropriate technical committee.
Within Barclays Capital, where models are used to value positions within
the trading book, the positions are subject to regular independent price
testing which covers all trading positions. Prices are compared with direct
external market data where possible. When this is not possible, more
analytic techniques are used, such as industry consensus pricing services.
Model Governance
Group Risk Technical Committee
Executive Models Committee
Group Risk Oversight Committee
Group Material Models
Technical Committee
Business Unit Technical Committee
Barclays PLC Annual Report 2010 www.barclays.com/annualreport10 71
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