Barclays 2010 Annual Report Download - page 74

Risk management
Barclays risk management strategy continued
These services enable peer banks to compare structured products and
model input parameters on an anonymous basis. The conclusions
and any exceptions to this exercise are communicated to senior levels
of business management.
Externally developed models are subject to the same governance
standards as internal models, and must be approved for use following
the validation and independent review process. External models are
also subject to the same standards for ongoing monitoring and annual
validation requirements.
Stress testing
A fundamental duty of risk management is to ensure that organisations
do not neglect to prepare for the worst event as they plan for success.
Stress testing helps Barclays to understand how its portfolios would react
if business conditions became significantly more challenging. We generate
specific forward-looking scenarios and analyse how well our profitability
would be maintained, whether our levels of capital would be adequate
and what managers could do in advance to mitigate the risk.
Barclays uses stress testing techniques at Group, portfolio and
product level and across a range of risk types. For example, portfolio
management in the US cards business employs stressed assumptions
of unemployment to determine profitability hurdles for new accounts.
In the UK mortgage business, affordability thresholds incorporate stressed
estimates of interest rates.
In the Investment Banking division, global scenario testing is used to
gauge potential losses that could arise in conditions of extreme market
stress. Stress testing is also conducted on positions in particular asset
classes, including interest rates, commodities, equities, credit and
foreign exchange.
At the Group level, stress tests capture a wide range of macroeconomic
variables that are relevant to the current environment, such as:
– GDP;
– unemployment;
– asset prices; and
– interest rates.
The Board Risk Committee agrees the range of scenarios to be tested
and the independent Group Risk function co-ordinates the process,
using bottom-up analysis performed by the businesses. The results of
the stress tests are presented to the Executive Committee, the Board Risk
Committee, the Board and the UK Financial Services Authority (FSA).
In 2010, the range of stress scenarios included the stress test set out
by the FSA as part of its assessment of the Group’s resilience to stressed
credit risk, market risk and economic conditions over a five-year period.
This stress scenario analysis took into account a wide range of
factors, including:
– The Group’s revenue generation potential given stressed
macroeconomic variables such as GDP and interest rates;
– The effect of the scenario on the probability of default and possible
losses given default within its loan book; and
– Possible declines in the market value of assets held in the trading
books caused by the stress.
Following this work and discussion with the FSA, the Group was able
to confirm that its capital resources, after exposure to the stress, were
expected to continue to meet the FSA’s capital requirements.
In addition, Barclays, along with 90 other banks, was included in the
Committee of European Banking Supervisors’ (CEBS)a stress test
performed in July 2010. The stress test was designed to assess the
resilience of the EU banking sector and each of the selected banks’ ability
to absorb possible shocks on credit and market risks, including sovereign
risks. Under the scenario considered, results indicated that Barclays would
be well-placed to withstand the stress.
In 2010, Barclays integrated ‘reverse’ stress testing into the Group wide
stress testing process. Reverse stress testing aims to identify the conditions
that would result in the business model no longer being viable, such as
extreme macroeconomic downturn scenarios or specific idiosyncratic
events. This is being used to help support the on-going risk management
of the Group, for example reverse stress testing has been integrated into
the Risk Appetite framework. This also supports the Group in meeting new
regulatory requirements in regards to reverse stress testing.
Information on the Group’s stress testing specifically relating to liquidity
risk is set out on page 131.
Note
a On 7th February 2011 CEBS was renamed the European Banking Authority
72 Barclays PLC Annual Report 2010 www.barclays.com/annualreport10