Barclays 2011 Annual Report Download - page 155

Operational risk appetite
Barclays approach to determining appetite for operational risk combines
both quantitative measures and qualitative judgement, in order to best
reflect the nature of non financial risks. This approach is applied at both
an overall operational risk level and for individual key risks.
The monitoring and tracking of operational risk measures is supplemented
with qualitative review and discussion at senior management executive
committees on the action being taken to improve controls and reduce risk
to an acceptable level.
Operational risk appetite is aligned to the Group’s Risk Appetite
Framework.
Reporting
The ongoing monitoring and reporting of operational risk is a key
component of an effective Operational Risk Framework. Reports are used
by the Operational Risk function and by business management to
understand, monitor, manage and control operational risks and losses.
Operational risk measurement
The Operational Risk capital model uses the outputs of the risk
management tools to measure Barclays operational risk exposure. KRSs
are the main input to the model, which also uses the frequency and
severity of operational risk losses to provide a distribution of potential
losses over a year for Barclays as a whole. This process takes into account
the possibility of correlations i.e. the likelihood of two key risks occurring
within the same year. The model generates a regulatory capital
requirement, which is determined to a level of 99.9% confidence. Once
the overall level of regulatory capital for the Group has been established
it is allocated, on a risk sensitive basis, to business units. This provides
an incentive for the business to manage its risks within appetite levels.
Operational risk profile
A high proportion of Barclays operational risk events have a low associated
financial cost and a very small proportion of operational risk events have
a material impact. In 2011, 70.4% of operational losses had a value of
£50,000 or less (2010: 75.0%) and accounted for 1.9% of the overall
impact (2010: 3.7%). In contrast, 4.1% of the operational risk events had
a value of £1m or greater (2010: 2.5%) and accounted for 91.1% of the
overall impact (2010: 86.5%).
The Group monitors trends in operational risk events by size, business unit
and internal risk categories (including Key Risk). For comparative purposes,
the analysis below presents Barclays operational risk events by Basel 2
category. In 2011, the highest frequency of events occurred in External
Fraud (42.5%) and Execution, Delivery and Process Management
(36.9%). Clients, Products and Business Practices accounted for the
highest proportion of losses by value, with 66% (2010: 67.9%). The
continued high impact in this category was driven by the £1bn provision
for PPI which was announced in May 2011. The volume of external fraud
events remained broadly stable in 2011, although there was an increase
in value due to a small number of high value fraud events.
Business disruption and
system failures
Clients, products
and business practices
Damage to physical assets
Employment practices
and workplace safety
Execution, delivery and
process management
External fraud
Internal fraud
3.8
5.2
4.9
0.9
36.9
42.5
5.8
2.5
5.3
2.3
1.0
39.2
42.7
7.0
2011
2010
Fig. 1: Operational risk events by risk category
% of total risk events by count
Business disruption and
system failures
Clients, products
and business practices
Damage to physical assets
Employment practices
and workplace safety
Execution, delivery and
process management
External fraud
Internal fraud
0.5
66.0
0.3
0.5
22.4
9.9
0.5
2.6
67.9
0.4
0.2
21.6
6.1
1.2
2011
2010
Fig. 2: Operational risk events by risk category
% of total risk events by value
Barclays PLC Annual Report 2011 www.barclays.com/annualreport 153
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