Barclays 2011 Annual Report Download - page 75

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 uses a wide range of models including estimations of
Probability of Default (PD), Exposure at Default (EAD) and Loss Given
Default (LGD), as well as those covering other types. The models are
developed and owned by each business unit. The risk of loss through
model failure is minimised through the Group Model Risk Policy (GMRP)
which 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 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. 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 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, including 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 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. Independent
reviews ensure 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 sets the requirements for ongoing performance monitoring.
Once implemented, all models 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 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 or if not possible, more analytic
techniques are used, such as industry consensus pricing services. These
services enable peer banks to compare structured products and model
input parameters on an anonymous basis. Conclusions and any
exceptions to this exercise are communicated to senior business
management.
Externally developed models must be approved for use following the
validation and independent review and are subject to the same
governance standards as internal models, including ongoing monitoring
and annual validation requirements.
Model Governance
Group Risk Technical Committee
Executive Models Committee
Financial Risk Committee
Group Material Models
Technical Committee
Business Unit Technical Committee
Oversight and Policy Model Sign-off
Barclays PLC Annual Report 2011 www.barclays.com/annualreport 73
The strategic report Governance Risk management Financial review Financial statements Shareholder information