Barclays 2012 Annual Report Download - page 334

Market risk management overview (audited)
Market risk is the risk of the Group’s earnings or capital being reduced
due to:
 The Group being impacted by changes in the level or volatility of
positions in its trading books. This includes changes in the interest
rates, credit spreads, commodity prices, equity prices and foreign
exchange levels (‘traded market risk’).
 The Group being unable to hedge its banking book balance sheet at
prevailing market levels (‘non-traded market risk’).
 The Group’s defined benefit obligations increasing or the value of the
assets backing these defined benefit obligations decreasing due to
changes in both the level and volatility of prices (‘pension risk’).
Group-wide view of market risk
Barclays defines three sources of market risk: traded market risk,
non-traded risk and pension risk. Traded risk in the businesses resides
primarily in Investment Bank including investment banking services at
Absa Capital, while non-traded market risk resides mainly in Retail and
Business Banking, Corporate Banking, Wealth and Investment
Management and Treasury. Pensions risk is monitored centrally with
the cost borne across businesses.
Barclays market risk objectives are to:
 understand and control market risk by robust measurement, limit
setting, reporting and oversight;
 facilitate business growth within a controlled and transparent risk
management framework;
 ensure that traded market risk in the businesses resides primarily in
Investment Bank including Absa Capital; and
 minimise non-traded market risk.
Barclays banking book operations generate non-traded market risk,
primarily through interest rate risk arising from the sensitivity of net
interest margin to changes in interest rates. Banking businesses, such
as RBB or Corporate Banking, engage in internal derivative trades with
Treasury to remove this interest rate risk. The businesses remain
susceptible to market risk from three key sources:
 Prepayment risk: balance run-off may be faster or slower than
expected due to economic conditions or customer’s response to
interest rates. This can lead to a mismatch between the anticipated
balance of products provided to customers and the hedges executed
with Treasury;
 Recruitment risk: the volume of new business may be lower or higher
than expected requiring the business to unwind or execute hedging
transactions with Treasury at different rates than expected; and
 Residual risk and margin compression: the business may retain a
small element of interest rate risk to facilitate the day-to-day
management of customer business. Additionally, in the current low
rate environment, Barclays managed rate deposits are exposed to
margin compression. This is because for any further fall in base rate
Barclays must absorb an increasing amount of the rate move in its
margin.
Treasury acts as a central internal clearing house for non-behavioural
interest rate risk, netting off positions between businesses where
possible. Treasury is subject to market risk limits which ensure the
majority of the interest rate risk in Treasury is passed to the Investment
Bank. Treasury is permitted to retain limited interest rate risks to
facilitate the day-to-day management of hedges with the banking
businesses.
Investment Bank manages the interest rate risk it receives from
Treasury as part of its day-to-day rates trading operations consistent
with its client-facing activities. The positions will contribute both to
market risk limits and regulatory capital requirements to the extent
they are retained by the Investment Bank. Investment Bank manages
the risk arising from these internal trades within the VaR, stress and
position limits set by Risk in the same manner as external, client-facing
transactions are managed.
The Management Daily Value at Risk (see traded market risk) metrics
disclosed in this annual report relate to the trading books in Investment
Bank and Absa, and some banking books in Investment Bank. Interest
rate risk in the banking book is typically measured through net interest
margin measures such as annual earnings at risk, which is disclosed
below.
barclays.com/annualreport332 I Barclays PLC Annual Report 2012
Risk management
Market risk management