Barclays 2013 Annual Report Download - page 389

Group-wide stress tests are an integral part of the annual MTP process
and ensure that the Group’s financial position and risk profile provide
sufficient resilience to withstand the impact of severe economic stress.
A key objective of the Group-wide stress test process is to identify and
document management actions that would be taken to mitigate the
impact of stress.The bottom-up process ensures all levels of
management are informed of the impact of the stress scenarios and
are aware of appropriate management actions to be taken when a
stress event occurs.The approach also includes reverse stress testing
techniques which aim to identify the circumstances under which our
business model would become no longer viable, leading to a significant
change in business strategy. See Stress testing below for more
information.
Risk appetite is approved and disseminated across Key Risks and
businesses, including the use of ‘M&S’ limits to enable and control
specific activities that have material concentration risk implications for
the Group.These limits also help avoid large one-off losses that are
specific to Barclays and outside stakeholder expectations.
Barclays has run a risk appetite process since 2004 and this process
comprises ‘Financial Volatility’, which is the level of potential deviation
from expected financial performance Barclays is prepared to sustain,
and ‘Mandate and Scale’, which ensures the Group stays within
appetite. The strategy and business activities are reflected in key
performance metrics, which are dependent in large part on risk
performance.
Simulate risk
Express business
objectives, under
‘Plan’ and ‘Stressed’
conditions
Manage and monitor risk metrics
as part of tracking of forecasts
throughout year, and report to
the Board. Implement strategic
changes if forecasts are outside
of acceptable range given
current conditions
Set Mandate and
Scale limits to help
ensure that maximum
losses remain within
acceptable limits
Simulate risk
performance under
stress conditions to
losses (risk metric)
under each scenario
to be consistent with
business objectives
Financial volatility
Financial volatility is defined as the level of potential deviation from
expected financial performance that Barclays is prepared to sustain at
relevant points on the risk profile. When setting appetite, management
and the Board articulate the Group’s strategy and summarise objectives
in terms of key financial metrics. The Group’s risk profile is assessed via
a ‘bottom-up’ analysis of the Group’s business plans to establish the
volatility of the key metrics. If the projections entail too high a level of
risk (i.e. breach the top-down financial objectives at the through-the-
cycle, moderate or severe level), management will challenge each area
to re-balance the risk profile to bring the bottom-up risk appetite back
within top-down appetite. Performance against risk appetite usage is
measured and reported to the Executive Committee and the Board
regularly throughout the year. Our top-down appetite is quantified
through an array of financial performance and capital metrics which
are reviewed by the Board on an annual basis. For 2013, the strategic
metrics in the table below were set at three levels: ’through-the-cycle’,
and stressed ‘one in seven’ and ‘one in twenty-five’, which are defined
as:
 Through-the-cycle: the average losses based on measurements over
many years;
 1 in 7 (moderate) loss: the worst level of losses out of a random
sample of 7 years; and
 1 in 25 (severe) loss: the worst level of losses out of a random sample
of 25 years.
These scenarios are defined through a level of probability of occurrence
rather than through a specific set of economic variables like in stress tests.
Potential size of loss in one year
Probability of loss
Mean
loss
Extreme
stress
Severe
stress
Moderate
stress
Risk appetite concepts (diagram not to scale)
Expected
loss
The potentially larger but increasingly less likely levels of loss are
illustrated in the risk appetite concepts chart above. Since the level of
loss at any given probability is dependent on the portfolio of exposures
in each business, the statistical measurement for each key risk category
gives the Group clearer sight and better control of risk taking
throughout the enterprise. Specifically, this framework enables it to:
 Improve management confidence and debate regarding the Group’s
risk profile;
 Re-balance the risk profile of the MTP where breaches are indicated,
thereby achieving a superior risk-return profile;
 Identify unused risk capacity, and thus highlight the need to identify
further profitable opportunities; and
 Improve executive management control and co-ordination of risk
taking across businesses.
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