Barclays 2013 Annual Report Download - page 419

Operational risk appetite
Barclays approach to determining its operational risk appetite
combines both quantitative measures and qualitative judgement, in
order to best reflect the nature of non-financial 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. The Board Conduct, Reputation and Operational Risk
Committee considers and recommends to the Board for approval, via
the Enterprise Wide Risk Committee, the Group’s risk appetite
statement for Operational Risk based on performance in the current
year and the projections for financial volatility the following year.
Reporting
The ongoing monitoring and reporting of operational risk is a key
component of the Barclays 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.
The operational risk profile is reviewed by senior management at the
Operational Risk & Control Committee and the Board at the Board
Conduct, Reputation and Operational Risk Committee.
Key risk scenarios
 Key Risk Scenarios are a summary of the extreme potential risk
exposure for each Key Risk in each business and function, including
an assessment of the potential frequency of risk events, the average
size of losses and three extreme scenarios. The Key Risk Scenario
assessments are a key input to the Advanced Measurement
Approach calculation of regulatory and economic capital
requirements (see following section on Operational Risk
Measurement). The assessment is performed by Key Risk Officers,
taking into account analysis of internal and external loss experience,
key risk indicators, risk and control self-assessments and other risk
information. The businesses and functions analyse potential extreme
scenarios, considering:
 the circumstances and contributing factors that could lead to an
extreme event;
 the potential financial and non-financial impacts (eg reputational
damage); and
 the controls that seek to limit the likelihood of such an event
occurring, and the mitigating actions that would be taken if the event
were to occur (eg crisis management procedures, business
continuity or disaster recovery plans).
Management may then conclude whether the potential risk is
acceptable (within appetite) or whether changes in risk management
control or business strategy are required.
Operational risk measurement
Barclays assesses its operational risk capital requirements using an
Advanced Measurement Approach. The approach involves estimating
the potential range of losses that could be incurred in a year from
operational risk events, using statistical distributions. Regulatory capital
requirements are set to cover 99.9% of the estimated losses. Barclays
also assesses its economic capital requirements to cover 99.98% of the
estimated losses that exceed the typical losses (diversified across all
risk classes).
The potential frequency and severity of losses is estimated for each Key
Risk (within the Operational Risk category) in each business and
function. The potential range of individual loss severities is represented
by a statistical distribution, estimated from the average loss size and
three extreme scenarios (from Key Risk Scenarios), as well as loss data
from the Operational RiskData eXchange (ORX).
The capital calculation also takes into account the possibility of
correlations between operational risk losses occurring in a year
(between risks within businesses and functions and between
businesses and functions).
In certain joint ventures and associates, Barclays may not be able to
apply the AMA and so uses the Basic Indicator Approach (BIA) to
calculate operational risk capital. With the BIA, Barclays is required to
hold a certain percentage, currently 15% of average gross income, in
capital. Areas where the BIA is applied are: the Africa RBB businesses,
including Barclays Bank Mozambique and National Bank of Commerce
(Tanzania); Barclays Bank PLC Pakistan; the new to bank business
activities acquired from Lehman Brothers; and the portfolios of assets
purchased from Woolworths Financial Services in South Africa, Citi
Cards Portugal and Italy, Standard Life Bank, ING Direct, MBNA
Corporate Cards, Upromise, RCI, Egg Cards, EdCon, Sallie Mae and
Ameriprice.
Insurance
As part of its risk management approach, the Group also uses
insurance to mitigate the impact of some operational risks.
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