Barclays 2013 Annual Report Download - page 74

Corporate governance report
Board Financial Risk Committee continued
Risk Management Governance and Framework
 Assessed and approved enhancements to the governance around the
limits applied to Barclays’ Leveraged Finance and Capital Markets
Underwriting businesses. The enhancements approved by the
Committee are designed to improve controls given the scale of the
business.
 Requested a review of models and model governance and assessed
the work that has been done to meet supervisory guidance on Model
Risk Management issued by the US Federal Reserve and the Office of
the Comptroller of Currency. This guidance sets out expectations for
achieving effective challenge, including independent validation of
models, by way of critical analysis by objective, informed parties.
Having assessed progress made to date, the Committee was content
with the changes made to the governance and framework and the
introduction of policies and standards. In 2013, 78 of the 83 most
significant risk models were reviewed and validated and the
Committee encouraged management to achieve full review and
validation of all of the most significant risk models on an annual basis
by the end of 2014.
 Debated the actions that are under way to implement a target
operating model for the Risk function in view of greater
functionalisation across the Group, in particular, the plans to
implement a global shared services model, which should deliver
more consistent processes and standards, improve efficiency and
effectiveness, reduce costs and reinforce the independence of the risk
function. The Committee endorsed the plans and requested further
progress reports as implementation progresses.
Risk in Remuneration
 Assessed the input provided to the Board Remuneration Committee
on the risk metrics to be used to determine financial performance
and evaluated the Risk function’s view of performance, which
informed remuneration decisions for 2013. Matters to be taken into
consideration included performance against risk profile, impairment
performance against budget and control processes and the
Committee requested that certain regulatory issues and risk control
issues were reflected. The Remuneration Report on pages 89 to 125
includes more detail on how risk is taken into account in
remuneration decisions.
Risk Due Diligence
 Asked management to undertake a post-acquisition review of the
acquisition of certain portfolios from Edcon Proprietary Limited. The
portfolio, acquired in 2012, had not performed as well as the
acquisition business case had forecast, although its returns at that
time still exceeded the Group’s target. The Committee was keen to
learn any lessons for future risk due diligence exercises, which were
identified as greater consideration of execution risks and further
financial analysis of potential economic and regulatory scenarios. At
the Committee’s request, the outputs of the review were shared more
widely with senior management across the Group.
Further details of the Group’s system of internal control and risk
management are included in the Directors’ Report on pages 80 and 81
and in the Risk Management Report on pages 377 to 422.
Governance in action
Redenomination Risk
A significant area of focus for the Committee during 2013 was
redenomination risk, in view of Barclays’ exposures in peripheral
Eurozone countries. The focus of the Committee’s attention was
Spain, Portugal and Italy, as Barclays’ exposures in Greece and
Ireland are not considered to be material.
Redenomination risk in this instance arises when local assets are
greater than local funding – there is a risk from the potential
depreciation of locally held assets against international liabilities in
the event of any disorderly exits from the Eurozone. In view of
continuing concerns arising from economic and political conditions
in the Eurozone, the Committee challenged management to
eliminate redenomination risk as far as possible over the course of
the year and requested regular updates on the actions taken and
their impact.
Management had established a Euro Crisis Committee, chaired by
the Chief Risk Officer and reporting up to the Committee,
specifically tasked with managing redenomination risk. Actions
taken in 2013 to close the funding gap have included seeking local
Euro funding to replace Sterling denominated funding provided by
the Group, via a combination of the European Central Bank’s
Long-Term Refinancing Operation, funding from local central banks
and raising local deposits. Further actions have included reducing
available for sale sovereign bond portfolios, particularly in Spain and
Portugal. Action has also been taken to dispose of local assets, with
positions in Spain, Portugal and Italy reduced across all asset
classes. In addition, a reverse stress testing exercise involving
Eurozone break-up scenarios has been run and detailed
contingency planning for any Eurozone exit has been developed and
tested. The Committee supported and encouraged these actions.
The Committee regularly assessed the progress being made during
2013 and continues to press management to explore further
options to reduce redenomination risk, in particular with respect to
Italy. During 2013, the net funding mismatch continued to decrease
from €11.8bn to €11.6bn in Italy and from €4.1bn to €3.0bn in
Portugal. The excess of local liabilities over local assets in Spain
increased from €2.3bn to €3.1bn.
barclays.com/annualreport
72 Barclays PLC Annual Report 2013