Barclays 2014 Annual Report Download - page 192

190 I Barclays PLC Annual Report 2014 barclays.com/annualreport
Risk performance
Funding risk – Capital
Risk review
Economic Capital (EC) and its use as part of the ICAAP assessment (Pillar 2)
RWAs are measured based on generic regulatory capital rules that assume all financial institutions have a well diversified portfolio. An alternative
approach to measure capital risk is to use an EC calculation approach that takes into consideration firm specific concentrations (e.g. sector,
geography, single name), risk exposures and portfolio correlations.
EC is an internal measure of the risk profile of the bank expressed as the estimated stress loss at a 99.98% confidence level. The Group assesses
capital requirements by measuring the Group’s risk profile using internally developed models. The Group assigns EC primarily within the following
risk categories: credit risk, market risk, operational risk, fixed asset risk (mainly property) and pension risk.
The Group regularly reviews its EC methodology and benchmarks outputs to external reference points. The framework uses default probabilities
during average credit conditions, rather than those prevailing at the balance sheet date, thus seeking to remove cyclicality from the EC calculation.
The EC framework takes into consideration time horizon, correlation of risks and risk concentrations. EC is allocated on a consistent basis across
all businesses and risk activities.
UK Firms, as part of Pillar 2 framework, are required to update annually the firm’s Internal Capital Adequacy Assessment Process (ICAAP). The
information provided by the Group within the ICAAP is used by the PRA/BoE to support the regulator capital solvency review. Requirements for
local ICAAPs also exist in a number of jurisdictions in which the Group operates (e.g. South Africa). The Group ICAAP is used to assess Group-
wide capital adequacy to cover for all risks to which the Group is exposed.
As part of the Group ICAAP, and in line with PRA/BoE rules, the internal measure of Capital (EC) is used to support the Group’s assessment of the
appropriateness of capital allocated to each risk type. EC is also used to assess capital adequacy of a number of subsidiaries (as part of Local
ICAAPs). Key risks considered as part of the Group and local ICAAPs are:
Q Pillar 1 risks (i.e. Credit, Market and Operational risk): for which capital requirements are primarily based on the Regulatory Capital framework
(IRB and Standardised approaches) and calculated in line with PRA rules set out in GENPRU/BIPRU. Regulatory Capital requirements are then
benchmarked against our EC calculations as part of the Group’s ICAAP assessment.
Q Non-Pillar 1 risks: for which we have bespoke approaches that are mainly included in the EC framework. Main non-Pillar 1 risks:
– Pension risk: the Group does not have ownership of the investments within the pension fund but rather works with the Trustees’ dedicated
investment team to ensure that the risk profile is appropriate and within risk appetite.
– Concentration risk (e.g. single name, industry, geography): managed and monitored as part of BAU, mainly through Group risk appetite
framework, policy setting, monitoring, stress testing and EC framework. For EC purposes concentration risk is accounted for within each
relevant risk type (mainly as part of the Wholesale Credit Risk EC calculation)
– Interest Rate Risk in the Banking Book (IRRBB): also called non-traded interest rate risk (included as part of Market Risk in charts below). The
Group’s objective is to minimise non-traded interest rate risk and this is achieved by transferring IRRBB from the business to Group Treasury,
which in turn hedges the net exposure via the Investment Bank with the external market. Limits exist to ensure no material risk is retained
within any business/product area.
2014
2013
11,500
10,900
7,750
7,80 0
2,400
2,200
2,400
3,200
1,300
1,400
1,250
1,100
Wholesale credit risk
(including CRLs)
Retail credit risk
Operational risk
Market risk
Fixed asset risk
Other risks
Spot economic capita
l
a
ll
ocation
b
y ris
k
type £ma,
b
, c Spot economic capital allocation by business (£m) a, b, c
1
2
3
4
5
6
2014
1Africa 3,000
2Barclaycard 3,950
3IB 5,800
4PCB 7,450
5HO (Treasury) 3,700
6Non-Core 3,000
Notes
a Figures are rounded to the nearest £50m for presentation purposes.
b Total period end spot economic capital requirement (including pension risk) as at 31 December 2014 stood at £30,450m (2013: £31,050m).
c Economic capital charts exclude the economic capital calculated for pension risk (spot pension risk as at 31 December 2014 is £3,850m compared with £4,450m in 2013).