Salz Review - Wall Street Journal

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153 Salz Review An Independent Review of Barclays’ Business Practices 12.16 The Principal Risks are defined by Barclays as follows: 244 ― Credit risk is the suffering of financial loss should any customers, clients or market counterparties fail to fulfil their contractual obligations; ― Market risk is the reduction to earnings or capital due to the volatility of any trading book positions or an inability to hedge the banking book balance sheet; ― Funding risk is the failure to maintain necessary capital ratios to support business activity and meet regulatory requirements and the failure to meet liquidity obligations; ― Operational risk is the direct or indirect impacts resulting from human factors, inadequate or failed internal processes and systems, or external events; ― Conduct risk is detriment to the bank, customers, clients or counterparties because of inappropriate execution of business activities; ― Reputation risk is damage to the brand arising from any association, action or inaction which is perceived by stakeholders to be inappropriate or unethical. Credit, Market and Funding Risk 12.17 Credit, Market and Funding risk are essential components of risk management in all banks and were severely tested in the financial crisis. 12.18 Barclays’ performance through the crisis would suggest that its efforts in this area were reasonably effective. In particular, we have noted market leading practices including early development of a formal risk appetite process for financial risks, the establishment of Group-wide ‘Mandate and Scales’ limits and in the development of credit portfolio analytics. Joint sign-off between market and credit risk and integrated daily Value at Risk (VaR) production, stress testing and reporting process were also good practices. 12.19 This picture was confirmed by interviewees from both the front office and the risk function. Notwithstanding this generally positive picture, we observed instances of limit excesses or particular risk concentrations: ― The front office has sometimes exceeded limits. This is particularly important because, in addition to its execution of client transactions, Barclays has historically operated some proprietary trading or principal trading businesses which required close supervision given the risks being taken; ― Losses in the US structured credit business suggest that the business did not fully assess the risk taken on (although the market volatility was unusually high); ― The real estate portfolio in certain business units, for example in Spain, became overly concentrated in property and construction. 244 See: Barclays, Annual Report 2012, March 2013, pp. 28, 116, and 187-9.
Salz Review An Independent Review of Barclays’ Business Practices 154 12.20 We consider that the Group-wide management and Board Risk Committee oversight of these risks would be improved if the management information provided included a more granular assessment of risk against appetite to identify divergence. Recommendation 28: Risk culture and control framework To develop a consistently strong risk culture, Barclays should communicate clear statements as to its Group risk appetite for all types of risk; embed adherence to Group risk appetite into all business units; reinforce limits with strong management action for breaches; and embed risk and compliance criteria in performance evaluations, and in remuneration and promotion decisions. Barclays should review its control framework and ensure that it covers all risk types and clearly articulates roles and responsibilities across the three lines of defence. The business (front office) responsibility for risk should be reinforced. Barclays should endeavour to embed the framework consistently in all its businesses. Conduct and Operational Risk 12.21 Conduct and operational risk management in the banking industry are less mature than credit and market risk management. While Barclays has not had a formal conduct risk framework, it has had an operational risk framework for some time and has developed its capability to quantify operational risk losses and capital. 12.22 Following the incidents described in Section 6, in June 2012 Barclays enhanced its product approval process, with approvals required at various points in the product development process. It required a product risk assessment considering control environment reliability, intended customer outcomes and internal capabilities. In addition, Barclays introduced a product review process to review continually the suitability of existing products. 12.23 Both internal control and regulatory compliance concerns suggest, however, that conduct and operational risk have not been managed as the framework intended. ― The extent of control and compliance issues in the investment bank following the Lehman acquisition suggests that management may not have adequately prioritised operational risk matters in the integration plan. ― Barclays has complex systems which have not been integrated and necessitate manual intervention, including in critical areas such as risk-weighted asset calculations, client money segregation and transaction reporting. ― Operational indicators for risks, which are difficult to quantify, are less well developed, reducing the effectiveness of key management and Board Committees. 12.24 As we noted in Section 6, there were also several crystallised conduct risk matters: ― Barclays’ fine for attempted LIBOR manipulation in the investment bank;
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Salz Review - April 2013
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Salz Review - Wall Street Journal

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