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Banking Risk: A Case of Barclays Bank Plc | Assignment Help Online

Banks are regarded as the heart of the economy since they contribute to the effective management of funds and the growth and development of a country. But then, management of these institutions has become more complex due to multiple levels of management, myriad of activities or function as well as the various banking risks that affect the industry. Banking institutions are literally prone to various types of risk, for instance, operational risks, credit risks and interest rate risks (Cornett & Saunders, 2003). A successful bank is one that is able to mitigate these risks and work towards creating consistent returns for the shareholders, something that requires proper management of key functions. Alleviation or risks begins by identifying the risks and their sources measuring or determining their impact and managing them in the best way possible.

Barclays bank is among the well-known monetary services providers. The bank is headquartered/based in London in the UK. Barclays bank operates across major continents in the world including Europe, the Americas, Africa and Asia. Just like any other banking institution, Barclays faces various banking risk which influences its operations in many ways. The bank often identifies the sources of risks and employs certain strategies to manage them. Interest rate risk, liquidity risk as well as operational risk threaten the success of the bank. What is the source of these risks? How have they measured management? What is their regulatory infrastructure?  The paper assesses interested rate, operational, liquidity risks and related concepts.

Part A

2.0 Interest rate risk

2.1 Sources of the risk    

IRR is a risk to the existing or expected capital or earnings that are brought about by fluctuation of interest rates over time. Interest rate risks often threaten the value of the liabilities and assets of a bank. Changes in interest rate negatively affect bank deposits, bonds and other investment. Thus, a bank may experience a decline in the value of its asset due to fluctuations (Fraser, Madura & Weigand, 2002). Banks often borrow at a lower rate so as to lend at a higher rate and make a profit. However, higher interests rates can easily put pressure on a client and lead to defaults in loan repayment.  The main causes of interest rate risk include volatility of the interest rate as well as the mismatch between interest rate exposures of a bank’s non-traded assets as well as liabilities (Madura & Zarruk, 1995). According to Barclay’s report published in 2018, the bank interest rate risk is brought about by the said mismatch.  But then, interest risks can be classified into four categories which include basis risk, maturity mismatch risk or repricing, yield curve risks and options risk.

2.1.1 Mismatch/gap risk

           A gap risk occurs when the bank holds liabilities, assets as well as off-balance sheet items with different principal totals, repricing or maturity date and hence exposing the bank to unanticipated changes in the existing market interest rates. Repricing is the most obvious source of interest risk for banks and is often determined by comparing the size of the assets that mature within a given period with the size of the liabilities that reprice (Kumar, 2014). A bank whose repricing asset maturity are greater than their repricing liability maturities is described as “liability sensitive” since the bank’s liabilities would reprice fast.

2.1.2 Basis risk

This is the risk that the interest rate of various liabilities, assets as well as off-set balance sheet items might change with varying degrees. Thus, it occurs when the market interest rates for different indices used to price liabilities and assets change by different amounts or at different times (Kumar, 2014). Basis risk also includes changes external rates and the rates created by banks, for instance, the risk may arise due to the differences in a bank offering rate on liability products like savings accounts and money market deposits and the prime rate.

2.1.3 Option risk

Option risk occurs when a bank’s customer or the bank has the right and not an obligation to adjust the timing and the level of the cash flow of liability, an asset and off-balance sheet financial instrument. An option holder has the right to sell (put option) or buy (call option a financial instrument at a particular price recognized as the strike price over a certain period of time (Kumar, 2014). Option holders often exercise the option if the resulting outcome is to their benefit. If there is an upsurge in interest rate, the value of customer’s deposit reduces and clients can “put” the deposit back to a banking institution to his or her advantage.

2.1.4 Yield curve risk

This type of interest rate risk that is experienced when a bank uses different financial instruments which mature at a different time as a basis for pricing liabilities and assets. The price benchmark may include fixed deposits, Treasury bill rates and call money market rates (Kumar, 2014). When various financial or monetary instruments are used to determine the value of assets and liabilities, there would be no parallel movement of the yield curve. The curve would fluctuate as the economy goes through business phases.

2.2 Measuring interest rate risk

Interest rate risk can be determined by carrying out maturity gap analysis, a simple analytical technique. A gap analysis allots interest-rate-sensitive liabilities, assets as well as off-balance sheet positions into a particular number of pre-defined time bands based on the remaining time for subsequent repricing (Makkar & Singh, 2013). Liabilities and assets that do not have a definite repricing interval like cash credit, bank savings, loans, and overdraft are assigned time bands based on the judgment of a bank and its past experience. Time bands are also allocated if actual maturities are not similar to contractual maturity like time deposits and put and call options. A bank with great exposure in the short run ought to test the sensitivity of assets as well as liabilities at short intervals (Madura & Zarruk, 1995). Interest rate-sensitive liabilities (RSLs) in every time band are compared with interest-rate-sensitive assets (RSAs) to examine earnings exposure and produce repricing gap.  If RSAs >RSLs this implies that an upsurge in interest rate will lead to an upsurge in net interest margin. The opposite is true. The gap is used to determine interest rate sensitivity.

The results (negative or positive) is multiplied by assumed changes in interest rate to (Earnings at Risk) EaR which estimates that earning that could be affected by changes in interest rate (Angbazo, 1997). Other measures include limitation gap analysis which examines the time difference between repricing dates of both assets and liabilities, duration gap analysis where the duration of liabilities and assets are matched rather than matching repricing dates or maturity dates and simulation analysis. Most banks use computer-based simulation analysis to assess interest rate sensitivity. With the Monte Carlo simulation, a bank can make assumptions regarding the shape of the yield curve and the future pathway of the interest rate. The simulation model is useful in understanding risk exposure in the different interest rate or balance sheet set-ups.

Barclays bank group measures the volatility of the net interest income by the Annual Earnings at Risk (AEaR). AEaR is assessed on a regular basis to report to the top management team and the risk committee as part of a risk management framework.  It is a key measure of risks associated with an interest rate in Barclay’s banking books. The AEaR is also used by the bank as a basis for measuring equity sensitivity (Barclays Bank, 2018). The changes in the interest rate on retained earnings, fair values and cash flow hedge reserve and tax effects are considered in the analysis.

2.3   Management and regulatory infrastructure

Effectual regulation of interest rate risk needs an extensive risk control process that include setting of policies and procedures which are meant to regulate the level of interest rate risk that Barclays bank takes, development of a system that identifies and measures interest rate risk, installing a system that monitors and reports exposure to risk and the creation of a strong internal control system to enhance integrity and risk management process (Van Deventer & Mesler, 2013). There ought to be a policy that specifies restrictions as well as the lines of duties and the power for controlling risk. Barclays Bank Plc is a complex organization with higher exposure to interest rate risk (Barclays Bank, 2018). Hence, the institution needs a management process that addresses typically a more complex and broader range of financial activities.

Barclays Bank plc has executed various actions to manage interest rate risks.  Barclays bank manages interest rate risks through interest swaps, where involved parties decide to exchange their forthcoming cash flow and forward rate, where one party is permitted to part with a fixed-rate at a planned future date. The bank has developed counterparties in countries where it operates t be able to hedge against exposure to interest rate risk (Van Deventer & Mesler, 2013). Furthermore, the bank has a risk management committee that reviews the group’s capital and treasury risk profile on behalf of the top management team. The committee recommends the bank’s risk appetite. Besides, it receives, commissions and considers reports on critical non-financial and financial risks and recommends Internal Capital Adequacy Assessment Process (ICAAP) as well as Internal Liquidity Adequacy Assessment Process (ILAAP) to the bank’s board for approval (Barclays Bank, 2018). Interest rate risks are transferred to the bank’s treasury through funding arrangement, interest swaps and centrally managed (Papadamou & Siriopoulos, 2014). According to the Asset liability Management theory, matching assets and liabilities based on interest rate as well as maturity allows banks to reduce both liquidity and interest rate risk (Wei & Wang, 2017). The bank observes this theory. Liabilities and assets are often matched in terms of rate interest sensitivity and maturity in a bid to reduce interest rate risk. Other management practices include the assessment of interest rate risk in client’s banking books, managing risk of funding activities and the liquidity of buffer investments and assessing risk limits used to monitor risk appetite for non-traded market risk.

3.0 Liquidity risk

3.1. Sources of the risk

Liquidity risks refer to the inability of an organization to meet its financial demands or buy and sell it asset within a given time without adversely changing the value of an asset. For Barclays, liquidity risk occurs when the bank fails to fund its portfolio of assets at a suitable rate and maturities and inability to timely liquidate a position at reasonable prices (Arif & Anees, 2012). A bank that experiences Liquidity risk also fails to meet its regulatory requirements.  The risk originates from the nature of the banking operations, from operational and financing policies. Excessive withdrawals out of a banking or financial institution, unexpected cessation in financing from related parties as well as collateral postings can cause liquidity risk.

3.2. Liquidity risk measurement.

Barclays Bank assesses liquidity risk by conducting liquidity risk stress testing. This assessment measures the possible contractual as well as contingent stress outflow under various stress situations. These situations include 90-day market-wide stress incident, 30-day Barclays-specific stress incident and 30-day joint scenario that is comprised of the two incidents (Barclays Bank, 2018). Generally, Barclays Bank plc has a strong liquidity position that is driven by the bank’s approach to liquidity risk management.

3.3. Management and regulatory infrastructure

Barclays bank plc controls liquidity risk by setting appropriate liquidity limit and observing them. Each division of the bank is given a level below which a requisition for additional cash ought to be made or beyond which the section should remit surplus cash to the relevant authorities. The limits are managed by the central management team. Moreover, the limits are aligned with insurance policies. The bank’s liquidity management framework integrates different risk management tools which are useful in limiting and monitoring Barclay’s contingent liabilities and the statement of financial position (Barclays Bank, 2018).  Barclays Bank also manages liquidity risk through internal transfer pricing (Liquidity Transfer Pricing (LTP)), a mechanism that involves the transfer of liquidity premium from one division to another.  The objective of LTP is to distribute the benefits and costs from business sections to a centrally controlled pool.

Furthermore, Barclay’s bank has a group policy that supports the control of liquidity risk. According to the group policy, each operation ought to ensure that it is able to access enough intraday liquidity to cater for any obligation it might have to payment and settlement system (Barclays Bank, 2018).  (Vento & La Ganga, 2009). The management structure for liquidity related strategy focuses on operating a centralized control process and governance to cover all activities meant to manage the risk.

4.0 Operational risks

4.1. Sources of the risk

Operational risks are the risk of losses that arises when there are weaknesses in internal control systems and process, information systems or external events. Lack of continuous access to critical or important knowledge about bank-related activities or services poses a threat to the development or the survival of a bank. Knowledge establishes a permanent and comprehensive vision that can explore and address possible risks (Hemrit & Arab, 2012). With continuous changes in technology and innovation, a bank like Barclays has no option but to often reestablish its risk management models and tools to allow leaders to manage operational risks.

Barclays bank is prone to operational risks that are caused by actions  of human beings as they accomplish various tasks, for instance, an employee can post a wrong transaction, fail to post an important transaction in the system or make errors during information processing and data transmission (Barclays Bank, 2018). Barclays bank faces the risk of material errors in various operational processes like payments, deposits and other transactions. The errors could disadvantage the bank or its customers leading to reputational damage (Hemrit & Arab, 2012).  An employee or a group of the employee can also increase the bank operational risk by committing a fraudulent transaction. Such actions expose the bank to income or capital losses depending on the magnitude of the transaction.

The bank is also exposed to operational risks due to the adoption of information technology. The financial sector is a primary target for cyber-criminal offences. The bank’s computer network might also be hacked by outsiders for the purpose of manipulating or destroying data, disrupting operations or stealing money (Hemrit & Arab, 2012). The bank’s management information systems (information technology system) may fail to function as expected due to programming errors. The effectiveness of employees depends on their competence to carry out various functions. Competent employees who lack the prerequisite knowledge and cognitive abilities to accomplish tasks weaken the governance system and expose a bank to operational risk. Perhaps the employment of highly skilled professional and continuous training would strengthen the governance system and alleviate operational risk.

4.2. Measuring operational risk

Operational risks are measured through two approaches thus the top-down approach as well as the bottom-up approach. This method requires a bank like Barclays plc to first estimate the risk and the capital requirements (Capital charge) and then use the Standard approach (a method that was approved in 2018) to determine the risk (Allen & Bali, 2007). The capital charge for the risk is computed as a proportion of the gross income over the past three years.

4.3. Management and regulatory infrastructure

To effectively manage operational risks most banks work towards operating within a well-established system that is coupled with strong internal controls. A strong system allows transactions to be carried out and risks taken without exposing the bank to reputational damage and high losses (McPhail, S2003). In a bid to manage operational risk, Barclays bank plc has an all-encompassing Enterprise Risk Management Framework which describes internal governance system. Barclays Bank PLC risk management section has three objectives which include delivering operational risk capability that is relevant and pragmatic, providing policy and framework that enable the management to realize its risk management responsibilities and delivering aggregated and consistent measurement of operational risk that offers expected insights (Barclays Bank, 2018). The bank uses advanced and updated security systems and programs to increase the safety of information. Barclays applies key security techniques like installing relevant security updates, Backing up of data, Continuous use of firewall and Regular changes of passwords.

 Risk calculations

Barclays bank PLC uses Annual Earnings at Risk (AEaR) to measures or determine interest rate risk. The table below (table 1) indicates the sensitivity analysis on net interest income before tax. The net interest income sensitivity (NII) applies the AEaR metric. The measurements are illustrated below.

Figure 1: Interest rate risk measurement

As suggested before, the bank measures liquidity risk through tress testing. The bank developed a liquidity risk appetite (LRA) with relevant limits. LRA is often set based on external liquidity risk examination and internal liquidity risk appetite, known as the liquidity coverage ratio (LCR).  In 2018 the LCR stood at 169% while in 2019 it stood at 160%. These measurements are shown in figure 2 below.


Figure 2: Liquidity risk measurement


The bank uses standardized measurement approach to determine operational risk. Figure 3 indicate Barclays bank’s measure of operational, market and credit risk based in the 2019 financial report. The table shows the movement analysis of risk weight assets for 2019 and 2018. From the analysis it is evident that there was a decrease in operational risk reduced from 56.7 pound sterling in 2018 to 41 pound sterling in 2019 owing to measures taken by the bank to reduce the risk. This contributed to the decrease in Risk Weighted Asset by 16.8 billion pound sterling (from 311.9 to 295.1). By the end of 2019 the total RWAs stood at 295.1 pound sterling. However, the overall decrease is also attributed in other types of risks. There were changes in credit risk, for example, in terms of book size there was an increase in credit risk by RWAs 1.4 pound sterling to increase in training activities whereas in book quality, credit risk decreased by 2.6 pound sterling. Other changes have are illustrated in the figure.

Figure 3: Barclays bank operational, credit risks and market risk


Part B

5.0 Fraud Risk Assessment Framework

5.1 Introduction

Today, fraud and financial scandals are no longer unexpected news in financial institutions. Financial institutions have suffered from the disturbing effect of scam. The costly cases of fraud have increased international concerns forcing stakeholders to develop measures of with fraud including fraud risk assessment framework. The fraud Triangle theory suggests that there are reason why people violet trust and engage themselves (Sorunke, 2016). For instance, personal financial problems which may be solved through violation laid down produced s and trust. The plan to engage in fraud begins with the motive or the pressure to engage in fraud and thereafter one finds an opportunity and justification for a fraudulent act (Sorunke, 2016). The Fraud Diamond theory suggests that fraud can only happen when fraudsters are capable of stealing, adding a fourth element (capability). It is therefore necessary for banks to have a risk assessment framework to reduce such cases.

5.2 The framework

FraudPossibility Significance The current risk control mechanism Response
Interest rate risk


Adjustment of interest rate payments to realize personal interests







Barclays Bank would experience losses thus increasing the possibilities of failure. The bank would be vulnerable to stressful market conditions.

The weakening of internal control system

Execution of strict rules and regulations that discourage personal interest.

Setting maximum limits for tolerable exposure to the risk

Use of tracking systems to identify those who fail to adhere to established rules.

Development and other policies and procedures to support the existing one Regular review of the procedure to determine whether they are strictly observed.
Collection of revenue:

Misappropriation of interest income

HighPresentation of inaccurate financial information.Execution of strict policies and regulations associated with misappropriation and use of tracking systems

Portfolio hedging to make sure that interest rate risk between funding in each currency and lending remains low.


Continuous review of laid down policies and procedures and engaging the risk management team in the process to minimize fraud risks.
Liquidity risk

Management of financial resources:

Fictitious withdrawals from the banks.







Creates mismatch between assets and liabilities for instance by

decreases the values of the asset

Makes the bank unable to meet its financial obligations

Setting appropriate liquidity limit and observing them. Each division of the bank is given a level below which a requisition for additional cash ought to be made or beyond which the section should remit surplus cash to the relevant authorities.

The bank manages liquidity risk through Liquidity Transfer Pricing (LTP).

Tracking all withdrawals and holding a liquidity reserve to ensure that the bank has a buffer that is preserved for adverse conditions.

Diversification of funding by borrowing in terms of instruments, maturities as well as currencies to avoid reliance on some funding sources

Asset and liability management: Fictitious transfer of assets and liabilities.


HighCreates mismatch between assets and liabilities. Lead to an inaccurate valuation of capital.Implementation of policies and regulation. For instance, each unit is expected to ensure that it is able to access enough intraday liquidity to cater for any obligation it might have to payment and settlement system.


Asset management: Deceitful Valuation of assets and liabilities


HighPresentation of inaccurate information due to Material misstatement in financial reports.Using an advanced system to track transactions made.

Creation a risk management committee to examine risks


Operational risks

Data manipulation



Very high


Presentation of inaccurate information due to alterations leading to poor decision makingDevelopment of a strong internal control system.Strengthening Internal control system
Managing transactions:

Fictitious transactions




Financial losses

In the past few decades the bank has discovered they  experienced losses due =fraud

Development of an all-encompassing Enterprise Risk Management Framework which describes internal governance system
HackingVery high


Loss of critical Information

Destruction of financial information

Use of  advanced and updated security programs

Data encryption

Use of firewall

Installing relevant security updates

Backing up of data

Continuous use of firewall

Regular change of password

Misstatement/ making accounting errors intentionally


Very highInaccurate financial reports.Development of a strong internal control system and audit teamStrengthening internal control system and risk regulatory



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Banking Risk: A Case of Barclays Bank Plc | Assignment Help Online . (2022, October 11). Essay Writing . Retrieved February 04, 2023, from https://www.essay-writing.com/samples/banking-risk-a-case-of-barclays-bank-plc/
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