The framework is designed to deliver the appropriate term and structure of funding consistent with the Group's Liquidity Risk Appetite and is fully compliant with regulatory requirements
Liquidity risk is defined as the risk that the bank is unable to meet its obligations as they fall due, leading to an inability to support normal business activity and meet liquidity regulatory requirements.
The framework incorporates a range of ongoing business management tools to monitor, limit and stress-test the Group's balance sheet and contingent liabilities:
- Limit setting and transfer pricing are tools designed to control the level of liquidity risk taken and to drive the appropriate mix of funds, which together reduce the likelihood that a liquidity stress event could lead to an inability to meet the Group's obligations as they fall due.
- The stress tests assess potential contractual and contingent outflows under a range of scenarios, which are then used to determine the size of the liquidity buffer that is immediately available to meet anticipated outflows if a stress of which of which are then used to determine the size of the liquidity buffer that is immediately available to meet anticipated outflows if a stress occurred.
Contingency funding plan
In addition, the Group maintains a contingency funding plan that details how liquidity stress events of varying severity would be managed. As the precise nature of any stress event cannot be known in advance, the plans are designed to be flexible to the nature and severity of the stress event, and provide a menu of options that could be used as appropriate at the time. Barclays also maintains recovery plans that consider actions to generate additional liquidity in order to facilitate recovery in a severe stress.
Liquidity Risk Appetite
Under the liquidity framework, the Group has established a Liquidity Risk Appetite (LRA), together with the appropriate limits for the management of the liquidity risk. This is the level of liquidity risk the Group chooses to take in pursuit of its business objectives and in meeting its regulatory obligations. The key expression of the liquidity risk is through internal stress testing. This involves comparing the liquidity pool with anticipated stressed net contractual and contingent outflows under a variety of stress scenarios. These scenarios are aligned to the PRA's prescribed stresses and cover the following:
- A market-wide stress event
- A Barclays-specific stress event
- A combination of the two.
Under normal market conditions, the liquidity pool is managed to be in excess of 100% of 90 days of anticipated outflows for a market-wide stress and 30 days of anticipated outflows for each of the Barclays-specifc and combined stresses.
We are primarily focused on the Barclays-specific stress scenario, which requires the largest liquidity pool to meet its stress outflows.
Barclays maintains a strong and high-quality liquidity pool that consists exclusively of unencumbered assets, representing resources immediately available to meet outflows in a stress. The liquidity pool mainly comprises cash and balances with central banks, government bonds and other highly liquid assets, denominated in multiple currencies and with different maturities.
The size of the liquidity pool is determined by the size of the LRA stress outflows, ensuring that the Group is able to meet its obligations as they fall due even in the event of a sudden and potentially protracted increase in net cash outflows.
Internal pricing and incentives
In order to induce the correct behaviour and decision-making, we actively manage the composition of our balance sheet and contingent liabilities through the appropriate transfer pricing of liquidity costs. Mechanisms used to do this include funds-transfer pricing, economic funds allocation of behaviouralised assets and liabilities, and contingent liquidity risk charging to the businesses. Such mechanisms are designed to ensure liquidity risk is reflected in product pricing and performance measurement, thereby ensuring that the liquidity framework is integrated into business-level decision-making to drive the appropriate mix of sources and uses of funds.