As an activist investor targets Barclays Plc for taking on too much risk, the London-based lender has disclosed how its internal models failed to predict a series of trading losses at its investment bank.
Barclays issued a so-called amber alert last year after the issues with its trading arm’s value-at-risk modeling, according to a recent filing. Tests of its models identified more unexpected losses than international rules allow for “green” status, leading to the downgrade of its risk-management systems during a six-month period in 2018 — well before the selloff that roiled markets at the end of last year.
While Barclays’s trading results have outpaced many European rivals, the amber alert — and others that have occurred since 2016 — show the potential perils from Chief Executive Officer Jes Staley’s push into more lucrative but complicated trading strategies.
“If your model is throwing up lots of exceptions, but other banks’ are not, it’s your model that has the problem,” said Paul Sharma, a former executive director of the Bank of England and co-head of the financial industry advisory practice at Alvarez & Marsal. “It’s pretty rare, outside of severe market disruptions, to see a model in the ‘amber’ zone.”
Dropping from green to amber can suggest a problem with a bank’s ability to gauge the amount of risk that its traders are taking, and can allow regulators to apply a capital buffer penalty.
“We stay in regular close contact with our regulators on all aspects of market risk, including value-at-risk exceptions,” a spokesman for Barclays said. “During amber periods, additional risk-weighted assets weighting is applied automatically, and this is already reflected in our capital ratios.”
Banks are allowed a maximum of four exceptional losses before they lose green status. As banks became more dependent on complex computer models, the three-color system to measure their accuracy was introduced about two decades ago by the Basel Committee on Banking Supervision.
Tim Throsby, a former JPMorgan Chase & Co. colleague of Staley’s, runs the investment bank, and has said the lender needed to rediscover its “commercial zeal” after losing “a suitable focus on opportunities to deploy risk.”