Barclays 2009 Annual Report Download - page 129

www.barclays.com/annualreport09 Barclays PLC Annual Report 2009 127
Risk management
Capital risk management
Capital risk is the risk that the Group has insufficient capital
resources to:
– Meet minimum regulatory requirements in the UK and in other
jurisdictions such as the United States and South Africa where
regulated activities are undertaken. The Group’s authority to
operate as a bank is dependent upon the maintenance of
adequate capital resources.
– Support its credit rating. A weaker credit rating would increase the
Group’s cost of funds.
– Support its growth and strategic options.
Organisation and structure
Barclays operates a centralised capital management model, considering
both regulatory and economic capital. The Group’s capital management
objectives are to:
– maintain sufficient capital resources to meet the minimum regulatory
capital requirements set by the FSA and the US Federal Reserve Bank’s
requirements that a financial holding company be ‘well capitalised’;
– maintain sufficient capital resources to support the Group’s risk appetite
and economic capital requirements;
– support the Group’s credit rating;
– ensure locally regulated subsidiaries can meet their minimum capital
requirements; and
– allocate capital to support the Group’s strategic objectives including
optimising returns on economic and regulatory capital.
Treasury Committee manages compliance with the Group’s capital
management objectives. The Committee reviews actual and forecast
capital demand and resources on a monthly basis. The processes in place
for delivering the Group’s capital management objectives are:
– establishment of internal targets for capital demand and ratios;
– managing capital ratio sensitivity to foreign exchange movement;
– ensuring local entity regulatory capital adequacy;
– allocating capital in the Group’s strategic medium-term plan; and
– economic Capital management.
In addition to the processes above, the Group Risk Oversight Committee
and the Board Risk Committee annually review and set risk appetite (see
page 268) and analyse the impacts of stress scenarios on the Group capital
forecast (see page 93) in order to understand and manage the Group’s
projected capital adequacy.
Internal targets
To support its capital management objectives, the Group sets internal
targets for its key capital ratios. Internal targets are reviewed regularly by
Treasury Committee to take account of:
– changes in forecast demand for capital caused by accessing new business
opportunities, including mergers and acquisitions;
– flexibility in debt capital issuance and securitisation plans;
– the possible impact of stress scenarios including:
– changes in forecast demand for capital from unanticipated drawdown
of committed facilities or as a result of deterioration in the credit quality
of the Group’s assets;
– changes in forecast profits and other capital resources; and
– changes to capital resources and forecast demand due to foreign
exchange rate movements.
Managing capital ratio sensitivity to foreign exchange rate movements
The Group has capital resources and risk weighted assets denominated
in foreign currencies. Changes in foreign exchange rates result in changes
in the sterling equivalent value of foreign currency denominated capital
resources and risk weighted assets. As a result, the Group’s regulatory
capital ratios are sensitive to foreign currency movements.
The Group’s capital ratio hedge strategy is to minimise the volatility of
the capital ratios caused by foreign exchange rate movements. To achieve
this, the Group aims to maintain the ratio of foreign currency Core Tier 1,
Tier 1 and Total Capital resources to foreign currency RWAs the same as
the Group’s capital ratios.
The Group’s foreign currency capital resources include investments in
subsidiaries and branches, intangible assets, non-controlling interest,
deductions from capital and debt capital instruments.
The Group’s investments in foreign currency subsidiaries and branches
create Core Tier 1 capital resources denominated in foreign currencies.
Changes in the sterling value of the investments due to foreign currency
movements are captured in the currency translation reserve, resulting in a
movement in Core Tier 1 capital.
To create foreign currency Tier 1 and Total Capital resources additional
to the Core Tier 1 capital resources, the Group issues, where possible, debt
capital in non-sterling currencies. This is primarily achieved by the issuance
of debt capital from Barclays Bank PLC, but can also be achieved by
subsidiaries issuing capital in local currencies.
In some circumstances, investments in foreign currency subsidiaries
and branches are hedged. In these circumstances, foreign currency capital
resources are not created. Hedging decisions take into account the impact
on capital ratios, the strategic nature of the investment, the cost of hedging,
the availability of a suitable foreign exchange market and prevailing foreign
exchange rates. Depending on the value of foreign currency net investments,
it is not always possible to maintain the ratio of Core Tier 1 capital to RWAs
consistent with the Group’s Core Tier 1 ratio in all currencies, leaving some
capital ratio sensitivity to foreign currency movements.
The investment of proceeds from the issuance of equity accounted
foreign currency preference shares also contributes to foreign currency
capital resources. If a preference share issuance is redeemed, the cumulative
movement from the date of issuance in the currency translation reserve will
be offset by an equal and opposite movement in reserves reflecting the
revaluation of the preference shares to prevailing foreign exchange rates.
Issuance of a replacement Tier 1 instrument in the same currency will
maintain the hedge of the Tier 1 ratio.
Local entity regulatory capital adequacy
The Group manages its capital resources to ensure that those Group entities
that are subject to local capital adequacy regulation in individual jurisdictions
meet their minimum capital requirements. Local management manages
compliance with entities minimum regulatory capital requirements by
reporting to local Asset and Liability Committees with oversight by The
Treasury Committee, as required.
Injections of capital resources into Group entities are centrally controlled
by The Treasury Committee, under authorities delegated from the Group
Executive Committee. The Group’s policy is for surplus capital held in Group
entities to be repatriated to Barclays Bank PLC in the form of dividends
and/or capital repatriation, subject to local regulatory requirements,
exchange controls and tax implications.
Other than as indicated above, the Group is not aware of any material
impediments to the prompt transfer of capital resources or repayment of
intra-group liabilities when due.