Barclays 2009 Annual Report Download - page 132

130 Barclays PLC Annual Report 2009 www.barclays.com/annualreport09
Risk management
Liquidity risk management
Liquidity risk is the risk that the Group is unable to meet its obligations
when they fall due as a result of a sudden, and potentially protracted,
increase in net cash outflows. Such outflows would deplete available
cash resources for client lending, trading activities, investments and
deposits. In extreme circumstances lack of liquidity could result in
reductions in balance sheet and sales of assets, or potentially an inability
to fulfil lending commitments. The risk that it will be unable to do so is
inherent in all banking operations and can be affected by a range of
institution-specific and market-wide events.
Organisation and structure
Barclays Treasury operates a centralised governance and control process
that covers all of the Group’s liquidity risk management activities. Businesses
assist Barclays Treasury in policy formation and limit setting by providing
relevant and expert input for their local markets and customers.
Execution of the Group’s liquidity risk management strategy is carried
out at country level within agreed policies, controls and limits, with the
Country Treasurer providing reports directly to Barclays Treasury to evidence
conformance with the agreed risk profile. Liquidity risk is a standing agenda
item at Country and Cluster Asset and Liability Committees and on a
consolidated basis is reported to the Group’s Treasury Committee.
The objective of the Group’s liquidity risk management strategy is to
ensure that the funding profile of individual businesses and the Group as a
whole is appropriate to underlying market conditions and the profile of our
business in each given country. Liquidity risk limits and controls are flexed to
achieve that profile and are based on regular qualitative and quantitative
assessments of conditions under both normal and stressed conditions.
Businesses are only allowed to have funding exposure to wholesale markets
where they can demonstrate that their market is sufficiently deep and liquid
and then only relative to the size and complexity of their business.
Liquidity limits reflect both local regulatory requirements as well as the
behavioural characteristics of their balance sheets. Breaches of limits are
reported to Treasury Committee together with details of the requirements
to return to compliance.
Liquidity risk framework
Barclays has a comprehensive Liquidity Risk Management Framework (the
Liquidity Framework) for managing the Group’s liquidity risk. The objective
of the Liquidity Framework is for the Group to have sufficient liquidity to
continue to operate for at least the minimum period specified by the FSA in
the event that the wholesale funding markets are neither open to Barclays
nor to the market as a whole. Many of the stress tests currently applied
under the Liquidity Framework will also be applied under the FSA’s new
regime, although the precise calibration may differ in Barclays final Individual
Liquidity Guidance to be set by the FSA. The Framework considers a range
of possible wholesale and retail factors leading to loss of financing including:
– maturing of wholesale liabilities;
– loss of secured financing and widened haircuts on remaining book;
– retail and commercial outflows from savings and deposit accounts;
– drawdown of loans and commitments;
– potential impact of a two-notch ratings downgrade; and
– withdrawal of initial margin amounts by counterparties.
These stressed scenarios are used to assess the appropriate level for the
Group’s liquidity pool, which comprises unencumbered assets and cash.
Barclays regularly uses these assets to access secured funding markets,
thereby testing the liquidity assumptions underlying pool composition. The
Group does not presume the availability of central bank facilities to monetise
the liquidity pool in any of the stress scenarios under the Liquidity
Framework.
Liquidity Pool
The Group liquidity pool as at 31st December 2009 was £127bn gross
(31st December 2008: £43bn) and comprised cash and unencumbered
assets.
The cost of maintaining the liquidity pool is a function of the source of
funding for the buffer and the reinvestment spread. The cost of funding the
liquidity pool is estimated to have been approximately £650m for 2009.
Composition of the Group liquidity pool Cash and Government
deposits Government and Other
with central guaranteed
supranational available
banks bonds bonds liquidity Total
£bn £bn £bn £bn £bn
As at 31st December 2009a81 3 31 12 127
As at 31st December 2008a30 – 2 11 43
Note
aPreviously disclosed as Barclays Capital only.