Barclays 2009 Annual Report Download - page 289

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48 Market risk continued
The economic hedges represent the US Dollar and Euro Preference Shares and Reserve Capital Instruments in issue that are treated as equity under IFRS,
and do not qualify as hedges for accounting purposes.
The impact of a change in the exchange rate between Sterling and any of the major currencies would be:
– A higher or lower Sterling equivalent value of non-Sterling denominated capital resources and risk weighted assets. This includes a higher or lower
currency translation reserve within equity, representing the retranslation of non-Sterling subsidiaries, branches and associated undertakings net
of the impact of foreign exchange rate changes on derivatives and borrowings designated as hedges of net investments.
– A higher or lower profit after tax, arising from changes in the exchange rates used to translate items in the consolidated income statement.
– A higher or lower value of available for sale investments denominated in foreign currencies, impacting the available for sale reserve.
49 Liquidity risk
Liquidity 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 the following cash and
unencumbered assets:
Composition of 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 2009 81 3 31 12 127
As at 31st December 2008a30 – 2 11 43
The cost of maintaining the liquidity pool is a function of the source of funding for the buffer and the reinvestment spread.
Note
aPreviously disclosed as Barclays Capital only.