Barclays 2009 Annual Report Download - page 84

82 Barclays PLC Annual Report 2009 www.barclays.com/annualreport09
Risk management
Risk factors
The following information sets forth the risk factors which the Group
believes could cause its future results to differ materially from expected
results. However, other factors could also adversely affect the Group’s
results and so the factors discussed in this report should not be
considered to be a complete set of all potential risks and uncertainties.
The Group’s approach to identifying, assessing, managing and reporting
risks is formalised in its Principal Risk framework, and definitions of the 13
Principal Risks are given below. A description of the Principal Risk framework
is provided on page 90.
This summary of risk factors also includes a discussion of the impact of
business conditions and the general economy, which are not Principal Risks
but can impact risk factors such as credit and market risk and so influence
the Group’s results.
Business conditions and general economy
Barclays operates a universal banking business model and its services range
from current accounts for personal customers to inflation-risk hedging for
governments and institutions. The Group also has significant activities in
a large number of countries. There are, therefore, many ways in which
changes in business conditions and the general economy can adversely
impact Barclays profitability, be they at the level of the Group, the individual
business units or the specific countries in which we operate.
The Group’s stress testing framework helps it understand the impact
of changes in business conditions and the general economy, as well as the
sensitivity of its business goals to such changes and the scope of
management actions to mitigate their impact.
As the current downturn has shown, higher unemployment in the UK,
US, Spain and South Africa has led to increased arrears in our credit card
portfolios, while falls in GDP have reduced the credit quality of the Group’s
corporate portfolios. In both cases, there is an increased risk that a higher
proportion of the Group’s customers and counterparties may be unable to
meet their obligations. In addition, declines in residential and commercial
property prices have reduced the value of collateral and caused mark to
market losses in some of the Group’s trading portfolios.
The business conditions facing the Group in 2010 are subject to
significant uncertainties, most notably:
– the extent and sustainability of economic recovery and asset prices in
the UK, US, Spain and South Africa as governments consider how and
when to withdraw stimulus packages;
– the dynamics of unemployment in those markets and the impact on
delinquency and charge-off rates;
– the speed and extent of possible rises in interest rates in the UK, US
and eurozone;
– the possibility of further falls in residential property prices in the UK,
South Africa and Spain;
– the potential for single name risk and for idiosyncratic losses in different
sectors and geographies where credit positions are sensitive to
economic downturn;
– possible additional deterioration in our remaining credit market
exposures, including commercial real estate and leveraged finance;
– the potential impact of deteriorating sovereign credit quality;
– changes in the value of Sterling relative to other currencies, which could
increase risk weighted assets and therefore raise the capital
requirements of the Group; and
– the liquidity and volatility of capital markets and investors’ appetite for
risk, which could lead to a decline in the income that the Group receives
from fees and commissions.
Principal Risk Factors
Retail and Wholesale Credit risk
Credit risk is the risk of suffering financial loss, should any of the Group’s
customers, clients or market counterparties fail to fulfil their contractual
obligations to the Group. The credit risk that the Group faces arises mainly
from wholesale and retail loans and advances. However, credit risk may also
arise where the downgrading of an entity’s credit rating causes a fall in the
fair value of the Group’s investment in that entity’s financial instruments.
In a recessionary environment, such as that recently seen in the United
Kingdom, the United States and other economies, credit risk increases.
Credit risk may also be manifested as country risk where difficulties
may arise in the country in which the exposure is domiciled, thus impeding
or reducing the value of the assets, or where the counterparty may be the
country itself.
Another form of credit risk is settlement risk, which is the possibility
that the Group may pay funds away to a counterparty but fail to receive the
corresponding settlement in return. The Group is exposed to many different
industries and counterparties in the normal course of its business, but its
exposure to counterparties in the financial services industry is particularly
significant. This exposure can arise through trading, lending, deposit-taking,
clearance and settlement and many other activities and relationships. These
counterparties include broker dealers, commercial banks, investment banks,
mutual and hedge funds and other institutional clients. Many of these