Barclays 2009 Annual Report Download - page 85

www.barclays.com/annualreport09 Barclays PLC Annual Report 2009 83
relationships expose the Group to credit risk in the event of default of a
counterparty and to systemic risk affecting its counterparties. Where the
Group holds collateral against counterparty exposures, it may not be able to
realise it or liquidate it at prices sufficient to cover the full exposures. Many of
the hedging and other risk management strategies utilised by the Group
also involve transactions with financial services counterparties. The failure
of these counterparties to settle, or the perceived weakness of these
counterparties, may impair the effectiveness of the Group’s hedging and
other risk management strategies.
The Group’s credit risk governance structure, management and
measurement methodologies, together with an analysis of exposures to
credit risk is detailed in the ‘Credit risk management’ section on page 94
and Note 47 to the financial statements on page 269.
An analysis of Barclays Capital’s credit market exposures is detailed on
pages 109 to 118.
Market risk
Market risk is the risk that the Group’s earnings or capital, or its ability to
meet business objectives, will be adversely affected by changes in the level
or volatility of market rates or prices such as interest rates, credit spreads,
commodity prices, equity prices and foreign exchange rates.
The majority of market risk exposure resides in Barclays Capital. Barclays
is also exposed to market risk through non-traded interest rate risk and the
pension fund.
The Group’s future earnings could be affected by depressed asset
valuations resulting from deterioration in market conditions. Financial
markets are sometimes subject to stress conditions where steep falls in
asset values can occur, as demonstrated by events in 2007 and 2008
affecting asset backed CDOs and the US sub-prime residential mortgage
market and which may occur in other asset classes during an economic
downturn. Severe market events are difficult to predict and, if they continue
to occur, could result in the Group incurring additional losses.
From the second half of 2007, the Group recorded material net losses
on certain credit market exposures, including ABS CDO Super Senior
exposures. As market conditions change, the fair value of these exposures
could fall further and result in additional losses or impairment charges,
which could have a material adverse effect on the Group’s earnings. Such
losses or impairment charges could derive from: a decline in the value of
exposures; a decline in the ability of counterparties, including monoline
insurers, to meet their obligations as they fall due; or the ineffectiveness
of hedging and other risk management strategies in circumstances of
severe stress.
The Group’s market risk governance structure, management and
measurement methodologies, together with an analysis of exposures
to both traded and non-traded market risk is detailed in the ‘Market risk
management’ section on page 122 and Note 48 to the financial statements
on page 283. Further details relating to the Group’s pension risk is included
in Note 30 on page 236.
Capital risk
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; and
– support its growth and strategic options.
Regulators assess the Group’s capital position and target levels of capital
resources on an ongoing basis. Targets may increase in the future, and rules
dictating the measurement of capital may be adversely changed, which
would constrain the Group’s planned activities and contribute to adverse
impacts on the Group’s earnings. During periods of market dislocation,
increasing the Group’s capital resources in order to meet targets may prove
more difficult or costly.
In December 2009 the Basel Committee on Banking Supervision issued
a consultative document that outlined proposed changes to the definition
of regulatory capital. These proposals are going through a period of
consultation and are expected to be introduced by the beginning of 2013,
with substantial transitional arrangements. While the proposals may
significantly impact the capital resources and requirements of the Group,
the Group maintains sufficient Balance Sheet flexibility to adapt accordingly.
Liquidity risk
Liquidity risk is the risk that the Group is unable to meet its obligations as
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 and investments. 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. This risk is
inherent in all banking operations and can be affected by a range of
institution-specific and market-wide events.