Barclays 2011 Annual Report Download - page 139

Ongoing Capital Management Risks
Capital ratio sensitivity to foreign exchange rate movements
The Group has capital resources and risk weighted assets (RWAs) denominated in foreign currencies. Changes in foreign exchange rates result in
changes in the Sterling equivalent value of foreign currency denominated capital resources and RWAs. 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 consolidated capital ratios.
The Group’s investments in foreign currency subsidiaries and branches, to the extent that they are not hedged, translate into Sterling upon
consolidation creating Core Tier 1 capital resources sensitive to foreign currency movements. 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 in US$ and EUR, but can also be
achieved by subsidiaries issuing capital in local currencies, such as South Africa.
Regulatory developments
Regulators assess the Group’s capital position and target levels of capital resources on an ongoing basis and there have been a number of recent
developments in regulatory capital requirements, including increases, which are likely to have a significant impact on the Group (such as Basel 3 and
its proposed implementation in the EU under the Capital Requirements Regulation and CRD4). Increased capital requirements and changes to what is
defined to constitute capital may constrain the Group’s planned activities and could increase costs 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.
The impact of regulatory changes are therefore assessed and monitored by Group Treasury and Group Risk and factored into the capital planning
process which ensures that the Group always maintains adequate capital to meet its minimum regulatory capital requirements.
Basel 3 and CRD4 (European Union implementation of Basel 3)
In December 2010, the Basel Committee on Banking Supervision (BCBS), issued the final text of the Basel 3 rules, providing details of the global
standards endorsed by the G20 leaders at their November 2010 Seoul summit. In July 2011, the European Commission published proposals to
implement the Basel 3 capital and liquidity standards within Europe. The proposals consist of a new Regulation and a Directive, collectively known as
‘CRD4’. The measures are subject to agreement by EU member state governments and the European Parliament. The key elements of the Basel 3
Accord that CRD4 is expected to incorporate are as follows:
– Quality of Capital
The proposals bring more stringent requirements for the eligibility of capital instruments with a focus on common equity as the principal component of
regulatory Tier 1 Capital, higher minimum capital ratios and changes to the regulatory deductions from shareholders’ equity. The proposals recommend
a minimum common equity requirement of 4.5% phased in between 2013 and 2015. In addition, new regulatory deductions are to be introduced
gradually from 2014-2018 with the concept of grandfathering applied to capital instruments that no longer meet CRD4 requirements over a 10 year
period.
– Capital Buffers
To promote the conservation of capital and the build up of adequate buffers that can be drawn down in periods of stress, CRD4 proposes the use
of common equity capital buffers, namely; a capital conservation buffer of 2.5% of RWAs to be built up during times of positive growth; and a
countercyclical capital buffer of up to an additional 2.5% of RWAs to be built up when credit growth exceeds GDP growth, allowing firms to use
this additional buffer in times of stress. These are expected to come into force from 1 January 2016 to 2019.
– Counterparty Credit Risk (CCR)
Whilst the central clearing aspects of these rules remain subject to finalisation, the requirements for managing and capitalising counterparty credit risk
are to be strengthened with higher capital requirements primarily on OTC exposures and centrally cleared trades. The increased reliance on observed
market data in the capital calculations has the potential to make these charges pro-cyclical. Net CCR RWAs are forecast to increase by £41.7bn. This is
already reflected in our capital plans and Barclays continues to maintain adequate capital to absorb this impact.
– Securitisation
The proposal calls for securitisation exposures to be risk weighted at 1250% as opposed to being treated as capital deductions (50% Core Tier 1 and
50% Tier 2) under the current Basel 2 rules. As a result, net RWAs are estimated to increase by £31.7bn. This is already reflected in our capital plans,
and Barclays continues to maintain adequate capital to absorb this impact.
Barclays PLC Annual Report 2011 www.barclays.com/annualreport 137
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