Barclays 2011 Annual Report Download - page 78

Risk management
Risk factors continued
2. Market risk
Market Risk is the risk of the Group suffering financial loss due to the
Group being unable to hedge its balance sheet at prevailing market levels.
The Group can be impacted by changes in both the level and volatility of
prices e.g. interest rates, credit spreads, commodity prices, equity prices
and foreign exchange rates.
The risk is reported as Traded Risk where Barclays supports customer
activity primarily via Barclays Capital; Non-Traded Risk to support
customer products primarily in the retail bank; and Pension Risk where
the investment profile is reviewed versus the defined benefit scheme.
Risk management
The Board approves Market Risk appetite for trading and non-trading
activities, with limits set within this context by the Group Market Risk
Director.
Group Risk is responsible for the overall Barclays Market Risk Control
Framework which implements the five step risk management process.
Business specific Market Risk teams are responsible for implementing
the Control Framework. Oversight and challenge is provided by business
committees, group committees and the central Group Market Risk team.
For further information see Market Risk (pages 121 to 129).
Key specific risks and mitigation
Specific areas and scenarios where market risk could lead to lower
revenues in future years include:
Reduced client activity and decreased market liquidity
While the Group is exposed to continued market volatility, Barclays
Capital’s trading activities are principally a consequence of supporting
customer activity.
The impact of ongoing economic uncertainty on client volumes, reduced
market liquidity and higher volatility could lead to lower revenues. The cost
base and risk positions are constantly reviewed to ensure that they are
calibrated appropriately. The portfolios are constantly reviewed to ensure
that inventories are sized appropriately to support customer activity taking
into account market volatility.
For further information see Market Risk (pages 121 to 129).
Non-traded interest rate risk
Interest rate volatility can impact the firm’s net interest margin. The
potential for future volatility and margin changes remain and it is difficult
to predict with any accuracy, changes in absolute interest rate levels, yield
curves and spread.
For further information see Market Risk (pages 121 to 129).
Pension fund risk
Adverse movements between pension assets and liabilities for defined
benefit could contribute to a pension deficit. Barclays and the Pension
Trustees dedicated Investment Management team constantly review the
asset liability mismatch to ensure appropriate investment strategy.
For further information see Market Risk (pages 121 to 129) and Note 39.
3. Funding risk
Funding Risk is the risk that the Group is unable to achieve its business
plans due to liquidity risk and capital risk or the management of structural
balance sheet risks.
Liquidity Risk is the risk that the Group is unable to meet its obligations as
they fall due resulting in: an inability to support normal business activity;
failing to meet liquidity regulatory requirements; or changes to credit
ratings.
Capital Risk is the risk that the Group is unable to maintain appropriate
capital ratios which could lead to an inability to support business activity;
failing to meet regulatory requirements; or changes to credit ratings.
Structural Risk relates to the management of non-contractual risks and
predominantly arises from the impact on the Group’s balance sheet of
changes in primarily interest rates on income or foreign exchange rates
on capital ratios.
Risk management
The Board approves the Group’s Liquidity Risk Appetite, Capital Plan
and approach for Structural Hedging.
Group Risk provides oversight review and challenge to the Liquidity,
Capital and Structural Risk Control Frameworks. The Risk function also
provides direct input into as well as approval of various aspects of the
calibration, calculation and reporting for these key risks.
Group Treasury has responsibility for implementing the Key Risk control
frameworks for Liquidity, Capital and Structural Risks at both the Group
and Legal Entity level and for ensuring that the firm maintains compliance
with all local regulatory minimum limit requirements relating to these key
risks.
Oversight and challenge is provided by local and Group Asset Liability
Committees all reporting up to Group Treasury Committee which meets
at least monthly.
For further information see Funding risk – Capital (pages 130 to 138)
and Funding risk – Liquidity (pages 139 to 150).
Key specific risks and mitigation
Specific areas and scenarios where funding risk could lead to higher costs
or limit Barclays ability to execute its business plans include:
Increasing capital requirements
There are a number of regulatory developments that impact capital
requirements. Most significantly Basel 3 as adopted into EU law through
the fourth Capital Requirements Directive (CRD4) and Capital
Requirements Regulation which are still going through the EU legislative
process. Additional capital requirements may arise from other proposals
including the recommendations of the Independent Commission on
Banking.
Barclays continues to prepare for the implementation of CRD4 and
includes the estimated impact of future regulatory changes in its capital
planning framework. Current forecasts already include the impact of Basel
3 as currently understood, and forecasts will be continually updated as
CRD4 and other proposals for regulatory developments are finalised.
Further detail on the regulatory developments impacting capital is
included on pages 137 to 138.
76 Barclays PLC Annual Report 2011 www.barclays.com/annualreport