Barclays 2012 Annual Report Download - page 112

(ii) Potential exit of one or more countries from the Euro as a result
of the European debt crisis
An exit of one or more countries from the Eurozone may adversely
impact the Group’s profitability in a number of ways. Risks associated
with a potential partial break-up of the Euro area include:
 Direct risk arising from sovereign default of an exiting country and
the impact on the economy of, and the Group’s counterparties in,
that country;
 Indirect risk arising from the subsequent impact on the economy
of, and the Group’s counterparties in, other Eurozone countries;
 Indirect risk arising from credit derivatives that reference Eurozone
sovereign debt; and
 Direct redenomination risk on the potential mismatch in the currency
of the assets and liabilities on balance sheets of the Group’s local
operations in countries in the Eurozone.
Although the Group reduced the aggregate net funding mismatch in
local balance sheets during 2012 from £12.1bn to a £1.9bn surplus in
Spain, from £6.9bn to £3.3bn in Portugal and from £12.0bn to £9.6bn
in Italy, there can be no assurance that the steps taken by the Group
to actively match local external assets with local external liabilities will
be fully successful.
Furthermore the departure from and/or the abandonment of the Euro
by one or more Eurozone countries could lead to significant negative
effects on both existing contractual relations and the fulfilment of
obligations by the Group and/or its customers, which would have a
negative impact on the activity, operating results, capital position and
financial condition of the Group. An exit by a country from the Euro
may also adversely affect the economic performance of that country,
impacting areas such as interest and unemployment rates, which in
turn may adversely affect our retail and wholesale counterparties’
(including a country’s government or its agencies) solvency and their
ability to service their debts. This may lead to additional impairment
or a reduction in value of Barclays credit assets in that country, which
would adversely impact the Group’s profitability.
The current absence of a predetermined mechanism for a member
state to exit the Euro means that it is not possible to predict the
outcome of such an event and to accurately quantify the impact of
such an event on the Group’s profitability, liquidity and capital.
However, the Group has performed, and continues to perform,
stress tests to model the event of a break-up of the Eurozone area.
Contingency planning has also been undertaken based on a series
of potential scenarios that might arise from an escalation in the crisis.
Multiple tests have been run to establish the impact on customers,
systems, processes and staff in the event of the most plausible
scenarios. Where issues have been identified, appropriate remedial
actions have either been completed or are underway.
For further information see Eurozone Exposure disclosures on
pages 143-154.
Specific sectors/geographies
The Group is subject to risks arising from changes in credit quality and
recovery of loans and advances due from borrowers and counterparties
from a specific portfolio, geography or large individual names remain.
Any deterioration in credit quality would lead to lower recoverability
and higher impairment in a specific sector, geography or specific large
counterparties.
(i) Possible deterioration in Credit Market Exposures
The Investment Bank holds certain exposures to credit markets that
became illiquid during 2007. These exposures primarily relate to
commercial real estate and leveraged finance loans. The Group
continues to actively manage down these exposures, but remains
at risk from further deterioration to the remaining exposures, resulting
in further impairment. During 2012, credit market exposures decreased
by £5.9bn to £9.3bn, mainly reflecting net sales and paydowns and
other movements.
For further information see Barclays Credit Market Exposure Section
(page 142).
(ii) Potential liquidity shortages increasing counterparty risks
The Group’s ability to enter into its normal funding arrangements could
be materially affected by the actions and commercial soundness of
other financial institutions. The Group has exposure to many different
industries and counterparties and should funding capacity in either
the wholesale markets or central bank operations change significantly,
liquidity shortages could result, which may lead to increased
counterparty risk with other financial institutions. This could also have
an impact on refinancing risks in the corporate and retail sectors. While
the Group continues to actively manage this risk, including through its
extensive system of Mandate and Scale limits, the performance of the
Group remains at risk from a material liquidity shortage.
(iii) Large single name losses
In the ordinary course of our loan business, we have large individual
exposures to individual single name counterparties. We are accordingly
exposed to the credit risk of such counterparties in the event of their
default of their obligations to us. If such defaults occur, they may
have a significant impact on the impairment charge particularly in
Investment Bank and the larger business book in Corporate Banking.
In addition, where such counterparty risk has been mitigated by taking
collateral, our credit risk may remain high if the collateral we hold
cannot be realised or has to be liquidated at prices which are insufficient
to recover the full amount of our loan or derivative exposure.
For further information see Wholesale Credit Risk disclosures on
pages 136-141.
barclays.com/annualreport110 I Barclays PLC Annual Report 2012
Risk review
Risk factors continued