Barclays 2014 Annual Report Download - page 118

116 I Barclays PLC Annual Report 2014 barclays.com/annualreport
Risk review
Material existing and emerging risks
Material existing and emerging risks to the Group’s future performance
The following information describes the material risks which senior
management are currently focused on and believe could cause its
future results of operations, financial condition and prospects to
differ materially from current expectations including the ability to
meet dividend expectations, ability to maintain appropriate levels of
capital and meet capital and leverage ratio targets, or achieve stated
targets and commitments as outlined in the Strategy section and
other expected benefits. In addition, risks relating to the Group that
are not currently known, or that are currently deemed immaterial,
may individually or cumulatively also have the potential to have a
material adverse effect on the Group’s future results of operations,
financial condition and prospects.
Material risks and their impact are described below in two sections: i)
risks which management believes may affect more than one Principal
Risk; and ii) risks management believes are more likely to impact a
single Principal Risk. Certain risks below have been classified as an
‘emerging risk’, which is a risk that has the potential to have an
increasingly significant detrimental effect on the Group’s performance,
but currently its outcome and the time horizon for the crystallisation of
its possible impact is even more uncertain and more difficult to predict
than for other risk factors that are not identified as emerging risks.
More information on Principal and Key Risks may be found in Barclays
Approach to Managing Risk in the Barclays PLC 2014 Pillar 3 Report.
For 2015, reputation risk will be recognised as a Key Risk within
conduct risk given the close alignment between them and the fact that
as separate Principal Risks they have a common Principal Risk Officer.
Material existing and emerging risks potentially impacting
more than one Principal Risk
i) Business conditions, general economy and geopolitical issues
The Group’s performance could be adversely affected in more than
one Principal Risk by a weak or deteriorating global economy or
political instability. These factors may also be focused in one or more
of the Group’s main countries of operation.
The Group offers a broad range of services to retail and institutional
customers, including governments, across a large number of countries
with the result that it could be materially adversely impacted by weak
or deteriorating economic conditions, including deflation, or political
instability in one or a number of countries in which the Group operates
or any other globally significant economy.
The global economy continues to face an environment characterised by
low growth, and this is expected to continue during 2015 with slow
growth or recession in some regions, such as Europe which may be
offset in part by expected growth in others, such as North America. Any
further slowing of economic growth in China would also be expected
to have an adverse impact on the global economy through lower
demand, which is likely to have the most significant impact on
countries in developing regions that are producers of commodities
used in China’s infrastructure development.
While the pace of decreasing monetary support by central banks, in
some regions, is expected to be calibrated to potential recovery in
demand in such regions, any such decrease of monetary support could
have a further adverse impact on volatility in the financial markets and
on the performance of significant parts of the Group’s business, which
could, in each case, have an adverse effect on the Group’s future results.
Falling or continued low oil prices could potentially have an adverse
impact on the global economy with significant wide ranging effects on
producer and importer nations as well as putting strain on client
companies in certain sectors which may lead to higher impairment
requirements.
Furthermore, the outcome of the ongoing political and armed conflicts
in the Ukraine and parts of the Middle East remain unpredictable and
may have a negative impact on the global economy.
A weak or deteriorating global economy and political instability could
impact Group performance in a number of ways including, for example:
(i) deteriorating business, consumer or investor confidence leading to
reduced levels of client activity and consequently a decline in revenues;
(ii) mark to market losses in trading portfolios resulting from changes
in credit ratings, share prices and solvency of counterparties; and (iii)
higher levels of default rates and impairment.
ii) UK political and policy environment (emerging risk)
The political outlook in the UK is uncertain ahead of the General
Election in May 2015. The public policy environment in the UK
(including but not limited to regulatory reform in the UK, a potential
referendum on UK membership of the European Union, and taxation
of UK financial institutions and clients) is likely to remain challenging
in the short to medium term, with the potential for policy proposals
emerging that could impact clients, markets and the Group either
directly or indirectly.
Aside from specific policy proposals, uncertainty arises in particular
with respect to:
Q An inconclusive result in the General Election and the potential for a
prolonged period of political uncertainty; and
Q Depending on the outcome of the election, a possible referendum on
continued UK membership of the European Union by 2017.
A referendum on the UK membership of the European Union may affect
the Group’s risk profile through introducing potentially significant new
uncertainties and instability in financial markets, both ahead of the
dates for this referendum and, depending on the outcomes, after the
event. As a member of the European Union, the UK and UK-based
organisations have access to the EU Single Market. Given the lack of
precedent, it is unclear how a potential exit of the UK from the EU
would affect the UK’s access to the EU Single Market and how it would
affect the Group.
iii) Model risk
The Group may suffer adverse consequences from risk based
business and strategic decisions based on incorrect or misused
model assumptions, outputs and reports.
The Group uses models in particular to assess and control the Group’s
credit and market exposures. Model risk can arise from a number of
sources, including: fundamental model flaws leading to inaccurate
outputs; incomplete, inaccurate or inappropriate data used for either
development or operation of the model; incorrect or inappropriate
implementation or use of a model; or assumptions in the models
becoming outdated or invalid due to the evolving external economic
and legislative environment and changes in customer behaviour.
If the Group were to place reliance on incorrect or misused model
outputs or reports, this could result in a material adverse impact on the
Group’s reputation, operations, financial condition and prospects, for
example, due to inaccurate reporting of financial statements;
estimation of capital requirement (either on a regulatory or economic
basis); or measurement of the financial risks taken by the Group as part
of its normal course of business.
As a consequence, management of model risk has become an
increasingly important area of focus for the Group, regulators and the
industry.
Material existing and emerging risks by Principal Risk
Credit risk
The financial condition of the Group’s customers, clients and
counterparties, including governments and other financial
institutions, could adversely affect the Group.
The Group may suffer financial loss if any of its customers, clients or
market counterparties fails to fulfil their contractual obligations to the
Group. Furthermore, the Group may also suffer loss when the value of
the Group’s investment in the financial instruments of an entity falls as
a result of that entity’s credit rating being downgraded. In addition, the
Group may incur significant unrealised gains or losses due solely to
changes in the Group’s credit spreads or those of third parties, as these
changes affect the fair value of the Group’s derivative instruments, debt
securities that the Group holds or issues, or any loans held at fair value.