Barclays 2014 Annual Report Download - page 121

barclays.com/annualreport Barclays PLC Annual Report 2014 I 119
iii) Rating agency methodology changes (emerging risk)
During 2015, credit rating agencies are expected to complete their
reviews and revisions of their ratings of banks by country to address
the agencies’ perception of the impact of ongoing regulatory changes
designed to improve the resolvability of banks in a manner that
minimises systemic risk, such that the likelihood of extraordinary
sovereign support for a failing bank is less predictable, as well as to
address the finalisation of revised capital and leverage rules under CRD
IV. Following their review, Standard and Poor’s downgraded Barclays
PLC’s long-term rating in February 2015 and placed Barclays Bank
PLC’s long- and short-term ratings on “credit watch with negative
implications”. While the overall outcome of the proposed changes in
bank ratings methodologies, and the related review of ratings for
removal of sovereign support, remains uncertain, there is a risk that any
potential rating downgrades could impact the Group’s performance
should borrowing cost and liquidity change significantly versus
expectations or the credit spreads of the Group be negatively affected.
For further information on the effect of a downgrade please refer to
Credit Ratings in the Liquidity Risk Performance section on page 203.
iv) Adverse changes in foreign exchange rates on capital ratios
The Group has capital resources and risk weighted assets denominated in
foreign currencies and changes in foreign currency exchange rates may
adversely impact the sterling equivalent value of foreign currency
denominated capital resources and risk weighted assets. As a result, the
Group’s regulatory capital ratios are sensitive to foreign currency
movements. Failure to appropriately manage the Group’s balance sheet to
take account of this risk could result in an adverse impact on regulatory
capital ratios. While the impact is difficult to predict with any accuracy it
may have a material adverse effect on the Group’s operations as a result
of a failure in maintaining appropriate capital and leverage ratios.
Operational risk
The operational risk profile of the Group may change as a result of
human factors, inadequate or failed internal processes and systems,
and external events.
The Group is exposed to many types of operational risk, including
fraudulent and other criminal activities (both internal and external), the
risk of breakdowns in processes, controls or procedures (or their
inadequacy relative to the size and scope of the Group’s business),
systems failure or an attempt, by an external party, to make a service or
supporting infrastructure unavailable to its intended users, known as a
denial of service attack, and the risk of geopolitical cyber threat activity
destabilising or destroying the Group’s IT (or critical infrastructure the
Group depends upon but does not control) in support of critical
economic business functions. The Group is also subject to the risk of
disruption of its business arising from events that are wholly or partially
beyond its control (for example natural disasters, acts of terrorism,
epidemics and transport or utility failures) which may give rise to losses
or reductions in service to customers and/or economic loss to the
Group. The operational risks that the Group is exposed to could change
rapidly and there is no guarantee that the Group’s processes, controls,
procedures and systems are sufficient to address, or could adapt
promptly to, such changing risks. All of these risks are also applicable
where the Group relies on outside suppliers or vendors to provide
services to it and its customers.
i) Cyber attacks (emerging risk)
The threat posed by cyber attacks continues to grow and the banking
industry has suffered major cyber attacks during the year. Activists,
nation states, criminal gangs, insiders and opportunists are among
those targeting computer systems. Given the increasing sophistication
and scope of potential cyber attack, it is possible that future attacks
may lead to significant breaches of security. The occurrence of one or
more of such events may jeopardise the Group or the Group’s clients’
or counterparties’ confidential and other information processed and
stored in, and transmitted through, the Group’s computer systems and
networks, or otherwise cause interruptions or malfunctions in the
Group’s, clients’, counterparties’ or third parties’ operations, which
could impact their ability to transact with the Group or otherwise result
in significant losses or reputational damage.
Failure to adequately manage cyber security risk and continually review
and update current processes in response to new threats could
adversely affect the Group’s reputation, operations, financial condition
and prospects. The range of impacts includes increased fraud losses,
customer detriment, regulatory censure and penalty, legal liability and
potential reputational damage.
ii) Infrastructure and technology resilience
The Group’s technological infrastructure is critical to the operation of
the Group’s businesses and delivery of products and services to
customers and clients. Sustained disruption in a customer’s access to
their key account information or delays in making payments could have
a significant impact on the Group’s reputation and may also lead to
potentially large costs to both rectify the issue and reimburse losses
incurred by customers.
iii) Ability to hire and retain appropriately qualified employees
The Group is largely dependent on highly skilled and qualified
individuals. Therefore, the Group’s continued ability to manage and
grow its business, to compete effectively and to respond to an
increasingly complex regulatory environment is dependent on
attracting new talented and diverse employees and retaining
appropriately qualified employees.
In particular, as the Group continues to implement changes to its
compensation structures in response to new legislation, there is a risk
that some employees may decide to leave the Group. This may be
particularly evident among those employees who are impacted by
changes to deferral structures and new claw back arrangements.
Additionally, colleagues who have specialist sets of skills within control
functions or within specific geographies that are currently in high
demand may also decide to leave the Group as competitors seek to
attract top industry talent to their own organisations. Finally, the
impact of regulatory changes such as the introduction of the Individual
Accountabilities Regime, under which greater individual responsibility
and accountability will be imposed on senior managers and non-
executives of UK banks and the structural reform of banking, may also
reduce the attractiveness of the financial services industry to high
calibre candidates in specific geographies.
Failure by the Group to prevent the departure of appropriately qualified
employees, to retain qualified staff who are dedicated to oversee and
manage current and future regulatory standards and expectations, or
to quickly and effectively replace such employees, could negatively
impact the Group’s results of operations, financial condition, prospects
and level of employee engagement.
iv) Critical accounting estimates and judgements
The preparation of financial statements in accordance with IFRS
requires the use of estimates. It also requires management to exercise
judgement in applying relevant accounting policies. The key areas
involving a higher degree of judgement or complexity, or areas where
assumptions are significant to the consolidated and individual financial
statements, include credit impairment charges for amortised cost
assets, impairment and valuation of available for sale investments,
calculation of current and deferred tax, fair value of financial
instruments, valuation of provisions and accounting for pensions and
post-retirement benefits. There is a risk that if the judgement exercised
or the estimates or assumptions used subsequently turn out to be
incorrect then this could result in significant loss to the Group, beyond
that anticipated or provided for.
The further development of standards and interpretations under IFRS
could also significantly impact the financial results, condition and
prospects of the Group. For example, the introduction of IFRS 9
Financial Instruments is likely to have a material impact on the
measurement and impairment of financial instruments held.
For more information please refer to Accounting Policy and Critical
Estimates on pages 262 to 264.
The Strategic Report Financial review Financial statements Shareholder information
Risk review
Governance