Barclays 2004 Annual Report Download - page 44

Risk Factors
The following discussion sets forth certain risk factors that the Group
believes could cause its actual future results to differ materially from
expected results. However, other factors could also adversely affect
the Group results and the reader should not consider the factors
discussed in this report to be a complete set of all potential risks
and uncertainties.
Business Conditions and General Economy
The profitability of Barclays businesses could be adversely affected by
a worsening of general economic conditions in the United Kingdom
or globally. Factors such as the liquidity of the global financial
markets, the level and volatility of equity prices and interest rates,
investor sentiment, inflation, and the availability and cost of credit
could significantly affect the activity level of customers. A market
downturn would likely lead to a decline in the volume of transactions
that Barclays executes for its customers and, therefore, lead to a
decline in the income it receives from fees and commissions. A market
downturn or worsening of the economy could cause the Group to
incur mark-to-market losses in its trading portfolios. A market
downturn also could potentially result in a decline in the fees Barclays
earns for managing assets. For example, a higher level of domestic or
foreign interest rates or a downturn in trading markets could affect the
flows of assets under management. An economic downturn or
significantly higher interest rates could adversely affect the credit
quality of Barclays on balance sheet and off balance sheet assets by
increasing the risk that a greater number of the Group’s customers
would be unable to meet their obligations.
Credit Risk
The Group’s provisions for credit losses provide for losses inherent
in loans and advances and other credit exposures. Estimating losses is
inherently uncertain and depends on many factors, including general
economic conditions, rating migration, structural and technological
changes within industries and changes in customer preferences that
alter competitive positions, mismanagement by customers and other
external factors such as legal and regulatory requirements.
Market Risks
The most significant market risks the Group faces are interest rate,
credit spread, foreign exchange, commodity price and equity price
risks. Changes in interest rate levels, yield curves and spreads may
affect the interest rate margin realised between lending income and
borrowing costs. Changes in currency rates, particularly in the sterling-
dollar and sterling-euro exchange rates, affect the value of assets and
liabilities denominated in foreign currencies and affect earnings
reported by the Group’s non-UK subsidiaries and may affect revenues
from foreign exchange dealing. The performance of financial markets
may cause changes in the value of the Group’s investment and trading
portfolios and in the amount of revenues generated from assets under
management. The Group has implemented risk management methods
to mitigate and control these and other market risks to which the
Group is exposed. However, it is difficult to predict with accuracy
changes in economic or market conditions and to anticipate the
effects that such changes could have on the Group’s financial
performance and business operations. In addition, the value of assets
held in the Group’s pension and long-term assurance funds are also
affected by the performance of financial markets.
Capital Risk
The Group’s authority to operate as a bank is dependent upon the
maintenance of an adequate capital base. It is required to meet
capitalisation requirements in the UK and in other markets where
banking activities are undertaken. As the level of capitalisation may
affect the Group’s debt rating, the Group also manages its capital to
secure the maintenance of its strong rating. Moreover, the absence of
a sufficiently strong capital base may constrain the Group’s growth and
strategic options. Unforeseen circumstances may arise under which
the Group is unable to maintain its desired capitalisation.
Liquidity Risk
Liquidity risk is the risk that the Group is unable to meet its payment
obligations when they fall due and to replace funds when they are
withdrawn; the consequence of which may be the failure to meet
obligations to repay depositors and fulfil commitments to lend. This
risk exists in the UK as well as in overseas markets. There is a risk that
the Group mismanages its liquidity or that circumstances may arise
under which it is unable to maintain adequate liquidity.
Operational Risks
The Group’s businesses are dependent on the ability to process a large
number of transactions efficiently and accurately. Operational risks
and losses can result from fraud, errors by employees, failure to
properly document transactions or to obtain proper internal
authorisation, failure to comply with regulatory requirements and
Conduct of Business rules, equipment failures, natural disasters or the
failure of external systems, for example, the Group’s suppliers or
counterparties (see page 68 for a fuller list). Although the Group has
implemented risk controls and loss mitigation actions, and substantial
resources are devoted to developing efficient procedures and to staff
training, it is only possible to be reasonably, but not absolutely, certain
that such procedures will be effective in controlling each of the
operational risks faced by the Group.
Regulatory Compliance Risk
The Group is subject to extensive supervisory and regulatory regimes
in the UK, elsewhere in Europe, the US, the Asia-Pacific region and in
the many other countries around the world in which it operates.
Regulatory compliance risk arises from a failure or inability to comply
fully with the laws, regulations or codes applicable specifically to the
financial services industry. Non-compliance could lead to fines, public
reprimands, damage to reputation, enforced suspension of operations
or, in extreme cases, withdrawal of authorisation to operate.
Risk factors
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