Barclays 2005 Annual Report Download - page 49

Barclays PLC
Annual Report 2005 47
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 so the factors discussed in this report should not be
considered 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, interest rates, inflation, investor
sentiment, and the availability and cost of credit could significantly
affect the activity level of customers. A market downturn would be likely
to 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 Barclays
customers would be unable to meet their obligations.
Credit Risk
Credit Risk is the risk that Barclays customers, clients or counterparties
will not be able or willing to pay interest, repay capital or otherwise to
fulfil their contractual obligations under loan agreements or other
credit facilities.
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,
Sterling-euro and Sterling-Rand 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,
business operations and the value of assets held in the Group’s pension
and long-term assurance funds.
Capital Risk
The Group’s authority to operate as a bank is dependent upon the
maintenance of an adequate capital base. Capital risk is the risk that
it is unable 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, a sufficiently strong capital base may assist 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. The
risk that it will be unable to do so is inherent in all banking operations
and can be impacted by a range of institution specific and market-wide
events including, but not limited to, credit events, merger and
acquisition activity, systemic shocks and natural disasters.
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, employee errors, 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
(see page 74 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 all countries 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.
Legal Risk
The Group is subject to a comprehensive range of legal obligations in
all countries in which it operates. As a result, the Group is exposed to
many forms of legal risk, which may arise in a number of ways.
Primarily:
•the Group’s business may not be conducted in accordance with
applicable laws around the world;
•contractual obligations may either not be enforceable as intended
or may be enforced against the Group in an adverse way;
•the intellectual property of the Group (such as its trade names) may
not be adequately protected; and
•the Group may be liable for damages to third parties harmed by the
conduct of its business.
The Group faces risk where legal proceedings are brought against it.
Regardless of whether such claims have merit, the outcome of legal
proceedings is inherently uncertain and could result in financial loss.
Defending legal proceedings can be expensive and time-consuming
and there is no guarantee that all costs incurred will be recovered even
if successful.
Although the Group has processes and controls to manage legal risks,
failure to manage these risks can impact the Group adversely, both
financially and reputationally.
Risk factors
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