Barclays 2006 Annual Report Download - page 68

Barclays PLC
Annual Report 2006
64
Risk factors
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,
globally or in certain individual markets such as the US or South Africa.
Factors such as interest rates, inflation, investor sentiment, the
availability and cost of credit, the liquidity of the global financial markets
and the level and volatility of equity prices could significantly affect the
activity level of customers, for example:
•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 Barclays customers would be unable to meet their
obligations.
•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 could reduce 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; and
•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 and interest.
Credit risk
Credit risk is the risk of suffering financial loss, should any of the Group’s
customers, clients or market counterparties fail to fulfil their contractual
obligations to the Group. Credit risk may also arise where the
downgrading of an entity’s credit rating causes the fair value of the
Group’s investment in that entity’s financial instruments to fall. The
credit risk that the Group faces arises mainly from commercial and
consumer loans and advances, including credit card lending.
Furthermore, credit risk is manifested as country risk where difficulties
may arise; in the country in which the exposure is domiciled thus
impeding or reducing the value of the asset; or where the counterparty
may be the country itself.
Settlement risk is another form of credit risk and is the possibility that
the Group may pay a counterparty – for example, a bank in a foreign
exchange transaction – but fail to receive the corresponding settlement
in return.
Market risk
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-US 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
it 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
Capital risk is the risk that the Group has insufficient capital resources to:
•Meet minimum regulatory capital requirements in the UK and in
other markets such as the US and South Africa where regulated
activities are undertaken. The Group’s authority to operate as a
bank is dependent upon the maintenance of adequate capital
resources.
•Support its strong credit rating. In addition to capital resources, the
Group’s rating is supported by a diverse portfolio of activities, an
increasingly international presence, consistent profit performance,
prudent risk management and a focus on value creation. A weaker
credit rating would increase the Group’s cost of funds; and
•Support its growth and strategic options.
The Group’s capital management activities seek to maximise
shareholder value by optimising the level and mix of its capital
resources. Capital risk is mitigated by:
•ensuring access to a broad range of investor markets;
•management of the Group’s demand for capital; and
•management of the exposure to foreign currency exchange rate
movements.
Liquidity risk
This is the risk that the Group is unable to meet its obligations when
they fall due and to replace funds when they are withdrawn, with
consequent failure 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 90 for a detailed 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.
Insurance risk
Insurance risk is the risk that the Group will have to make higher than
anticipated payments to settle claims arising from its long-term and
short-term insurance businesses.
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.