Barclays 2007 Annual Report Download - page 80

Risk management
Risk factors disclosure
78 Barclays PLC Annual Report 2007
Risk factors
The following information sets forth certain risk factors
that the Group believes could cause its actual future results
to differ materially from expected results. For further
information related to such matters, please refer to page 67
(Barclays Capital credit market positions), pages 80-81
(2007 risk developments), pages 96 to 104 (credit risk
management and market risk management), pages
107-111 (liquidity risk management and operational risk
management), page 217 (Note 35 – legal proceedings) and
page 218 (Note 36 – competition and regulatory matters).
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.
– A market downturn would be likely to lead to a decline in the volume of
customer transactions that Barclays executes and, therefore, 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.
Credit risk may also be 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. Another form of credit risk is settlement risk, which 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
Market risk is the risk that the Group’s earnings or capital, or its ability to
meet business objectives, will be adversely affected by changes in the level
or volatility of market rates or prices such as interest rates, credit spreads,
commodity prices, equity prices and foreign exchange rates. The main
market risk arises from trading activities. The Group is also exposed to
interest rate risk in the banking book and market risk in the pension fund.
Operational risk
Operational risk is the risk of direct or indirect losses resulting from human
factors, external events, and inadequate or failed internal processes and
systems. Operational risks are inherent in Barclays operations and are
typical of any large enterprise. Major sources of operational risk include
operational process reliability, IT security, outsourcing of operations,
dependence on key suppliers, implementation of strategic change,
integration of acquisitions, fraud, human error, customer service quality,
regulatory compliance, recruitment, training and retention of staff, and
social and environmental impacts.