Barclays 2010 Annual Report Download - page 128

Capital risk is the risk that the Group has insufficient
capital resources to:
– Meet minimum regulatory requirements in the UK and
in other jurisdictions such as the United States 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 credit rating. A weaker credit rating would
increase the Group’s cost of funds.
– Support its growth and strategic options.
Organisation and structure (audited)
Barclays operates a centralised capital management model, considering
both regulatory and economic capital. The Group’s capital management
objectives are to maintain sufficient capital resources to:
– ensure the financial holding company is well capitalised relative to the
minimum regulatory capital requirements set by the UK FSA and the
US Federal Reserve;
– ensure locally regulated subsidiaries can meet their minimum regulatory
capital requirements;
– support the Group’s Risk Appetite and Economic Capital requirements;
and
– support the Group’s credit rating.
Capital is allocated to businesses to support the Group’s strategic
objectives, including optimising returns on regulatory and economic
capital.
The Group Treasury Committee manages compliance with the Group’s
capital management objectives. The Committee reviews actual and
forecast capital demand and resources on a monthly basis. The processes
in place for delivering the Group’s capital management objectives are to:
– establishment of internal targets for capital demand and ratios;
– manage capital ratio sensitivity to foreign exchange movement; and
– manage local entity regulatory capital adequacy.
In addition to the processes above, the Group Risk Oversight Committee
and the Board Risk Committee annually review risk appetite and analyse
the impacts of stress scenarios on the Group capital forecast (see pages
163 and 164) in order to understand and manage the Group’s projected
capital adequacy.
Internal targets
To support its capital management objectives, the Group sets internal
targets for its key capital ratios. Internal targets are reviewed regularly
by Group Treasury Committee to take account of:
– changes in forecast demand for capital caused by accessing new
business opportunities, including mergers and acquisitions;
– flexibility in debt capital issuance and securitisation plans;
– the possible impact of stress scenarios including:
– changes in forecast demand for capital from unanticipated
drawdown of committed facilities or as a result of deterioration
in the credit quality of the Group’s assets;
– changes in forecast profits and other capital resources; and
– changes to capital resources and forecast demand due to foreign
exchange rate movements.
Managing capital ratio sensitivity to foreign exchange rate movements
The Group has capital resources and risk weighted assets denominated
in foreign currencies. Changes in foreign exchange rates result in changes
in 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.
The Group’s capital ratio hedge strategy is to minimise the volatility of the
capital ratios caused by foreign exchange rate movements. To achieve this,
the Group aims to maintain the ratio of foreign currency Core Tier 1, Tier 1
and Total Capital resources to foreign currency RWAs the same as
the Group’s capital ratios.
The Group’s foreign currency capital resources include investments in
subsidiaries and branches, intangible assets, non-controlling interest,
deductions from capital and debt capital instruments.
The Group’s investments in foreign currency subsidiaries and branches
create Core Tier 1 capital resources denominated in foreign currencies.
Changes in the Sterling value of the investments due to foreign currency
movements are captured in the currency translation reserve, resulting in
a movement in Core Tier 1 capital.
To create foreign currency Tier 1 and Total Capital resources additional to
the Core Tier 1 capital resources, the Group issues, where possible, debt
capital in non-Sterling currencies. This is primarily achieved by the issuance
of debt capital from Barclays Bank PLC, but can also be achieved by
subsidiaries issuing capital in local currencies.
In some circumstances, investments in foreign currency subsidiaries and
branches are hedged. In these circumstances, foreign currency capital
resources are not created. Hedging decisions take into account the impact
on capital ratios, the strategic nature of the investment, the cost of hedging,
the availability of a suitable foreign exchange market and prevailing foreign
exchange rates. Depending on the value of foreign currency net investments,
it is not always possible to maintain the ratio of Core Tier 1 capital to RWAs
consistent with the Group’s Core Tier 1 ratio in all currencies, leaving some
capital ratio sensitivity to foreign currency movements.
The investment of proceeds from the issuance of equity accounted foreign
currency preference shares also contributes to foreign currency capital
resources. If a preference share issuance is redeemed, the cumulative
movement from the date of issuance in the currency translation reserve
will be offset by an equal and opposite movement in reserves reflecting the
revaluation of the preference shares to prevailing foreign exchange rates.
Issuance of a replacement Tier 1 instrument in the same currency will
maintain the hedge of the Tier 1 ratio.
Local entity regulatory capital adequacy
The Group manages its capital resources to ensure that those Group
entities that are subject to local capital adequacy regulation in individual
jurisdictions meet their minimum capital requirements. Local management
manages compliance with entities minimum regulatory capital requirements
by reporting to local Asset and Liability Committees with oversight by
The Treasury Committee, as required.
Injections of capital resources into Group entities are centrally controlled
by the Group Treasury Committee, under authorities delegated from the
Group Executive Committee. The Group’s policy is for surplus capital held
in Group entities to be repatriated to Barclays Bank PLC in the form of
dividends and/or capital repatriation, subject to local regulatory
requirements, exchange controls and tax implications.
Other than as indicated above, the Group is not aware of any material
impediments to the prompt transfer of capital resources or repayment
of intra-group liabilities when due.
Risk management
Capital risk management
All disclosures in this section (pages 126 to 130) are unaudited unless otherwise stated
126 Barclays PLC Annual Report 2010 www.barclays.com/annualreport10