Barclays 2011 Annual Report Download - page 159

The ICB issued its final report in September 2011. Among other things,
the recommendations included that: (i) the UK and EEA retail banking
activities of a UK bank or building society should be placed in a legally
distinct, operationally separate and economically independent entity
(“ring-fencing”); and (ii) the loss-absorbing capacity of ring-fenced banks
and UK-headquartered global systemically important banks (such as
Barclays Bank PLC) should be increased to levels higher than the Basel 3
proposals. The UK Government published its response to the ICB
recommendations in December 2011 and indicated that primary and
secondary legislation relating to the proposed ring-fence will be completed
by May 2015, with UK banks and building societies expected to be
compliant as soon as practicable thereafter, and the requirements relating
to increased loss-absorbing capacity of ring-fenced banks and UK-
headquartered global systemically important banks will be applicable from
1 January 2019. The Government will publish a White Paper in late spring
2012 with further details on how the recommendations will be implemented.
The FSA continues to develop and apply its more intrusive and assertive
approach to supervision and its policy of credible deterrence in relation to
enforcement that has continued to see significant growth in the size of
regulatory fines. In anticipation of international agreement, the FSA has
established and implemented capital and liquidity requirements that are
substantially increased from pre-crisis levels, and has, together with the
Bank of England, proceeded to establish Recovery and Resolution Planning
requirements. In keeping with the requirements of the FSB, the Group is
required to submit a Recovery and Resolution Plan by 30 June 2012. The
Retail Distribution Review and the Mortgage Market Review will affect the
economics of investment advice and home finance provision respectively.
The FSA, following consultation, has also made clear its intention to take a
more interventionist approach to the design of financial products and to
the governance processes around product design. This approach will be
carried through into the FCA when it is established.
United States
The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA)
became law in July 2010. The full scale of the DFA’s impact on the Group
remains unclear because the rules required to implement many of the
provisions of DFA have not been implemented and, in some areas, have
yet to be proposed by the responsible agencies. In addition, market
practices and structures may change in response to the requirements of
the DFA in ways that are difficult to predict but that could impact Barclays
business. Nonetheless, certain provisions of the DFA are particularly likely
to have an effect on the Group, including in the following:
– Systemic rsk: The DFA created the Financial Stability Oversight Council
(FSOC) and empowered it to make recommendations to the FRB to
apply heightened supervisory requirements and prudential standards
applicable to “systematically important” entities and activities and to
work with all primary financial regulatory agencies to establish
regulations, as necessary, to address financial stability concerns.
In December 2011, the FRB issued proposed rules that bank holding
companies with total consolidated assets of over $50 billion, and other
financial companies designated by the FSOC as systemically important,
be subject to enhanced prudential standards, including (i) capital
requirements and leverage limits, (ii) mandatory stress testing of capital
levels, (iii) liquidity requirements, (iv) overall risk management
requirements, and (v) concentration and credit exposure limits.
However, as drafted, these would not currently affect the Group.
Although the relevant sections of DFA apply both to domestic US bank
holding companies with total consolidated assets of over $50 billion
and non-US banking organisations with US operations that have total
consolidated assets of over $50 billion, such as the Group, the FRB has
deferred proposing rules to cover such non-US organisations. Instead,
the proposed rules would apply only to a subsidiary of a foreign-owned
US bank holding company if the subsidiary itself has $50 billion or more
in total consolidated assets. The Group’s only US-domiciled subsidiary
bank holding company, Barclays Delaware Holdings, LLC, has total
assets under this threshold. Nonetheless, it is possible that the FRB
could propose additional rules that would apply similar enhanced
prudential requirements to all non-US banking organisations with US
operations that have total consolidated assets of over $50 billion, or to
any other non-US banking organisation that the FSOC designates as
systemically important. In this regard, it is potentially relevant that in
November 2011 Barclays was listed by the FSB as a global systemically
important bank. It is not yet clear what regard the FSOC or the other
agencies will have to the home country prudential regulators of non-US
organisations when considering the imposition of heightened
prudential requirements on such organisations pursuant to the DFA.
– Other enhanced prudential requirements: In addition to the ability of
the FSOC to recommend heightened prudential standards for specific
institutions, the DFA, separate and apart from Basel 3, also imposes
higher capital, liquidity and leverage requirements on US banks and
bank holding companies generally.
– Restrictions on proprietary trading and fund-related activities: The
so-called “Volcker Rule,” which will, once effective, significantly restrict
the ability of US bank holding companies and their affiliates, and the US
branches of foreign banks, to conduct proprietary trading in securities
and derivatives as well as certain activities related to hedge funds and
private equity funds. In October 2011, US regulators consulted on rules
to implement the Volcker Rule. The proposed rules are highly complex
and many aspects remain unclear, including the exemption from the
proprietary trading and fund-related activity prohibitions for activities
conducted by non-US organisations “solely outside the United States.”
The agencies appeared to construe this exemption very narrowly in the
proposed rules. Analysis continues of the proposals, but it is clear that
compliance with them would entail significant effort by the Group.
Although the Volcker Rule is likely to impose significant additional
compliance and operational costs on the Group, the full impact will not
be known with certainty until the rules have been finalised. Whilst the
Group has identified that its private equity fund, hedge fund and
trading operations may be affected by the Volcker Rule, until the final
regulations are adopted, the impact on the Group’s ability to engage in
these activities will be affected continues to remain uncertain. As such,
it cannot currently be determined whether the restrictions will have
a material effect on the Group. The statutory Volcker Rule provisions
are scheduled to take effect in July 2012, regardless of whether the
implementing rules have been finalised, and companies will have two
years from that time to come into full compliance with them, subject
to possible extensions.
Barclays PLC Annual Report 2011 www.barclays.com/annualreport 157
The strategic report Governance Risk management Financial review Financial statements Shareholder information