Barclays 2011 Annual Report Download - page 76

During 2011, the Principal Risks Policy was updated, resulting in risks being
grouped into four categories with no significant change to the underlying
risk types. Definitions of the four Principal Risks are provided on pages 75
to 78. This summary also includes discussions of the impact of business
conditions and the general economy and regulatory changes which
can impact risk factors and so influence the Group’s results. The Principal
Risks described below can also potentially impact the Group’s reputation
and brand.
The following information describes the risk factors which the Group
believes could cause its future results to differ materially from
expectations. However, other factors could also adversely affect the
Group’s 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 the general economy
The Group has significant activities in a large number of countries.
Consequently there are many ways in which changes in business
conditions and the general economy can adversely impact profitability,
whether at Group level, the individual business units or specific countries
of operation.
During 2011, the economic environment in Barclays main markets was
marked by generally weaker than expected growth and the ongoing
sovereign debt crisis in the Eurozone. In the UK, the economy recovered
slightly during 2011 although GDP declined slightly in the fourth quarter
leading to uncertainty in the near term. The potential for persistent
unemployment, higher interest rates and rising inflation may increase the
pressure on disposable incomes, affecting an individual’s debt service
ability with the potential to adversely impact performance in the Group’s
retail sector. US economic conditions were better than the UK in 2011.
However, unemployment is still high, which increases uncertainty in the
near term. Credit conditions in Europe remain weak and a depressed
housing sector and high unemployment may, in the near term, adversely
affect Barclays business operations in this region. The global wholesale
environment has been affected by the sovereign debt crisis and the
business confidence has generally declined. Performance in the near term,
therefore, remains uncertain.
The business conditions facing the Group in 2012 globally and in many
markets in which the Group operates are subject to significant
uncertainties which may in some cases lead to material adverse impacts
on the Group’s operations, financial condition and prospects including,
for example, changes in credit ratings, share price and solvency of
counterparties as well as higher levels of impairment, lower revenues
or higher costs.
Significant uncertainties by Principal Risk include:
Credit risk
– Impact of potentially deteriorating sovereign credit quality, particularly
debt servicing and refinancing capability;
– Extent and sustainability of economic recovery, including impact
of austerity measures on the European economies;
– Increase in unemployment due to weaker economies in a number
of countries in which the Group operates, fiscal tightening and other
measures;
– Impact of rising inflation and potential interest rate rises on consumer
debt affordability and corporate profitability;
– Possibility of further falls in residential property prices in the UK, South
Africa and Western Europe;
– Potential liquidity shortages increasing counterparty risks;
– Potential for large single name losses and deterioration in specific
sectors and geographies;
– Possible deterioration in remaining credit market exposures; and
– Potential exit of one or more countries from the Euro as a result of the
European debt crisis.
Market risk
– Reduced client activity leading to lower revenues;
– Decreases in market liquidity due to economic uncertainty;
– Impact on banking book income from uncertain interest and exchange
rate environment; and
– Asset returns underperforming pension liabilities.
Funding risk
– Impact of Basel 3 as regulatory rules are finalised;
– Impacts on capital ratios from weak profit performance;
– Availability and volatility in cost of funding due to economic uncertainty;
and
– Reduction in available depositor and wholesale funding.
Operational risk
– Implementation of strategic change and integration programmes across
the Group;
– Continued regulatory and political focus, driven by the global economic
climate;
– Impact of new, wide ranging, legislation in various countries coupled
with changing regulatory landscape;
– Increasingly litigious environment; and
– The crisis management agenda and breadth of regulatory change
required in global financial institutions.
Risk factors
The Group’s approach to identifying, assessing, controlling, reporting and managing risks
is formalised in its Principal Risks framework and supporting processes.
Risk management
Risk factors
74 Barclays PLC Annual Report 2011 www.barclays.com/annualreport