Barclays 2011 Annual Report Download - page 79

Maintaining capital strength
A material adverse deterioration in the Group’s financial performance can
affect the capacity to support further capital deployment. The Capital Plan
is continually monitored against the internal target capital ratios with Risk,
the business and legal entities through a proactive and forward looking
approach to capital risk management which ensures that the Plan remains
appropriate. The capital management process also includes an internal
and regulatory stress testing process which informs the Group capital
plan. Further detail on the Group’s regulatory capital resources is included
on pages 130 to 138.
Changes in funding availability and costs
Market liquidity, the level of customer deposits and the Group’s ability
to raise wholesale funding impacts both the Group’s net interest margin,
which is sensitive to volatility in cost of funding, and its ability to both
fulfil its obligations and support client lending, trading activities and
investments. Large unexpected outflows, for example from customer
withdrawals, ratings downgrades or loan drawdowns, could also result in
forced reduction in the balance sheet, inability to fulfil lending obligations
and regulatory breaches. The Liquidity Profile is monitored constantly and
is supported by a range of early warning indicators to ensure the profile
remains appropriate and sufficient liquid resources are held to protect
against unexpected outflows. Further details are provided in the Funding
Risk – Liquidity section on pages 139 to 150.
Local balance sheet management and redenomination risk
The introduction of capital controls or new currencies by countries
(for example in the Eurozone) to mitigate current stresses could have
an ongoing or point-in-time impact on the performance of local balance
sheets of certain Group companies based on the asset quality, types of
collateral and mix of liabilities. Local assets and liability positions are
carefully monitored by local asset and liability committees with oversight
by Group Treasury. For further information see the Group’s exposures to
selected Eurozone countries (pages 112 to 120).
4. Operational risk
Operational Risk is the risk of direct or indirect impacts resulting from
human factors, inadequate or failed internal processes and systems or
external events. Operational risks are inherent in the Group’s business
activities.
The Key Risks that this Principal Risk includes are External Suppliers,
Financial Reporting, Fraud, Information, Legal, Product, Payment Process,
People, Premises & Security, Regulatory, Taxation, Technology and
Transaction operations. For definitions of these key risks see page 151.
Risk management
The Operational risk framework enables Barclays to manage and measure
its Operational risk profile and to calculate the amount of Operational risk
capital that it needs to hold. The minimum mandatory requirements
applicable to all Business Units are set out in the Group Operational risk
policies.
Group Key Risk Owners are required to monitor information relevant to
their Key Risk from each Operational risk framework element. In addition,
each Key Risk Owner mandates control requirements specific to their Key
Risk through a Key Risk Control Framework.
For further information see Operational risk management (pages 151 to
153).
Key specific risks and mitigation
Specific areas and scenarios where Operational risk could lead to financial
and/or non-financial impacts including legal or regulatory breaches or
reputational damage include:
Regulatory risk
Regulatory risk arises from a failure or inability to comply fully with the
laws, regulations or codes applicable specifically to the financial services
industry which are currently subject to significant changes. Non-
compliance could lead to fines, public reprimands, damage to reputation,
increased prudential requirements, enforced suspension of operations or,
in extreme cases, withdrawal of authorisations to operate.
The regulatory response to the financial crisis has led and will continue
to lead to very substantial regulatory changes in the countries in which
the Group operates. It has also (amongst other things) led to (i) a more
assertive approach being demonstrated by the authorities in many
jurisdictions; and (ii) enhanced capital and liquidity requirements (for
example pursuant to CRD4). Current examples of specific areas of concern
include:
The Independent Commission on Banking (ICB)
The ICB was charged by the UK Government with reviewing the UK
banking system and its findings were published on 12 September 2011.
The ICB recommended (amongst other things) 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 (so-called “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.
Barclays PLC Annual Report 2011 www.barclays.com/annualreport 77
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