Barclays 2012 Annual Report Download - page 113

The strategic report Governance Risk review Financial review Financial statements Risk management Shareholder information
Market risk
Barclays is at risk from its earnings or capital being reduced due to:
 Traded market risk, where Barclays supports customer activity
primarily via the Investment Bank and is the risk of the Group being
impacted by changes in the level or volatility of positions in its trading
books. This includes changes in interest rates, inflation rates, credit
spreads, property prices, commodity prices, equity and bond prices
and foreign exchange levels;
 Non-traded market risk, to support customer products primarily in
the retail bank and is the risk of the Group being unable to hedge its
banking book balance sheet at prevailing market levels; and
 Pension risk, where the investment profile is reviewed versus the
defined benefit scheme and is the risk of the Group’s defined benefit
obligations increasing or the value of the assets backing these
defined benefit obligations decreasing due to changes in both the
level and volatility of prices.
Risks
Specific areas and scenarios where market risk could lead to
significantly lower revenues and adversely affect our results of
operations in future years include:
(i) Reduced client activity and decreased market liquidity
The Investment Bank business model is focused on client
intermediation. A significant reduction in client volumes or market
liquidity could result in lower fees and commission income and a
longer time period between executing a client trade, closing out a
hedge, or exiting a position arising from that trade. Longer holding
periods in times of higher volatility could lead to revenue volatility
caused by price changes. Such conditions could adversely impact
the Group’s financial results in future periods.
For further information see market risk management (pages 155-161).
(ii) Uncertain interest rate environment
Interest rate volatility can impact Barclays net interest margin, which is
the interest rate spread realised between lending and borrowing costs.
The potential for future volatility and margin changes remains, and it
is difficult to predict with any accuracy changes in absolute interest
rate levels, yield curves and spreads. Most developed economies are
currently operating under historically low rates. Consequently the net
interest margin earned by Barclays is reduced. This margin would likely
compress further were central bank rates to be cut. Rate changes, to
the extent they are not neutralised by hedging programmes, may have
a material adverse effect on the Group’s results of operations, financial
condition and prospects.
For further information see market risk management (pages 155-161).
(iii) Pension fund risk
Adverse movements between pension assets and liabilities for defined
benefit pension schemes could contribute to a pension deficit. The key
sensitivities are the discount rate and long term inflation assumptions
made in determining the defined benefit obligation. The discount rate
is derived from yields of corporate bonds with AA-ratings and
consequently includes exposure both to risk-free yields and credit
spreads. Barclays defined benefit pension net position has been
adversely affected, and could be adversely affected again, by decreases
in discount rate or an increase in long term inflation assumptions.
For further information see market risk management (pages 155-161).
Funding risk
Funding risk is the risk that the Group is unable to achieve its business
plans due to:
 Capital risk: the risk that the Group is unable to maintain appropriate
capital ratios which could lead to: an inability to support business
activity; a failure to meet regulatory requirements; and/or changes
to credit ratings, which could also result in increased costs or
reduced capacity to raise funding;
 Liquidity risk: the risk that the Group is unable to meet its obligations
as they fall due resulting in: an inability to support normal business
activity, a failure to meet liquidity regulatory requirements; and/or
changes to credit ratings; and
 Structural risk: this risk predominantly arises from the impact on
the Group’s balance sheet of changes in primarily interest rates on
income or foreign exchange rates on capital ratios and is, therefore,
difficult to predict with any accuracy and may have a material
adverse effect on the Group’s results of operations, financial
condition and prospects.
For further information see pages 162-186.
Risks
(i) Increasing capital requirements
There are a number of regulatory developments that impact capital
requirements. Most significantly Basel 3 which is planned to be
adopted into EU law through the fourth Capital Requirements Directive
(CRD IV) and Capital Requirements Regulation which are on-going
through the EU legislative process. Additional capital requirements may
arise from other proposals including the recommendations of the UK
Independent Commission on Banking, including with respect to
‘ring-fencing’ separately the trading and non-trading businesses of
banks: The Financial Services (Banking Reform) Bill; EU Review; and,
section 165 of the Dodd-Frank Act. For more information see
Operational Risk - Legal and Regulatory Related Risks below.
Increased capital requirements and changes to what is defined to
constitute capital may constrain the Group’s planned activities and
could increase costs and contribute to adverse impacts on the
Group’s earnings. During periods of market dislocation, increasing
the Group’s capital resources in order to meet targets may prove
more difficult or costly.
Barclays continues to prepare for the implementation of CRD IV and
includes the estimated impact of future regulatory changes in its
capital planning framework. Current forecasts already include the
impact of Basel 3 as currently understood, and forecasts will be
continually updated as CRD IV and other proposals for regulatory
developments are finalised. Further detail on the regulatory
developments impacting capital is included on pages 190-195.
(ii) Maintaining capital strength
A material adverse deterioration in the Group’s financial performance
can affect the Group’s capacity to support further capital deployment.
The Capital Plan is continually monitored against the internal target
capital ratios to ensure 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 page 163.
barclays.com/annualreport Barclays PLC Annual Report 2012 I 111