Barclays 2013 Annual Report Download - page 136

Risk review
Risk factors continued
Specific sectors and geographies
The Group is subject to risks arising from changes in credit quality and
recovery of loans and advances due from borrowers and counterparties
in a specific portfolio or geography or from a large individual name.
Any deterioration in credit quality could lead to lower recoverability and
higher impairment in a specific sector, geography or in respect of
specific large counterparties.
i) Exit Quadrant assets
The Investment Bank holds a large portfolio of Exit Quadrant assets,
including commercial real estate and leveraged finance loans, which
(i) remain illiquid; (ii) are valued based upon assumptions, judgements
and estimates which may change over time; and (iii) which are subject
to further deterioration and write downs.
For further information see page 181
ii) Corporate Banking assets held at fair value
Corporate Banking holds a portfolio of longer term loans to the
Education, Social Housing and Local Authority (ESHLA) sectors which
are marked on a fair value basis. The value of these loans is therefore
subject to market movements and may give rise to losses.
iii) Large single name losses
In addition, the Group has large individual exposures to single name
counterparties. The default of obligations by such counterparties could
have a significant impact on the carrying value of these assets. In
addition, where such counterparty risk has been mitigated by taking
collateral, credit risk may remain high if the collateral held cannot be
realised or has to be liquidated at prices which are insufficient to
recover the full amount of the loan or derivative exposure. Any such
defaults could have a material adverse effect on the Group’s results of
operations, financial condition and prospects.
Market risk
The Group’s financial position may be adversely affected by changes
in both the level and volatility of prices
Barclays is at risk from its earnings or capital being reduced due to:
(i) changes in the level or volatility of positions in its trading books,
primarily in the Investment Bank, including changes in interest rates,
inflation rates, credit spreads, commodity prices, equity and bond
prices and foreign exchange levels; (ii) the Group being unable to
hedge its banking book balance sheet at prevailing market levels; and
(iii) the risk of the Group’s defined benefit pensions obligations
increasing or the value of the assets backing these defined benefit
pensions obligations decreasing due to changes in either the level or
volatility of prices. These market risks could lead to significantly lower
revenues, which could have an adverse impact on the Group’s results of
operations, financial condition and prospects.
Specific examples of scenarios where market risk could lead to
significantly lower revenues and adversely affect the Group’s operating
results include:
i) Reduced client activity and decreased market liquidity
The Investment Bank’s 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 have a material
adverse effect on the Group’s results of operations, financial condition
and prospects.
For further information see pages 190 to 198
iii) Political instability or economic uncertainty in markets in which
Barclays operates
Political instability in less developed regions in which Barclays operates
could weaken growth prospects that could lead to an adverse impact
on customers’ ability to service debt. For example, economic and
political uncertainty in South Africa continues to dampen down
investment into the country with lending growth rates persisting,
particularly in unsecured lending. Furthermore, debt serviceability may
be adversely impacted by a further interest rate rise early in 2014 as a
result of a downgrade to South Africa’s credit rating.
The referenda on Scottish independence in September 2014 and on UK
membership of the European Union (expected before 2017) may affect
the Group’s risk profile through introducing potentially significant new
uncertainties and instability in financial markets, both ahead of the
respective dates for these referenda and, depending on the outcomes,
after the event.
There remain concerns in the market about credit risk (including that
of sovereign states) and the Eurozone crisis. The large sovereign debts
and/or fiscal deficits of a number of Eurozone countries and the
sustainability of austerity programmes that such countries have
introduced have raised concerns among market participants regarding
the financial condition of these countries as well as financial
institutions, insurers and other corporates that are located in, or have
direct or indirect exposures to, such Eurozone countries.
For further information see pages 182 to 189
(iv) Exit of one or more countries from the Eurozone
The Group is exposed to an escalation of the Eurozone crisis whereby
a sovereign defaults and exits the Eurozone, in the following ways:
 The direct risk arising from the sovereign default of an existing
country in which the Group has significant operations and the
adverse impact on the economy of that exiting country and the credit
standing of the Group’s clients and counterparties in that country.
 The subsequent adverse impact on the economy of other Eurozone
countries and the credit standing of the Group’s clients and
counterparties in such other Eurozone countries.
 Indirect risk arising from credit derivatives that reference Eurozone
sovereign debt.
 Direct redenomination risk on the balance sheets of the Group’s local
operations in countries in the Eurozone should the value of the assets
and liabilities be affected differently as a result of one or more
countries reverting to a locally denominated currency.
 The introduction of capital controls or new currencies by any such
existing countries.
 Significant effects on existing contractual relations and the fulfilment
of obligations by the Group and/or its customers.
If some or all of these conditions arise, persist or worsen, as the case
may be, they may have a material adverse effect on the Group’s
operations, financial condition and prospects. The current absence of a
predetermined mechanism for a member state to exit the Euro means
that it is not possible to predict the outcome of such an event or to
accurately quantify the impact of such an event on the Group’s
operations, financial condition and prospects.
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134 Barclays PLC Annual Report 2013