Barclays 2013 Annual Report Download - page 137

ii) Uncertain interest rate environment
Interest rate volatility can impact the Group’s net interest margin, which
is the interest rate spread earned 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. 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 pages 190 to 198
iii) Pension fund risk
Adverse movements between pension assets and liabilities for defined
benefit pension schemes could contribute to a pension deficit. Inflation
is a key risk to the pension fund and Barclays defined benefit pension
net position has been adversely affected, and could be adversely
affected again, by any increase in long term inflation assumptions. A
decrease in the discount rate, which is derived from yields of corporate
bonds with AA ratings and consequently includes exposure both to
risk-free yields and credit spreads, may also impact pension valuations
and may therefore have a material adverse effect on the Group’s results
of operations, financial condition and prospects.
For further information see pages 197 and 198
Funding risk
The ability of the Group to achieve its business plans may be
adversely impacted if it does not effectively manage its capital,
liquidity and leverage ratios
Funding risk is the risk that the Group may not be able to achieve its
business plans due to: being unable to maintain appropriate capital
ratios (Capital risk); being unable to meet its obligations as they fall due
(Liquidity risk); adverse changes in interest rate curves impacting
structural hedges of non-interest bearing assets/liabilities or foreign
exchange rates on capital ratios (Structural risk).
i) Maintaining capital strength in increasingly challenging environment
Should the Group be unable to maintain or achieve appropriate capital
ratios this could lead to: an inability to support business activity; a
failure to meet regulatory requirements; changes to credit ratings,
which could also result in increased costs or reduced capacity to raise
funding; and/or the need to take additional measures to strengthen the
Group’s capital or leverage position. Basel III and CRD IV have increased
the amount and quality of capital that Barclays is required to hold. CRD
IV requirements adopted in the United Kingdom may change, whether
as a result of further changes to CRD IV agreed by EU legislators,
binding regulatory technical standards being developed by the
European Banking Authority or changes to the way in which the PRA
interprets and applies these requirements to UK banks (including as
regards individual model approvals granted under CRD II and III).
Such changes, either individually and/or in aggregate, may lead to
further unexpected enhanced requirements in relation to the Group’s
CRD IV capital.
Additional capital requirements will also arise from other proposals,
including the recommendations of the UK Independent Commission on
Banking, the Liikanen Review and section 165 of the Dodd-Frank Act. It
is not currently possible to predict with accuracy the detail of
secondary legislation or regulatory rulemaking expected under any of
these proposals, and therefore the likely consequences to the Group.
However, it is likely that these changes in law and regulation would
require changes to the legal entity structure of the Group and how its
businesses are capitalised and funded and/or are able to continue to
operate and as such could have an adverse impact on the operations,
financial condition and prospects of the Group. Any such increased
capital requirements or changes to what is defined to constitute capital
may also constrain the Group’s planned activities, lead to forced asset
sales and/or balance sheet reductions and could increase costs, impact
on the Group’s earnings and restrict Barclays’ ability to pay dividends.
Moreover, during periods of market dislocation, or when there is
significant competition for the type of funding that the Group needs,
increasing the Group’s capital resources in order to meet targets may
prove more difficult and/or costly.
ii) Changes in funding availability and costs
Should the Group fail to manage its liquidity and funding risk
sufficiently, this may result in: an inability to support normal business
activity; and/or a failure to meet liquidity regulatory requirements; and/
or changes to credit ratings. Any material adverse change in market
liquidity (such as that experienced in 2008), or the availability and cost
of customer deposits and/or wholesale funding, in each case whether
due to factors specific to Barclays (such as due to a downgrade in
Barclays’ credit rating) or to the market generally, could adversely
impact the Group’s ability to maintain the levels of liquidity required to
meet regulatory requirements and sustain normal business activity. In
addition, there is a risk that the Group could face sudden, unexpected
and large net cash outflows, for example from customer deposit
withdrawals, or unanticipated levels of loan drawdowns under
committed facilities, which could result in (i) forced reductions in
Barclays’ balance sheet; (ii) Barclays being unable to fulfil its lending
obligations; and (iii) a failure to meet the Group’s liquidity regulatory
requirements. During periods of market dislocation, the Group’s ability
to manage liquidity requirements may be impacted by a reduction in
the availability of wholesale term funding as well as an increase in the
cost of raising wholesale funds. Asset sales, balance sheet reductions
and increased costs of raising funding could all adversely impact the
results of operations, financial condition and prospects of the Group.
iii) Changes in foreign exchange and interest rates
The Group has capital resources and risk weighted assets denominated
in foreign currencies; changes in foreign exchange rates result in
changes in the Sterling equivalent value of foreign currency
denominated capital resources and risk weighted assets. As a result,
the Group’s regulatory capital ratios are sensitive to foreign currency
movements. The Group also has exposure to non-traded interest rate
risk, arising from the provision of retail and wholesale (non-traded)
banking products and services. This includes current accounts and
equity balances which do not have a defined maturity date and an
interest rate that does not change in line with base rate changes.
Failure to appropriately manage the Group’s balance sheet to take
account of these risks could result in: (i) in the case of foreign
exchange risk, an adverse impact on regulatory capital ratios; and (ii) in
the case of non-traded interest rate risk, an adverse impact on income.
Structural risk is difficult to predict with any accuracy and may have a
material adverse effect on the Group’s results of operations, financial
condition and prospects.
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