Barclays 2013 Annual Report Download - page 140

Risk review
Risk factors continued
Regulatory change
The Group, in common with much of the financial services industry,
continues to be subject to significant levels of regulatory change and
increasing scrutiny in many of the countries in which it operates
(including, in particular, the UK and the US and in light of its significant
investment banking operations). This has led to a more intensive
approach to supervision and oversight, increased expectations and
enhanced requirements, including with regard to: (i) capital, liquidity
and leverage requirements (for example arising from Basel III and
CRDIV): (ii) structural reform and recovery and resolution planning; and
(iii) market infrastructure reforms such as the clearing of over-the-
counter derivatives. As a result, regulatory risk will continue to be a
focus of senior management attention and consume significant levels
of business resources. Furthermore, this more intensive approach and
the enhanced requirements, uncertainty and extent of international
regulatory coordination as enhanced supervisory standards are
developed and implemented may adversely affect the Group’s business,
capital and risk management strategies and/or may result in the Group
deciding to modify its legal entity structure, capital and funding
structures and business mix or to exit certain business activities
altogether or to determine not to expand in areas despite their
otherwise attractive potential.
For further information see Regulatory Developments in the section on
Supervision and Regulation.
Implementation of Basel III/CRD IV and additional PRA supervisory
expectations
CRD IV introduces significant changes in the prudential regulatory
regime applicable to banks including: increased minimum capital
ratios; changes to the definition of capital and the calculation of risk
weighted assets; and the introduction of new measures relating to
leverage, liquidity and funding. CRD IV entered into force in the UK and
other EU member states on 1 January 2014. CRD IV permits a
transitional period for certain of the enhanced capital requirements and
certain other measures, such as the CRD IV leverage ratio, which are
not expected to be finally implemented until 2018. Notwithstanding
this, the PRA’s supervisory expectation is for Barclays to meet certain
capital and leverage ratio targets within certain prescribed timeframes.
Barclays met the PRA’s expectation to have an adjusted fully loaded
CET 1 ratio of 7% by 31 December 2013 and will be expected to meet a
PRA Leverage Ratio of 3% by 30 June 2014.
There is a risk that CRD IV requirements adopted in the UK may
change, whether as a result of further changes to global standards, EU
legislation, including the CRDIV text and/or via 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
models approvals granted under CRD II and III. For example, further
guidelines published by the Basel Committee in January 2014 regarding
the calculation of the leverage ratio are expected to be incorporated
into EU and UK law during 2014.
In addition the Financial Policy Committee of the Bank of England has
legal powers, where this is required to protect financial stability, to
make recommendations about the application of prudential
requirements, and has, or may be given, other powers including powers
to direct the PRA and FCA to adjust capital requirements through
sectoral capital requirements (SCR). Directions would apply to all UK
banks and building societies, rather than to the Group specifically.
Such changes, either individually or in aggregate, may lead to
unexpected enhanced requirements in relation to the Group’s capital,
leverage, liquidity and funding ratios or alter the way such ratios are
calculated. This may result in a need for further management actions
to meet the changed requirements, such as: increasing capital,
reducing leverage and risk weighted assets, modifying legal entity
structure (including with regard to issuance and deployment of capital
and funding for the Group) and changing Barclays’ business mix or
exiting other businesses and/or undertaking other actions to
strengthen Barclays position.
Structural reform
A number of jurisdictions have enacted or are considering legislation
and rule making that could have a significant impact on the structure,
business risk and management of the Group and of the financial
services industry more generally. Key developments that are relevant to
Barclays include:
 The UK Financial Services (Banking Reform) Act 2013, gives UK
authorities the power to implement key recommendations of the
Independent Commission on Banking, including: (i) the separation of
the UK and EEA retail banking activities of the largest UK banks into a
legally, operationally and economically separate and independent
entity (so called ‘ring fencing’); (ii) statutory depositor preference in
insolvency; (iii) a reserve power for the PRA to enforce full separation
of the retail operations of UK banks to which the reforms apply under
certain circumstances; and (iv) a ‘bail-in’ stabilisation option as part
of the powers of the UK resolution authority;
 The European Commission proposals of January 2014 for a directive
to implement recommendations of the EU High Level Expert Group
Review (the Liikanen Review). The directive would apply to EU
globally significant financial institutions and envisages, among other
things: (i) a ban on engaging in proprietary trading in financial
instruments and commodities; (ii) giving supervisors the power and,
in certain instances, the obligation to require the transfer of other
trading activities deemed to be ‘high risk’ to separate legal trading
entities within a banking group; and (iii) rules governing the
economic, legal, governance and operational links between the
separated trading entity and the rest of the banking group;
 On 18 February 2014, the US Board of Governors of the Federal
Reserve System (FRB) issued final rules implementing various
enhanced prudential standards under Section 165 of the DFA
applicable to certain foreign banking organisations and their US
operations, including Barclays. Because its total US and non-US
assets exceed $50bn, Barclays would be subject to the most stringent
requirements of the final rules, including the requirement to create a
US intermediate holding company (IHC) structure to hold its US
banking and non-banking subsidiaries, including Barclays Capital Inc.
the Group’s US broker-dealer subsidiary. The IHC would generally be
subject to supervision and regulation, including as to regulatory
capital and stress testing, by the FRB as if it were a US bank holding
company of comparable size. In particular, under the final rules, the
consolidated IHC would be subject to a number of additional
supervisory and prudential requirements, including: (i) subject to
certain limited exceptions, FRB regulatory capital requirements and
leverage limits that are the same as those applicable to US banking
organisations of comparable size; (ii) mandatory company-run and
supervisory stress testing of capital levels and submission of a capital
plan to the FRB; (iii) supervisory approval of and limitations on capital
distributions by the IHC to Barclays Bank PLC; (iv) additional
substantive liquidity requirements (including monthly internal
liquidity stress tests and maintenance of specified liquidity buffers)
and other liquidity risk management requirements; and (v) overall
risk management requirements, including a US risk committee and a
US chief risk officer. The effective date of the final rule is 1 June 2014,
although compliance with most of its requirements will be phased-in
between 2015 and 2018. Barclays will not be required to form its IHC
until 1 July 2016. The IHC will be subject to the US generally
applicable minimum leverage capital requirement (which is different
than the Basel III international leverage ratio, including to the extent
that the generally applicable US leverage ratio does not include
off-balance sheet exposures) starting 1 January 2018. In light of the
recent release of the final rules, Barclays continues to evaluate their
implications for Barclays. Nevertheless, the Group currently believes
that, in the aggregate, the final rules (and, in particular, the leverage
requirements in the final rules that will ultimately become applicable
to the IHC) are likely to increase the operational costs and capital
requirements and/or require changes to the business mix of Barclays’
US operations, which ultimately may have an adverse effect on the
Group’s overall result of operations;
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138 Barclays PLC Annual Report 2013