Barclays 2013 Annual Report Download - page 141

 In the US, in December 2013, the relevant US regulatory agencies,
finalised the rules implementing the requirements of Section 619 of
the Dodd-Frank Act – the so-called ‘Volcker Rule’. The Volcker Rule,
once fully effective, will prohibit banking entities, including Barclays
PLC, Barclays Bank PLC and their various subsidiaries and affiliates
from undertaking certain ‘proprietary trading’ activities and will limit
the sponsorship of, and investment in, private equity funds and
hedge funds, in each case broadly defined, by such entities.These
restrictions are subject to certain important exceptions and
exemptions, as well as exemptions applicable to transactions and
investments occurring ‘solely outside of the United States’. The rules
will also require the Group to develop an extensive compliance and
monitoring programme (both inside and outside of the United
States), subject to various executive officer attestation requirements,
addressing proprietary trading and covered fund activities, and
Barclays therefore expects compliance costs to increase. The final
rules are highly complex and differ in certain significant respects
from the rules as proposed in October 2011. As such, their full impact
will not be known with certainty until market practices and structures
develop under them. Subject entities are generally required to be in
compliance by July 2015 (with certain provisions subject to possible
extensions); and
 The European Commission’s proposal for a directive providing for a
new framework for the recovery and resolution of credit institutions
and investment firms (the Recovery and Resolution Directive or RRD),
which is expected to be finalised in 2014.
These laws and regulations and the way in which they are interpreted
and implemented by regulators may have a number of significant
consequences, including changes to the legal entity structure of the
Group, changes to how and where capital and funding is raised and
deployed within the Group, increased requirements for loss-absorbing
capacity within the Group and/or at the level of certain legal entities or
sub-groups within the Group and potential modifications to the
business mix and model (including potential exit of certain business
activities). These and other regulatory changes and the resulting
actions taken to address such regulatory changes, may have an adverse
impact on the Group’s profitability, operating flexibility, flexibility of
deployment of capital and funding, return on equity, ability to pay
dividends and/or financial condition. It is not yet possible to predict the
detail of such legislation or regulatory rulemaking or the ultimate
consequences to the Group which could be material.
Recovery and resolution planning
There continues to be a strong regulatory focus on resolvability from
international and UK regulators. The Group continues to work with all
relevant authorities on recovery and resolution plans (RRP) and the
detailed practicalities of the resolution process. This includes the
provision of information that would be required in the event of a
resolution, in order to enhance the Group’s resolvability. The Group
made its first formal RRP submissions to the UK and US regulators in
mid-2012 and has continued to work with the relevant authorities to
identify and address any impediments to resolvability. The second US
resolution plan was submitted in October 2013 and Barclays anticipates
annual submissions hereafter.
The EU has agreed the text of the RRD and expects to finalise the
legislation in 2014. The RRD establishes a framework for the recovery
and resolution of credit institutions and investment firms. The aim of
this regime is to provide authorities with the tools to intervene
sufficiently early and quickly in a failing institution so as to ensure the
continuity of the institution or firm’s critical financial and economic
functions while minimising the impact of its failure on the financial
system. The regime is also intended to ensure that shareholders bear
losses first and that certain creditors bear losses after shareholders,
provided that no creditor should incur greater losses than it would have
incurred if the institution had been wound up under normal insolvency
proceedings. The Directive provides resolution authorities with powers
to require credit institutions to make significant changes in order to
enhance recovery or resolvability. These include, amongst others, the
powers to require the group to: make changes to its legal or operational
structures (including demanding that the Group be restructured into
units which are more readily resolvable); limit or cease specific existing
or proposed activities; hold a specified minimum amount of liabilities
subject to write down or conversion powers under the so-called
‘bail-in’ tool. The proposal is to be implemented in all European
Member States by 1 January 2015, with the exception of the bail-in
powers which must be implemented by 1 January 2016.
In the UK, recovery and resolution planning is now considered part of
continuing supervision. Removal of barriers to resolution will be
considered as part of the PRA’s supervisory strategy for each firm, and
the PRA can require firms to make significant changes in order to
enhance resolvability. The UK will also need to consider how it will
transpose the RRD into UK law.
Whilst Barclays believes that it is making good progress in reducing
impediments to resolution, should the relevant authorities ultimately
decide that the Group or any significant subsidiary is not resolvable, the
impact of such structural changes (whether in connection with RRP or
other structural reform initiatives) could impact capital, liquidity and
leverage ratios, as well as the overall profitability of the Group, for
example via duplicated infrastructure costs, lost cross-rate revenues
and additional funding costs.
Regulatory action in the event of a bank failure
The UK Banking Act 2009, as amended (the Banking Act) provides for a
regime to allow the Bank of England (or, in certain circumstances, HM
Treasury) to resolve failing banks in the UK. Under the Banking Act,
these authorities are given powers to make share transfer orders and
property transfer orders. Following the Financial Services (Banking
Reform) Act 2013 the authorities also have at their disposal a statutory
bail-in power. This bail-in power is available to the UK resolution
authority to enable it to recapitalize a failed institution by allocating
losses to its shareholders and unsecured creditors. The bail-in power
enables the UK resolution authority to cancel liabilities or modify the
terms of contracts for the purposes of reducing or deferring the
liabilities of the bank under resolution and the power to convert
liabilities into another form (e.g. shares).
The draft RRD includes provisions similar to the Banking Act for the
introduction of statutory bail-in powers, including the power to (i)
cancel existing shares and/or dilute existing shareholders by
converting relevant capital instruments or eligible liabilities into shares
of the surviving entity and (ii) cancel all or a portion of the principal
amount of, or interest on, certain unsecured liabilities (including certain
debt securities) of a failing financial institution and/or to convert
certain debt claims into another security, including ordinary shares of
the surviving Group entity, if any. The Banking Act bail-in power is not
expected to require significant amendments following finalisations of
the RRD, but this cannot be guaranteed. Accordingly, if the Group were
to be at or approaching the point of non-viability such as to require
regulatory intervention, any exercise of any resolution regime powers
by the relevant UK resolution authority may result in shareholders
losing all or a part of their shareholdings and/or in the rights of
shareholders being adversely affected, including by the dilution of their
percentage ownership of the Barclays’ share capital, and may result in
creditors, including debt holders, losing all or a part of their investment
in the Group’s securities that could be subject to such powers.
In addition to bail-in power, the powers currently proposed to be
granted to the relevant UK resolution authority under the Banking Act
and draft RRD include the power to: (i) direct the sale of the relevant
financial institution or the whole or part of its business on commercial
terms without requiring the consent of the shareholders or complying
with the procedural requirements that would otherwise apply; (ii)
transfer all or part of the business of the relevant financial institution to
a ‘bridge bank’ (a publicly controlled entity); and (iii) transfer the
impaired or problem assets of the relevant financial institution to an
asset management vehicle to allow them to be managed over time.
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