Barclays 2015 Annual Report Download - page 128

126 I Barclays PLC Annual Report 2015 home.barclays/annualreport
Risk review
Material existing and emerging risks
Material existing and emerging risks to the Group’s future performance
these operations means that deterioration in the economic environment,
or an increase in political instability in countries where it is active, or any
other systemically important economy, could adversely affect the
Group’s performance.
Global growth is expected to remain modest, with low single digit
growth in advanced economies alongside a slowdown in emerging
markets. This moderate economic performance, lower commodity prices
and increased geopolitical tensions mean that the distribution of risks to
global economic activity continues to be biased to the downside.
As the US Federal Reserve embarks on monetary policy tightening, the
increasing divergence of policies between major advanced economies
risks triggering further financial market volatility. The sharp change in
value of the US dollar during 2015 reflected this and, has played a major
role in driving asset price volatility and capital reallocation as markets
adjusted. Changes to interest rate expectations risk igniting further
volatility and US dollar appreciation, particularly if the US Federal Reserve
were to increase rates faster than markets currently expect.
Emerging markets have already seen growth slow following increased
capital outflows, but a deeper slowdown in growth could emerge if
tighter US interest rate policy drives further reallocation of capital.
Moreover, sentiment towards emerging markets as a whole continues to
be driven in large part by developments in China, where there is
significant concern around the ability of authorities to manage the
growth transition towards services. A stronger than expected slowdown
could result if authorities fail to appropriately manage the end of the
investment and credit-led boom, while the consequences from a faster
slowdown would flow through both financial and trade channels into
other economies, and affect commodity markets.
Commodity prices, particularly oil prices, have already fallen significantly,
but could fall further if demand growth remains weak or supply takes
longer than expected to adjust. At the same time, countries with high
reliance on commodity related earnings have already experienced a
tightening of financial conditions. A sustained period of low prices risks
triggering further financial distress, default and contagion.
In several countries, reversals of capital inflows, as well as fiscal austerity,
have already caused deterioration in political stability. This could be
exacerbated by a renewed rise in asset price volatility or sustained
pressure on government finances. In addition, geopolitical tensions in
some areas of the world, including the Middle East and Eastern Europe
are already acute, and are at risk of further deterioration.
While in Europe, risks of stagnation, entrenched deflation and a Eurozone
break up have diminished, they remain a risk.
In the UK, the referendum on EU membership gives rise to some political
uncertainty and raises the possibility of a disruptive and uncertain exit
from the EU, with attendant consequences for investment and
confidence. Following the referendum in June 2016, in the event that
there is a vote in favour of leaving the EU, a period of negotiation is likely,
widely anticipated to be around two years, with unpredictable
implications on market conditions.
A drop in business or consumer confidence related to the
aforementioned risks may have a material impact on GDP growth in one
or more significant markets and therefore Group performance. At the
same time, even if output in most advanced economies does grow, it
would also be likely to advance at a slower pace than seen in the
pre-crisis period. Growth potential could be further eroded by the low
levels of fixed asset investment and productivity growth.
For the Group, a deterioration of conditions in its key markets could
affect performance in a number of ways including, for example: (i)
deteriorating business, consumer or investor confidence leading to
reduced levels of client activity; (ii) higher levels of default rates and
impairment; and (iii) mark to market losses in trading portfolios resulting
from changes in credit ratings, share prices and solvency of
counterparties.
iii) Business change/execution (emerging risk)
As Barclays moves towards a single point of entry (Holding Company)
resolution model and implementation of the structural reform
programme execution, the expected level of structural and strategic
change to be implemented over the medium term will be disruptive and
is likely to increase funding and operational risks for the Group and could
impact its revenues and businesses. These changes will include: the
creation and rundown of Non-Core; the delivery against an extensive
agenda of operational and technology control and infrastructure
improvements; and, planned cost reductions. Execution may be
adversely impacted by external factors (such as a significant global
macroeconomic downturn or further significant and unexpected
regulatory change in countries in which the Group operates) and/or
internal factors (such as availability of appropriately skilled resources or
resolution of legacy issues). Moreover, progress in regard to Barclays’
strategic plans is unlikely to be uniform or linear and progress on certain
targets may be achieved more slowly than others.
If any of the risks outlined above were to occur, singly or in aggregate,
they could have a material adverse effect on the Group’s business,
results of operations and financial condition.