Strategic Shareholder Climate and Risk Financial Financial Barclays PLC 276 report information sustainability report Governance review review statements Annual Report 2022 Material existing and emerging risks (continued) a result of competition in the banking environments and stressed conditions (non-traded) assets and liabilities. The industry. (both actual and as defined for internal Group’s hedging programmes for interest planning or regulatory stress testing rate risk in the banking book rely on • Ongoing access to wholesale funding: purposes). This also includes the risk from behavioural assumptions and, as a result, the Group regularly accesses the money the Group’s pension plans. Key capital risks the effectiveness of the hedging strategy and capital markets to provide short- that the Group faces include: cannot be guaranteed. A potential term and long-term unsecured and mismatch in the balance or duration of the secured funding to support its • Failure to meet prudential capital hedging assumptions could lead to requirements: this could lead to the operations. A loss of counterparty earnings deterioration if there are interest Group being unable to support some or confidence, or adverse market rate movements which are not adequately all of its business activities, a failure to conditions (such as the recent rises in hedged. A decline in interest rates may pass regulatory stress tests, increased interest rates) could lead to a reduction cost of funding due to deterioration in also compress net interest margin on retail in the tenor, or an increase in the costs, investor appetite or credit ratings, and corporate portfolios. In addition, the of the Group’s unsecured and secured restrictions on distributions (including in Group’s liquid asset portfolio is exposed to wholesale funding or affect the Group’s respect of its shares and/or additional potential capital and/or income volatility access to such funding. tier 1 instruments), leading to the due to movements in market rates and • Impacts of market volatility: adverse inability to comply with the Group's prices which may have a material adverse dividend policy and/or the need to take market conditions, with increased effect on the capital position of the Group. additional measures to strengthen the volatility in asset prices could: (i) For further details on the Group’s approach to Group’s capital or leverage position. negatively impact the Group’s liquidity + treasury and capital risk, refer to the treasury and • Adverse changes in FX rates impacting position through increased derivative capital risk management and treasury and capital risk performance sections. capital ratios: the Group has capital margin requirements and/or wider resources, risk weighted assets and haircuts when monetising liquidity pool v) Operational risk leverage exposures denominated in securities; and (ii) make it more difficult Operational risk is the risk of loss to the foreign currencies. Changes in foreign for the Group to execute secured Group from inadequate or failed processes currency exchange rates may adversely financing transactions. or systems, human factors or due to impact the sterling equivalent value of • Intraday liquidity usage: increased external events where the root cause is these items. As a result, the Group’s collateral requirements for payments not due to credit or market risks. Examples regulatory capital ratios are sensitive to and securities settlement systems could include: foreign currency movements. Failure to negatively impact the Group’s liquidity appropriately manage the Group’s a) Operational resilience position, as cash and liquid assets balance sheet to take account of foreign The Group functions in a highly required for intraday purposes are currency movements could result in an competitive market, with customers and unavailable to meet other outflows. adverse impact on the Group’s clients that expect consistent and smooth • Off-balance sheet commitments: regulatory capital and leverage ratios. business processes. The loss of or deterioration in economic and market • Adverse movements in the pension disruption to business processing is a conditions could cause customers to fund: adverse movements in pension material inherent risk within the Group and draw on off-balance sheet assets and liabilities for defined benefit across the financial services industry, commitments provided to them, for pension schemes could result in deficits whether arising through failures in the example revolving credit facilities, on a technical provision and/or IAS 19 Group’s technology systems, closure of negatively affecting the Group’s liquidity accounting basis. This could lead to the the Group's real estate services including position. Group making substantial additional its retail branch network, or availability of • Credit rating changes and impact on contributions to its pension plans and/or personnel or services supplied by third funding costs: any reductions in a credit a deterioration in its capital position. The parties. Failure to build resilience and rating (in particular, any downgrade market value of pension fund assets recovery capabilities into business below investment grade) may affect the might decline; or investment returns processes or into the services on which Group’s access to the money or capital might reduce. Under IAS 19, the the Group’s business processes depend, markets and/or terms on which the liabilities discount rate is derived from may result in significant customer Group is able to obtain market funding the yields of high-quality corporate detriment, costs to reimburse losses (for example, this could lead to bonds. Therefore, the valuation of the incurred by the Group’s customers, and increased costs of funding and wider Group’s defined benefits schemes reputational damage. credit spreads, the triggering of would be adversely affected by a b) Cyberattacks additional collateral or other prolonged fall in the discount rate due to Cyberattacks continue to be a global requirements in derivative contracts and a persistent low interest rate and/or threat that is inherent across all industries, other secured funding arrangements, or credit spread environment. Inflation is with the number and severity of attacks limits on the range of counterparties another significant risk driver to the continuing to rise. The financial sector who are willing to enter into transactions pension fund as the liabilities are remains a primary target for with the Group). adversely impacted by an increase in cybercriminals, hostile nation states, long-term inflation expectations. b) Capital risk opportunists and hacktivists. The Group, c) Interest rate risk in the banking book Capital risk is the risk that the Group has an like other financial institutions, experiences Interest rate risk in the banking book is the insufficient level or composition of capital numerous attempts to compromise its risk that the Group is exposed to capital or to support its normal business activities cybersecurity protections. income volatility because of a mismatch and to meet its regulatory capital The Group dedicates significant resources between the interest rate exposures of its requirements under normal operating to reducing cybersecurity risks, but it