Strategic Shareholder Climate and Risk Financial Financial Barclays PLC 59 report information sustainability report Governance review review statements Annual Report 2022 Viability statement (continued) Certain risks are additionally identified as key ▪ evolving operational risks (notably cyber • cost of goods increase coupled with energy Bank's Climate Risk Framework as well as its themes and monitored closely by the Board and security, technology and resilience) and the price inflation at a time of falling demand financial resilience to climate risk. Board Committees. These are chosen on the ability to respond to the new and emerging putting significant pressure on small and The Group-wide stress testing framework also basis of their potential to impact viability during technologies in a controlled fashion. medium businesses, increasing their default includes internal reverse stress testing the time frame of the assessment but in some rates As a universal bank with a diversified and assessments, conducted once a year, which aim instances the risks may continue beyond this • residential house prices in the UK decline 31%. connected portfolio of businesses, servicing to identify the circumstances under which the time frame. Commercial real estate prices are stressed customers and clients globally, the Group is Group’s business model would no longer be These particular risks include: even more, at 45%, reflecting more cyclical impacted in the longer term by a wide range of viable, leading to a significant change in business occupier demand and contagion effects from ▪ the potential impact of: (i) further rises in cost macroeconomic, political, regulatory and strategy and to the identification of appropriate the financial markets. of living pressures including inflation and accounting, technological, social and mitigating actions. Examples include extreme interest rates, particularly in developed environmental developments. The evolving macroeconomic downturn (‘severely adverse’) The above stress test outcome for the scenarios, or specific one-off events, covering markets and the possibility of elevated operating environment presents opportunities macroeconomic internal stress test assesses unemployment; (ii) a resurgence in COVID-19 and risks in respect of which we continue to both operational risk and capital/liquidity items. the Group's full financial performance over the and/or restrictions on movement imposed evaluate and take steps to appropriately adapt Reverse stress testing is used to help support horizon of the scenario in terms of profitability, locally to combat outbreaks or new strains; and our strategy and its delivery. ongoing risk management and is an input to the capital, liquidity and leverage to ensure the Group (iii) further trading disruption between the UK Group’s recovery planning process. remains viable. Stress tests and the EU and general supply chain Legal proceedings, competition, regulatory and Climate risk was not part of the internal stress The Board has also considered the Group’s disruption. These risks may result in an remediation/redress conduct matters are also test this year but is being explored separately as viability under a specific internal stress scenario. adverse impact on profitability and capital assessed as part of the stress testing process. part of a pilot scenario analysis assessing tail through increased costs and increased The latest macroeconomic internal stress test, Capital and LRA are set at a level designed to event climate risks. expected credit losses conducted in Q4 2022, was informed by the Bank enable the Group to withstand various stress Additionally, the Board considered the results of of England 2022 regulatory stress test with the scenarios. As part of this process, management ▪ failure to successfully adapt the Group’s the following external climate-related stress following narrative: operations and business strategy to address also identified actions, including cost reductions tests: the financial risks resulting from both: (i) the and withdrawal from lines of business, available to • high and persistent inflation (peaks at 17%) • The BoE announced in Q2 the results of the physical risk of climate change; and (ii) the risk restore the Group to its desired capital flight coupled with rising global interest rates (peak Climate Stress Test undertaken in 2021 which from the transition to a low-carbon economy path. These internal stress tests informed the 6% UK, 6.5% US) in an attempt to curb inflation considered the impact of three climate conclusions of the WCR. drives considerable affordability pressures on ▪ legal proceedings, competition, regulatory and scenarios covering both 'transition' and customers conduct matters giving rise to the potential The results of the macroeconomic internal 'physical' risks. This was an exploratory risk of fines, loss of regulatory licences and stress test were approved by the Board Risk • severe UK recession brought by falling exercise across the banking industry with a permissions and other sanctions, as well as Committee and allowed the Board to approve household real incomes, job losses leading to focus on the banking book. The aim was to size potential adverse impacts on our reputation the Medium Term Plan as being able to sustain a 8.5% unemployment rate, declining economic financial exposures to climate-related risks, severe but plausible scenario and remain within with clients and customers and on investor confidence and tight financial conditions. understand the challenges to business models confidence and/or potentially resulting in Risk Appetite. Other major economies experience very from these risks and enhance management of adverse impacts on capital, liquidity and similar shocks Based on current forecasts, taking account of climate-related financial risks. The exploratory funding material known regulatory changes to be nature of the exercise was specifically stated, ▪ sudden shocks or geopolitical instability in any enacted and having considered possible stress acknowledging climate stress testing scenarios, the current liquidity and capital of the major economies in which the Group capabilities are in their infancy hence it was not operates which could alter the behaviour of position of the Group continues to support the used to set capital requirements. depositors and other counterparties, affect Board’s assessment of the Group’s viability. • in addition, Barclays Bank Ireland undertook the ability of the firm to maintain appropriate the ECB Climate Risk Stress Test (CRST), an capital and liquidity ratios or impact the exploratory exercise designed to test both the Group's credit ratings