Strategic Shareholder Climate and Risk Financial Financial Barclays PLC 275 report information sustainability report Governance review review statements Annual Report 2022 Material existing and emerging risks (continued) impact a customer’s ability to service events and market volatility during the iii) Market risk debt payments could lead to increased underwriting period, which may result in Market risk is the risk of loss arising from arrears in both unsecured and secured losses for the Group, or increased potential adverse changes in the value of products. capital requirements should there be a the Group’s assets and liabilities from need to hold the exposure for an fluctuation in market variables including, • UK retail, hospitality and leisure: falling extended period. but not limited to, interest rates, foreign demand, rising costs and, for UK retail, a exchange, equity prices, commodity structural shift to online shopping, • Oil & Gas sector: High market energy prices, credit spreads, implied volatilities continue to pressurise sectors heavily prices during 2022 have helped restore and asset correlations. reliant on consumer discretionary balance sheet strength to companies spending. Such sectors may also be operating in this sector. However, in the Economic and financial market adversely impacted by cost of living longer term, costs associated with the uncertainties remain elevated, driven by pressures and other macroeconomic transition towards renewable sources of elevated inflation and tightening monetary factors which affect consumers This energy may place greater financial policy, both of which are exacerbated by represents a potential risk in the Group’s demands on oil and gas companies. the conflict in Ukraine and supply-chain UK corporate portfolio as a higher disruptions caused by the COVID-19 • Air travel: the sector struggled to probability of default exists for retailers, pandemic. A disruptive adjustment to resource for the recovery in lower hospitality providers and their landlords higher interest rate levels and margin (tourist) demand for air travel while these pressures remain. deteriorating trade and geopolitical evidenced in 2022 (after the drop in tensions could heighten market risks for • UK real estate: UK property represents a demand during the pandemic), and to the Group’s portfolios. significant portion of the Group's overall adjust to the structural decline in higher retail and corporate credit exposure and margin business travel. While this In addition, the Group’s trading business is the Group remains at risk of increased transition plays out, there remains a generally exposed to a prolonged period of heightened risk to the revenue streams impairment from a material fall in elevated asset price volatility, particularly if property prices. During 2021 and of the Group’s clients and, it adversely affects market liquidity. Such a continuing through the first half of 2022, consequentially, their ability to service scenario could impact the Group’s ability property prices rose, particularly in the debt obligations. Increasing concerns to execute client trades and may also residential property market where about the impact of air travel on climate result in lower client flow-driven income change will also influence consumer customers sought more space as home and/or market-based losses on its existing working became more prevalent. behaviour, representing additional risks portfolio of market risks. These can include However, rising mortgage interest rates for the sector. higher hedging costs from rebalancing and increasing economic concerns have risks that need to be managed dynamically The Group also has large individual reduced demand and borrowing as market levels and their associated exposures to single name counterparties, capacity which resulted in small house volatilities change. (such as brokers, central clearing houses, price decreases in Q4 2022. This is likely dealers, banks, mutual and hedge funds Changes in market conditions could have a to continue in 2023, especially in London and other institutional clients) both in its material adverse effect on the Group’s and the South East of the UK where the lending and trading activities, including business, results of operations, financial Group has a high exposure. Additionally, derivative trades. The default of one such condition and prospects. as mortgages roll off existing rates and counterparty could cause contagion For further details on the Group’s approach to onto new rates at higher levels, there is a across clients involved in similar activities + market risk, refer to the market risk management and risk of increasing borrower defaults market risk performance sections. and/or adversely impact asset values which could then put further downward should margin calls necessitate rapid asset iv) Treasury and capital risk pressure on property prices and in turn disposals by that counterparty to raise impact the Group’s impairment and There are three primary types of treasury liquidity. In addition, where such capital position. Furthermore, small and capital risk faced by the Group: counterparty risk has been mitigated by segments of the housing market could taking collateral, credit risk may remain a) Liquidity risk be subject to specific valuation impacts high if the collateral held cannot be Liquidity risk is the risk that the Group is (for example, certain properties within monetised, or has to be liquidated at prices unable to meet its contractual or the Group's residential loan portfolio which are insufficient to recover the full contingent obligations or that it does not may be subject to remediation activities amount of the loan or derivative exposure. have the appropriate amount, tenor and relating to fire safety standards). The Any such defaults could have a material composition of funding and liquidity to Group’s corporate exposure is adverse effect on the Group’s results due support its assets. This could cause the vulnerable to a deteriorating economic to, for example, increased credit losses Group to fail to meet regulatory and/or environment and (for offices in and higher impairment charges. internal liquidity requirements, make particular) post COVID-19 pandemic repayments of principal or interest as they For further details on the Group’s approach to credit structural shifts, such as the + risk, refer to the credit risk management and credit risk fall due or to support day-to-day business performance sections. normalisation of remote working. activities. Key liquidity risks that the Group Landlords serving discretionary faces include: consumer spending sector tenants are • Stability of the Group’s deposit funding also at risk from reduced rent collection. profile: deposits which are payable on • Leveraged finance underwriting: the demand or at short notice could be Group takes on non-investment grade adversely affected by the Group failing underwriting exposure, including single to preserve the current level of name risk, particularly in the US and the customer and investor confidence or as UK. The Group is exposed to credit