Barclays 2011 Annual Report Download - page 77

1. Credit risk
Credit Risk is the risk of the Group suffering financial loss if any of its
customers, clients or market counterparties fails to fulfil their contractual
obligations to the Group.
The credit risk that the Group faces arises mainly from wholesale and
retail loans and advances together with the counterparty credit risk arising
from derivative contracts entered into with its clients. Other sources of
credit risk arise from trading activities, including debt securities,
settlement balances with market counterparties, available for sale assets
and reverse repurchase loans. It can also arise when an entity’s credit
rating is downgraded, leading to a fall in the value of Barclays investment
in its issued financial instruments.
Risk management
The Board and management have established a number of key
committees to review credit risk management, approve overall Group
credit policy and resolve all significant credit policy issues. These comprise:
the BRC, the Financial Risk Committee, the Wholesale Credit Risk
Management Committee and the Retail Credit Risk Committee.
Barclays constantly reviews its concentration in a number of areas
including, for example, portfolio segments, geography, maturity, industry
and credit rating.
Diversification is achieved through setting maximum exposure guidelines
and mandate and scale limits to portfolio segments, individual
counterparties, sectors and countries, with excesses reported to the
Financial Risk Committee and the BRC.
For further information see Credit Risk Management (pages 79 to 120).
Key specific risks and mitigation
Specific areas and scenarios where credit risk could lead to higher
impairment charges in future years include:
Sovereign risk
Fiscal deficits continue to remain high, leading to high levels of public debt
in some countries at a time of modest GDP growth. This has led to a loss
of market confidence in certain countries to which the Group is exposed
causing deteriorating sovereign credit quality, particularly in relation to
debt servicing and refinancing. The Group has put certain countries on
watch list status with detailed monthly reporting to the Wholesale Credit
Risk Management Committee.
For further information see Group exposures to selected Eurozone
countries (pages 112 to 120).
Economic weakness
The implementation of austerity measures to tackle high levels of public
debt has negatively impacted economic growth and led to rising
unemployment in some European countries and the monetary, interest
rate and other policies of central banks and regulatory authorities may also
have a significant adverse effect on a number of countries in which the
Group operates.
The threat of weaker economies in a number of countries in which the
Group operates could lead to even higher increasing levels of
unemployment, rising inflation, potentially higher interest rates and falling
property prices. For example, the Spanish and Portuguese housing sectors
continue to be depressed, impacting the Group’s wholesale and retail
credit risk exposures.
The Group has experienced elevated impairment across its operations in
these two regions, although impairment in Spain decreased in 2011,
following a marked reduction in construction activity and shrinking
consumer spending. The Group has reduced its credit risk appetite to the
most severely affected segments of the economy. In Spain, new lending to
the property and construction sector ceased and workout team resources
have been increased significantly.
In addition, if funding capacity in either the wholesale markets or central
bank operations were to change significantly, liquidity shortages could
result which may lead to increased counterparty risk with other financial
institutions. This could also have an impact on refinancing risks in the
corporate and retail sectors. The Group continues to actively manage this
risk including through its extensive system of Mandate and Scale limits.
For further information see Retail Credit Risk and Wholesale Credit Risk
(pages 96 to 103).
Eurozone crisis
Concerns about credit risk (including that of sovereigns) and the Eurozone
crisis remain very high. The large sovereign debts and/or fiscal deficits of a
number of European countries have raised concerns regarding the
financial condition of financial institutions, insurers and other corporates
(i) located in these countries; (ii) that have direct or indirect exposure to
these countries (both to sovereign debt and private sector debt); and/or
(iii) whose banks, counterparties, custodians, customers, service
providers, sources of funding and/or suppliers have direct or indirect
exposure to these countries. The default, or a further decline in the credit
rating, of one or more sovereigns or financial institutions could cause
severe stress in the financial system generally and could adversely affect
the markets in which the Group operates and the businesses, economic
condition and prospects of the Group’s counterparties, customers,
suppliers or creditors, directly or indirectly, in ways which it is difficult
to predict.
For further information see Group exposures to selected Eurozone
countries (pages 112 to 120).
Credit market exposures
Barclays Capital holds certain exposures to credit markets that became
illiquid during 2007. These exposures primarily relate to commercial real
estate and leveraged finance loans. The Group continues to actively
manage down these exposures.
For further information see Barclays Capital Credit Market Exposures
(pages 110 to 111).
Barclays PLC Annual Report 2011 www.barclays.com/annualreport 75
The strategic report Governance Risk management Financial review Financial statements Shareholder information