Barclays 2011 Annual Report Download - page 90

Risk management
Credit risk continued
E. Monitoring weaknesses in portfolios
Whilst the basic principles for monitoring weaknesses in wholesale and
retail exposures are broadly similar, they will reflect the differing nature
of the assets. As a matter of policy all facilities granted to corporate or
wholesale customers are subject to a review on, at least, an annual basis,
even when they are performing satisfactorily.
Corporate accounts that are deemed to contain heightened levels of risk
are recorded on graded early warning lists (EWLs) or watchlists (WLs)
comprising three categories graded in line with the perceived severity of
the risk attached to the lending, and its probability of default. Examples of
heightened levels of risk may include, for example: a material reduction in
profits; a material reduction in the value of collateral held; a decline in net
tangible assets in circumstances which are not satisfactorily explained; or
periodic waiver requests or changes to the terms of the credit agreement
over an extended period of time. These lists are updated monthly and
circulated to the relevant risk control points. Once an account has been
placed on WL or EWL, the exposure is carefully monitored and, where
appropriate, exposure reductions are effected. Should an account become
impaired, it will normally, but not necessarily, have passed through each
of the three categories, which reflect the need for increasing caution and
control. Where an obligor’s financial health gives grounds for concern,
it is immediately placed into the appropriate category. While all obligors,
regardless of financial health, are subject to
a full review of all facilities on, at least, an annual basis, more frequent
interim reviews may be undertaken should circumstances dictate.
Specialist recovery functions deal with clients in default, collection or
insolvency. Their mandate is to maximise shareholder value via the orderly
and timely recovery of impaired debts.
Within the retail portfolios, which tend to comprise homogeneous assets,
statistical techniques more readily allow potential weaknesses to be
monitored on a portfolio basis. The approach is consistent with the
Group’s policy of raising a collective impairment allowance as soon as
objective evidence of impairment is identified. Retail accounts can be
classified according to specified categories of arrears status (or cycle),
which reflects the level of contractual payments which are overdue on
a loan.
The probability of default increases with the number of contractual
payments missed, thus raising the associated impairment requirement.
Once a loan has passed through all six cycles it will charge-off and enter
recovery status. In most cases, charge-off will result in the account
moving to a legal recovery function or debt sale. This will typically occur
after an account has been treated by a collections function. However, in
certain cases, an account may be charged off directly from a performing
(up to date) status, such as in the case of insolvency or death.
Monitoring weaknesses in portfolios
Business Support
EWL 3, WL 3.5
Delinquent (Collections)
Arrears Status 1-6
Write Off
Wholesale account status Retail account status
Increasing state of delinquency Increasing state of delinquency
– Watchlist Committee flags
client on the basis of evidence
of financial difficulty.
– Business support assists
the client to return to in
order position.
– Customer misses contractual
payment and moves to
collections function.
– Customer pays total overdue
payments and returns back
to in order position.
– Customer’s financial difficulty
requires a decision on the
form of future relationship.
– Customer reaches high
arrears status and is moved
to the recovery function
where legal action is taken.
Default (Recovery) Default (Charge-off ) (Recovery)
Arrears Status 6+
– Asset is considered
irrecoverable and is
written off.
– Asset is considered
irrecoverable and is
written off.
Performing (Current)
Areas Status 0
Performing
Including EWL 1-2, WL 1-3
88 Barclays PLC Annual Report 2011 www.barclays.com/annualreport