Citibank 2012 Annual Report Download - page 96

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CREDIT RISK
Credit risk is the potential for financial loss resulting from the failure of a
borrower or counterparty to honor its financial or contractual obligations.
Credit risk arises in many of Citigroup’s business activities, including:
•฀ wholesale and retail lending;
•฀ capital markets derivative transactions;
•฀ structured finance; and
•฀ repurchase agreements and reverse repurchase transactions.
Credit risk also arises from settlement and clearing activities, when Citi
transfers an asset in advance of receiving its counter-value, or advances funds
to settle a transaction on behalf of a client. Concentration risk, within credit
risk, is the risk associated with having credit exposure concentrated within a
specific client, industry, region or other category.
Credit Risk Management
Credit risk is one of the most significant risks Citi faces as an institution. As
a result, Citi has a well-established framework in place for managing credit
risk across all businesses. This includes a defined risk appetite, credit limits
and credit policies, both at the business level as well as at the firm-wide
level. Citi’s credit risk management also includes processes and policies
with respect to problem recognition, including “watch lists,” portfolio
review, updated risk ratings and classification triggers. With respect to Citi’s
settlement and clearing activities, intra-day client usage of lines is closely
monitored against limits, as well as against “normal” usage patterns. To
the extent a problem develops, Citi typically moves the client to a secured
(collateralized) operating model. Generally, Citi’s intra-day settlement and
clearing lines are uncommitted and cancellable at any time.
To manage concentration of risk within credit risk, Citi has in place a
concentration management framework consisting of industry limits, obligor
limits and single-name triggers. In addition, as noted under “Management
of Global Risk—Risk Aggregation and Stress Testing” above, independent
risk management reviews concentration of risk across Citi’s regions and
businesses to assist in managing this type of risk.
Credit Risk Measurement and Stress Testing
Credit exposures are generally reported in notional terms for accrual loans,
reflecting the value at which the loans are carried on the Consolidated
Balance Sheet. Credit exposure arising from capital markets activities is
generally expressed as the current mark-to-market, net of margin, reflecting
the net value owed to Citi by a given counterparty.
The credit risk associated with these credit exposures is a function of
the creditworthiness of the obligor, as well as the terms and conditions of
the specific obligation. Citi assesses the credit risk associated with its credit
exposures on a regular basis through its loan loss reserve process (see
“Significant Accounting Policies and Significant Estimates” and Notes 1
and 17 to the Consolidated Financial Statements below), as well as through
regular stress testing at the company-, business-, geography- and product-
levels. These stress-testing processes typically estimate potential incremental
credit costs that would occur as a result of either downgrades in the credit
quality, or defaults, of the obligors or counterparties.