Barclays 2003 Annual Report Download - page 43

Barclays PLC Annual Report 2003 41
Credit Risk Management
Credit risk arises because the Group’s customers, clients
or counterparties may not be able or willing to fulfil their
contractual obligations under loan agreements or other
credit facilities.
The taking of credit risk is central to our business. At the year end,
Barclays had £291,820m (2002: £263,648m) of loans and advances
and also other credit risks. The annual credit risk expense of £1,347m
(2002: £1,484m) exceeds the risk-taking cost associated with all other
risk types combined. Therefore considerable resources, expertise and
controls are devoted to managing credit risk.
Credit Risk Control
The central objective of credit risk management at Barclays is to create
shareholder value by ensuring that the net income generated by each
exposure individually and in aggregate is commensurate with the risk
taken. At Barclays, this is primarily achieved through People and Systems:
People with the skill and experience needed for this task working within
the Group Risk Governance Framework.
Systems, including advanced analytics, to measure, monitor and analyse
the risk and inform management judgement.
People: Credit Risk Management Responsibility
Barclays recognises that the taking of credit risk involves judgement,
skill and knowledge.
The Group’s approach to managing credit risk is consistent with the
Governance framework described previously but varies in execution
according to the specific nature of the risk in each of the businesses.
In retail businesses, such as Barclaycard and Personal Financial
Services, where there are large numbers of customers, a systems
driven environment prevails. Credit decisions are made with the aid of
statistically based scoring systems. Account management is likewise
automated. Both application scoring for new accounts and behavioural
scoring for existing relationships are used. These systems measure risk
using statistical methodologies derived from the wealth of information
and experience Barclays has gained through its relationships with over
14 million customers.
Small business credit risk is managed like consumer accounts using
scoring systems. Mid-range business credits are approved and reviewed
according to a hierarchy of discretions, under which limits are set
according to the skills, experience and seniority of the credit managers
and sanctioning teams. They are assisted by analytical models – credit
grading tools – that help to assess the quality of the borrower.
Large value wholesale credits are similarly handled by experienced front-
line risk management staff – also equipped with analytical tools – who
work alongside relationship management teams. Decisions must be
referred to the Group Credit Committee if the intended exposures
exceed specified limits. Besides loans, the credit risks include those
arising from money market, foreign exchange, derivative, securities
dealing and other products.
In each business, specialist teams deal with impaired credits.
As mentioned in the preceding section, the risk management teams are
accountable to the Business Risk Directors in each business who, in turn,
report to the head of their business and also to the Group Risk Director.
In addition, Group Credit Risk, led by the Group Credit Risk Director,
provides Group-wide direction of credit risk-taking. Group Credit Risk
manages resolution of all significant credit policy issues and runs the
Group Credit Committee which approves major credit decisions. The
Group Credit Risk Director reports to the Group Financial Risk Director,
a new role introduced in 2003, who reports to the Group Risk Director.
The Group Financial Risk Director has responsibility for both credit and
market risk.
Regular reports are provided to the Group Risk Oversight Committee to
enable it to discharge its responsibilities.
Systems: Credit Risk Measurement and Analysis
Data and analytical tools are integral to risk management. Barclays has
been in the forefront of the development and use of advanced credit risk
systems. These systems assist the bank in managing credit risk, both in
front-line credit decisions on new commitments and in managing the
portfolio of existing exposures. They enable the application of consistent
risk measurements across all credit exposures, retail and wholesale. The
key building blocks, described below, are the probability of customer
default (expressed through an internal risk rating), severity, and
exposure in the event of default.
Internal risk ratings
Internal risk ratings are used to assess the credit quality of borrowers.
Each internal rating corresponds to a probability of default, which is the
statistical probability of a customer defaulting within a 12-month period.
This internal rating is derived from different sources depending upon the
borrower, e.g. internal model or credit rating agency. The table below
shows Barclays internal ratings and the associated expected probabilities
of default.
Where internal models are used, they are based upon up-to-date
account, market and financial information. The models are reviewed
regularly to monitor their robustness relative to actual performance
and revised as necessary to optimise their effectiveness.
Barclays credit ratings
Barclays
Internal Probability of Default
Rating Minimum Maximum Mid Point
1.2 0.02% 0.04% 0.025%
1.5 0.05% 0.09% 0.075%
1.8 0.10% 0.14% 0.125%
2.1 0.15% 0.19% 0.175%
2.5 0.20% 0.24% 0.225%
2.8 0.25% 0.29% 0.275%
3 0.30% 0.59% 0.450%
4 0.60% 1.19% 0.900%
5 1.20% 2.49% 1.850%
6 2.50% 4.99% 3.750%
7 5.00% 9.99% 7.500%
8 10.00%+ – 15.000%
Risk Management
Credit Risk Management