Barclays 2004 Annual Report Download - page 171

36 Contingent liabilities and commitments
In common with other banks, the Group conducts business involving acceptances, guarantees, performance bonds and indemnities. The majority
of these facilities are offset by corresponding obligations of third parties. In addition, there are other off balance sheet financial instruments,
including swaps, futures, forwards and option contracts or combinations thereof (all commonly known as derivatives), the nominal amounts of
which are not reflected in the consolidated balance sheet.
Following internationally accepted banking supervisory practice for the calculation of the credit risk associated with such non-derivative off
balance sheet items, for the purpose of this Note the contract or underlying principal amounts are either recognised at face value or converted
to credit risk equivalents by applying specified conversion factors.
Nature of instruments
For a description of the nature of derivative financial instruments, see page 71.
An acceptance is an undertaking by a bank to pay a bill of exchange drawn on a customer. The Group expects most acceptances to be presented,
but reimbursement by the customer is normally immediate. Endorsements are residual liabilities of the Group in respect of bills of exchange
which have been paid and subsequently rediscounted.
Guarantees and assets pledged as collateral security are generally written by a bank to support the performance of a customer to third parties.
As the Group will only be required to meet these obligations in the event of the customer’s default, the cash requirements of these instruments
are expected to be considerably below their nominal amounts.
Other contingent liabilities include transaction related customs and performance bonds and are, generally, short-term commitments to third
parties which are not directly dependent on the customer’s creditworthiness.
Commitments to lend are agreements to lend to a customer in the future, subject to certain conditions. Such commitments are either made for
a fixed period, or have no specific maturity but are cancellable by the lender subject to notice requirements.
Documentary credits commit the Group to make payments to third parties on production of documents, which are usually reimbursed
immediately by customers.
The following table summarises the nominal principal amount of contingent liabilities and commitments with off balance sheet risk as at
31st December 2004:
2004 2003
Contract or Contract or
underlying underlying
principal principal
amount amount
£m £m
Contingent liabilities
Acceptances and endorsements 303 671
Guarantees and assets pledged as collateral security 30,011 24,596
Other contingent liabilities 8,245 8,427
Off balance sheet credit risk 38,559 33,694
Commitments
Other commitments:
Arising out of sale and option to resell transactions 1–
Documentary credits and other short-term trade related transactions 522 359
Forward asset purchases and forward forward deposits placed 55 88
Undrawn formal standby facilities, credit lines and other commitments to lend:
Over one year 36,083 27,160
In one year or less 97,390 87,240
Off balance sheet credit risk 134,051 114,847
Current year credit card commitments to lend have been calculated on a contractual basis rather than a modelled basis. Had this method been
applied in 2003, reported commitments would have been increased by £5,899m to £120,746m.
As an active participant in international banking markets, the Group has a significant concentration of off balance sheet items with financial
institutions, as shown in Note 55.
For a further description of the nature and management of credit risks and market risks, see pages 44 to 85 of the Risk Management section.
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