Barclays 2006 Annual Report Download - page 82

Barclays PLC
Annual Report 2006
78
Credit risk mitigation
The Group uses a wide variety of techniques to reduce credit risk on its
lending. The most basic of these is performing an assessment of the
ability of a borrower to service the proposed level of borrowing without
distress. In addition, the Group commonly obtains security for the funds
advanced, such as in the case of a retail or commercial mortgage, a
reverse repurchase agreement, or a commercial loan with a floating
charge over book debts and inventories. The Group also uses various
forms of specialised legal agreements to reduce risk, including netting
agreements which permit it to offset positive and negative balances
with customers in certain circumstances to minimise the exposure at
default, financial guarantees, and the use of covenants in commercial
lending agreements. Other techniques include the use of credit
derivatives and other forms of credit protection.
Barclays manages the diversification of its portfolio to avoid unwanted
credit risk concentrations. This takes several dimensions. Maximum
exposure guidelines are in place relating to the exposures to any
individual counterparty. These permit higher exposures to highly rated
borrowers than to lower rated borrowers.
They also distinguish between types of counterparty, for example,
between sovereign governments, banks and corporations. Excesses are
considered individually at the time of credit sanctioning, are reviewed
regularly, and are reported to the Risk Oversight Committee and the
Board Risk Committee.
Similarly, country risk policy specifies Risk Appetite by country and
avoids excessive concentrations of credits in individual countries.
Finally, there are policies that limit lending to certain industries, for
example, commercial real estate.
Barclays actively manages its credit exposures. When weaknesses in
exposures are detected – either in individual exposures or in groups of
exposures – action is taken to mitigate the risks. These include steps to
reduce the amounts outstanding (in discussion with the customers,
clients or counterparties if appropriate), the use of credit derivatives
and, sometimes, the sale of the loan assets. Credit derivatives are traded
for profit and are used for managing credit exposures. Details of these
activities may be found in the statistical section (page 101) and Note 52
to the accounts.
Country risk
Country grades
Country risk grades are assigned to all countries where the Group has,
or is likely to have, exposure and are reviewed every quarter to ensure
they remain appropriate. Country grades, which are derived from
long-term sovereign foreign currency ratings, range from 1 (lowest
probability of default) to 21 (highest probability of default). A ceiling is
applied where a country is graded 12 or worse so that the counterparty
cannot be graded better than the country, unless some form of
protection is available in the event of a cross-border event, such as a
significant portion of a counterparty’s assets or income being held or
generated in hard currency.
Country risk appetite
To manage exposure to country risk the Group uses two country limits:
the Prudential Guideline and the Country Guideline. The Prudential
Guideline is identified through the strict mapping of a country grade to
derive a model-driven acceptable level of loss given default. The
Country Guideline for all graded countries is set by the Group Credit
Committee (GCC) based on the Prudential Guideline and the internal
appetite for country risk. The Country Guideline may therefore be above
or below the Prudential Guideline.
Measuring country risk
Country risk is managed through the application of Country Loss Given
Default (CLGD). All cross-border or domestic foreign currency
transactions incur CLGD from the Country Guideline agreed at GCC.
The level of CLGD incurred by a counterparty transaction will largely
depend on three main factors: the country severity, the product severity
and counterparty grade.
CLGD is incurred in the country of direct risk, defined as where the
majority of operating assets are held. This may be different to the
country of incorporation. However, where transactions are secured with
collateral, the country risk can be transferred from the country of the
borrower to the country of the collateral provider. This is only permitted
where the collateral definitely covers the borrowing and is not expected
to decrease over time.
Country executives
Country Managers are in place for all countries where the Group has
exposure and they, under the direction of GCC, have responsibility for
allocating country risk to individual transactions. The total allocation
of country limits is monitored on a daily basis by Group Credit Risk, as
headed by the Group Credit Risk Director. Discretions exist to increase
the Country Guideline above the level agreed by GCC where the Country
Guideline is below the Prudential Guideline. All requests to increase the
Country Guideline in line with individual discretions must be submitted
to and applied centrally through Group Credit Risk.
Credit concentration
A concentration of credit risk exists when a number of counterparties
are engaged in similar activities and have similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions.
The Risk Oversight Committee has delegated responsibility for
management of retail exposure, which comprises personal lending
(including small businesses), mortgages and credit cards, to the Group
Retail Credit Risk Management Committee (RCRMC) and wholesale
exposure, which comprises lending to businesses, banks and other
financial institutions to the Group Wholesale Credit Risk Management
Committee (WCRMC). The RCRMC, considers, among others metrics,
the ratio of loan to value for home loans and the exposure by the
Barclays Retail Grade (BRG) of the customer, whilst the WCRMC
monitors exposure by country and by industry sector and individual
large exposures and exposures to sub-investment grade countries.
A further protection against undesirable concentration of risk is the
mandate and scale framework described on page 73. Mandate and
scale limits, which can also be set at Group level to reflect overall risk
appetite, can relate either to the stock of current exposures in the
relevant portfolio or to the flow of new exposures into that portfolio.
Typical limits include the caps on UK commercial investment property
lending, the proportion of lending with maturity in excess of seven years
and the proportion of new mortgage business that is buy-to-let.
The concentrations of credit exposure described in the next section
(Risk management: loans and advances to customers) and in the
statistical sections are not proportionally related to credit loss. Some
segments of the Group’s portfolio have and are expected to have
proportionally higher credit charges in relation to the exposure than
others. Moreover, the volatility of credit loss is different in different parts
of the portfolio. Thus comparatively large credit impairment charges
could arise in parts of the portfolio not mentioned below.
Risk management
Credit risk management