Barclays 2006 Annual Report Download - page 85

Barclays PLC
Annual Report 2006 81
Operating review
1
Risk management
Other credit risks
Other credit risks
In addition to drawn loans and advances, Barclays is exposed to other
credit risks. These exposures comprise loan commitments, contingent
liabilities, debt securities and other exposures arising in the course of
trading activities. The risks are managed in a similar way to those in
loans and advances, and are subject to the same or similar approval and
governance processes.
The nature of the credit risks among these exposures differ
considerably.
•Loan commitments may become funded loans and the risks are thus
similar to loans.
•Contingent liabilities (guarantees, assets pledged as security,
acceptances and endorsements) historically experience low loss
rates.
•Losses arising from exposures held for trading (derivatives, debt
securities) are accounted for as trading losses, rather than credit
charges, even though the fall in value causing the loss may be
attributable to credit deterioration.
Further details of these exposures are shown in the tables below and
Note 39 to the accounts. The most notable other credit risks are to
guarantees and irrevocable loan commitments, to settlement risk and
to debt securities.
Guarantees and irrevocable loan commitments
The Group is exposed to loss through the financial guarantees it issues
to clients and commitments to provide loan finance which cannot be
withdrawn once entered in to. The credit risks associated with such
contracts are managed in a similar way to loans and advances, and
form part of the exposure at default measure.
Settlement risk
Barclays is exposed to settlement risk in its dealings with other financial
institutions. These risks arise, for example, in foreign exchange
transactions when Barclays pays away its side of the transaction to
another bank or other counterparty before receiving payment from the
other side. The risk is that the counterparty may not meet its obligation.
While these exposures are of short duration, they can be large. In recent
years settlement risk has been reduced by several industry initiatives
that have enabled simultaneous and final settlement of transactions to
be made (such as payment-versus-payment through Continuous
Linked Settlement and delivery-versus-payment).
Barclays has worked with its peers in the development of these
arrangements. Increasingly the majority of high value transactions are
settled by such mechanisms. Where these mechanisms are not
available, the risk is addressed by dealing predominantly with highly
rated counterparties, holding collateral and limiting the size of the
exposures according to the rating of the counterparty, with smaller
exposures to those of higher risk.
Debt securities
Managing the risks associated with debt securities differs in two
important respects from the process for loans. Firstly, a market price is
generally available for a bond or other debt security, which gives a good
indicator of creditworthiness. The financial position of the issuer still
needs to be assessed and monitored, just as with the borrower of a loan.
Moreover, care needs to be taken when using market price as a proxy for
credit risk. To give a simple example, if a bond pays a coupon lower than
equivalent market yields, it will tend to trade at below par (say 98 rather
than 100) so as to realign the yield to market levels. In this case, the
market is not expecting a credit loss of 2% of the face value of the bond.
A second key difference is that many debt securities are rated by
independent rating agencies, giving a further indicator of credit quality.
However, even with continuous monitoring by the rating agencies, there
is often a lag between a credit event and rerating. So, while useful,
external ratings can only inform and are not a substitute for the credit
assessment undertaken for each exposure by Barclays, using its own
grading system (see page 78).
Other commercial commitments
Amount of commitment expiration per period
Between Between Total
Less than one to three to After amounts
one year three years five years five years committed
£m £m £m £m £m
Acceptances and endorsements 281 6 – – 287
Guarantees and letters of credit pledged as collateral security 23,130 1,966 4,048 2,108 31,252
Other contingent liabilities 5,364 1,016 498 1,002 7,880
Documentary credits and other short-term trade related transactions 393 21 – – 414
Forward asset purchases and forward deposits placed 304 – – 56 360
Standby facilities, credit lines and other 146,996 17,998 27,529 12,207 204,730
Contractual obligations
Payments due by period
Between Between
Less than one to three to After
one year three years five years five years Total
£m £m £m £m £m
Long-term debt 84,802 10,644 4,709 19,346 119,501
Operating lease obligations 344 659 491 2,057 3,551
Purchase obligations 183 186 313 5 687
Total 85,329 11,489 5,513 21,408 123,739
The long-term debt does not include undated loan capital of £5,442m.
Further information on the contractual maturity of the Group’s assets and liabilities is given in Note 56.