Barclays 2007 Annual Report Download - page 102

Risk management
Credit risk management
100 Barclays PLC Annual Report 2007
Allowances for impairment and other credit provisions
Barclays establishes, through charges against profit, impairment allowances
and other credit provisions for the incurred loss inherent in the lending book.
Under IFRS, impairment allowances are recognised where there is
objective evidence of impairment as a result of one or more loss events
that have occurred after initial recognition, and where these events have
had an impact on the estimated future cash flows of the financial asset
or portfolio of financial assets. Impairment of loans and receivables is
measured as the difference between the carrying amount and the present
value of estimated future cash flows discounted at the financial asset’s
original effective interest rate. If the carrying amount is less than the
discounted cash flows, then no further allowance is necessary.
Impairment is measured individually for assets that are individually
significant, and collectively where a portfolio comprises homogenous
assets and where appropriate statistical techniques are available.
In terms of individual assessment, the trigger point for impairment is
formal classification of an account as exhibiting serious financial problems
and where any further deterioration is likely to lead to failure. Two key
inputs to the cash flow calculation are the valuation of all security and
collateral and the timing of all asset realisations, after allowing for all
attendant costs. This method applies in the corporate portfolios – Barclays
Commercial Bank, Barclays Capital and certain areas within International
Retail and Commercial Banking and Barclaycard.
For collective assessment, the trigger point for impairment is the missing
of a contractual payment. The impairment calculation is based on a roll-
rate approach, where the percentage of assets that move from the initial
delinquency to default are derived from statistical probabilities based on
experience. Recovery amounts and contractual interest rates are
calculated using a weighted average for the relevant portfolio. This
method applies to parts of International Retail and Commercial Banking,
Barclaycard and UK Banking and is consistent with Barclays policy of
raising an allowance as soon as impairment is identified.
Unidentified impairment allowances, albeit significantly lower in
amount than those reported above, are also raised to cover losses which
are judged to be incurred but not yet specifically identified in customer
exposures at the balance sheet date, and which, therefore, have not been
specifically reported.
The incurred but not yet reported calculation is based on the asset’s
probability of moving from the performing portfolio to being specifically
identified as impaired within the given emergence period and then on to
default within a specified period. This is calculated on the present value
of estimated future cash flows discounted at the financial asset’s original
effective interest rate.
The emergence periods vary across businesses and are based on actual
experience and are reviewed on an annual basis. This methodology ensures
that the Group only captures the loss incurred at the balance sheet date.
These impairment allowances are reviewed and adjusted at least quarterly
by an appropriate charge or release of the stock of impairment allowances
based on statistical analysis and management judgement.
Where appropriate, the accuracy of this analysis is periodically assessed
against actual losses.
As one of the controls of ensuring that adequate impairment allowances
are held, movements in impairment allowances to individual names above
£10m are presented to the Group Credit Committee for agreement.
The Group Credit Risk Impairment Committee (GCRIC), on a semi-annual
basis, obtains assurance on behalf of the Group that all businesses are
recognising impairment in their portfolios accurately and promptly in their
recommendations and in accordance with policy, accounting standards
and established governance.
GCRIC exercises the authority of the Barclays Risk Director, as delegated
by the Chief Executive, and is chaired by Barclays Credit Risk Director.
GCRIC reviews the movements to impairment in the businesses, including
those already agreed at Group Credit Committee, Potential Credit Risk
Loans and Risk Tendency.
These committees are supported by a number of Group Policies including:
Group Retail Impairment and Provisioning Policy; Group Wholesale
Impairment and Provisioning Policy; and, Group Model Policy.
GCRIC makes twice-yearly recommendations to the Board Audit
Committee on the adequacy of Group impairment allowances.
Impairment allowances are reviewed relative to the risk in the portfolio,
business and economic trends, current policies and methodologies and
our position against peer banks.
Fig. 16: Impairment charges for bad and doubtful debts
2007 2006 2005
£m £m £m
UK Banking 849 887 671
Barclaycard 838 1,067 753
International Retail and
Commercial Banking 252 167 33
Barclays Capital 846 42 111
Barclays Global Investors –––
Barclays Wealth 722
Head office functions and other operations 3(11) 1
Total impairment charges 2,795 2,154 1,571
03 04
a07
06
05
1,347
1,571
2,154
2,795
1,093
Fig. 17: Impairment/provisions charges over five years £m
UK GAAP IFRS
Notes
aDoes not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective
from 1st January 2005.