Barclays 2007 Annual Report Download - page 245

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Financial statements
Barclays PLC Annual Report 2007 243
47 Credit risk (continued)
Listed and unlisted debt securities and market counterparties where external ratings are available
External ratings Financial statements description
AAA, AA+, AA, AA-, A+, A, A-,BBB+, BBB, BBB- Strong
BB+, BB, BB-, B+, B Satisfactory
B-, CCC+, CCC and lower Weak / Substandard
Wholesale lending
Default Grade Financial statements description Probability of default
1-3 Strong 0.0-0.05%
4-5 0.05-0.15%
6-8 0.15-0.30%
9-11 0.30-0.60%
12-14 Satisfactory 0.60-2.15%
15-19 2.15-11.35%
20-21 Weak / Substandard 11.35% +
Retail lending
Barclays Retail Grade Financial statements description Probability of default
1Strong 0.0-0.15%
20.15-0.30%
30.30-0.60%
4-5 Satisfactory 0.60-2.50%
5-7 2.50-10.00%
8 Weak / Substandard 10.00% +
Financial statement descriptions can be summarised as follows:
Strong – there is a very high likelihood of the asset being recovered in full. If it is a debt security, then it will be investment grade.
Satisfactory – whilst there is a high likelihood that the asset will be recovered and therefore, of no cause for concern to the Group, the asset may not be
collateralised, or may relate to retail facilities, such as credit card balances and unsecured loans, which have been conservatively classified as satisfactory,
regardless of the fact that the output of internal grading models may have indicated a higher classification. At the lower end of this grade there are
customers that are being more carefully monitored, for example corporate customers which are indicating some evidence of some deterioration,
mortgages with a high loan to value ratio, and unsecured retail loans operating outside normal product guidelines.
Weak/Sub-standard – there is concern over the obligor’s ability to make payments when due. However, these have not yet converted to actual
delinquency. There may also be doubts over the value of collateral or security provided. However, the borrower or counterparty is continuing to make
payments when due and is expected to settle all outstanding amounts of principal and interest.
Credit risk mitigation, collateral, security, and other credit enhancements
The Group uses a wide variety of techniques to reduce credit risk on its lending. The most important of these is performing an assessment of the ability
of a borrower to service the proposed level of borrowing. Barclays policy is to establish that loans are within the customer’s capacity to repay, rather than
to rely excessively on security. As a result no security is required for a wide range of lending products.
Credit risk mitigation
Barclays actively manages its credit exposures. When weaknesses in exposures are detected – either in individual exposures or in groups of exposures –
the Group takes action to mitigate the risks. Such actions may, for example, include; reducing the amounts outstanding (in discussion with the customers,
clients or counterparties if appropriate); using credit derivatives securitising the assets; and, on occasion, selling them.
Barclays maintains the diversification of its portfolio to avoid unwanted credit risk concentrations. Maximum exposure guidelines are in place relating
to the exposures to any individual counterparty. These permit higher exposures to higher-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, whilst other policies
limit lending to certain industries.
A further protection against undesirable concentration of risk is the mandate and scale framework. 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 proportion of lending with maturity in excess of seven years and the proportion of new mortgage business that
is buy-to-let.