Barclays 2007 Annual Report Download - page 246

Notes to the accounts
For the year ended 31st December 2007
244 Barclays PLC Annual Report 2007
47 Credit risk (continued)
Businesses may put in place other forms of credit risk mitigation, such as credit derivatives or other forms of credit protection in accordance with their
procedures or policies. Hedges and mitigants are monitored and risk appetite reviewed to ensure that credit risk is kept to acceptable levels.
Collateral and security
Collateral and security can be an important mitigant of credit risk.
The Group routinely obtains collateral and security, such as in the case of a residential or commercial mortgage, a reverse repurchase agreement, or a
commercial loan with a floating charge over book debts and inventories.
The Group ensures that any collateral held is sufficiently liquid, legally effective, enforceable and regularly reassessed. Before attaching value to collateral,
businesses holding specific, agreed classes of collateral must ensure that they are holding a correctly perfected charge.
The principal collateral and security types are as follows:
– Personal lending – mortgages over residential properties;
– Commercial and industrial sector – charges over business assets such as premises, stock and debtors, and third party credit protection
(i.e. guarantees);
– Commercial real estate sector – charges over the properties being financed; and,
– Over-The-Counter (OTC ) trading exposures – cash; direct debt obligation government (G14+) bonds denominated in the domestic currency of the
issuing country, debt issued by supranationals and letters of credit issued by an institution with a long-term unsecured debt rating of A+/A3 or better.
Valuation of the collateral and security taken is within agreed parameters.
Before reliance is placed on third party protection in the form of bank, government or corporate guarantees or credit derivative protection from financial
intermediary counterparties, a credit assessment is undertaken. Eligibility parameters for guarantees and credit derivative are similar to those applied to
collateral held against OTC traded exposures.
Any collateral taken in respect of OTC trading exposures will be subject to a ‘haircut’ which is negotiated at the time of signing the collateral agreement.
A haircut is the valuation percentage applicable to each type of collateral and will be largely based on liquidity and price volatility of the underlying security.
The Group also uses various forms of specialised legal agreements to reduce risk, including entering into master netting agreement with counterparties,
which the Group uses to restrict its exposure to credit losses. Group policy requires all netting arrangements to be legally documented. The ISDA Master
Agreement is the Group’s preferred agreement for documenting OTC activity. It provides the contractual framework within which dealing activities across
a full range of OTC products are conducted and contractually binds both parties to apply close-out netting across all outstanding transactions covered by
an agreement if either party defaults or other pre-determined events occur. In the normal course of events, where the master agreement is ISDA, the
collateral document will be the ISDA Credit Support Annex (CSA). The collateral document must give Barclays the power to realise any collateral placed
with it in the event of the failure of the counterparty, and to place further collateral when requested or in the event of insolvency, administration or similar
processes, as well as in the case of early termination.
Security structures and legal covenants are subject to regular review, at least annually, to ensure that they remain fit for purpose and remain consistent
with accepted local market practice.
Any properties repossessed are made available for sale in an orderly and timely fashion, with any proceeds realised being used to reduce or repay the
outstanding loan. For business customers, in some circumstances,where excess funds are available after repayment in full of the outstanding loan, they
are offered to any other, lower ranked, secured lenders. Any additional funds are returned to the customer. Barclays does not, as a rule, occupy
repossessed properties for its business use.
Maximum exposure to credit risk before collateral held or other credit enhancements
For financial assets recognised on the balance sheet, the exposure to credit risk equals their carrying amount. For financial guarantees granted, the
maximum exposure to credit risk is the maximum amount that Barclays would have to pay if the guarantees were to be called upon. For loan commitments
and other credit related commitments that are irrevocable over the life of the respective facilities, the maximum exposure to credit risk is the full amount
of the committed facilities.
The following table presents the maximum exposure at 31 December 2007 and 2006 to credit risk of balance sheet and off balance sheet financial
instruments, before taking account of any collateral held or other credit enhancements and after allowance for impairment and netting where appropriate.