Barclays 2007 Annual Report Download - page 82

80 Barclays PLC Annual Report 2007
Risk management
Introduction
80 Barclays PLC Annual Report 2007
This risk section outlines Barclays approach to risk
management, explaining our objectives as well as the
high level policies, processes, measurement techniques
and controls that are used. This also presents our
summary information and disclosure on our portfolios
and positions. Consequent to the adoption of IFRS 7,
some of our risk disclosure is moved from this section
to the financial statements section of this report, as
described in our list of tables on page 77.
2007 Developments
Wholesale credit risk
The results of severe disruption in the US sub-prime mortgage market
were felt across many wholesale credit markets in the second half of 2007,
and were reflected in wider credit spreads, higher volatility, tight liquidity in
interbank and commercial paper markets, more constrained debt issuance
and lower investor risk appetite. Although impairment and other credit
provisions in Barclays Capital rose as a consequence of these difficult
sub-prime market conditions, our risks in these portfolios were identified
in the first half and management actions were taken to reduce limits and
positions. Further reductions and increased hedging through the rest of
the year continued to bring net positions down and limited the financial
effect of the significant decline in market conditions. Our ABS CDO
Super Senior positions were reduced during the year and our remaining
exposure reflected netting against writedowns, hedges, and subordination.
At the end of the year, market conditions remained difficult with reduced
liquidity in cash and securitised products, and reflected stress at some
counterparties such as the monoline insurers.
The international markets for Leveraged Finance were also disrupted
in 2007. The level of underwritten positions was steady during the
second half, with some small turnover in the portfolio. The vast majority
of positions held were senior tranches. Liquidity conditions at year
end remained constrained.
The Group’s wholesale credit risk profile in 2007 benefited from the
diversification available from the UK and international portfolios, which
grew by 14% and 41% respectively. The corporate credit risk profile
remained steady, with corporate credit ratings and watch list balances
broadly stable.
At Barclays Commercial Bank there was good growth in loans and
advances. The risk profile of the Larger Business portfolio remained stable
as early warning list balances, default rates and loan loss rates were steady.
There was no increase to exposure levels to leveraged finance during 2007
and limits were reduced.
Wholesale credit portfolio performance was steady in South Africa,
particularly for Absa’s most significant wholesale portfolios – agriculture,
property and sovereign lending – which were relatively unaffected during
2007 by interest rate rises compared with consumer-facing sectors and
retail portfolios. Relatively good performance in these sectors in 2007 was
reflected in a reduction in Absa’s wholesale impairment charge. After many
years of positive economic conditions in South Africa, the wholsesale
portfolios will be under more stress in current market conditions.
Loan loss rates across the Western Europe and Emerging Markets
wholesale businesses were stable in 2007. The Group continued to invest
in risk management infrastructure to support these businesses’ growth
initiatives in Dubai, India, Egypt and Italy.
Going into 2008, the credit environment reflects concern about weakening
economic conditions in our major markets. Credit spreads and other
indicators signal that the credit cycle has changed after a long period
of stability. We expect some deterioration in credit metrics as default
probabilities move toward their medium-term averages. This environment
has led to a more cautious approach to credit assessment, pricing and
ongoing control in the financial industry, which we believe will continue
through the year.