Barclays 2007 Annual Report Download - page 96

Risk management
Credit risk management
94 Barclays PLC Annual Report 2007
Risk tendency
In 2007, Risk Tendency increased 4% (£95m) to £2,355m (2006: £2,260m),
significantly less than the 23% growth in the Group’s loans and advances
balances. This relatively small rise in Risk Tendency reflected, in particular,
the improving risk profile of the UK unsecured loan book. Other factors
influencing Risk Tendency included: methodology changes in Barclaycard,
UK Retail Banking and International Retail and Commercial Banking – Absa;
the sale of the Monument portfolio; and a maturing credit risk profile in
the international card portfolios.
UK Retail Banking Risk Tendency decreased £30m to £470m (2006: £500m).
This reflected an improvement in the credit risk profile in the UK unsecured
consumer lending portfolios, partially offset by the impact of methodology
changes and asset growth.
Risk Tendency in Barclays Commercial Bank increased £15m to £305m
(2006: £290m). This reflected some growth in loan balances offset by
improvements in the credit risk profile.
Barclaycard Risk Tendency decreased £190m to £945m (2006: £1,135m).
This reflected improvement in the credit risk profile of UK cards, the sale
of part of the Monument portfolio and methodology changes in UK cards,
partially offset by asset growth in the international portfolios.
Risk Tendency at International Retail and Commercial Banking – excluding
Absa increased £145m to £220m (2006: £75m), reflecting an increase
to the risk profile and balance sheet growth in Emerging Markets and
Western Europe.
In International Retail and Commercial Banking – Absa, the increase of
£110m in Risk Tendency to £255m (2006: £145m) included a change to
the methodology following the introduction of Basel compliant, PD, EAD
and LGD models. Excluding this change, Risk Tendency increased £90m,
reflecting a weakening of retail credit conditions in South Africa after a
series of interest rate rises in 2006 and 2007 and balance sheet growth.
Risk Tendency in Barclays Capital increased £45m to £140m (2006: £95m)
primarily due to drawn leveraged loan positions. The drawn liquidity
facilities on ABS CDO Super Senior positions are classified as credit risk
loans and therefore no Risk Tendency is calculated on them.
Since Risk Tendency and impairment allowances are calculated for
different parts of the portfolio, for different purposes and on different
bases, Risk Tendency does not predict loan impairment.
Credit risk mitigation
The Group uses a wide variety of techniques to reduce credit risk on its
lending. The most basic of these is performing an assessment of the
ability of a borrower to service the proposed level of borrowing without
distress. In addition, the Group commonly obtains security for the funds
advanced, such as in the case of a retail or commercial mortgage, a reverse
repurchase agreement, or a commercial loan with a floating charge over
book debts and inventories. The Group ensures that the collateral held is
sufficiently liquid, legally effective, enforceable and regularly valued.
Various forms of collateral are held and commonly include cash in major
currencies; fixed income products including government bonds; Letters
of Credit; property, including residential and commercial; and other
fixed assets. For further discussion concerning credit risk mitigation,
see credit risk Note 47.
The Group actively manages its credit exposures and when weaknesses
in exposures are detected – either in individual exposures or in groups of
exposures – action is taken to mitigate the risks. These include steps to
reduce the amounts outstanding (in discussion with the customers,
clients or counterparties if appropriate), the use of credit derivatives and,
sometimes, the sale of the loan assets. (Credit derivatives may also be
traded for profit; details of these activities may be found on page 105 and
Note 14 to the accounts).
The Group also uses various forms of specialised legal agreements to
reduce risk, including netting agreements which permit it to offset
positive and negative balances with customers in certain circumstances
to minimise the exposure at default, financial guarantees, and the use
of covenants in commercial lending agreements.
Barclays manages the diversification of its portfolio to avoid unwanted
credit risk concentrations. A concentration of credit risk exists when a
number of counterparties are engaged in similar activities and have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
or other conditions.
Credit risk mitigation to address concentrations takes several dimensions.
Maximum exposure guidelines are in place relating to the exposures to
any individual counterparty. These permit higher exposures to highly 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.
07
06
Head office
functions
and other
operations a
Risk Tendency by business £m
10
470
500
0706 07
06
Barclays
Wealth
Barclays
Capital b
140
10
07
06
07
06
Barclays
Commercial
Bank
UK Retail
Banking
305
07
06
07
06
International
Retail &
Commercial
Banking
– ex Absa
International
Retail &
Commercial
Banking
– Absa
220
255
07
06
945
10
95
10
290
75
145
1,135
Barclaycard
Notes
aHead office functions and other operations comprises discontinued businesses
in transition.
bExcludes ABS CDO Super Senior positions as these are classified as credit risk loans
and therefore no Risk Tendency is calculated on them.