Barclays 2007 Annual Report Download - page 97

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Business review
Barclays PLC Annual Report 2007 95
The Risk Oversight Committee has delegated and apportioned
responsibility for risk management to the Retail and Wholesale Credit Risk
Management Committees.
The Retail Credit Risk Management Committee (RCRMC) oversees
exposures, which comprise unsecured personal lending (including small
businesses), mortgages and credit cards. The RCRMC monitors the risk
profile and performance of the retail portfolios by receipt of key risk
measures and indicators at an individual portfolio level, ensuring mitigating
actions taken to address performance are appropriate and timely. Metrics
reviewed will consider portfolio composition at both an overall stock and
new flow level.
The Wholesale Credit Risk Management Committee (WCRMC) oversees
wholesale exposures, comprising lending to businesses, banks and other
financial institutions. The WCRMC monitors exposure by country, industry
sector, individual large exposures and exposures to sub-investment
grade countries.
Country concentrations are addressed through the country risk policy,
which specifies Risk Appetite by country and avoids excessive
concentrations of credits in individual countries. Country risk grades are
assigned to all countries where the Group has, or is likely to have, exposure
and are reviewed regularly to ensure they remain appropriate.
Country grades, which are derived from long-term sovereign foreign
currency ratings, range from 1 (lowest probability of default) to 21
(highest probability of default). A ceiling is applied where a country is
graded 12 or worse so that the counterparty cannot receive a higher risk
grading than the country, unless some form of protection is available
in the event of a cross-border event, such as a significant portion of a
counterparty’s assets or income being held or generated in hard currency.
To manage exposure to country risk, the Group uses two country limits:
the Prudential Guideline and the Country Guideline. The Prudential
Guideline is identified through the strict mapping of a country grade to
derive a model-driven acceptable level of loss given default. The Country
Guideline for all graded countries is set by the Group Credit Committee
(GCC) based on the Prudential Guideline and the internal appetite for
country risk. The Country Guideline may therefore be above or below
the Prudential Guideline.
Country risk is managed through the application of Country Loss Given
Default (CLGD). All cross-border or domestic foreign currency transactions
incur CLGD from the Country Guideline agreed at GCC. The level of CLGD
incurred by a counterparty transaction will largely depend on three main
factors: the country severity, the product severity and counterparty grade.
CLGD is incurred in the country of direct risk, defined as where the
majority of operating assets are held. This may differ from the country
of incorporation. However, where transactions are secured with collateral,
the country risk can be transferred from the country of the borrower to
the country of the collateral provider. This is only permitted where the
collateral covers the borrowing and is not expected to decrease over time.
Country Managers are in place for all countries where the Group has
exposure and they, under the direction of GCC, have responsibility for
allocating country risk to individual transactions. The total allocation of
country limits is monitored on a daily basis by Group Credit Risk, as headed
by the Group Credit Risk Director. Discretions exist to increase the Country
Guideline above the level agreed by GCC where the Country Guideline is
below the Prudential Guideline. All requests to increase the Country
Guideline in line with individual discretions must be submitted to and
applied centrally through Group Credit Risk.
A further mitigant against undesirable concentration of risk is the
mandate and scale framework described on page 86. 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 caps on UK commercial investment property lending, the proportion
of lending with maturity in excess of seven years and the proportion of
new mortgage business that is buy-to-let.
Concentrations of credit exposure described in this credit risk management
section and the following statistical section are not proportionally related
to credit loss. Some segments of the Group’s portfolio have and are expected
to have proportionally higher credit charges in relation to the exposure
than others. Moreover, the volatility of credit loss is different in different
parts of the portfolio. Thus, comparatively large credit impairment charges
could arise in parts of the portfolio not mentioned here.
Securitisations
In the course of its business, Barclays undertakes securitisations of its
own originated assets as well as the securitisation of third party assets
via sponsored conduit vehicles and shelf programmes.
Barclays securitises its own originated assets in order to remove risk from
the Group’s credit position, to obtain regulatory capital relief, and to obtain
term liquidity for the Group balance sheet.
For these transactions Barclays adopts the following roles in the
securitisation process:
– Originator of securitised assets
– Executor of securitisation trades including bond marketing and
syndication
– Provider of securitisation trade servicing, including data management,
investor payments and reporting
Barclays also acts as an administrator and manager of multi-seller conduits
through which interests in third-party-originated assets are securitised
and funded via the issuance of asset backed commercial paper.
In relation to such conduit activity, Barclays may also provide all or a
portion of the backstop liquidity to the commercial paper, programme-
wide credit enhancement and, as appropriate, interest rate and foreign
currency hedging facilities.
RWAs reported for securitised assets as at December 2007 are calculated
in line with rules set out in IPRU (BANK) as well as any individual guidance
received from the FSA as at the end of this period.
As of 1st January 2008, Barclays calculates securitisation RWAs using
the ratings based approach and/or the supervisory formula method as
per the FSA’s revised rules, which implement the Basel Accord and Capital
Requirements Directive.
Further information about securitisation activities and accounting
treatment is in Note 29. The Group’s accounting policies, including
those relevant to securitisation activities (policies 4 and 10), are on
pages 165 and 168.
Barclays employs External Credit Assessment Institutions to provide
ratings for its asset backed securities. Their use is dependant on the
transaction or asset class involved. For existing transactions, we employ
Standard & Poor’s, Moody’s and Fitch for securitisations of corporate,
residential mortgage and other retail exposures and Standard & Poor’s
and Moody’s only for securitisations of small and medium-sized entity
and revolving retail exposures.