Barclays 2008 Annual Report Download - page 88

86 Barclays PLC Annual Report 2008 |Find out more at www.barclays.com/annualreport08
Risk management
Credit risk management
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.
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.
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, as well as 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. Within wholesale credit risk, maximum exposure guidelines
are in place relating to the exposures to any individual counterparty. These
permit higher exposures to borrowers with higher ratings. They also
distinguish between types of counterparty, for example, between
sovereign governments, banks and corporations. Excesses to maximum
exposure guidelines 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.
‘Wrong way risk’ in a trading exposure arises when there is significant
correlation between the underlying asset and the counterparty which in the
event of default would lead to a significant mark to market loss.
When assessing the credit exposure of a wrong way trade, analysts
take into account the correlation between the counterparty and the
underlying asset as part of the sanctioning process. Adjustments to the
calculated CEE are considered on a case by case basis.
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,
other financial institutions and sovereigns. 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
and utilisation of country limits which specify Risk Appetite by country and
avoid 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 normally 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 country appetite. The Country
Guideline for all graded countries is set by the Credit Committee based on
the Prudential Guideline and the internal assessment of country risk. The
Country Guideline may therefore be above or below the Prudential
Guideline.
Country risk is calculated 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 Credit
Committee. 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 Credit Committee, 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 Credit Risk Director. Discretions exist to
increase the Country Guideline above the level agreed by Credit
Committee 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.