Barclays 2010 Annual Report Download - page 93

F. Measuring exposures and concentrations
Loans and advances to customers provide the principal source of credit
risk to the Group although Barclays can also be exposed to other forms
of credit risk through, for example, loans to banks, loan commitments
and debt securities. Barclays risk management policies and processes are
designed to identify and analyse risk, to set appropriate risk appetite, limits
and controls, and to monitor the risks and adherence to limits by means of
reliable and timely data. One area of particular review is concentration risk.
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 and other conditions. As a result, Barclays
constantly reviews its concentration in a number of areas including, for
example, geography, maturity and industry (see previous page).
Diversification is achieved through setting maximum exposure guidelines
to individual counterparties. Excesses are reported to the Group Risk
Oversight Committee and the Board Risk Committee. Mandate & Scale
limits are used to limit the stock of current exposures in a loan portfolio
and the flow of new exposures into a loan portfolio. Limits are typically
based on the nature of the lending and the amount of the portfolio
meeting certain standards of underwriting criteria.
G. Monitoring weaknesses in portfolios
Whilst the basic principles for monitoring weaknesses in wholesale and
retail exposures are broadly similar, they will reflect the differing nature
of the assets. As a matter of policy all facilities granted to corporate or
wholesale customers are subject to a review on, at least, an annual basis,
even when they are performing satisfactorily.
Corporate accounts that are deemed to contain heightened levels of risk
are recorded on graded early warning lists or watchlists comprising three
categories graded in line with the perceived severity of the risk attached
to the lending, and its probability of default. These are updated monthly
and circulated to the relevant risk control points. Once an account has
been placed on watchlist (WL) or early warning list (EWL), the exposure
is carefully monitored and, where appropriate, exposure reductions are
effected. Should an account become impaired, it will normally have passed
through each of the three categories, which reflect the need for increasing
caution and control. Where an obligor’s financial health gives grounds for
concern, it is immediately placed into the appropriate category. While all
obligors, regardless of financial health, are subject to a full review of all
facilities on, at least, an annual basis, more frequent interim reviews may
be undertaken should circumstances dictate. Specialist recovery functions
deal with clients in default, collection or insolvency. Their mandate is to
maximise shareholder value via the orderly and timely recovery of impaired
debts. Accounts can stay in Recoveries for up to two years unless a
longer-term strategy has been agreed.
Within the retail portfolios, which tend to comprise homogeneous assets,
statistical techniques more readily allow potential weaknesses to be
monitored on a portfolio basis. The approach is consistent with the Group’s
policy of raising a collective impairment allowance as soon as objective
evidence of impairment is identified. Retail accounts can be classified
according to specified categories of arrears status (or cycle), which reflects
the level of contractual payments which are overdue on a loan.
The probability of default increases with the number of contractual
payments missed, thus raising the associated impairment requirement.
Once a loan has passed through all six cycles it will enter recovery status,
having been charged off. In most cases, charge-off will result in the account
moving to a legal recovery function or debt sale. This will typically occur
after an account has been treated by a collections function. However, in
certain cases, an account may be charged off directly from a performing
(up to date) status, such as in the case of insolvency or death.
Monitoring weaknesses in portfolios
Wholesale account status Retail account status
Default (Recovery) Default (Charge-off) (Recovery)
Arrears Status 6+
Performing
Including EWL 1-2, WL 1-3
Performing (Current)
Arrears Status 0
Write Off
Business Support
EWL 3, WL 3.5
Delinquent (Collections)
Arrears Status 1- 6
– Watchlist Committee
flags client on the basis
of evidence of financial
difficulty.
– Customer’s financial
difficulty requires a
decision on the form
of future relationship.
– Business support assists
the client to return to in
order position.
– Customer misses
contractual payment
and moves to
collections function.
– Customer reaches high
arrears status and is moved
to the recovery function
where legal action is taken.
– Customer pays total
overdue payments
and returns back
to in order position.
– Asset is considered
irrecoverable and
is written off.
– Asset is considered
irrecoverable and
is written off.
Increasing state of delinquency
Increasing state of delinquency
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