Barclays 2011 Annual Report Download - page 84

Risk management
Credit risk continued
Overview
As at 31 December 2011, the Group’s net exposure to credit risk after
taking into account netting and set-off, collateral and risk transfer
remained broadly flat at £794,700m (2010: £766,033m). The extent to
which the Group holds mitigation on its assets rose marginally from 55%
to 56%.
Of the remaining exposure left unmitigated, a significant portion relates
to cash held at central bank, available for sale debt securities issued by
governments, cash collateral and settlement balances, all of which are
considered lower risk. Trading portfolio liability positions, which to a
significant extent economically hedge trading portfolio assets but which
are not held specifically for risk management purposes, are excluded from
the analysis above. The credit quality of counterparties to derivative,
available for sale and wholesale loan assets are predominantly investment
grade. Further analysis on the credit quality of assets is presented on
pages 104 to 109.
Netting and set-off
The Group has the ability to offset asset and liability positions on default
or bankruptcy of the borrower. This includes master netting agreements
for loans and advances (whether held at amortised cost or fair value).
Derivatives may also be settled net where there is a master agreement
in place providing for this in the event of default, reducing the Group’s
exposure to counterparties on derivative asset positions. The reduction in
risk is the amount of the liability held. The Group offsets asset and liability
amounts on the balance sheet when it has both the ability and the
intention to settle net. The amounts above represent available netting
in the event of default of the counterparty.
Collateral
The Group has the ability to call on collateral in the event of default
of the borrower or other counterparty, comprising:
– Home loans: a fixed charge over residential property in the form
of houses, flats and other dwellings;
– Wholesale lending: a fixed charge over commercial property and other
physical assets, in various forms;
– Credit cards, unsecured and other retail lending: includes charges
over motor vehicle and other physical assets; second lien charge over
residential property, which is subordinate to first charge held either
by the Group or by another party; and finance lease receivables, for
which typically the Group retains legal title to the leased asset and has
the right to repossess the asset on the default of the borrower;
– Derivatives: cash and non-cash collateral may be held against derivative
trades with certain counterparties;
– Reverse repurchase agreements: collateral typically comprises highly
liquid securities which have been legally transferred to Barclays subject
to an agreement to return them for a fixed price; and
– Financial guarantees and similar off-balance sheet commitments:
cash collateral may be held against these arrangements.
The Group may also obtain collateral in the form of floating charges over
receivables and inventory of corporate and other business customers.
The value of this collateral varies from period to period depending on the
level of receivables and inventory. It is impracticable to provide an estimate
of the amount (fair value or nominal value) of this collateral. The Group
may in some cases obtain collateral and other credit enhancements at a
counterparty level, which are not specific to a particular class of financial
instrument. The fair value of the credit enhancement gained has been
apportioned across the relevant asset classes.
The carrying value of non-cash collateral reflects the fair value of the
physical assets limited to the carrying value of the asset where the
exposure is over-collateralised. In certain cases where active markets or
recent valuations of the assets are not available, estimates are used. For
assets collateralised by residential or commercial property (and certain
other physical assets), where it is not practicable to assess current market
valuations of each underlying property, values reflect historical fair values
updated for movements in appropriate external indices.
For assets collateralised by traded financial instruments, values reflect
mark to market or mark to model values of those assets, applying a
haircut where appropriate. For further information on loan-to-value ratios
in principal home loans portfolios and the Group’s policy regarding the
valuation of wholesale collateral, refer to pages 97 to 98 and 103
respectively.
The net realisable value from a distressed sale of collateral obtained by
the Group upon default or insolvency of a counterparty will in some cases
be lower than the carrying value recognised above. Assets obtained are
normally sold, generally at auction, or realised in an orderly manner for the
maximum benefit of the Group, the borrower and the borrower’s other
creditors in accordance with the relevant insolvency regulations. For
business customers, in some circumstances, where excess funds are
available after repayment in full of the outstanding loan, they are offered
to any other, lower ranked, secured lenders. Any additional funds are
returned to the customer. Barclays does not, as a rule, occupy repossessed
properties for its business use or use assets obtained in its operations.
Risk transfer
The Group in some cases holds guarantees, letters of credit and similar
instruments from third parties which enable it to claim settlement from
them in the event of default on the part of the counterparty. The balances
shown represent the notional value of the guarantees held by the Group
issued by corporate and financial institutional counterparties. In addition,
the Group obtains guarantees from customers in respect of personal loans
and smaller business loans, which are not reflected in the above table.
82 Barclays PLC Annual Report 2011 www.barclays.com/annualreport