Barclays 2012 Annual Report Download - page 324

Reporting
The Group dedicates considerable resources to gaining a clear and
accurate understanding of credit risk across the business and ensuring
that its balance sheet correctly reflects the value of the assets in
accordance with applicable accounting principles. This process can be
summarised in four broad stages:
 measuring exposures and concentrations;
 monitoring weaknesses in portfolios;
 raising allowances for impairment and other credit provisions; and
 returning assets to a performing status or writing off assets when the
whole or part of a debt is considered irrecoverable.
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 pages 118-121).
Diversification is achieved through setting maximum exposure
guidelines to individual counterparties. Excesses are reported to the
Financial Risk Committee and the BRC. Mandate and Scale limits are
used to maintain concentrations at appropriate levels. Limits are
typically based on the nature of the lending and the amount of the
portfolio meeting certain standards of underwriting criteria.
Monitoring weaknesses in portfolios
Whilst the basic principles for monitoring weaknesses in wholesale and
retail exposures are broadly similar, they reflect the differing nature of
the assets. As a matter of policy all facilities granted to corporate or
wholesale counterparties are subject to a review on, at least, an annual
basis, even when they are performing satisfactorily.
Wholesale portfolios
Wholesale accounts that are deemed to contain heightened levels of
risk are recorded on graded early warning lists (EWL) or watchlists
(WL) comprising three categories graded in line with the perceived
severity of the risk attached to the lending, and its probability of
default. Examples of heightened levels of risk may include, for example:
 a material reduction in profits;
 a material reduction in the value of collateral held;
 a decline in net tangible assets in circumstances which are not
satisfactorily explained; or
 periodic waiver requests or changes to the terms of the credit
agreement over an extended period of time.
These lists are updated monthly and circulated to the relevant risk
control points. Once an account has been placed on WL or EWL, the
exposure is carefully monitored and, where appropriate, exposure
reductions are effected. Should an account become impaired, it will
normally, but not necessarily, 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 higher levels of EWL/WL, default, collection or
insolvency. Their mandate is to maximise shareholder value ideally via
working intensively with the client to help them to either return to
financial health or in the cases of insolvency obtain the orderly and
timely recovery of impaired debts.
Within the wholesale portfolios the Basel definitions of default are used
as default indicators in addition to the IAS 39 objective evidence of
impairment. A default is triggered if individual identified impairment is
recognised. The Basel definitions of default used are:
1. Bank puts the credit obligation on a non-accrued status.
2. Bank makes a charge-off or account specific identified impairment
resulting from a significant perceived decline in credit quality.
3. Bank sells the credit obligation at a material credit-related
economic loss.
4. Bank consents to a distressed restructuring of the credit obligation
where this is likely to result in a diminished financial obligation
caused by the material forgiveness or postponement of principal,
interest or fees.
5. Bank triggers a petition for obligor’s bankruptcy or similar order.
6. Bank becomes aware of the obligor having sought or having been
placed in bankruptcy or similar protection where this would avoid
or delay repayment of the credit obligation to the banking group.
7. Bank becomes aware of an acceleration of an obligation by a firm.
8. Where the obligor is a bank – revocation of authorisation.
9. Where the obligor is a sovereign – trigger of default definition of an
approved External Credit Assessment Institution (i.e. a rating
agency).
10. Obligor past due more than 90 days on any material credit
obligation to the banking group.
Retail portfolios
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. An outstanding balance is deemed to be delinquent when it is
one day or one penny down and goes into default when it moves into
recovery (normally 180 days). Impairment is considered from entry into
delinquency.
The probability of default increases with the number of contractual
payments missed, thus raising the associated impairment requirement.
Once a loan has passed through a prescribed number of cycles
(normally six) it will charge-off and enter recovery status. ‘Charge-off’
refers to the point in time when collections activity changes from the
collection of arrears to the recovery of the full balance. 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 status, such as in the case of
insolvency or death.
The timings of the charge-off points are established based on the type
of loan. For the majority of products, the standard period for charging
off accounts is six cycles (180 days past due date of contractual
obligation). Early charge-off points are prescribed for unsecured assets.
For example, in case of customer bankruptcy or insolvency, associated
accounts are charged off within 60 days of notification.
barclays.com/annualreport322 I Barclays PLC Annual Report 2012
Risk management
Credit risk management continued