Barclays 2012 Annual Report Download - page 331

The strategic report Governance Risk review Financial review Financial statements Risk management Shareholder information
Credit risk mitigation
Barclays employs a range of techniques and strategies to actively
mitigate credit risks to which it is exposed. These can broadly be
divided into three types:
 netting and set-off;
 collateral; and
 risk transfer.
Barclays has detailed policies in place to ensure that credit risk
mitigation is appropriately recognised and recorded. The recognition of
credit risk mitigation is subject to a number of considerations,
including ensuring legal certainty of enforceability and effectiveness,
ensuring the valuation and liquidity of the collateral is adequately
monitored, and ensuring the value of the collateral is not materially
correlated with the credit quality of the obligor.
All three types of credit risk mitigation may be used by different areas
of the Group for exposures with a full range of counterparties. For
instance, Investment Bank, Corporate Banking and other business
areas may all take property, cash or other physical assets as collateral
for exposures to retailers, property companies or other client types.
Netting and set-off
In many jurisdictions in which Barclays operates, credit risk exposures
can be reduced by applying netting and set-off. In exposure terms, this
credit risk mitigation technique is used mainly in derivative and repo
transactions with financial institutions.
For derivative transactions, Barclays will often seek to enter into
standard master agreements with counterparties (e.g. ISDA). These
master agreements allow for netting of credit risk exposure to a
counterparty resulting from a derivative transaction against Barclays
obligations to the counterparty in the event of default, to produce a
lower net credit exposure. These agreements may also reduce
settlement exposure (e.g. for foreign exchange transactions) by
allowing for payments on the same day in the same currency to be set
off against one another.
In the majority of its portfolios Barclays uses the Internal Model
Method (IMM) to calculate counterparty credit risk exposures.
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: Barclays also often seeks to enter into CSAs with
counterparties with which Barclays has master agreements in place.
These annexes to master agreements provide a mechanism for
further reducing credit risk, whereby collateral (margin) is posted on
a regular basis (typically daily or weekly) to collateralise the mark to
market exposure of a derivative portfolio;
 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.
In exposure terms, the main portfolios that Barclays takes collateral for
are home loans and reverse repurchase agreements with financial
institutions.
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.
Assets other than cash are subject to regular revaluation to ensure they
continue to achieve appropriate mitigation of risk. Customer
agreements often include requirements for provision of additional
collateral should valuations decline or credit exposure increase (for
example due to market moves impacting a derivative exposure).
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 further information on loan-to-value ratios in principal home loans
portfolios see page 132.
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.
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.
When property is taken as collateral it is monitored to ensure that the
current value is not less than its value at origination. Monitoring is
undertaken at least once every three years for residential property, and
annually for commercial property. More frequent monitoring is carried
out where the property sector is subject to significant deterioration.
Deterioration is monitored principally by geography. Specific exercises
to monitor property values may be undertaken where the property
sector in a given geography has been subject to significant
deterioration and where Barclays has a material concentration of
property collateral.
barclays.com/annualreport Barclays PLC Annual Report 2012 I 329