Barclays 2012 Annual Report Download - page 332

Monitoring may be undertaken either at the level of an individual
property or at a portfolio level. Monitoring on a portfolio level refers to
a more frequent process of indexing collateral values on each individual
loan, using a regional or national index, and updating LGD values.
Where an appropriate local index is not available, property values are
monitored on an individual basis as part of the annual review process
for the loan.
For larger loans, property valuation is reviewed by an independent
valuer at least every three years, and an independent valuer also
reviews the property valuation where information indicates that the
value of the property may have declined materially relative to general
market prices. In addition, trigger points are defined under which
property values must be reviewed.
Liens over fluctuating assets such as inventory and trade receivables,
known as floating charges, over the assets of a borrower are monitored
annually. The valuation of this type of collateral takes into account the
ability to establish objectively a price or market value, the frequency
with which the value can be obtained (including a professional
appraisal or valuation), and the volatility or a proxy for the volatility of
the value of the collateral.
Additional revaluations are usually performed when a loan is moved to
EWL or WL. More detail of when a corporate account may be moved to
an EWL or WL may be found on page 322. Exceptions to this may be
considered where it is clear a revaluation is not necessary, for instance
where there is a very high margin of security or a recent valuation has
been undertaken. Conversely, a material reduction in the value of
collateral held represents an increase in credit risk and will often cause
a loan to be placed on the EWL or WL.
Any one of these events may also trigger a test for impairment,
depending on individual circumstances of the loan. When calculating
impairment, the difference between an asset’s carrying amount and the
present value of all estimated cash flows discounted at the original
effective interest rate will be recognised as impairment. Such cash
flows include the estimated fair value of the collateral which reflects the
results of the monitoring and review of collateral values as detailed
above and valuations undertaken as part of our impairment process.
Whether property values are updated as part of the annual review
process, or by indexation of collateral values, the updated collateral
values feed into the calculation of risk parameters (for example Loss
Given Default) which, in turn, feed into identified and unidentified
impairment calculations at each balance sheet date.
Trends in loan loss rates incorporate the impact of any decrease in the
fair value of collateral held.
Where Barclays calculates regulatory capital under advanced IRB
regulations the benefit of collateral is generally taken by adjusting
LGDs. For standardised portfolios the benefit of collateral is taken using
the financial collateral comprehensive method: supervisory volatility
adjustments approach.
Risk transfer
A range of instruments including guarantees, credit insurance, credit
derivatives and securitisation can be used to transfer credit risk from
one counterparty to another. This mitigates credit risk in two main ways:
 firstly, if the risk is transferred to a counterparty which is more credit
worthy than the original counterparty, then overall credit risk will
have been reduced
 secondly, where recourse to the first counterparty remains, both
counterparties must default before a loss materialises. This will be
less likely than the default of either counterparty individually so credit
risk is reduced
Risk transfer can also be used to reduce risk concentrations within
portfolios lowering the impact of stress events.
Risk transfer transactions are undertaken with consideration to
whether the collateral provider is correlated with the exposure, the
credit worthiness of the collateral provider and legal certainty of
enforceability and effectiveness. Where credit risk mitigation is deemed
to transfer credit risk this exposure is appropriately recorded against
the credit risk mitigation provider.
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.
In exposure terms, risk transfer is used most extensively as a credit risk
mitigation technique for wholesale loans and derivative financial
instruments.
For instruments that are deemed to transfer credit risk, in advanced IRB
portfolios the protection is recognised by using the PD and LGD of the
protection provider.
Off-balance sheet risk mitigation
The Group applies fundamentally the same risk management policies
for off-balance sheet risks as it does for its on-balance sheet risks. In
the case of commitments to lend, customers and counterparties will be
subject to the same credit management policies as for loans and
advances. Collateral may be sought depending on the strength of the
counterparty and the nature of the transaction.
Asset credit quality
Loans and advances
All loans and advances are categorised as either neither past due nor
impaired; past due but not impaired; or impaired, which includes
restructured loans. For the purposes of the disclosures on pages
122-123 and 127-128:
 a loan is considered past due when the borrower has failed to make a
payment when due under the terms of the loan contract.
 the impairment allowance includes allowances against financial
assets that have been individually impaired and those subject to
collective impairment.
 loans neither past due nor impaired consist predominantly of
wholesale and retail loans that are performing. These loans, although
unimpaired, may carry an unidentified impairment provision.
 loans that are past due but not impaired consist predominantly of
wholesale loans that are past due but individually assessed as not
being impaired. These loans, although individually assessed as
unimpaired, may carry an unidentified impairment provision.
 impaired loans that are individually assessed consist predominantly
of wholesale loans that are past due and for which an individual
allowance has been raised.
 impaired loans that are collectively assessed consist predominantly
of retail loans that are one day or more past due for which a
collective allowance is raised. Wholesale loans that are past due,
individually assessed as unimpaired, but which carry an unidentified
impairment provision, are excluded from this category. Refer to pages
323-325 for further detail on Group Risk Impairment Policy.
barclays.com/annualreport330 I Barclays PLC Annual Report 2012
Risk management
Credit risk management continued