Barclays 2013 Annual Report Download - page 314

Note 18: Fair value of assets and liabilities continued
Observability: Repurchase agreement pricing is generally observable.
Level 3 sensitivity: There is no Level 3 sensitivity associated with repurchase agreements as inputs to valuation are observable.
Non asset backed loans
Description: This category is largely made up of fixed rate loans, such as the ESHLA portfolio, which are valued using models that discount
expected future cash flows.
Valuation: Fixed rate loans are valued using models that calculate fair value based on observable interest rates and unobservable loan spreads.
Unobservable loan spreads are modelled according to issuer credit quality.
Observability: Within this population, the unobservable input is the loan spread.
Level 3 sensitivity: The sensitivity for fixed rate loans is calculated by applying a shift to loan spreads.
Asset backed securities
Description: These are securities that are linked to the cash flows of a pool of referenced assets via securitisation. This category includes residential
mortgage backed securities, commercial mortgage backed securities, asset backed securities, CDOs and CLOs.
Valuation: Where available, valuations are based on observable market prices which are sourced from broker quotes and inter-dealer prices.
Otherwise, valuations are determined using industry standard discounted cash flow analysis that calculates the fair value based on valuation
inputs such as constant default rate, conditional prepayment rate, loss given default and yield. These inputs are determined by reference to a
number of sources including proxying to observed transactions, market indices or market research, and by assessing underlying collateral
performance.
Proxying to observed transactions, indices or research requires an assessment and comparison of the relevant securities’ underlying attributes
including collateral, tranche, vintage, underlying asset composition (historical losses, borrower characteristics, and loan attributes such as
loan-to-value ratio and geographic concentration) and credit ratings (original and current).
Observability: Where an asset backed product does not have an observable market price and the valuation is determined using a model, an
instrument is considered unobservable.
Level 3 sensitivity: The sensitivity analysis for asset backed products is based on externally sourced pricing dispersion, defined at the position level.
Asset backed loans
Description: These are loans made to individual borrowers or originators in return for the expectation of repayment of both principal and interest
in the future. This category includes loans backed by residential whole loans and residential real estate (property).
Valuation: Valuations are determined using industry standard discounted cash flow analysis that calculates the fair value based on inputs such
constant default rate, conditional prepayment rate, loss given default and yield. Valuations inputs are determined by reference to a number of
sources including proxying to observed transactions, market indices or market research, and by assessing underlying collateral performance.
Observability: Where an asset backed loan does not have an observable market price and the valuation is determined using a model, an instrument
is considered unobservable.
Level 3 sensitivity: The sensitivity analysis for asset backed loans is based on stressing the inputs to the discounted cash flow analysis.
Commercial Real Estate loans
Description: This portfolio includes loans that are secured by a range of commercial property types including retail, hotel, office, multi-family and
industrial properties.
Valuation: Performing loans are valued using discounted cash flow analysis which considers the characteristics of the loan such as property type,
geographic location, credit quality and property performance reviews in order to determine an appropriate credit spread. Where there is significant
uncertainty regarding loan performance, valuation is based on independent third party appraisals or bids for the underlying properties.
Independent third party appraisals are determined by discounted cash flow analysis. The key valuation inputs are yield and loss given default.
Observability: Since each commercial real estate loan is unique in nature and the secondary market for them is relatively illiquid, valuation inputs
are generally considered unobservable.
Level 3 sensitivity: For performing loans, sensitivity is determined by stressing the credit spread for each loan. For loans which have significant
uncertainty regarding loan performance, sensitivity is determined by either a range of bids or by stressing the inputs to independent third party
appraisals.
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312 Barclays PLC Annual Report 2013
Notes to the financial statements
For the year ended 31 December 2013 continued