Barclays 2013 Annual Report Download - page 402

Risk management
Credit risk management continued
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. These mitigate credit risk in two main
ways:
 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; and
 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.
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 generally 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.
Forbearance and other concession programmes
Forbearance programmes
Forbearance takes place when a concession is made on the contractual
terms of a facility in response to an obligor’s financial difficulties. The
Group offers forbearance programmes to assist customers and clients
in financial difficulty through agreements that may include accepting
less than contractual amounts due where financial distress would
otherwise prevent satisfactory repayment within the original terms and
conditions of the contract. These agreements may be initiated by the
customer, Barclays or a third party.
Forbearance programmes for wholesale portfolios
Wholesale client relationships are individually managed with lending
decisions made with reference to specific circumstances and on
bespoke terms.
Forbearance occurs when Barclays, for reasons relating to the actual or
perceived financial difficulty of an obligor, grants a concession below
current Barclays standard rates (i.e. lending criteria below the Group’s
current lending terms), that would not otherwise be considered. This
includes all troubled debt restructures granted below our standard
rates.
Forbearance would typically be evident where the concession(s) agreed
impact the ability to repay debt or avoid recognising a default with a
lack of appropriate commercial balance and risk mitigation/ structural
enhancement of benefit to Barclays in return for concession(s).
The following list is not exhaustive but provides some examples of
instances that would typically be considered to be evidence of
forbearance:
 A reduction of current contractual interest rate for the sole purpose
of maintaining performing debt status with no other improvement to
terms of benefit to the Bank;
 Non-enforcement of a material covenant breach impacting the
borrower’s ability to repay;
 Converting a fully or partially amortising facility to bullet repayment
at maturity with no other improvement to terms of benefit to the
Bank for the sole purpose of avoiding a payment default due to
customer’s inability to meet amortisation;
 Extension in maturity date for a project finance facility that gives an
effective contractual term longer than the underlying project contract
being financed; and,
 Any release of a material security interest without receiving
appropriate value by way of repayment/ alternate security offered or
other improvement in terms available to the Bank commensurate
with the value of the security released.
Where a concession is granted that is not a result of financial difficulty
and/ or is within our current market terms, the concession would not
amount to forbearance. For example, a commercially balanced
restructure within our current terms which involves Barclays granting
concessions and receiving risk mitigation/ structural enhancement of
benefit to Barclays would not be indicative of forbearance.
The following list (not exhaustive) gives some examples of instances
that would not typically be considered to be forbearance:
 Temporary/ permanent waivers/ resets of covenants agreed in line
with our current terms;
 Amending contractual maturity to meet current lending terms that
results in a previously amortising facility having a bullet repayment as
a consequence of shorter maturity date;
 Equity/ warrants taken to increase return to the Bank without
compromising contractual interest;
 Extension of maturity date where the extension is within the
normally granted terms for the type of facility in question; and
 Release of a material security interest where commensurate value is
received by way of repayment/ other security offered.
Cases where a technical default may have occurred, the Bank has
decided to reserve its position but does not consider the default to be
sufficient to impact the borrower’s ability to pay, would not typically be
considered forbearance (as the borrower would continue to meet its
payment obligations under existing terms).
The Group WL/EWL and Forbearance Policy requires that a permanent
record is retained of all individual cases of forbearance, and upon
granting forbearance the obligor is placed on WL/EWL. The obligor
then remains on WL/EWL and is flagged as being in forbearance for a
minimum of 12 months from the date forbearance is applied. Obligors
may be removed from WL/EWL status in less than 12 months in
exceptional circumstances, e.g. full repayment of facilities or significant
restructuring. Obligors placed on WL/EWL status are subject to
increased levels of credit risk oversight.
Obligors who have been granted forbearance are classified as a Basel
‘unlikeliness’ to pay default for capital purposes with PD of 1
throughout the period that they remain classified as being in
forbearance. This is on the basis that without intervention by Barclays
the obligor is unlikely to meet its obligations in full which would lead to
default.
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400 Barclays PLC Annual Report 2013