Barclays 2013 Annual Report Download - page 404

Risk management
Credit risk management continued
For disclosure on the Group’s accounting policy with respect to
impairment, see Note 7 and the Reporting section on page 393.
Other programmes
Retail re-aging activity
Re-aging refers to the placing of an account into an up-to-date position
without the requisite repayment of arrears. The re-age policy applies to
revolving products only. No reduction is made to the minimum due
payment amounts which are calculated, as a percentage of balance,
with any unpaid principal included in the calculation of the following
month’s minimum due payment.
The changes in timing of cash flows following re-aging do not result in
any additional cost to Barclays. The following are the conditions
required to be met before a re-age may occur:
 The account must not have been previously charged off or written
off;
 The borrower cannot be bankrupt, subject to an Individual Voluntary
Arrangement (a UK contractual arrangement with creditors for
individuals wishing to avoid bankruptcy), a fraud or deceased;
 The borrower must show a renewed willingness and ability to repay
the debt. This will be achieved by the borrower making at least three
consecutive contractual monthly payments or the equivalent
cumulative amount. Contractual monthly payment is defined as the
contractual minimum due. Funds may not be advanced for any part
of this;
 The account must have been on book at least nine months (i.e. nine
months prior to the three month qualification period); and
 No account should be re-aged more than once within any 12 month
period, or more than twice in a five year period.
Barclays considers assets are considered to belong to a separate ‘High
Risk’ pool. Under ‘High Risk’, the performance of the assets is a risk
characteristic and results in a higher probability of default being
assigned to them in impairment models which meet the requirement of
IAS 39, AG87-88. This results in an appropriately higher impairment
allowance being recognised on the assets. See Re-age in Risk review
section on page 170 for more information.
Retail small arrears capitalisation
Small arrears capitalisation is available for amortising products with the
exception of residential mortgages. This refers to the capitalisation of
small levels of arrears (up to 90 days past due), together with either a
corresponding term extension or increase to contractual monthly
payment without the requirement to classify the accounts as
forbearance. Contractual monthly payments must not be reduced. The
small arrears capitalisation activity is also subject to the conditions
outlined above under retail re-aging activity, being met. Any
capitalisation event exceeding this must be executed under the
direction of the Forbearance policy.
Refinancing risk
This is the risk that the borrower or group of correlated borrowers may
be unable to roll or repay bullet repayment loans at expiry, and will
therefore need refinancing.
From a Wholesale perspective, refinancing risk will typically be
associated with loans that have an element of bullet repayment
incorporated into the repayment profile. Refinancing risk is taken into
account on a case by case basis as part of the credit review and
approval process for each individual loan. The review will consider
factors such as the strength of the business model and sustainability of
the cash flows and for bridge loans the review will also include an
evaluation of the market risk.
Commercial Real Estate loans will frequently incorporate a bullet
repayment element at maturity. Where this is the case, deals are sized
and structured to enable Barclays to term out the loan if the client were
unable to refinance the loan at expiry. Credit review will incorporate an
examination of various factors that are central to this consideration,
such as tenant quality, tenancy agreements (including break clauses)
and interest rate sensitivity.
Loans to SMEs will typically be either revolving credit lines to cover
working capital needs or amortising exposures, with periodic
refinancing to give the opportunity to review structure, pricing, etc.
Please refer to the maturity analysis for UK CRE, customers with
interest only home loans and Spanish corporate exposure in the Risk
review on pages 172 and 177 for more information.
Derivative exposures
Derivative counterparty credit exposures
The Group buys and sells financial instruments that are traded or
cleared on an exchange, including interest rate swaps, futures and
options on futures. Holders of exchange traded instruments provide
margin daily with cash or other security at the exchange, to which the
holders look for ultimate settlement.
The Group also buys and sells financial instruments that are traded
over the counter, rather than on a recognised exchange. These
instruments range from standardised transactions in derivative
markets, to trades where the specific terms are tailored to the
requirements of the Group’s customers. In many cases, industry
standard documentation is used, most commonly in the form of a
master agreement, with individual transaction confirmations. The
existence of a signed master agreement is intended to give the Group
protection in situations where counterparty is in default.
Counterparty credit exposure arises from the risk that parties are
unable to meet their payment obligations under certain financial
contracts such as derivatives, securities financing transactions (e.g.
repurchase agreements), or long settlement transactions.
Internal capital for counterparty credit risk is assessed and allocated
based on the economic capital for wholesale credit risk calculation. The
magnitude of the exposure is determined by considering the current
mark to market of the contract, the historic volatility of the underlying
asset and the time to maturity. This allows calculation of a Credit
Equivalent Exposure (CEE) for such exposures. The total economic
capital for a portfolio of such exposures is then calculated in a manner
similar to a book of loans.
‘Wrong-way risk’ in a trading exposure arises when there is significant
correlation between the underlying asset and the counterparty, which
in the event of default would lead to a significant mark to market loss.
When assessing the credit exposure of a wrong-way trade, analysts
take into account the correlation between the counterparty and the
underlying asset as part of the sanctioning process.
Adjustments to the calculated CEE are considered on a case by case
basis. In the case of specific wrong-way risk trades, which are
self-referencing or reference other entities within the same
counterparty, specific approval by a senior credit officer is required.
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402 Barclays PLC Annual Report 2013