Financial review

	Credit risk management Credit risk arises because the Bank’s customers, clients or counterparties may not be willing or able to fulfil their contractual obligations. This type of risk may be divided into a number of different categories which includes primary, trading and settlement risks.

In relation to its management of credit risk, the Group Credit Risk Unit (GCRU) has day-to-day responsibility for monitoring compliance with Group policies. GCRU also reviews portfolio management and risk concentration issues, including country exposure, sector exposure, product risking and credit grading. GCRU is headed by the Group Credit Risk Director. Risk Measurement The Group uses a grading structure to show the probability of future default by borrowers. This is used to estimate levels of annualised credit losses from the overall lending portfolio (termed Risk Tendency). Risk Tendency assists in portfolio management decisions, such as setting exposure limits to any single counterparty or borrower, establishing the desired aggregate exposure levels to individual sectors, determining pricing policy and setting the level of the general provision. Gradings also provide a guide to changes in the underlying credit quality of the lending portfolio over time. A similar structure is also in place to control exposures to countries. Credit exposure, or replacement cost, on derivative instruments represents the potential cost to replace contracts with a positive value if counterparties failed to perform their obligations. This cost is usually less than the face value of the contracts and the actual amount is monitored on an ongoing basis. To control the level of credit risk taken, the Group assesses counterparties, using the same techniques and grading structure as for lending decisions. Dealings are predominantly with counterparties of high credit quality. Risk Control The Group Credit Committee is responsible for sanctioning large credit exposures to all customers and counterparties arising from lending, trading activities, derivative instruments and settlement risks. The Group Credit Committee is supported by business line focused risk management departments (RMDs) either in or responsible to each of the Strategic Business Units. Each RMD ensures that the SBU adheres to Group Standards for Credit Risk analysis and sanctioning. The SBUs’ credit risk positions are reviewed and challenged by the Group Credit Risk Unit on a regular basis. Retail Financial Services and Corporate Banking, which have the majority of the Group’s personal and corporate credit exposures, each operate a hierarchy of credit exposure discretions, whereby credit risk teams, overseas country offices and specialist lending departments are allocated discretionary limits. Local management are sub-allocated varying levels of discretionary limits, which vary according to their skills, experience, seniority and the quality of the borrower as measured by the credit grading structure. A similar hierarchy exists for monitoring and provisioning purposes. The application of this structure results in a large proportion of local lending portfolios being sanctioned and controlled at local and regional level. Credit risk within Barclaycard is controlled by their Risk Management Department. Policy relating to exposures is set by this department and implemented by the Customer Management Teams. Within Customer Management, advisors are allocated discretionary limits, according to grade and experience. Any lending decision falling outside policy may only be sanctioned after reference to Risk Management. Barclays Capital has a lesser number of credit exposures, but typically for larger individual amounts and with significant credit exposures arising from money market, foreign exchange, derivatives, securities dealing and other similar products. These trading activities, which include the use of on-and off-balance sheet instruments, result in certain credit risks. The majority are referred to the Group Credit Committee or are sanctioned within Barclays Capital’s risk management department in London or in its office in New York. Smaller credit exposures, however, are sanctioned and controlled by specialist departments and individual Barclays Capital business units under a hierarchy of credit exposure discretions. Since Barclays Global Investors passes credit risk upon its transactions to its investor clients, it is excluded from this structure. However, the procedures for assessing such credit risk are similar to those undertaken elsewhere in the Group and fall under the overall supervision of GCRU. Environmental Risk Management Unit, part of the credit risk management function, aims to protect the Group from material environmental risks, worldwide. These risks may be direct (lender liability) or indirect (environmental issues may impact the viability of our borrowing customers). Potential reputational risks are also addressed. These would arise through the Group’s association with companies or projects which may be perceived to be environmentally damaging. Group Treasury is responsible for the monitoring and regulatory reporting of intra-group exposures under the EC Large Exposures Directive. Risk Mitigation As the credit markets develop, Barclays is expanding the mechanisms used to manage credit risk. This includes the use of credit derivatives and securitisation, with the primary objective of reducing the uncertainty of returns from the credit portfolio. There will be greater opportunities to use these techniques as the credit markets develop. The cost of these transactions is generally treated as a deduction from the related category of income with any benefits being reflected in reduced credit risk provisions. The Group enters into master agreements whenever possible and, when appropriate, obtains collateral. Master agreements provide that, if an event of default occurs, all outstanding transactions with the counterparty will be terminated and all amounts outstanding will be settled on a net basis. Concentrations of credit risk, which arise through the Group’s trading and non-trading activities, are presented in note 64 to the accounts.