# Basel II Pillar 3 Disclosures 2010 Year end results --- # Basel II Pillar 3 Consolidated Disclosures Barclays PLC Basel II Pillar 3 Consolidated Disclosures 2010 --- ## Notes about this report ### Overview of Basel II and Pillar 3 Barclays has applied the Basel II framework since 2008. The Basel accord is made up of three pillars: * Pillar 1 covers the calculation of risk-weighted assets for credit risk, market risk and operational risk. * Pillar 2 allows firms and supervisors to take a view on whether the firm should hold additional capital to cover the three Pillar 1 risk types, or to cover other risks. A firm’s own internal models and assessments support this process. * Pillar 3 covers external communication of risk and capital information by banks as specified in the Basel rules. Basel II also provides for different approaches to calculating capital requirements. * The first is the Standardised approach, where the risk weights used to assess requirements against credit exposures are consistent across the industry. This is similar to the Basel I framework, but with a more detailed classification of asset types to enable better risk sensitivity; * The second approach is the Internal Ratings Based approach (IRB) that relies on the bank’s internal models to derive the risk weights. Throughout this report the tables distinguish between these two approaches. The IRB approach is further sub-divided into two alternative applications, Advanced and Foundation: - Under Advanced IRB (AIRB), Barclays uses its own estimates of probability of default (PD), loss given default (LGD) and credit conversion factor to model a given risk exposure; - Under Foundation IRB, Barclays applies its own PD as for Advanced, but it uses standard parameters for the LGD and the credit conversion factor. The Foundation IRB approach is specifically designed for wholesale credit exposures. Hence retail, equity, securitisation positions and non-credit obligations asset exposures are treated under Standardised or AIRB. Barclays lead regulator is the UK Financial Services Authority (FSA). Pillar 3 principles can be found within its “Prudential Sourcebook for Banks, Building Societies and Investment Firms” (“BIPRU” Section 11). This report is currently published once a year, in accordance with the Group’s Pillar 3 Policy covering standards related to disclosure process, verification and frequency. The report is available from the Barclays Investor Relations web site (www.investorrelations.barclays.com). Note that this report also contains references to risk disclosures in the Barclays PLC Annual Report (‘Annual Report’). ### Regulatory changes in 2010-11 The Pillar 3 rules have been updated in 2010 and include new requirements around market risk, operational risk and remuneration. Remuneration disclosures are found on pages 166 to 182 of the Annual Report. More generally, the regulatory environment to which the Group’s operations are subject continues to evolve. More detail on this is found in the Annual Report, on page 139 under “Supervision and regulation”. ### Presentation of risk data, verification and sign-off This document discloses Barclays assets both in terms of exposures and capital requirements. For the purposes of this document, credit exposure is defined as the estimate of the amount at risk in the event of a default (before any recoveries) or through the decline in value of an asset. This estimate takes account of contractual commitments related to undrawn amounts. In contrast, an asset in the Group’s balance sheet, as published in the Annual Report, is reported as a drawn balance only. This is one of the reasons why exposure values in the Pillar 3 report can differ from asset values as reported in the published accounts. Where this document discloses credit exposures or capital requirements, Barclays has followed the scope and application of its Pillar 1 capital adequacy calculations. Where figures for impairment or losses are disclosed within this document, Barclays has followed the IFRS definitions used in the Annual Report. Throughout this report, tables show credit exposures or capital requirements split into various exposure classes (for instance, industry or type of borrower). Some of these classes are specified in the FSA rules. Where the regulations are not explicit, such as in industry and geographic analyses, Barclays shows the exposure class splits on the same basis as its Annual Report. This report was verified and approved internally by Barclays in line with its Pillar 3 policy. This included a review by the Group Risk Oversight Committee to ensure that Barclays external disclosures (which include the Pillar 3 report, the Preliminary Results Announcement, Interim Management Statements, and the Annual Report) convey its risk profile comprehensively, subject to the information being material and not proprietary nor confidential. There are no requirements for external auditing of these disclosures. ### Basis of consolidation In this report, Barclays PLC information is presented on a consolidated basis. All of these disclosures are published for Barclays PLC for the year ended 31 December 2010. The consolidation basis used is the same as that used for regulatory capital adequacy. Certain overseas subsidiaries operate under local regulatory capital regimes that are recognised as equivalent by the FSA. In these cases, Barclays has used these local capital calculations in its Group consolidation. The scope of consolidation is similar to that used for statutory accounting reporting for most of the Group’s activities (see Appendix for differences). --- ## Previous year comparisons The 2010 Pillar 3 disclosure describes the Group's credit risk exposures covering both the Standardised and the IRB approaches. In many cases, the change in treatment of credit risk portfolios from the Standardised to the IRB approach caused material changes in the year on year balances. Where this is the case, this is noted in the commentary to the disclosures. The process of transferring portfolios to the IRB approach is expected to remain a significant driver of year on year movements for future years. During 2010, in support of our AIRB application for Foundation portfolios, we have improved the collateral reporting and updated the granularity of our exposure breakdowns. This enhanced exposure reporting has not affected total volumes, but is visible in year on year comparatives of certain exposure classes and categories. For securitisations, improvements in granularity and breakdowns have also been implemented and to aid analysis, we have provided restated 2009 tables to capture the updated list of reportable securitisation transactions. These improvements had no effect on our capital ratios for 2009 as previously reported. --- ## Table of contents | Section | Page number | | :--- | :--- | | Introduction: Review of 2010, Overview of Risk Management | 4 | | Capital Risk Management (How Barclays assesses its capital requirements and maintains adequate capital resources.) | 9 | | Barclays Capital Adequacy (Details of capital resources, by resource items, as well as Pillar 1 requirements for the different risk types (credit, market and operational).) | 11 | | Credit Risk Management (Description of Barclays organisational structure and processes employed to manage credit risks.) | 18 | | Credit Internal Ratings Based Approach (Barclays approach to calculating internal ratings and risk information on the exposures to which this approach applies.) | 20 | | Counterparty Credit Risk (How counterparty credit risk is measured and mitigated, and the Group counterparty risk profile.) | 36 | | Credit Risk Exposures (Analyses of Barclays credit risk exposures by class, geography, industry, maturity and credit quality. Impaired exposures are also shown.) | 41 | | Credit Risk Mitigation (The Group’s approaches to risk mitigation.) | 59 | | Securitisations (How securitisations are used to manage Barclays risk and capital requirements, and analyses of securitised exposures.) | 62 | | Market Risk Management (Barclays market risk management strategy, risk modelling approach and market risk exposures.) | 70 | | Operational Risk Management (Barclays operational risk management organisational structure and strategic processes.) | 78 | | Liquidity Risk Management (Barclays liquidity risk management organisational structure and strategic processes.) | 80 | | Appendix: Basis of preparation of this report | 82 | | Glossary of terms | 83 | --- ## Introduction: Review of 2010, Overview of Risk Management ### Review of 2010 The financial performance of Barclays improved over 2010. Group profit before tax increased 32% to £6,065m. This was driven by lower impairment charge (down 30%), and higher income (up 8%). The financial strength of Barclays increased, with Core Tier 1 ratio up 80bps to 10.8%. Return on average regulatory risk weighted assets (RWA) also improved, to 2.2% from 1.5% in 2009. The balance sheet, in terms of total assets, increased £111bn to £1,490bn in 2010. The biggest increases were in cash and balances at central banks, trading portfolio assets and reverse repurchase lending. In the various tables in this report, this is reflected mainly in increased exposures (note that here they are measured in exposure at default (EAD) as opposed to balances) to central governments. Risk weighted assets increased by 4% from £383bn to £398bn in 2010. Foreign exchange and model methodology changes have had a substantial impact. The liquidity position of the Group has improved further in 2010, with the liquidity pool increasing £27bn to £154bn; this is a reflection of our continued ability to attract deposits and term funding in the markets. ### Principal risks faced by Barclays A global financial institution such as Barclays faces a wide range of risks beyond credit, market and operational, which are the main focus of this report. These risks are described on pages 73 to 81 of the Annual Report under “Risk factors”. ### Overview of risk management Barclays has clear risk management objectives and a well-established strategy to deliver them, through core risk management processes. At a strategic level, our risk management objectives are: * to identify the Group’s material risks; * to formulate the Group’s risk appetite and ensure that business profile and plans are consistent with it; * to optimise risk/return decisions by taking them as closely as possible to the business, while establishing strong and independent review and challenge structures; * to ensure that business growth plans are properly supported by effective risk infrastructure; * to manage risk profile to ensure that specific financial deliverables remain possible under a range of adverse business conditions; * to help executives improve the control and co-ordination of risk taking across the business. The Group’s approach is to provide direction on: understanding the principal risks to achieving Group strategy; establishing risk appetite; and establishing and communicating the risk management framework. The process is then broken down into five steps: identify, assess, control, report, and manage/challenge. Each of these steps is broken down further, to establish end to end activities within the risk management process and the infrastructure needed to support it (see panel on page 66 of the Annual Report). The Group’s risk management strategy is broadly unchanged from 2009. ### Assigning responsibilities Responsibility for risk management resides at all levels within the Group, from the Board and the Executive Committee down through the organisation to each business manager and risk specialist. Barclays distributes these responsibilities so that risk/return decisions are taken at the most appropriate level; as close as possible to the business, and subject to robust and effective review and challenge. The responsibilities for effective review and challenge reside with senior managers, risk oversight committees, Barclays Internal Audit, the independent Group Risk function, the Board Risk Committee and, ultimately, the Board. The Board is responsible for approving risk appetite (see page 7), which is the level of risk the Group chooses to take in pursuit of its business objectives. The Chief Risk Officer regularly presents a report to the Board summarising developments in the risk environment and performance trends in the key portfolios. The Board is also responsible for the Internal Control and Assurance Framework (Group Control Framework). It oversees the management of the most significant risks through the regular review of risk exposures and related key controls. Executive Management responsibilities relating to these are set via the Group’s Principal Risks Policy. The Board Risk Committee (BRC) monitors the Group’s risk profile against the agreed appetite. Where actual performance differs from expectations, the actions being taken by management are reviewed to ensure that the BRC is comfortable with them. After each meeting, the Chair of the BRC prepares a report for the next meeting of the Board. Barclays first established a separate Board Risk Committee in 1999 and all members are non-executive directors. The Finance Director and the Chief Risk Officer attend each meeting as a matter of course and the Chief Risk Officer has a dotted reporting line to the Chair. The BRC receives regular and comprehensive reports on risk methodologies and the Group’s risk profile including the key issues affecting each business portfolio and forward risk trends. The Committee also commissions in-depth analyses of significant risk topics, which are presented by the Chief Risk Officer or senior risk managers in the businesses. The Chair of the Committee prepares a statement each year on its activities (see pages 163-164 of the Annual Report). The Board Audit Committee receives quarterly reports on control issues of significance and a half-yearly review of the adequacy of impairment allowances, which it reviews relative to the risk inherent in the portfolios, the business environment, the Group’s policies and methodologies and the performance trends of peer banks. The Chair of the Board Audit Committee also sits on the Board Risk Committee. See pages 160 to 162 of the Annual Report for additional details on the membership and activities of the Board Audit Committee. The Board Remuneration Committee receives advice from the Board Risk Committee on the management of remuneration risk, including advice on the setting of performance objectives in the context of incentive packages. Summaries of the relevant business, professional and risk management experience of the Directors of the Board are given on pages 9 to 11 of the Annual Report. The terms of reference for each of the principal Board Committees are available from the Corporate Governance section at: www.aboutbarclays.com. The Chief Risk Officer is a member of the Executive Committee and has overall day to day accountability for risk management under delegated authority from the Finance Director. The Finance Director must consult the Chairman of the Board Risk Committee in respect of the Chief Risk Officer’s performance appraisal and compensation as well as all appointments to or departures from the role. The Chief Risk Officer manages the independent Group Risk function and chairs the Group Risk Oversight Committee, which monitors the Group’s risk profile relative to established risk appetite. Reporting to the Chief Risk Officer, and working in the Group Risk function, are risk-type heads for: retail credit risk, wholesale credit risk, market risk, operational risk, financial crime risk and capital demand. Along with their teams, the risk-type heads are responsible for establishing a Group-wide framework for risk control and oversight. These risk-type teams liaise with each business as part of the monitoring and management processes. In addition, each business unit has an embedded risk management function, headed by a business risk director. Business risk directors and their teams are responsible for assisting business heads in the identification and management of their business risk profiles and for implementing appropriate controls. These teams also assist Group Risk in the formulation of Group policies and their implementation across the businesses. The business risk directors report jointly to their respective business heads and to the Chief Risk Officer. The risk type heads within the central Group Risk function and the business risk directors within the business units report to the Chief Risk Officer and are members of the Group Risk Oversight Committee. For further details on the management of each of the principal risks, see pages 74 to 81 of the Annual Report. Internal Audit is responsible for the independent review of risk management and the control environment. Its objective is to provide reliable, valued and timely assurance to the Board and Executive Management over the effectiveness of controls, mitigating current and evolving high risks and in so doing enhancing the controls culture within the Group. The Board Audit Committee reviews and approves Internal Audit’s plans and resources, and evaluates the effectiveness of Internal Audit. An assessment by external advisers is also carried out periodically. In addition to the Committees shown in the chart, there is a Brand and Reputation Committee reviewing emerging issues with potentially significant reputational impact. Risk management responsibilities are laid out in the Principal Risks Policy, which covers the categories of risk in which the Group has its most significant actual or potential risk exposures. The Principal Risks Framework: * creates clear ownership and accountability; * ensures the Group’s most significant risk exposures are understood and managed in accordance with agreed risk appetite (for financial risks) and risk tolerances (for non-financial risks); and * ensures regular reporting of both risk exposures and the operating effectiveness of controls. Each Principal Risk is owned by a senior individual within Barclays, known as the Group Principal Risk Owner (GPRO). The GPRO is required to document, communicate and maintain a risk control framework, which makes clear the mandated control requirements in managing exposures to that Principal Risk, for every business across the firm. These control requirements are given further specification, according to the business unit or risk type, to provide a complete and appropriate system of internal control. Business unit and Group centre function heads are responsible for obtaining ongoing assurance that the controls they have put in place to manage the risks to their business objectives are operating effectively. Six-monthly reviews support the regulatory requirement for the Group to make a statement about its system of internal controls (the ‘Turnbull’ statement), in the Annual Report and Accounts. GPROs report their assessments of the risk exposure and control effectiveness to Group-level oversight committees. Their assessments form the basis of the reports that go to the Board Risk Committee. --- ### Risk management processes at Barclays One of the main objectives of managing risk is to ensure that Barclays achieves an adequate balance between capital requirements and resources. In addition to the modelling of credit, market, operational and other risks, Barclays uses several tools to ensure that risk is properly assessed and mitigated. The main elements are summarised below. #### The Group Stress Testing framework A fundamental duty of risk management is to ensure that organisations do not neglect to prepare for the worst event as they plan for success. Stress testing helps Barclays to understand how its portfolios would react if business conditions became significantly more challenging. We generate specific forward-looking scenarios and analyse how well our profitability would be maintained, whether our levels of capital would be adequate and what managers could do in advance to mitigate the risk. Barclays uses stress testing techniques at Group, portfolio and product level and across a range of risk types. For example, portfolio management in the US cards business employs stressed assumptions of unemployment to determine profitability hurdles for new accounts. In the UK mortgage business, affordability thresholds incorporate stressed estimates of interest rates. In the Investment Banking division, global scenario testing is used to gauge potential losses that could arise in conditions of extreme market stress. Stress testing is also conducted on positions in particular asset classes, including interest rates, commodities, equities, credit and foreign exchange. At the Group level, stress tests capture a wide range of macroeconomic variables that are relevant to the current environment, such as: * GDP * Unemployment * Asset prices * Interest rates. The Board Risk Committee agrees the range of scenarios to be tested and the independent Group Risk function co-ordinates the process, using bottom-up analysis performed by the businesses. The results of the stress tests are presented to the Executive Committee, the Board Risk Committee, the Board and the UK Financial Services Authority (FSA). In 2010, the range of stress scenarios included the stress test set out by the FSA as part of its assessment of the Group’s resilience to stressed credit risk, market risk and economic conditions over a five-year period. This stress scenario analysis took into account a wide range of factors, including: * the Group’s revenue generation potential given stressed macroeconomic variables such as GDP and interest rates; * the effect of the scenario on the probability of default and possible losses given default within its loan book; and * possible declines in the market value of assets held in the trading books caused by the stress. Following this work and discussion with the FSA, the Group was able to confirm that its capital resources, after exposure to the stress, were expected to continue to meet the FSA’s capital requirements. In addition, Barclays, along with 90 other banks, was included in the Committee of European Banking Supervisors’ (CEBS)$^a$ stress test performed in July 2010. The stress test was designed to assess the resilience of the EU banking sector and each of the selected banks’ ability to absorb possible shocks on credit and market risks, including sovereign risks. Under the scenario considered, results indicated that Barclays would be well-placed to withstand the stress. In 2010, Barclays integrated ‘reverse’ stress testing into the Group-wide stress testing process. Reverse stress testing aims to identify the conditions that would result in the business model no longer being viable, such as extreme macroeconomic downturn scenarios or specific idiosyncratic events. This is being used to help support the on-going risk management of the Group, for example reverse stress testing has been integrated into the Risk Appetite framework. This also supports the Group in meeting new regulatory requirements in regards to reverse stress testing. Information on the Group’s stress testing specifically relating to liquidity risk can be found within the Liquidity risk management section on page 80. $^a$ On 7th February 2011 CEBS was renamed the European Banking Authority --- ### The Group Risk Appetite framework Risk Appetite is defined as the level of risk that Barclays is prepared to sustain whilst pursuing its business strategy, recognising a range of possible outcomes as business plans are implemented. Barclays framework combines a top-down view of its capacity to take risk with a bottom-up view of the business risk profile associated with each business area’s medium term plans. The risk appetite is ultimately approved by the Board. The Risk Appetite framework consists of two elements: ‘Financial Volatility’ and ‘Mandate & Scale’. Taken as a whole, the Risk Appetite framework provides a basis for the allocation of risk capacity across Barclays Group. Financial Volatility is defined as the level of potential deviation from expected financial performance that Barclays is prepared to sustain at relevant points on the risk profile. The Board sets the Group’s financial volatility Risk Appetite in terms of broad financial objectives (ie ‘top down’) on through the cycle, 1 in 7 and 1 in 25 severity levels. The Group’s risk profile is assessed via a ‘bottom-up’ analysis of the Group’s business plans to establish the financial volatility. If the projections entail too high a level of risk (i.e breach the top-down financial objectives at the through the cycle, 1 in 7 or 1 in 25 level), management will challenge each area to rebalance the risk profile to bring the bottom-up Risk Appetite back within top-down appetite. Performance against Risk Appetite usage is measured and reported to the Executive Committee and the Board regularly throughout the year. To measure the risk entailed by the business plans, management estimates the potential earnings volatility from different businesses under various scenarios, represented by severity levels: * expected loss: the average credit losses based on measurements over many years; * 1 in 7 (moderate) loss: the worst level of losses out of a random sample of 7 years; * 1 in 25 (severe) loss: the worst level of losses out of a random sample of 25 years. These potentially larger but increasingly less likely levels of loss are illustrated in the Risk Appetite concepts chart on page 69 of the Annual Report. Since the level of loss at any given probability is dependent on the portfolio of exposures in each business, the statistical measurement for each key risk category gives the Group clearer sight and better control of risk-taking throughout the enterprise. Specifically, Barclays believes that this framework enables it to: * improve management confidence and debate regarding the Group’s risk profile; * re-balance the risk profile of the medium-term plan where breaches are indicated, thereby achieving a superior risk-return profile; * identify unused risk capacity, and thus highlight the need to identify further profitable opportunities; * improve executive management control and co-ordination of risk-taking across businesses. The second element to the setting of Risk Appetite in Barclays is an extensive system of Mandate & Scale limits, which is a risk management approach that seeks to formally review and control business activities to ensure that they are within Barclays mandate (i.e. aligned to the expectations of external stakeholders), and are of an appropriate scale (relative to the risk and reward of the underlying activities). Barclays achieves this by using limits and triggers to avoid concentrations, which would be out of line with external expectations, and which may lead to unexpected losses of a scale that would be detrimental to the stability of the relevant business line or of the Group. These limits are set by the independent Risk function, formally monitored each month and subject to Board-level oversight. For example, in our commercial property finance portfolios, a comprehensive series of limits are in place to control exposure within each business and geographic sector. To ensure that limits are aligned to the underlying risk characteristics, the Mandate & Scale limits differentiate between types of exposure. There are, for example, individual limits for property investment and property development and for senior and subordinated lending. Since the onset of the global economic downturn, these limits have been reduced significantly and the frequency of review has been increased. The Group’s exposure to Ireland has been restricted through the recent reduction in Mandate & Scale limits. Barclays uses the Mandate & Scale framework to: * limit concentration risk; * keep business activities within Group and individual business mandate; * ensure activities remain of an appropriate scale relative to the underlying risk and reward; * ensure risk-taking is supported by appropriate expertise and capabilities. As well as Group-level Mandate & Scale limits, further limits are set by risk managers within each business unit, covering particular portfolios. --- ### Relationship between Risk Appetite and Stress Testing Stress testing occurs throughout the Bank and it helps to ensure that our medium term plan has sufficient flexibility to remain appropriate over a multi-year time horizon during times of stress. Stress testing allows us to analyse a specific potential economic scenario or event using defined macro and market based parameters. The results of a stress test, whether at a Group or business level, will produce an output that could be compared to a point in the curve of our Financial Volatility based statistical outcomes, although stress tests are scenario based and as such are not calibrated to a specific confidence level. Given that the Stress Testing, Risk Appetite, and medium term planning timelines are all aligned, the outputs of stresses are used by risk functions throughout the Group to inform Risk Appetite (particularly at a business level). The outputs of stresses also feed into the setting of Mandate & Scale limits. For example, via the use of primary and secondary stresses in Market Risk, we identify and limit the scale of risks that DVaR would not automatically capture. Reverse stress testing also supports our Risk Appetite framework. Reverse stress testing starts with defining a worst case set of metrics and deduces a scenario that could theoretically cause that situation to occur. This will help to ensure that we understand the tail risks across our books and explain what would have to happen to generate a change in strategy. Group reverse stress testing also identifies risks that in one business alone would not have been sufficient to be a critical event, thereby complementing the Financial Volatility and Mandate & Scale processes. ### Measurement of capital requirements Regulatory capital requirements are calculated on the basis of Pillar 1 and Pillar 2 of the Basel framework. Pillar 1 capital covers credit, market and operational risks. The calculation methods (including formulae and ratings per exposure category) are specified by Basel II rules. Pillar 2 capital can also be held against the three risk types above, but mainly covers other types of risk. Barclays uses its own internal economic capital framework and stress testing processes to help determine Pillar 2 capital, though the final decision rests with the regulator. Barclays calculates economic capital requirements based on its own internal framework, which is regularly enhanced and benchmarked to external reference points. It therefore represents the Group’s view of the risk profile of the firm. While it is used to support the assessment of Pillar 2 regulatory requirements, its main purpose is to drive business decision-making. The Group assigns economic capital primarily within the following risks: retail and wholesale credit risk, market risk, operational risk, fixed assets, private equity and pension risk. --- ## Capital Risk Management Capital risk is the risk that the Group has insufficient capital resources to: * meet minimum regulatory requirements in the UK and in other jurisdictions such as the United States and South Africa where regulated activities are undertaken. The Group’s authority to operate as a bank is dependent upon the maintenance of adequate capital resources; * support its credit rating. A weaker credit rating would increase the Group’s cost of funds; * support its growth and strategic options. ### Organisation and structure Barclays operates a centralised capital management model, considering both regulatory and economic capital. The Group’s capital management objectives are to maintain sufficient capital resources to: * ensure the financial holding company is well capitalised relative to the minimum regulatory capital requirements set by the UK FSA and the US Federal Reserve; * ensure locally regulated subsidiaries can meet their minimum regulatory capital requirements; * support the Group’s Risk Appetite and Economic Capital requirements; and * support the Group’s credit rating. Capital is allocated to businesses to support the Group’s strategic objectives, including optimising returns on regulatory and economic capital. The Group Treasury Committee manages compliance with the Group’s capital management objectives. The Committee reviews actual and forecast capital demand and resources on a monthly basis. The processes in place for delivering the Group’s capital management objectives are to: * establishment of internal targets for capital demand and ratios; * manage capital ratio sensitivity to foreign exchange movement; and * manage local entity regulatory capital adequacy. In addition to the processes above, the Group Risk Oversight Committee and the Board Risk Committee annually review risk appetite and analyse the impacts of stress scenarios on the Group capital forecast (see page 6) in order to understand and manage the Group’s projected capital adequacy. ### Internal targets To support its capital management objectives, the Group sets internal targets for its key capital ratios. Internal targets are reviewed regularly by Group Treasury Committee to take account of: * changes in forecast demand for capital caused by accessing new business opportunities, including mergers and acquisitions; * flexibility in debt capital issuance and securitisation plans; * the possible impact of stress scenarios including: - changes in forecast demand for capital from unanticipated drawdown of committed facilities or as a result of deterioration in the credit quality of the Group’s assets; - changes in forecast profits and other capital resources; and - changes to capital resources and forecast demand due to foreign exchange rate movements. ### Managing capital ratio sensitivity to foreign exchange rate movements The Group has capital resources and RWAs denominated in foreign currencies. Changes in foreign exchange rates result in changes in the Sterling equivalent value of foreign currency denominated capital resources and RWAs. As a result, the Group’s regulatory capital ratios are sensitive to foreign currency movements. The Group’s capital ratio hedge strategy is to minimise the volatility of the capital ratios caused by foreign exchange rate movements. To achieve this, the Group aims to maintain the ratio of foreign currency Core Tier 1, Tier 1 and Total Capital resources to foreign currency RWAs the same as the Group’s capital ratios. The Group’s foreign currency capital resources include investments in subsidiaries and branches, intangible assets, non-controlling interest, deductions from capital and debt capital instruments. --- The Group’s investments in foreign currency subsidiaries and branches create Core Tier 1 capital resources denominated in foreign currencies. Changes in the Sterling value of the investments due to foreign currency movements are captured in the currency translation reserve, resulting in a movement in Core Tier 1 capital. To create foreign currency Tier 1 and Total Capital resources additional to the Core Tier 1 capital resources, the Group issues, where possible, debt capital in non-Sterling currencies. This is primarily achieved by the issuance of debt capital from Barclays Bank PLC, but can also be achieved by subsidiaries issuing capital in local currencies. In some circumstances, investments in foreign currency subsidiaries and branches are hedged. In these circumstances, foreign currency capital resources are not created. Hedging decisions take into account the impact on capital ratios, the strategic nature of the investment, the cost of hedging, the availability of a suitable foreign exchange market and prevailing foreign exchange rates. Depending on the value of foreign currency net investments, it is not always possible to maintain the ratio of Core Tier 1 capital to RWAs consistent with the Group’s Core Tier 1 ratio in all currencies, leaving some capital ratio sensitivity to foreign currency movements. The investment of proceeds from the issuance of equity accounted foreign currency preference shares also contributes to foreign currency capital resources. If a preference share issuance is redeemed, the cumulative movement from the date of issuance in the currency translation reserve will be offset by an equal and opposite movement in reserves reflecting the revaluation of the preference shares to prevailing foreign exchange rates. Issuance of a replacement Tier 1 instrument in the same currency will maintain the hedge of the Tier 1 ratio. ### Local entity regulatory capital adequacy The Group manages its capital resources to ensure that those Group entities that are subject to local capital adequacy regulation in individual jurisdictions meet their minimum capital requirements. Local management manages compliance with entities minimum regulatory capital requirements by reporting to local Asset and Liability Committees with oversight by The Treasury Committee, as required. Injections of capital resources into Group entities are centrally controlled by the Group Treasury Committee, under authorities delegated from the Group Executive Committee. The Group’s policy is for surplus capital held in Group entities to be repatriated to Barclays Bank PLC in the form of dividends and/or capital repatriation, subject to local regulatory requirements, exchange controls and tax implications. Other than as indicated above, the Group is not aware of any material impediments to the prompt transfer of capital resources or repayment of intra-group liabilities when due. ### Allocating capital in the Group’s strategic medium-term plan Capital adequacy and returns on regulatory and economic capital form a key part of the Group’s annual strategic medium-term planning process. Amongst other strategic objectives, the Group seeks to optimise returns on economic and regulatory capital through the planning process. To achieve this, executive management consider returns on RWAs and economic capital when setting limits for business capital demand. Executive management will also review the forecast capital ratios to ensure internal targets continue to be met over the medium-term plan. The Treasury Committee reviews the limits on capital demand on a monthly basis taking into account actual performance. --- ## Barclays Capital Adequacy ### Capital Resources Table 1 shows regulatory capital resources held by Barclays to meet the requirements set out by the regulators. Capital is classified as “Tier 1” and “Tier 2”, depending on regulatory assessment of the degree to which the capital can absorb losses. “Core Tier 1” capital is a narrower measure, which only includes resources deemed to be very close to equity in nature. Under Core Tier 1 resources, the following are included before various regulatory deductions$^b$: * Ordinary shareholders’ funds, which include: - The cumulative proceeds from the issuance of ordinary shares at their nominal value. See note 28 in the Barclays Bank PLC Annual Report for more details. These instruments confer a share of ownership in the bank, and carry no obligations; - Share Premium Account, the cumulative proceeds from share issuance beyond the nominal value. See note 29 in the Annual Report for more information on the share capital of Barclays; - Retained earnings, which represent the cumulative profits not distributed to shareholders, and other eligible reserves. These reserves are not linked to financial instruments; they are funds on the balance sheet that are available to absorb losses. * Equity non-controlling interests: This includes minority interests in subsidiaries. Deductions from Core Tier 1 resources include intangible assets, 50% of relevant securitisation positions and 50% of the excess of expected loss over impairment. The following resources, when added to Core Tier 1 capital and after deductions make up Tier 1 capital: * Proceeds from the issuance of preference shares in Barclays Bank plc. Information on the terms and conditions of preference shares can be found in note 28 of the Barclays Bank PLC Annual Report; * Innovative tier 1 capital is composed of Reserve Capital Instruments (RCIs), which comprise instruments that are both debt and equity accounted. More information on these can be found in note 23 of the Annual report. * Tier one notes (TONs) terms and conditions are contained in note 23 of the Annual Report. The most material deduction from Tier 1 is for 50% of material holdings in other financial companies are deducted from Tier 1 capital. Tier 2 capital comprises the following resources: * Eligible reserves under Tier 2, including revaluation reserves, and unrealised gains on equity holdings; * Non-controlling interests in Tier 2 capital; * Collective impairment; * Subordinated loan capital – see note 23 of the Annual Report for more information. These instruments are debt obligations, which are subordinated to senior debt holders and account holders. The remaining 50% of relevant securitisation positions, the excess of expected loss over impairment and material holdings in other financial companies are deducted from Tier 2 capital. Finally, total net capital resources are obtained by applying deductions for investments in the capital of non-consolidated subsidiaries from the total of Tier 1 and Tier 2 capital. The table on the next page represents the Group’s capital position at 31 December 2010. --- $^b$ Note some references on this page are to the Barclays Bank PLC Annual Report, which is distinct from the Barclays PLC Annual Report (referred to as ‘Annual Report’ throughout this document). --- Table 1: Tier 1 and Tier 2 Capital Resources | | As at 31.12.10 (£m) | As at 31.12.09 (£m) | | :--- | :--- | :--- | | Ordinary shareholders' funds | 50,858 | 47,277 | | Regulatory adjustments to reserves: | | | | - Available for sale reserve - debt | 340 | 83 | | - Available for sale reserve - equity | - | (309) | | - Cash flow hedging reserve | (152) | (252) | | - Defined benefit pension scheme | 99 | 431 | | - Adjustments for scope of regulatory consolidation | 99 | 196 | | - Foreign exchange on RCIs and upper Tier 2 loan stock | 209 | 25 | | - Adjustment for own credit | (621) | (340) | | - Other adjustments | (40) | 144 | | Equity non-controlling interests | 2,923 | 2,351 | | Less: Intangible assets | (8,326) | (8,345) | | Less: Net excess of expected loss over impairment at 50% | (168) | (25) | | Less: Securitisation positions at 50% | (2,360) | (2,799) | | **Core Tier 1 capital** | **42,861** | **38,437** | | Preference shares$^1$ | 6,317 | 6,256 | | Reserve Capital Instruments$^2$ | 6,098 | 6,724 | | Tier 1 Notes | 1,046 | 1,017 | | Tax on the net excess of expected loss over impairment | (100) | 8 | | Less: Material holdings in financial companies at 50% | (2,676) | (2,805) | | **Total qualifying Tier 1 capital** | **53,546** | **49,637** | | Revaluation reserves | 29 | 26 | | Available for sale reserve - equity | - | 309 | | Collectively assessed impairment allowances | 2,409 | 2,443 | | Tier 2 non-controlling interests | 572 | 547 | | Qualifying subordinated liabilities: | | | | - Undated loan capital | 1,648 | 1,350 | | - Dated loan capital | 16,565 | 15,657 | | Less: Net excess of expected loss over impairment at 50% | (168) | (25) | | Less: Securitisation positions at 50% | (2,360) | (2,799) | | Less: Material holdings in financial companies at 50% | (2,676) | (2,805) | | **Total qualifying Tier 2 capital** | **16,019** | **14,703** | | Less: Other regulatory deductions | (2,250) | (880) | | **Total net capital resources** | **67,315** | **63,460** | Core Tier 1 capital increased by £4.4bn to £42.9bn in 2010 (2009: £38.4bn). £3.6bn of this increase was a result of attributable profit. In addition £1.5bn of equity was issued following the exercise of warrants and £0.7bn additional Core Tier 1 was reflected in the currency translation reserve. These were offset by net losses on available for sale equity positions, of which BlackRock Inc. was £0.9bn, and dividends paid of £0.5bn. Total qualifying Tier 1 capital increased by £3.9bn in 2010 as the increase in Core Tier 1 capital was offset by the redemption of Reserve Capital Instruments of £0.7bn. Total net capital resources increased by £3.9bn in 2010 reflecting the growth in Tier 1 capital and an increase in total qualifying Tier 2 capital, primarily due to the net issuance of additional subordinated debt of £0.9bn. This was offset by an increase in other regulatory deductions for investments in non-consolidated subsidiaries and associates of £1.4bn. Notes on Table 1: $^1$ Hybrid capital, which is capital that features characteristics typical of both debt and equity instruments. $^2$ Hybrid capital (sometimes referred to as “innovative capital”) with incentive to redeem, i.e. with interest rate that increases on a certain date unless called by the issuer. --- ## Minimum Capital Requirements and Risk Weighted Assets (RWA) analysis Under Basel 2, capital requirements against risk weighted exposures are 8% of the associated RWAs. The following table provides a breakdown of the Group’s RWAs by risk type. Table 2: Minimum capital requirement and risk weighted assets | As at 31.12.10 | Capital Requirement (£m) | RWA (£m) | | :--- | :--- | :--- | | Standardised Approach Credit Risk | 6,924 | 86,553 | | Advanced and Foundation IRB Approach Credit Risk | 13,956 | 174,445 | | Counterparty Credit Risk | 3,509 | 43,863 | | **Total Credit Risk** | **24,389** | **304,861** | | Market Risk | 4,884 | 61,051 | | Operational Risk | 2,570 | 32,119 | | **Total** | **31,843** | **398,031** | | As at 31.12.09 | Capital Requirement (£m) | RWA (£m) | | :--- | :--- | :--- | | Standardised Approach Credit Risk | 7,242 | 90,525 | | Advanced and Foundation IRB Approach Credit Risk | 12,922 | 161,529 | | Counterparty Credit Risk | 3,636 | 45,450 | | **Total Credit Risk** | **23,800** | **297,504** | | Market Risk | 4,362 | 54,526 | | Operational Risk | 2,450 | 30,623 | | **Total** | **30,612** | **382,653** | In 2010 the Group’s capital requirement increased by £1.2bn to £31.8bn (2009: £30.6bn). The increase in the Group requirement was driven by foreign exchange movements, and methodology and model changes which more than offset efficiency gains in the use of capital. Credit risk and market risk, which increased £0.6bn and £0.5bn respectively, account for the majority of the increase. Note that the capital requirement for Standardised Approach Credit Risk is different from that shown in table 3. This small difference is due to the inclusion of capital requirements against positions falling under the “aggregation plus” method in the table above. Note that Barclays had no subsidiaries outside the scope of regulatory consolidation that had capital resources less than their required minimum at 31st December 2010. --- ## Capital Requirements for credit risk The following table represents the Group’s credit risk capital requirement for exposures measured under the Standardised approach method. More details on the calculation of exposures and risk weighting under the Standardised approach may be found on page 56. Table 3: Minimum capital requirement for credit risk under the Standardised approach | Standardised Credit Risk Exposure Class | As at 31.12.10 (£m) | As at 31.12.09 (£m) | | :--- | :--- | :--- | | Central governments or central banks | 246 | 191 | | Regional governments or local authorities | 3 | 11 | | Administrative bodies and non-commercial undertakings | 5 | 6 | | Institutions | 108 | 99 | | Corporates | 3,282 | 3,328 | | Retail | 1,691 | 1,732 | | Secured on real estate property | 917 | 943 | | Past due items | 426 | 450 | | Private Equity$^1$ | 146 | 413 | | Covered bonds | 5 | - | | Securitisation positions | 24 | - | | Collective investment undertakings | 8 | 11 | | Other items | 37 | 50 | | **Total Standardised Requirement** | **6,898** | **7,234** | The capital requirement for Standardised Approach Credit Risk is different from that shown in table 2 (£6,924m) because positions falling under the “aggregation plus” method are not included in table 3. In 2010 capital requirements decreased £0.3bn to £6.9bn (2009: £7.2bn), driven mainly by lower capital requirements for private equity (down £0.3bn to £0.1bn, from £0.4bn in 2009) which is now, in the main, treated as a deduction. Exposure amounts in other classes were broadly stable. Exposures under Central Governments and Central Banks increased following enhancements to the Group’s liquidity position. Notes on Table 3: $^1$ The “Private Equity” category is comprised of exposures that would fall under the “Items belonging to regulatory high risk categories” in the FSA rules. --- Table 4: Minimum capital requirement for credit risk under the IRB approach | IRB Exposure Class | As at 31.12.10 (£m) | As at 31.12.09 (£m) | | :--- | :--- | :--- | | Central governments or central banks | 165 | 109 | | Institutions | 224 | 242 | | Corporates | 7,011 | 7,140 | | Retail | | | | - Small and medium enterprises (SME) | 672 | 683 | | - Secured by real estate collateral | 1,961 | 1,521 | | - Qualifying revolving retail | 1,072 | 995 | | - Other retail | 894 | 817 | | Equity - simple risk weight approach | | | | - Exchange traded exposures | 24 | 34 | | - Private equity exposures | 179 | 158 | | - Other exposures | - | - | | Securitisation positions | 658 | 299 | | Non-credit obligation assets | 1,096 | 924 | | **Total IRB Requirement** | **13,956** | **12,922** | In 2010 minimum capital requirements under the IRB approach increased £1.1bn to £14.0bn (2009: £12.9bn). Capital requirements against total retail credit exposures rose by £0.6bn to £4.6bn (2009: £4.0bn), with Absa showing the biggest increase, and against securitisation positions, by £0.4bn to £0.7bn (2009: £0.3bn). Securitisation positions increased within Barclays Capital driven by a change in the regulatory treatment of the Protium transaction. See page 114 in the Annual Report for information on the loan to Protium. --- ## Capital Requirements for Market Risk Information on the management of market risk is found in the “Market Risk Management” section on page 70. Barclays market risk capital requirements comprise three elements: 1) Trading book positions where the market risk is measured under an FSA approved Daily Value at Risk (DVaR) model. 2) Trading book positions that have not yet met the conditions for inclusion within the approved DVaR model. Their capital requirement is calculated using Standardised rules. 3) Positions within overseas subsidiaries which operate under the capital requirements of their local regulators and are recognised as equivalent regimes by the FSA. In such cases, the FSA requires that the local capital requirement is aggregated with the Group total. Table 5: Minimum capital requirement for market risk and counterparty risk | Market Risk | As at 31.12.10 (£m) | As at 31.12.09 (£m) | | :--- | :--- | :--- | | DVaR Model Based PRR$^1$ | 1,038 | 1,280 | | Interest rate PRR | 1,420 | 1,304 | | Equity PRR | 152 | 184 | | Option PRR | 5 | 24 | | Collective investment schemes PRR | 98 | 101 | | Commodity PRR | 104 | 87 | | Foreign exchange PRR | 12 | 1 | | Local Regulatory Aggregated PRR | 2,055 | 1,381 | | **Total Market Risk Capital Requirement** | **4,884** | **4,362** | | **Counterparty risk capital component** | **3,509** | **3,636** | In 2010 the total capital requirement for market risk increased by £0.5bn to £4.9bn (2009: £4.4bn) mainly due to higher requirements for Local Regulatory Aggregated PRR, which stemmed from the equities business of Barclays Capital in the United States. The DVaR model Based PRR decreased by £0.3bn to £1.0bn (2009: £1.3bn), reflecting lower client activity, increased diversification and the rolling off of the 2008, highly volatile, historical data points from the DVaR calculation. Note on Table 5: $^1$ PRR: Position Risk Requirement --- ## Capital for Operational Risk The following table details the Group’s operational risk capital requirement. Barclays has approval from the FSA to calculate its operational risk capital requirement using a Basel II Advanced Measurement Approach (AMA), although recently acquired businesses are excluded from this approval. Barclays uses the Basic Indicator Approach or the Standardised approach while it transitions these areas to AMA. More information about Barclays operational risk modelling may be found in pages 78 and 79. Table 6: Minimum capital requirement for operational risk | Operational Risk | As at 31.12.10 (£m) | As at 31.12.09 (£m) | | :--- | :--- | :--- | | Operational Risk - Basic Indicator Approach | 131 | 136 | | Operational Risk - Standardised Approach | 48 | 26 | | Operational Risk - Advanced Measurement Approach | 2,391 | 2,288 | | **Total Operational Risk Capital Requirement** | **2,570** | **2,450** | In 2010, Barclays operational risk capital requirements increased £0.1bn to £2.6bn (2009: £2.5bn), in line with business risk growth, foreign exchange movements and some small portfolios acquisitions. --- ## Credit Risk Management ### Credit Risk Management Strategy Credit risk is the risk of suffering financial loss should any of the Group’s customers, clients or market counterparties fail to fulfil their contractual obligations to the Group. The granting of credit is one of the Group’s major sources of income and, as the most significant risk, the Group dedicates considerable resources to its control. The credit risk that the Group faces arises mainly from wholesale and retail loans and advances together with the counterparty credit risk arising from derivative contracts entered into with our clients. Other sources of credit risk arise from trading activities, including debt securities, settlement balances with market counterparties, available for sale assets and reverse repurchase loans. Credit risk management objectives are to: * establish a framework of controls to ensure credit risk-taking is based on sound credit risk management principles; * identify, assess and measure credit risk clearly and accurately across the Group and within each separate business, from the level of individual facilities up to the total portfolio; * control and plan credit risk-taking in line with external stakeholder expectations and avoiding undesirable concentrations; * monitor credit risk and adherence to agreed controls; and * ensure that risk-reward objectives are met. In the review of Barclays credit risk management that follows, we explain how the Group meets its credit risk management objectives through its organisation, structure and governance, mitigation techniques, measurement and reporting. ### Organisation and structure Barclays has structured the responsibilities of credit risk management so that decisions are taken as close as possible to the business, whilst ensuring robust review and challenge of performance, risk infrastructure and strategic plans. The credit risk management teams in each business are accountable to the business risk directors in those businesses who, in turn, report to the heads of their businesses and also to the Chief Risk Officer. The role of the Group Risk function is to provide Group-wide direction, oversight and challenge of credit risk-taking. Group Risk sets the Credit Risk Control Framework, within which credit risk is managed together with supporting Group Credit Risk Policies. Group Risk also provides technical support, review and validation of credit risk measurement models across the Group. Group Credit Risk Policies currently in force include: * Maximum Exposure Guidelines to limit the exposures to an individual customer or counterparty; * Country risk policies to specify risk appetite by country and avoid excessive concentration of credit risk in individual countries; * Aggregation policy to set out the circumstances in which counterparties should be grouped together for credit risk purposes; * Expected loss policies to set out the approaches for the calculation of the Group’s expected loss, i.e. measure of anticipated loss for exposures; * Repayment plans policy for setting the standards for repayment plans and restructures within retail portfolios; and * Impairment and provisioning policies to ensure that measurement of impairment accurately reflects incurred losses and that clear governance procedures are in place for the calculation and approval of impairment allowances. The largest credit exposures are approved at the Credit Committee, which is managed by Group Risk. Group Risk also manages and approves the Mandate & Scale limits and triggers that mitigate concentration risk and define appetite in risk sensitive areas of the portfolio such as commercial property finance (see page 7). The principal committees that review credit risk management, approve overall Group credit policy and resolve all significant credit policy issues are the Board Risk Committee, the Group Risk Oversight Committee, the Wholesale Credit Risk Management Committee and the Retail Credit Risk Management Committee. Senior Group and business risk management are represented on the Group Risk Oversight Committee, the Wholesale Credit Risk Management Committee and the Retail Credit Risk Management Committee. On a semi-annual basis, the Credit Risk Impairment Committee (CRIC) obtains assurance on behalf of the Group that all businesses are recognising impairment in their portfolios accurately, promptly and in accordance with policy, accounting standards and established governance. CRIC is chaired by the Credit Risk Director and reviews the movements in impairment, including those already agreed at Credit Committee, as well as potential credit risk loans, loan loss rates, asset quality metrics and impairment coverage ratios. CRIC makes twice-yearly recommendations to the Board Audit Committee on the adequacy of Group impairment allowances. Impairment allowances are reviewed relative to the risk in the portfolio, business and economic trends, current policies and methodologies, and the Group’s position relative to peer banks. More information on credit risk management is found in pages 82 to 117 of the Annual Report. --- ## Credit Internal Ratings Based Approach ### Scope of permission of Internal Ratings Based approach Barclays has regulatory approval to use its internal credit models in the calculation of the majority of its credit risk and counterparty credit risk exposures (OTC derivatives, repurchase and reverse repurchase and stock borrow loan transactions). The following table summarises the principal portfolios within Barclays that use the Standardised, Foundation IRB and Advanced IRB approaches as at December 2010: Table 7: The scope of the Standardised and IRB approaches | Business | Standardised Approach | Foundation IRB Approach | Advanced IRB Approach | | :--- | :--- | :--- | :--- | | Barclays Capital | Fund of funds, insurance, certain non-UK or emerging market portfolios | None | Most portfolios | | Barclays Wealth | All portfolios | None | None | | UK Retail Banking | Certain minor portfolios within personal accounts, mortgages and consumer loans | None | Most portfolios | | Barclays Corporate | Non UK portfolios, asset and sales finance, New Markets and Western Europe portfolios | None | Larger and Medium business portfolios, trade finance portfolios | | Barclaycard | Non UK portfolios | None | UK retail credit cards | | Western Europe Retail Banking | All other portfolios | None | Mortgages Portugal, most Mortgages Italy | | Barclays Africa | All portfolios | None | None | | Absa | Certain minor portfolios | Wholesale portfolios | Retail portfolios | | Head office Functions and other operations | None | None | All portfolios | ### Measurement, reporting and internal ratings The principal objective of credit risk measurement is to produce the most accurate possible quantitative assessment of the credit risk to which the Group is exposed, from the level of individual facilities up to the total portfolio. Integral to this is the calculation of internal ratings, which are used in numerous aspects of credit risk management and in the calculation of regulatory and economic capital. The key building blocks of this process are: * Probability of default (PD); * Exposure at default (EAD); and * Loss given default (LGD). For example, Barclays can assign an expected loss over the next 12 months to each customer by multiplying these three factors. We calculate probability of default (PD) by assessing the credit quality of borrowers and other counterparties. For the sake of illustration, suppose a customer has a 2% probability of defaulting over a 12-month period. The exposure at default (EAD) is our estimate of what the outstanding balance will be if the customer does default. Supposing the current balance is £150,000, our models might predict a rise to £200,000 by then; the EAD is then £200,000. Should customers default, some part of the exposure is usually recovered. The part that is not recovered, together with the economic costs associated with the recovery process, comprise the loss given default (LGD), which is expressed as a percentage of EAD. Supposing the LGD in this case is estimated to be 50%, the expected loss for this customer is: 2% x £200,000 x 50% or £2,000. To calculate probability of default (PD), Barclays assesses the credit quality of borrowers and other counterparties and assigns them an internal risk rating. Multiple rating methodologies may be used to inform the overall rating decision on individual large credits, such as internal and external models, rating agency ratings and other market information. For smaller credits, a single source may suffice such as the result from an internal rating model. Barclays recognises the need for two different expressions of PD depending on the purpose for which it is used. Each PD model outputs an estimate of default probability that is point-in-time (PIT), through-the-cycle (TTC) or a hybrid (e.g. a 50:50 blend). Bespoke conversion techniques, appropriate to the portfolio in question, are then applied to convert the model output to pure PIT and TTC PD estimates. In deriving the appropriate conversion, industry and location of the counterparty and an understanding of the current and long-term credit conditions are considered. Both PIT and TTC PD estimates are recorded for each client. For the purposes of pricing and existing customer management, PDs should represent the best estimate of probability of default given the current position in the credit cycle and PIT PDs are employed. For the purposes of calculating regulatory and economic capital, long-run average TTC PDs are generally preferred although we only employ TTC methodologies where the FSA has agreed to the approach. In certain retail portfolios, for example unsecured products, the FSA requires the use of long run average point-in time PDs. Within Barclays, the calculation of internal ratings differs between wholesale and retail customers. For wholesale portfolios, the rating system is constructed to ensure that a client receives the same rating regardless of the part of the business with which it is dealing. To achieve this, a model hierarchy is adopted that requires users to adopt a specific approach to rating each counterparty depending upon the nature of the business and its location. A range of methods are utilised for estimating wholesale counterparty PDs. These include bespoke grading models developed within the Group (internal models), vendor models such as MKMV Credit Edge and RiskCalc, and a conversion of external alphabet ratings from either S&P, Moody’s or Fitch. Retail models, especially those used for capital purposes, are almost exclusively built internally using Barclays data. In many cases bureau data is used to complement internal data. In addition, in some low data/low default environments, external developments may also be utilised. --- A key element of the Barclays wholesale framework is the PD Masterscale (see below). This scale has been developed to distinguish meaningful differences in the probability of default risk throughout the risk range. In contrast to wholesale businesses, retail areas rarely bucket exposures into generic grades for account management purposes (although they may be used for reporting purposes). Instead, accounts are managed at a more granular and bespoke level. Table 8: Internal default grade probabilities | DG/TTC Band | Default Probability (>=Min) | Default Probability (Mid) | Default Probability ( 0 - < 0.15% | 118,393 | 102,021 | | EL Grade => 0.15 - < 0.3% | 14,282 | 13,224 | | EL Grade => 0.3 - < 0.8% | 8,228 | 7,337 | | EL Grade => 0.8 - < 2.15% | 3,657 | 3,132 | | EL Grade => 2.15 - < 4.45% | 939 | 681 | | EL Grade => 4.45 - < 8.65% | 728 | 1,135 | | EL Grade => 8.65 - < 18.65% | 469 | 2,177 | | EL Grade => 18.65 - < 100% | 3,034 | 207 | | **Total** | **149,730** | **129,914** | Retail exposure secured on real estate collateral increased £19.8bn to £149.7bn (2009: 129.9bn). This occurred primarily in UK Retail Banking, where business growth and the acquisition of the Standard Life book drove the increase in grades 2.15% and better. The 18.65 – 100 band saw a fifteen-fold increase mainly due to the implementation of a new retail model in Absa resulting in a more conservative approach to the estimation of EAD. --- The following table shows the EAD for unsecured retail exposures. Table 12: Analysis of unsecured exposures by expected loss grade | As at 31.12.10 | Retail SME (£m) | Qualifying revolving retail (£m) | Other retail (£m) | Total Unsecured Retail (£m) | | :--- | :--- | :--- | :--- | :--- | | EL Grade => 0 - < 0.8% | 7,433 | 23,598 | 2,899 | 33,930 | | EL Grade => 0.8 - < 2.15% | 2,849 | 4,445 | 4,356 | 11,650 | | EL Grade => 2.15 - < 3.05% | 733 | 2,151 | 923 | 3,807 | | EL Grade => 3.05 - < 4.45% | 534 | 1,411 | 1,036 | 2,981 | | EL Grade => 4.45 - < 6.35% | 469 | 1,087 | 868 | 2,424 | | EL Grade => 6.35 - < 8.65% | 307 | 710 | 460 | 1,477 | | EL Grade => 8.65 - < 18.65% | 483 | 1,008 | 583 | 2,074 | | EL Grade => 18.65 - < 100% | 577 | 2,786 | 1,653 | 5,016 | | **Total** | **13,385** | **37,196** | **12,778** | **63,359** | | As at 31.12.09 | Retail SME (£m) | Qualifying revolving retail (£m) | Other retail (£m) | Total Unsecured Retail (£m) | | :--- | :--- | :--- | :--- | :--- | | EL Grade => 0 - < 0.8% | 8,290 | 16,681 | 3,927 | 28,898 | | EL Grade => 0.8 - < 2.15% | 2,138 | 4,890 | 4,321 | 11,349 | | EL Grade => 2.15 - < 3.05% | 561 | 1,207 | 782 | 2,550 | | EL Grade => 3.05 - < 4.45% | 494 | 1,194 | 1,241 | 2,929 | | EL Grade => 4.45 - < 6.35% | 473 | 740 | 467 | 1,680 | | EL Grade => 6.35 - < 8.65% | 304 | 579 | 386 | 1,269 | | EL Grade => 8.65 - < 18.65% | 512 | 1,387 | 867 | 2,766 | | EL Grade => 18.65 - < 100% | 482 | 2,113 | 1,842 | 4,437 | | **Total** | **13,254** | **28,791** | **13,833** | **55,878** | Unsecured retail exposures increased by £7.5bn to £63.4bn (2009: £55.9bn) driven by qualifying revolving retail exposures that increased £8.4bn to £37.2bn (2009: £28.8bn), principally within Barclaycard. The implementation of a more conservative approach to rescheduled credit card exposures (“forbearance programmes”) has increased the EAD on defaulted exposures. Also, the redemption of a securitisation trade brought assets back onto the book. --- ### Impairment and Actual Value Adjustments Table 13 shows the impairment and actual value adjustments taken by the Group in the portfolios to which the IRB approaches apply. The figures include actual value adjustments taken on portfolios within the trading book and banking book where the Advanced IRB approach is used to determine the counterparty credit exposure. These charges are included within the net trading income and net investment income within the Annual Report. For this and other reasons, the figures below differ from the impairment roll-forward analysis in Table 33 (“Analysis of movement on impairment and amounts taken directly to profit and loss”). Additionally, the figures below are only for portfolios that use the IRB approaches; in contrast, the analysis in Table 33 shows impairment and actual value adjustments for both IRB and Standardised approach portfolios. The majority of businesses reported improvements in credit losses reflecting improving credit conditions in the main sectors and geographies in which Barclays lends. The largest reduction was in the wholesale portfolios, due to lower charges against credit market exposures and fewer large single name charges. This was partially offset by the impact of deteriorating credit conditions within the Spanish property and constructor sectors that resulted in an increase in impairment in Barclays Corporate, and impairment related to the Protium loan in Barclays Capital. In the retail portfolios, impairment performance improved as delinquency rates fell across Barclays businesses, most notable the UK, US, Spanish, Indian and African portfolios. Table 13: Impairment charges and actual value adjustments | IRB Exposure Class | Actual Value Adjustments and Individual Impairment Charges Year ended As at 31.12.10 (£m) | Actual Value Adjustments and Individual Impairment Charges Year ended As at 31.12.09 (£m) | | :--- | :--- | :--- | | Central governments or central banks | (8) | (11) | | Institutions | (7) | 112 | | Corporates | 649 | 3,063 | | Retail | | | | - Retail SME | 114 | 111 | | - Retail exposures secured by real estate collateral | 31 | 206 | | - Qualifying revolving retail | - | 76 | | - Other retail | - | 177 | | Equity | - | - | | Securitisation positions | - | - | | Non-credit obligation assets | - | - | | **Total** | **779** | **3,734** | Actual value adjustments and individual impairment charges decreased £2.9bn to £0.8bn (2009: £3.7bn), driven by the corporates category following write-downs made in 2009 coupled with improving market conditions in 2010; this mainly occurred within Barclays Capital. The decrease in impairment charges within the retail sector was primarily driven by improved economic conditions within South Africa. ### Loss Analysis – Regulatory Expected Loss versus Actual Losses The following table shows Barclays Regulatory Expected Loss measure compared with an actual loss measure in 2010 for those portfolios where credit risk is calculated using the IRB approach. #### Regulatory Expected Loss Regulatory Expected Loss is a Basel II measure based upon Pillar 1 metrics that is an input to the Capital Adequacy process. Regulatory Expected Loss can be seen as an expectation of average future loss as derived from our IRB models, and is not a prediction of future impairment. For non-defaulted assets, Regulatory Expected Loss is calculated using probability of default and downturn loss given default estimates. For the calculation of Regulatory Expected Loss for defaulted assets, the probability of default is 100% and loss given default is based upon an estimate of likely recovery levels for each asset. #### Actual Loss Cumulative Actual Loss is made up of two parts: the existing impairment stock at 31st December 2009 plus the net impairment charge recorded through the income statement in 2010. --- Cumulative Actual Loss includes a degree of impairment allowance on assets not identified as being in default at the balance sheet date and can also include charges against assets that were originated during the year and which were therefore outside of the scope of the Regulatory Expected Loss calculated at the beginning of the year. Actual Loss does not include the effects on impairment stock of amounts written off in the year. Table 14: Analysis of expected loss versus actual losses | IRB Exposure Class | Total Expected Loss to 31.12.10 (£m) | Total Actual Loss to 31.12.10 (£m) | | :--- | :--- | :--- | | Central governments or central banks | 3 | 5 | | Institutions | 77 | 63 | | Corporates | 3,321 | 4,768 | | Retail | | | | - SME | 431 | 459 | | - Secured by real estate collateral | 646 | 792 | | - Qualifying revolving retail | 1,990 | 2,358 | | - Other retail | 1,469 | 1,766 | | Equity | - | - | | Securitisation positions | - | - | | Non-credit obligation assets | N/A | N/A | | **Total IRB** | **7,937** | **10,211** | | IRB Exposure Class | Total Expected Loss to 31.12.09 (£m) | Total Actual Loss to 31.12.09 (£m) | | :--- | :--- | :--- | | Central governments or central banks | 2 | 9 | | Institutions | 941 | 1,146 | | Corporates | 1,375 | 4,628 | | Retail | | | | - SME | 369 | 386 | | - Secured by real estate collateral | 423 | 570 | | - Qualifying revolving retail | 1,273 | 1,777 | | - Other retail | 1,123 | 1,548 | | Equity | - | - | | Securitisation positions | 13 | - | | Non-credit obligation assets | N/A | N/A | | **Total IRB** | **5,519** | **10,064** | The decreases in institutions’ expected loss (£0.9bn) and actual loss (£1.1bn) were driven by writedowns made in 2009, coupled with improving market conditions in 2010 (mainly within Barclays Capital). Actual loss for corporates is in excess of expected loss; this is driven by fair value adjustments. The increases within qualifying revolving retail expected loss (£0.7bn) and actual loss (£0.6bn) were driven by current year impairment charges and the roll out of certain portfolios to the IRB approach. While the impairment charge and the expected loss measure respond to similar drivers, they are not comparable. The expected loss does not reflect growth of portfolios or changes in the mix of exposures. In forecasting and tracking impairment, the Group looks at actual trends in the cash flow behaviour of customer accounts. Also, in times of stress we expect, by definition, actual losses to be higher than the expected loss; actual losses will capture losses beyond the average measures captured by expected loss. Note that while Barclays has exposure to banking book equity through Absa, no expected loss is shown as such a figure is not defined under South African rules. --- ### Credit Model Performance - Estimated versus Actual The following table shows the forecast and actual probability of default, loss given default and exposure at default ratio for the assets under the IRB approach. In each case, the forecasts are based on Barclays operational model calibrations at the start of the period. This may differ from the models’ applications in regulatory capital calculations where the probability of default is generally estimated on a “through the cycle” basis and the loss given default on a downturn basis. Additionally, regulatory capital calculations set minimum values for certain parameters, which are typically more conservative than Barclays modelled and observed values. In particular, retail loans secured by real estate collateral have a regulatory minimum LGD of 10%. The PDs below are based on the total portfolio of Advanced and Foundation assets managed by the Group. Individual portfolio PDs within an exposure class have been weighted in proportion to the expected monetary loss of the portfolio to arrive at the class PD. The LGD percentages and EAD ratios are based on analysis of defaulted assets only, under the Advanced approach (the Foundation approach does not estimate these figures but uses parameters stipulated by FSA regulations). Table 15: Analysis of expected credit model performance versus actual results | IRB Exposure Class As at 31.12.10 | PD of Total Portfolio Estimated (%) | PD of Total Portfolio Actual (%) | LGD of Defaulted Assets$^1$ Estimated (%) | LGD of Defaulted Assets$^1$ Actual (%) | Exposure at Default of Defaulted Assets$^1$ Estimate to Actual Ratio$^2$ | | :--- | :--- | :--- | :--- | :--- | :--- | | **Wholesale** | | | | | | | Central Governments or central banks | 0.12 | 0.00 | 15.94 | 0.00 | N/A | | Institutions | 0.49 | 0.00 | 36.99 | 0.00 | N/A | | Corporates | 2.28 | 1.26 | 35.81 | 30.64 | 1.19 | | **Retail** | | | | | | | SME | 8.49 | 7.00 | 57.23 | 54.23 | 1.05 | | Secured by real estate collateral UK$^3$ | 1.92 | 0.60 | 15.90 | 11.40 | 1.01 | | Secured by real estate collateral Rest of World$^3$ | 2.69 | 3.91 | 13.96 | 13.64 | 0.94 | | Qualifying revolving retail | 2.78 | 3.32 | 79.61 | 79.38 | 1.07 | | Other retail | 5.75 | 6.56 | 97.10 | 96.90 | 0.96 | Barclays credit models continue to perform adequately across all portfolios. Actual outcomes have generally been close to model estimates across both retail and wholesale portfolios. Notes on Table 15: $^1$ Where default rates are typically low Barclays carries out multi-year analysis to improve the sample data and as such the estimates and outcomes above do not represent the results for a single year. The LGD results for different portfolios have been weighted in proportion to the expected EAD of the defaulted assets. Where individual portfolio EAD results are based on multi year analysis they have been annualised for consolidation by dividing them by the period of years the sample portfolio covers. Barclays uses PD, EAD, LGD and expected loss models to calculate the risk of its credit exposures; credit risk related to equity, securitisation, and non-credit obligation asset portfolios do not use such models. Accordingly there is no model analysis to disclose for these exposure classes. $^2$ FSA regulations require the disclosure of appropriate components of the credit models’ expected loss such as PD, LGD and Credit Conversion Factor (CCF). The CCF is a model’s estimation of the utilisation of undrawn commitments at the time of default. Barclays believes that it is more useful and appropriate to disclose the ratio of the pre default estimated EAD to the actual EAD of defaulted assets at the time of default. Where the estimate exceeds the actual exposure the ratio is greater than 100%. $^3$ Barclays has shown the model performance information for UK and ROW retail exposures secured on real estate collateral separately in order to provide homogeneous results. --- ## Counterparty Credit Risk ### Counterparty Credit Exposures 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. Credit risk from derivatives is mitigated, where possible, through netting agreements whereby derivative assets and liabilities with the same counterparty can be offset. Group policy requires all netting arrangements to be legally documented. The ISDA Master Agreement is the Group’s preferred agreement for documenting OTC derivatives. It provides the contractual framework within which dealing activities across a full range of OTC products are conducted and contractually binds both parties to apply close-out netting across all outstanding transactions covered by an agreement if either party defaults or other predetermined events occur. Collateral is obtained against derivative assets, depending on the creditworthiness of the counterparty and/or nature of the transaction. Any non-cash collateral taken in respect of OTC trading exposures will be subject to a ‘haircut’, which is negotiated at the time of signing the collateral agreement. A haircut is the valuation percentage applicable to each type of collateral and will be largely based on liquidity and price volatility of the underlying security. The collateral obtained for derivatives is either cash, direct debt obligation government (G14+) bonds denominated in the domestic currency of the issuing country, debt issued by supranationals or letters of credit issued by an institution with a long-term unsecured debt rating of A+/A3 or better. Where the Group has ISDA master agreements, the collateral document will be the ISDA Credit Support Annex (CSA). The collateral document must give Barclays the power to realise any collateral placed with it in the event of the failure of the counterparty, and to place further collateral when requested or in the event of insolvency, administration or similar processes, as well as in the case of early termination. ‘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. Table 16 shows Barclays counterparty credit exposure including the impact of netting contracts and the offset of collateral held (see “Credit Risk Mitigation” section on page 59 for policies governing collateral management). Where the Group calculates the exposure under the Standardised approach and the Internal Model Method, the impact of both netting and collateral is integral to the calculation of the exposure. These contract exposures are therefore only available on a net basis. Where the Group uses the mark to market approach, it is possible to identify the impact of netting and collateral. ### Derivative counterparty credit risk measurement (Credit Value Adjustments) Barclays participates in derivative transactions, and is therefore exposed to counterparty credit risk (or “counterparty risk”). This is the risk that a counterparty will fail to make the future payments agreed in the derivative contract. This is considered as a separate risk to the volatility of the mark to market payment flows. Modelling this counterparty risk is an important part of managing credit risk on derivative transactions. The counterparty risk arising under derivative transactions is taken into account when reporting the fair value of derivative positions. The adjustment to the value is known as Credit Value Adjustment. It is the difference between the value of a derivative contract with a risk free counterparty and that of a contract with the actual counterparty. This is equivalent to the cost of hedging the counterparty risk, which is replicated by purchasing and selling credit default swaps (CDS) on the counterparty to create a hedge position that mirrors the Expected Exposure profile for the counterparty. Credit Value Adjustment for derivative positions are calculated as a function of the “Expected Exposure”, which is the average of future hypothetical exposure values (or mark to market) for a single transaction or group of transactions by the same counterparty, and the CDS spread for a given horizon. In order to calculate the Expected Exposure, the expected mark to market is calculated using Monte Carlo simulations of risk factors that may affect the valuation of the derivative. These simulations include credit mitigants such as exposure netting, collateral, mandatory break clauses and set-off clauses. Counterparties with appropriate credit mitigants will generate a lower Expected Exposure profile compared to counterparties without credit mitigants in place for the same derivative transactions. --- Table 16: Counterparty credit exposure | | Gross Positive Fair Value of Contracts (£m) | Potential Future Credit Exposure (£m) | Netting Benefits (£m) | Netted Current Credit Exposure (£m) | Collateral Held (£m) | Net Derivatives Credit Exposure (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **As at 31.12.10** | | | | | | | | Mark to Market Method | 6,387 | 3,603 | (4,813) | 5,177 | - | 5,177 | | Internal Model Method | N/A | N/A | N/A | N/A | N/A | 64,454 | | **Total** | **N/A** | **N/A** | **N/A** | **N/A** | **N/A** | **69,631** | | | Gross Positive Fair Value of Contracts (£m) | Potential Future Credit Exposure (£m) | Netting Benefits (£m) | Netted Current Credit Exposure (£m) | Collateral Held (£m) | Net Derivatives Credit Exposure (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **As at 31.12.09** | | | | | | | | Mark to Market Method | 4,311 | 3,017 | (2,993) | 4,335 | 15 | 4,320 | | Internal Model Method | N/A | N/A | N/A | N/A | N/A | 67,423 | | **Total** | **N/A** | **N/A** | **N/A** | **N/A** | **N/A** | **71,743** | Exposures under the Internal Model Method declined £2.9bn to £64.5bn (2009: £67.4bn), driven by a number of closed positions and decreased net exposures. In addition to the £69.6bn counterparty credit exposure under Mark to Market and Internal Model Methods (2009: £71.7bn), Barclays has additional counterparty credit exposure of £3.5bn (2009: £3.4bn) calculated under other approved approaches. --- ### Credit derivative notionals The following table shows the notional of the credit derivative transactions outstanding as at year-end. Barclays internal counterparty credit risk models calculate expected exposure as the first stage in the preparation of the regulatory capital requirement. The model is calibrated to simulate an economic downturn through the use of a scaling factor (known generically as alpha) to arrive at the exposure at default. Table 17: Notionals of credit derivative contracts | | Notional Exposure to Credit Derivative Transaction: Own Credit Portfolio | Notional Exposure to Credit Derivative Transaction: Own Credit Portfolio | Notional Exposure to Credit Derivative Transaction: Intermediation Activities | Notional Exposure to Credit Derivative Transaction: Intermediation Activities | | :--- | :--- | :--- | :--- | :--- | | **Outstanding Amount of Exposure held: Credit Derivative Product Type as at 31.12.10** | **As Protection Purchaser (£m)** | **As Protection Seller (£m)** | **As Protection Purchaser (£m)** | **As Protection Seller (£m)** | | Credit Default Swaps | 9,347 | 5,595 | 977,538 | 944,450 | | Total Return Swaps | - | 10,172 | 15,223 | 1,404 | | **Total** | **9,347** | **15,767** | **992,761** | **945,854** | | | Notional Exposure to Credit Derivative Transaction: Own Credit Portfolio | Notional Exposure to Credit Derivative Transaction: Own Credit Portfolio | Notional Exposure to Credit Derivative Transaction: Intermediation Activities | Notional Exposure to Credit Derivative Transaction: Intermediation Activities | | :--- | :--- | :--- | :--- | :--- | | **Outstanding Amount of Exposure held: Credit Derivative Product Type as at 31.12.09** | **As Protection Purchaser (£m)** | **As Protection Seller (£m)** | **As Protection Purchaser (£m)** | **As Protection Seller (£m)** | | Credit Default Swaps | 19,372 | 6,727 | 995,009 | 974,610 | | Total Return Swaps | 9 | 9 | 18,408 | 2,652 | | **Total** | **19,381** | **6,736** | **1,013,417** | **977,262** | The decrease of £10.1bn to £9.3bn (2009: £19.4bn) in notional exposure to credit derivative transactions on own credit portfolio was driven by the re-deployment of certain exposures previously held for Barclays account towards intermediation activities on behalf of clients. --- The following table shows the Group’s exposure at default (EAD) to counterparty credit risk after credit risk mitigation (CRM) analysed by the type of financial contract. The nature of the calculation of credit exposure under the Internal Model Method precludes the identification of individual product exposures. Only the total for each counterparty has been calculated. Table 18: Counterparty credit exposures analysed by financial contract type | As at 31.12.10 | EAD Post CRM under Mark to Market Approach (£m) | EAD Post CRM under Internal Model Method (£m) | | :--- | :--- | :--- | | **Financial Contract Type** | | | | Interest Rate Contracts | 904 | N/A | | Foreign Currency Contracts | 958 | N/A | | Equities Contracts | 626 | N/A | | Precious Metal other than Gold Contracts | 970 | N/A | | Commodities other than Precious Metal Contracts | 491 | N/A | | Securities financing transactions | - | N/A | | Credit Derivatives | 137 | N/A | | Other | 1,090 | N/A | | **Total** | **5,176** | **89,877** | | As at 31.12.09 | EAD Post CRM under Mark to Market Approach (£m) | EAD Post CRM under Internal Model Method (£m) | | :--- | :--- | :--- | | **Financial Contract Type** | | | | Interest Rate Contracts | 994 | N/A | | Foreign Currency Contracts | 764 | N/A | | Equities Contracts | 485 | N/A | | Precious Metal other than Gold Contracts | 150 | N/A | | Commodities other than Precious Metal Contracts | 1,082 | N/A | | Securities financing transactions | 1,064 | N/A | | Credit Derivatives$^1$ | 231 | N/A | | Other | 614 | N/A | | **Total** | **5,384** | **104,481** | Internal Model Method (IMM) exposures reduced £14.6bn to £89.9bn (2009:£104.5bn) as closure of positions more than offset new business. Barclays has additional counterparty exposure calculated under other approved approaches totalling £6.2bn (2009: £9.1bn after restatement). This is comprised of £3.5bn (2009: £3.4bn) “other” and £2.7bn (2009: £5.7bn) “securities financing transactions”. The decrease in securities financing transactions follows a reduction in the level of activity with governments (mainly the Bank of England and the European Investment Bank). --- The following table sets out the notional value of the Group credit derivative contracts held for hedging purposes. Table 19: Notional value of credit derivative contracts held for hedging purposes | Risk Methodology | As at 31.12.10 (£m) | As at 31.12.09 (£m) | | :--- | :--- | :--- | | Notional value of credit derivative hedges for Mark to Market Method | 380 | - | | Notional value of credit derivative hedges under the Internal Model Method | 5,810 | 4,090 | | **Total** | **6,190** | **4,090** | The primary driver for the increase of £2.1bn to £6.2bn (2009: £4.1bn) in contracts was an increase in hedges against Euro transactions held by European and US-based financial institution clients. --- ## Credit Risk Exposures ### Standardised Approach Credit Exposure The following table shows Barclays credit exposure for its portfolios under the Standardised approach before the use of credit risk mitigation (CRM). Table 20: Credit risk exposure under the Standardised approach | As at 31.12.10 | Credit Exposure (EAD) Pre-CRM (£m) | Average Credit Exposure (EAD) Pre-CRM over the year (£m) | | :--- | :--- | :--- | | Central governments or central banks | 14,192 | 12,506 | | Regional government or local authorities | 151 | 221 | | Administrative bodies and non-commercial undertakings | 288 | 329 | | Institutions | 2,862 | 3,032 | | Corporates | 44,622 | 44,597 | | Retail | 25,232 | 25,407 | | Secured on real estate property | 27,752 | 27,119 | | Past due items | 4,001 | 4,206 | | Private equity | 1,214 | 1,993 | | Covered bonds | 285 | 100 | | Securitisation positions | 407 | 81 | | Short term claims on institutions and corporates | - | - | | Collective investment undertakings | 653 | 866 | | Other items | 3,653 | 3,598 | | **Total Standardised Credit Risk Exposure** | **125,312** | **124,055** | | As at 31.12.09 | Credit Exposure (EAD) Pre-CRM (£m) | Average Credit Exposure (EAD) Pre-CRM over the year (£m) | | :--- | :--- | :--- | | Central governments or central banks | 10,329 | 6,558 | | Regional government or local authorities | 260 | 197 | | Administrative bodies and non-commercial undertakings | 384 | 338 | | Institutions | 2,909 | 3,375 | | Corporates | 44,777 | 50,650 | | Retail | 26,130 | 26,938 | | Secured on real estate property | 26,881 | 32,041 | | Past due items | 4,116 | 3,584 | | Private equity | 2,138 | 2,173 | | Covered bonds | - | - | | Securitisation positions | - | - | | Short term claims on institutions and corporates | - | 6,553 | | Collective investment undertakings | 921 | 1,464 | | Other items | 3,643 | 2,695 | | **Total Standardised Approach Credit Risk Exposure** | **122,488** | **136,566** | In 2010 EAD, before CRM, increased by £2.8bn to £125.3bn (2009: £122.5bn). The pre-CRM EAD of central governments or central banks increased by £3.9bn to £14.2bn (2009: £10.3bn), reflecting higher liquidity buffers, with Absa contributing the majority of the increase. Retail exposure decreased in most businesses and overall by £0.9bn to £25.2bn (2009: £26.1bn). Private equity fell by £0.9bn to £1.2bn (2009: £2.1bn) as a significant amount of exposures are now treated as capital deductions. Exposure under “Secured on real estate property” increased by £0.9bn to £27.8bn (2009: £26.9bn) driven by new business in Barclays Wealth. --- ### Advanced and Foundation IRB Approach Credit Exposure The following table shows the Group’s credit exposures measured under the Advanced IRB approach and the Foundation IRB approach before the application of credit risk mitigation. Table 21: Credit risk exposures under the Advanced and Foundation IRB approaches | As at 31.12.10 | Credit Exposure (EAD) Pre-CRM: Advanced IRB (£m) | Credit Exposure (EAD) Pre-CRM: Foundation IRB (£m) | Average Credit Exposure (EAD) Pre-CRM over the year: Advanced IRB (£m) | Average Credit Exposure (EAD) Pre-CRM over the year: Foundation IRB (£m) | | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 120,705 | 1,358 | 113,986 | 1,170 | | Institutions | 24,149 | 969 | 28,319 | 1,642 | | Corporates | 146,605 | 19,159 | 143,196 | 16,492 | | Retail | | | | | | - SME | 13,386 | N/A | 13,757 | N/A | | - Secured by real estate collateral | 149,730 | N/A | 142,782 | N/A | | - Qualifying revolving retail | 37,195 | N/A | 32,708 | N/A | | - Other retail | 12,779 | N/A | 13,505 | N/A | | Equity | 659 | N/A | 652 | N/A | | Securitisation positions | 29,894 | N/A | 31,263 | N/A | | Non-credit obligation assets | 14,397 | N/A | 13,576 | N/A | | **Total IRB Credit Risk Exposure** | **549,499** | **21,486** | **533,744** | **19,304** | | As at 31.12.09 | Credit Exposure (EAD) Pre-CRM: Advanced IRB (£m) | Credit Exposure (EAD) Pre-CRM: Foundation IRB (£m) | Average Credit Exposure (EAD) Pre-CRM over the year: Advanced IRB (£m) | Average Credit Exposure (EAD) Pre-CRM over the year: Foundation IRB (£m) | | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 85,789 | 919 | 29,375 | 619 | | Institutions | 35,545 | 2,057 | 57,657 | 1,678 | | Corporates | 143,208 | 14,559 | 116,614 | 13,054 | | Retail | | | | | | - SME | 13,251 | N/A | 13,567 | N/A | | - Secured by real estate collateral | 129,914 | N/A | 119,153 | N/A | | - Qualifying revolving retail | 28,791 | N/A | 29,222 | N/A | | - Other retail | 13,833 | N/A | 13,976 | N/A | | Equity | 637 | N/A | 680 | N/A | | Securitisation positions | 31,023 | N/A | 57,785 | N/A | | Non-credit obligation assets | 12,143 | N/A | 14,029 | N/A | | **Total IRB Credit Risk Exposure** | **494,134** | **17,535** | 452,058 | 15,351 | Exposures treated under the Advanced IRB approach increased by £55.4bn to £549.5bn (2009: £494.1bn). This was driven by an increase of £34.9bn to £120.7bn (2009: £85.8bn) in EAD calculated against central governments or central banks reflecting increased liquidity. Retail exposures increased £27.3bn to £213.1bn (2009: £185.8bn), driven mainly by UK Retail Banking, where secured exposures increased £14.4bn, and Barclaycard where EAD for qualifying revolving retail exposures rose £8.4bn (see table 12). Exposures under institutions for Advanced IRB declined £11.4bn to £24.1bn (2009: £35.5bn) mainly following the sale of Certificates of Deposits and bonds as exposures were moved to the government exposure class to enhance the liquidity position. --- ### Geographic Analysis The following tables represent Barclays credit exposure by geographic region. Exposures are allocated to the region in which the customer is located and are disclosed before the application of CRM. Table 22: Geographic analysis of credit risk exposures under the Standardised approach | As at 31.12.10 | United Kingdom (£m) | Other European Union (£m) | United States (£m) | Africa (£m) | Rest of the World (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 169 | 4,751 | 966 | 7,735 | 571 | 14,192 | | Regional governments or local authorities | 22 | 98 | 16 | 15 | - | 151 | | Administrative bodies and non-commercial undertakings | 53 | 235 | - | - | - | 288 | | Institutions | 649 | 967 | 226 | 544 | 476 | 2,862 | | Corporates | 11,521 | 16,477 | 3,234 | 3,390 | 10,000 | 44,622 | | Retail | 6,827 | 8,703 | 6,556 | 1,806 | 1,340 | 25,232 | | Secured on real estate property | 8,877 | 16,365 | 72 | 376 | 2,062 | 27,752 | | Past due items | 1,249 | 1,471 | 746 | 111 | 424 | 4,001 | | Private equity positions | 530 | 161 | 447 | 50 | 26 | 1,214 | | Covered bonds | - | 285 | - | - | - | 285 | | Securitisation positions | 380 | - | 10 | - | 17 | 407 | | Collective investment undertakings | - | 653 | - | - | - | 653 | | Other items | 2,643 | 346 | 60 | 470 | 134 | 3,653 | | **Total Standardised Approach Credit Risk Exposure** | **32,920** | **50,512** | **12,333** | **14,497** | **15,050** | **125,312** | | As at 31.12.09 | United Kingdom (£m) | Other European Union (£m) | United States (£m) | Africa (£m) | Rest of the World (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 134 | 3,706 | 493 | 5,500 | 496 | 10,329 | | Regional governments or local authorities | 12 | 140 | 65 | 43 | - | 260 | | Administrative bodies and non-commercial undertakings | 53 | 331 | - | - | - | 384 | | Institutions | 479 | 1,061 | 131 | 521 | 717 | 2,909 | | Corporates | 11,681 | 17,872 | 2,401 | 3,442 | 9,381 | 44,777 | | Retail | 7,294 | 8,933 | 6,717 | 1,854 | 1,332 | 26,130 | | Secured on real estate property | 8,310 | 16,629 | 224 | 276 | 1,442 | 26,881 | | Past due items | 1,164 | 1,833 | 714 | 47 | 358 | 4,116 | | Private equity positions | 883 | 307 | 847 | 40 | 61 | 2,138 | | Covered bonds | - | - | - | - | - | - | | Securitisation positions | - | - | - | - | - | - | | Collective investment undertakings | - | 921 | - | - | - | 921 | | Other items | 2,816 | 381 | - | 313 | 133 | 3,643 | | **Total Standardised Approach Credit Risk Exposure** | **32,826** | **52,114** | **11,592** | **12,036** | **13,920** | **122,488** | In 2010 Standardised approach EAD increased £2.8bn to £125.3bn (2009: £122.5bn), driven by increases in –Africa (£2.5bn), Rest of the World (£1.1bn) and the United States (£0.7bn). This is partly offset by decreases in other European Union countries (£1.6bn). Increases in central governments or central banks portfolios' exposures across geographies during 2010 are due to higher liquidity requirements. Declines in retail portfolios’ exposures across most geographies reflect transitions to Advanced IRB and closure of certain secured portfolios. Private equity exposures in both United Kingdom and the United States declined as a result of a significant amount of exposures now treated as capital deductions. --- Table 23: Geographic analysis of credit risk exposures under the Foundation IRB approach | As at 31.12.10 | United Kingdom (£m) | Other European Union (£m) | United States (£m) | Africa (£m) | Rest of the World (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | - | 0 | - | 1,358 | 0 | 1,358 | | Institutions | 113 | 87 | 198 | 542 | 29 | 969 | | Corporates | 15 | 72 | - | 19,018 | 54 | 19,159 | | **Total Foundation Approach Credit Risk Exposure** | **128** | **159** | **198** | **20,918** | **83** | **21,486** | | As at 31.12.09 | United Kingdom (£m) | Other European Union (£m) | United States (£m) | Africa (£m) | Rest of the World (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | - | - | - | 919 | - | 919 | | Institutions | - | - | - | 2,057 | - | 2,057 | | Corporates | 72 | - | - | 14,487 | - | 14,559 | | **Total Foundation Approach Credit Risk Exposure** | **72** | **-** | **-** | **17,463** | **-** | **17,535** | The figures above relate to wholesale credit risk in Absa. Total exposure under the Foundation IRB approach increased £4.0bn to £21.5bn (2009: £17.5bn), driven by the appreciation of the value of the Rand against Sterling and business growth. --- Table 24: Geographic analysis of credit risk exposures under the Advanced IRB approach | As at 31.12.10 | United Kingdom (£m) | Other European Union (£m) | United States (£m) | Africa (£m) | Rest of the World (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 30,206 | 18,682 | 43,402 | 1,339 | 27,076 | 120,705 | | Institutions | 13,639 | 5,714 | 1,459 | 269 | 3,068 | 24,149 | | Corporates | 76,956 | 22,226 | 36,056 | 378 | 10,989 | 146,605 | | Retail | 153,227 | 19,773 | 18 | 40,033 | 39 | 213,090 | | Equity | 1 | 9 | 33 | 616 | - | 659 | | Securitisation positions | 3,704 | 4,131 | 18,418 | 1,239 | 2,402 | 29,894 | | Non-credit obligation assets | 9,201 | 1,291 | 1,121 | 2,468 | 316 | 14,397 | | **Total Advanced IRB Credit Risk Exposure** | **286,934** | **71,826** | **100,507** | **46,342** | **43,890** | **549,499** | | As at 31.12.09 | United Kingdom (£m) | Other European Union (£m) | United States (£m) | Africa (£m) | Rest of the World (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 38,270 | 4,303 | 32,574 | 1,348 | 9,294 | 85,789 | | Institutions | 16,949 | 8,091 | 6,815 | 111 | 3,579 | 35,545 | | Corporates | 81,317 | 22,187 | 27,927 | 217 | 11,560 | 143,208 | | Retail | 131,986 | 16,515 | 8 | 37,263 | 17 | 185,789 | | Equity | - | - | - | 637 | - | 637 | | Securitisation positions | 4,996 | 4,163 | 17,646 | 1,222 | 2,996 | 31,023 | | Non-credit obligation assets | 6,236 | 1,651 | 1,206 | 2,568 | 482 | 12,143 | | **Total Advanced IRB Credit Risk Exposure** | **279,754** | **56,910** | **86,176** | **43,366** | **27,928** | **494,134** | Exposure treated under Advanced IRB increased £55.4bn to £549.5bn (2009: £494.1bn), reflecting increases in Rest of the World (£16.0bn), Europe (£14.9bn), and the United States (£14.3bn). However, exposure classes within the various regions showed offsetting movements. Exposure to UK retail customers increased £21.2bn to £153.2bn (2009: £132.0bn), driven mainly by secured exposures in UK Retail Banking that rose by £15.5bn. US exposure to corporates increased £8.1bn, reflecting business growth. Exposures to institutions in the US and Europe declined due to a strategy to sell exposures to institutions and hold more government and central bank assets to enhance the liquidity position of Barclays. --- ### Industry Analysis The following table represents the Group’s credit exposures split by industry and counterparty type. Exposure includes drawn as well as undrawn amounts and is Barclays calculation of the expected maximum amount which may be drawn at the time of default. It cannot be directly compared with the balance sheet industry analysis contained within the Annual Report. Table 25: Industry analysis of credit exposure under the Standardised approach | As at 31.12.10 | Financial institutions/ services (£m) | Agriculture, forestry and fishing (£m) | Manufacturing (£m) | Construction (£m) | Property (£m) | Energy and water (£m) | Wholesale and retail, distribution and leisure (£m) | Transport (£m) | Postal and communication (£m) | Business and other services (£m) | Home loans (£m) | Other personal (£m) | Non-customer assets (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 9,983 | - | - | - | - | - | - | - | - | 4,209 | - | - | - | 14,192 | | Regional governments or local authorities | 12 | - | - | - | 0 | 0 | - | 0 | - | 139 | - | - | - | 151 | | Administrative bodies and non-commercial undertakings | - | - | 16 | 0 | - | 105 | 1 | 34 | - | 132 | 0 | - | - | 288 | | Institutions | 2,764 | - | 0 | - | 2 | - | - | - | - | 86 | - | 1 | 9 | 2,862 | | Corporates | 7,046 | 214 | 5,186 | 1,648 | 5,513 | 2,617 | 4,494 | 3,822 | 817 | 11,490 | 48 | 1,727 | - | 44,622 | | Retail | 294 | 70 | 367 | 160 | 261 | 307 | 318 | 1,203 | 11 | 899 | 779 | 20,563 | - | 25,232 | | Secured on real estate property | 735 | 103 | 490 | 239 | 1,181 | 38 | 609 | 174 | 42 | 3,576 | 14,622 | 5,943 | - | 27,752 | | Past due items | 80 | 8 | 114 | 111 | 387 | 6 | 80 | 256 | 7 | 244 | 834 | 1,874 | - | 4,001 | | Private equity positions | 787 | - | 128 | 7 | 6 | - | 39 | 7 | 12 | 228 | - | - | - | 1,214 | | Covered bonds | 285 | - | - | - | - | - | - | - | - | - | - | - | - | 285 | | Securitisation positions | 407 | - | - | - | - | - | - | - | - | - | - | - | - | 407 | | Collective investment undertakings | 652 | - | - | - | 0 | - | - | - | - | 1 | - | - | - | 653 | | Other items | 85 | - | 0 | - | 8 | - | - | - | - | 26 | - | - | 3,534 | 3,653 | | **Total Standardised Approach Credit Exposure** | **23,130** | **395** | **6,301** | **2,165** | **7,358** | **3,073** | **5,541** | **5,496** | **889** | **21,030** | **16,283** | **30,108** | **3,543** | **125,312** | | As at 31.12.09 | Financial institutions/ services (£m) | Agriculture, forestry and fishing (£m) | Manufacturing (£m) | Construction (£m) | Property (£m) | Energy and water (£m) | Wholesale and retail, distribution and leisure (£m) | Transport (£m) | Postal and communication (£m) | Business and other services (£m) | Home loans (£m) | Other personal (£m) | Non-customer assets (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 7,002 | - | - | - | - | - | - | - | - | 3,327 | - | - | - | 10,329 | | Regional governments or local authorities | 2 | - | - | 1 | - | - | - | - | 9 | 248 | - | - | - | 260 | | Administrative bodies and non-commercial undertakings | - | - | 26 | 1 | - | 80 | 29 | 47 | - | 201 | - | - | - | 384 | | Institutions | 2,684 | - | - | - | - | - | - | - | - | 90 | - | 131 | 4 | 2,909 | | Corporates | 6,300 | 285 | 5,475 | 2,264 | 5,989 | 2,079 | 3,701 | 4,428 | 906 | 11,678 | 68 | 1,604 | - | 44,777 | | Retail | 94 | 73 | 423 | 214 | 253 | 325 | 348 | 1,417 | 15 | 1,047 | 766 | 21,155 | - | 26,130 | | Secured on real estate property | 427 | 105 | 443 | 230 | 1,098 | 30 | 601 | 147 | 35 | 3,024 | 16,169 | 4,572 | - | 26,881 | | Past due items | 187 | 11 | 127 | 89 | 525 | 13 | 81 | 357 | 4 | 192 | 946 | 1,584 | - | 4,116 | | Private equity positions | 1,213 | - | 205 | 16 | 5 | 39 | 97 | 15 | 18 | 530 | - | - | - | 2,138 | | Covered bonds | - | - | - | - | - | - | - | - | - | - | - | - | - | - | | Securitisation positions | - | - | - | - | - | - | - | - | - | - | - | - | - | - | | Collective investment undertakings | 921 | - | - | - | - | - | - | - | - | - | - | - | - | 921 | | Other items | 109 | - | - | - | 151 | - | - | - | - | 6 | - | - | 3,377 | 3,643 | | **Total Standardised Approach Credit Exposure** | **18,939** | **474** | **6,699** | **2,815** | **8,021** | **2,566** | **4,857** | **6,411** | **987** | **20,343** | **17,949** | **29,046** | **3,381** | **122,488** | The £2.8bn increase in exposures to £125.3bn (2009: £122.5bn) was driven by financial institutions and services, mainly to central governments or central banks reflecting a strategy to enhance the Group’s liquidity position. --- Table 26: Industry analysis of credit exposure under the Foundation IRB approach | As at 31.12.10 | Financial institutions/ services (£m) | Agriculture, forestry and fishing (£m) | Manufacturing (£m) | Construction (£m) | Property (£m) | Energy and water (£m) | Wholesale and retail, distribution and leisure (£m) | Transport (£m) | Postal and communication (£m) | Business and other services (£m) | Other personal (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 1,258 | - | 24 | - | 0 | 3 | - | 68 | - | 5 | - | 1,358 | | Institutions | 785 | - | - | - | - | - | - | - | - | 184 | - | 969 | | Corporates | 1,046 | 2,027 | 2,175 | 639 | 3,320 | 917 | 2,172 | 698 | 5 | 6,160 | - | 19,159 | | **Total Foundation IRB Approach Credit Exposure** | **3,089** | **2,027** | **2,199** | **639** | **3,320** | **920** | **2,172** | **766** | **5** | **6,349** | **-** | **21,486** | | As at 31.12.09 | Financial institutions/ services (£m) | Agriculture, forestry and fishing (£m) | Manufacturing (£m) | Construction (£m) | Property (£m) | Energy and water (£m) | Wholesale and retail, distribution and leisure (£m) | Transport (£m) | Postal and communication (£m) | Business and other services (£m) | Other personal (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 917 | - | - | - | - | - | - | - | - | 2 | - | 919 | | Institutions | 2,057 | - | - | - | - | - | - | - | - | - | - | 2,057 | | Corporates | 3,414 | 764 | 1,492 | 396 | 1,774 | 454 | - | 86 | 2,240 | 3,177 | 762 | 14,559 | | **Total Foundation IRB Approach Credit Exposure** | **6,388** | **764** | **1,492** | **396** | **1,774** | **454** | **-** | **86** | **2,240** | **3,179** | **762** | **17,535** | The figures above relate to wholesale credit risk in Absa. Total exposure under the Foundation IRB approach increased £4.0bn to £21.5bn (2009: £17.5bn), driven by the appreciation of Rand against Sterling and business growth. --- Table 27: Industry analysis of credit exposure under the Advanced IRB approach | As at 31.12.10 | Financial institutions/ services (£m) | Agriculture, forestry and fishing (£m) | Manufacturing (£m) | Construction (£m) | Property (£m) | Energy and water (£m) | Wholesale and retail, distribution and leisure (£m) | Transport (£m) | Postal and communication (£m) | Business and other services (£m) | Home loans (£m) | Other personal (£m) | Non-customer assets (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 92,338 | - | - | - | - | - | - | - | - | 28,367 | - | - | - | 120,705 | | Institutions | 24,149 | - | - | - | - | - | - | - | - | - | - | - | - | 24,149 | | Corporates | 22,148 | 1,338 | 18,173 | 4,234 | 28,841 | 16,240 | 13,229 | 7,064 | 5,844 | 29,494 | - | 0 | - | 146,605 | | Retail | 95 | 1,975 | 899 | 805 | 2,493 | 19 | 3,031 | 366 | 49 | 3,696 | 149,612 | 50,050 | - | 213,090 | | Equity | 203 | - | 87 | 7 | 200 | 0 | 42 | - | 16 | 104 | - | - | - | 659 | | Securitisation positions | 29,542 | - | - | - | 231 | - | - | - | - | 121 | - | - | - | 29,894 | | Non-credit obligation assets | - | - | - | - | - | - | - | - | - | - | - | - | 14,397 | 14,397 | | **Total Advanced IRB Approach Credit Exposure** | **168,475** | **3,313** | **19,159** | **5,046** | **31,765** | **16,259** | **16,302** | **7,430** | **5,909** | **61,782** | **149,612** | **50,050** | **14,397** | **549,499** | | As at 31.12.09 | Financial institutions/ services (£m) | Agriculture, forestry and fishing (£m) | Manufacturing (£m) | Construction (£m) | Property (£m) | Energy and water (£m) | Wholesale and retail, distribution and leisure (£m) | Transport (£m) | Postal and communication (£m) | Business and other services (£m) | Home loans (£m) | Other personal (£m) | Non-customer assets (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 72,858 | - | - | - | - | - | - | - | - | 12,931 | - | - | - | 85,789 | | Institutions | 35,545 | - | - | - | - | - | - | - | - | - | - | - | - | 35,545 | | Corporates | 18,900 | 1,290 | 21,159 | 4,546 | 28,864 | 14,646 | 14,662 | 5,041 | 4,685 | 28,836 | - | 579 | - | 143,208 | | Retail | 494 | 2,073 | 831 | 814 | 2,064 | 15 | 2,729 | 291 | 277 | 3,587 | 129,914 | 42,700 | - | 185,789 | | Equity | 74 | - | 324 | - | 199 | - | 31 | - | - | 9 | - | - | - | 637 | | Securitisation positions | 30,183 | - | - | - | 728 | - | - | - | - | 112 | - | - | - | 31,023 | | Non-credit obligation assets | - | - | - | - | - | - | - | - | - | - | - | - | 12,143 | 12,143 | | **Total Advanced IRB Approach Credit Exposure** | **158,054** | **3,363** | **22,314** | **5,360** | **31,855** | **14,661** | **17,422** | **5,332** | **4,962** | **45,475** | **129,914** | **43,279** | **12,143** | **494,134** | The £55.4bn to £549.5bn (2009: £494.1bn) increase in exposures under the Advanced IRB approach occurred mainly in business and other services, home loans, financial institutions and services, and other personal. Other personal and home loans are both retail categories where increases were driven mainly by UKRB and Absa. The increase within central governments or central banks across industries reflects the enhancement in the Group’s liquidity position. --- ### Residual maturity analysis The maturity analysis below shows all of the Group’s credit exposure by maturity date for regulatory purposes. This is defined as the contractual maturity date and it is the basis upon which capital adequacy calculations are performed. This differs from the treatment required by IFRS, under which firms disclose drawn balances rather than exposures and apportion maturity according to the repayment schedule. Table 28: Residual maturity analysis of credit exposures under the Standardised approach | As at 31.12.10 | On demand and qualifying revolving (£m) | Under one year (£m) | Over one year but not more than three years (£m) | Over three years but not more than five years (£m) | Over five years but not more than ten years (£m) | Over ten years or undated (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 4,961 | 4,705 | 2,345 | 1,751 | 43 | 387 | 14,192 | | Regional governments or local authorities | 15 | 112 | 4 | 2 | 1 | 17 | 151 | | Administrative bodies and non-commercial undertakings | 0 | 148 | 55 | 53 | 6 | 26 | 288 | | Institutions | 203 | 1,633 | 300 | 608 | 7 | 111 | 2,862 | | Corporates | 2,107 | 22,015 | 8,285 | 6,777 | 2,585 | 2,853 | 44,622 | | Retail | 11,924 | 2,908 | 2,997 | 3,052 | 3,318 | 1,033 | 25,232 | | Secured on real estate property | 232 | 2,343 | 1,540 | 2,213 | 2,458 | 18,966 | 27,752 | | Past due items | 1,536 | 797 | 297 | 209 | 323 | 839 | 4,001 | | Private equity | - | 0 | 47 | 42 | 86 | 1,039 | 1,214 | | Covered Bonds | - | - | 69 | 91 | 69 | 56 | 285 | | Securitisation positions | - | 17 | 80 | - | - | 310 | 407 | | Collective investment undertakings | 0 | 611 | 2 | - | 40 | 0 | 653 | | Other items | 3,130 | 40 | 0 | 18 | 0 | 465 | 3,653 | | **Total Standardised Approach Credit Risk Exposure** | **24,108** | **35,329** | **16,021** | **14,816** | **8,936** | **26,102** | **125,312** | | As at 31.12.09 | On demand and qualifying revolving (£m) | Under one year (£m) | Over one year but not more than three years (£m) | Over three years but not more than five years (£m) | Over five years but not more than ten years (£m) | Over ten years or undated (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 3,053 | 3,784 | 1,284 | 1,840 | 368 | - | 10,329 | | Regional governments or local authorities | 1 | 139 | 51 | - | 3 | 66 | 260 | | Administrative bodies and non-commercial undertakings | - | 214 | 8 | 108 | 6 | 48 | 384 | | Institutions | 342 | 1,620 | 169 | 648 | 37 | 93 | 2,909 | | Corporates | 1,426 | 22,152 | 8,074 | 5,269 | 5,414 | 2,442 | 44,777 | | Retail | 12,185 | 3,175 | 3,376 | 3,099 | 3,157 | 1,138 | 26,130 | | Secured on real estate property | 27 | 1,675 | 1,042 | 1,889 | 4,135 | 18,113 | 26,881 | | Past due items | 1,586 | 621 | 345 | 337 | 294 | 933 | 4,116 | | Private equity | - | 25 | 9 | 24 | 128 | 1,952 | 2,138 | | Covered Bonds | - | - | - | - | - | - | - | | Securitisation positions | - | - | - | - | - | - | - | | Collective investment undertakings | - | 832 | 7 | - | 82 | - | 921 | | Other items | 2,942 | 272 | 94 | - | - | 335 | 3,643 | | **Total Standardised Approach Credit Risk Exposure** | **21,562** | **34,509** | **14,459** | **13,214** | **13,624** | **25,120** | **122,488** | Overall requirements increased £2.8bn to £125.3bn (2009: £122.5bn), driven by exposures to central governments or central banks as the Group enhanced its liquidity position. Exposures increased in all maturity bands except for a £4.7bn decline in the 5 to 10 years maturity band driven by Western Europe, where corporate exposures and exposures secured on real estate property declined in 2010. --- Table 29: Residual maturity analysis of credit exposures under the Foundation IRB approach | As at 31.12.10 | On demand and qualifying revolving (£m) | Under one year (£m) | Over one year but not more than three years (£m) | Over three years but not more than five years (£m) | Over five years but not more than ten years (£m) | Over ten years or undated (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 1,354 | 0 | - | - | 4 | - | 1,358 | | Institutions | 4 | 462 | 223 | 24 | 256 | - | 969 | | Corporates | 1,737 | 1,559 | 1,342 | 881 | 13,640 | - | 19,159 | | **Total Foundation IRB Approach Credit Risk Exposure** | **3,095** | **2,021** | **1,565** | **905** | **13,900** | **-** | **21,486** | | As at 31.12.09 | On demand and qualifying revolving (£m) | Under one year (£m) | Over one year but not more than three years (£m) | Over three years but not more than five years (£m) | Over five years but not more than ten years (£m) | Over ten years or undated (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 919 | - | - | - | - | - | 919 | | Institutions | 1,089 | 99 | 869 | - | - | - | 2,057 | | Corporates | 6,745 | 2,367 | 2,173 | 748 | 1,931 | 595 | 14,559 | | **Total Foundation IRB Approach Credit Risk Exposure** | **8,753** | **2,466** | **3,042** | **748** | **1,931** | **595** | **17,535** | The figures above relate to wholesale credit risk in Absa. Total exposure under the Foundation IRB approach increased £4.0bn to £21.5bn (2009: £17.5bn), driven by the appreciation in the value of the Rand against Sterling and business growth. The implementation of an enhanced data system led to reclassifications between maturities, as discussed on page 2. --- Table 30: Residual maturity analysis credit exposures under the Advanced IRB approach | Credit exposure (EAD) Pre-CRM as at 31.12.10 | On demand and qualifying revolving (£m) | Under one year (£m) | Over one year but not more than three years (£m) | Over three years but not more than five years (£m) | Over five years but not more than ten years (£m) | Over ten years or undated (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 78,588 | 17,203 | 3,014 | 2,271 | 12,505 | 7,124 | 120,705 | | Institutions | 2,425 | 6,600 | 8,111 | 5,920 | 1,019 | 74 | 24,149 | | Corporates | 8,204 | 24,453 | 46,955 | 27,425 | 10,459 | 29,109 | 146,605 | | Retail | 45,022 | 1,641 | 8,359 | 9,868 | 20,520 | 127,680 | 213,090 | | Equity | - | - | - | 659 | - | - | 659 | | Securitisation positions | - | 7,779 | 2,576 | 96 | 16,120 | 3,323 | 29,894 | | Non-credit obligation assets | 78 | 95 | - | - | - | 14,224 | 14,397 | | **Total Advanced IRB Credit Risk Exposure** | **134,317** | **57,771** | **69,015** | **46,239** | **60,623** | **181,534** | **549,499** | | Credit exposure (EAD) Pre-CRM as at 31.12.09 | On demand and qualifying revolving (£m) | Under one year (£m) | Over one year but not more than three years (£m) | Over three years but not more than five years (£m) | Over five years but not more than ten years (£m) | Over ten years or undated (£m) | Total (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 71,771 | 4,394 | 3,121 | 2,429 | 2,391 | 1,683 | 85,789 | | Institutions | 1,732 | 18,574 | 13,712 | 613 | 447 | 467 | 35,545 | | Corporates | 10,223 | 20,096 | 47,493 | 27,100 | 13,113 | 25,183 | 143,208 | | Retail | 37,424 | 1,852 | 7,147 | 9,209 | 18,774 | 111,383 | 185,789 | | Equity | 637 | - | - | - | - | - | 637 | | Securitisation positions | - | 10,229 | 3,177 | 895 | 12,632 | 4,090 | 31,023 | | Non-credit obligation assets | 177 | 67 | - | - | - | 11,899 | 12,143 | | **Total Advanced IRB Credit Risk Exposure** | **121,964** | **55,212** | **74,650** | **40,246** | **47,357** | **154,705** | **494,134** | The £55.4bn increase in exposures treated under the Advanced IRB approach to £549.5bn (2009: £494.1bn) occurred in all maturity bands except 1-3 years, with the highest increase in the over ten years or undated maturity band. This was principally driven by increases in: central governments/banks, mainly within Barclays Capital and Group Treasury; retail, driven by UKRB secured loans; and corporates, within Barclays Capital. --- ### Impaired exposures At each balance sheet date, the Group assesses whether there is objective evidence that loans and receivables or available for sale financial investments are impaired. These are considered to be impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the asset and prior to the balance sheet date that have adversely impacted the estimated future cash flows of the financial asset or the portfolio. The criteria that the Group uses to determine that there is objective evidence of an impairment loss include: * significant financial difficulty of the issuer or obligor; * a breach of contract, such as a default or delinquency in interest or principal payments; * the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; * it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; * the disappearance of an active market for that financial asset because of financial difficulties; or * observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including: - adverse changes in the payment status of borrowers in the portfolio; - national or local economic conditions that correlate with defaults on the assets in the portfolio. For loans and receivables the Group first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed loan and receivable, whether significant or not, it then includes the asset in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. The amount of the loss is recognised using an allowance account and recognised in the income statement. Where appropriate, the calculation of the present value of the estimated future cash flows of a collateralised loan and receivable asset reflects the cash flows that may result from foreclosure costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, loans and receivables are grouped on the basis of similar risk characteristics, taking into account asset type, industry, geographical location, collateral type, past due status and other relevant factors. These characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the counterparty’s ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of loans and receivables that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted based on current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Following impairment, interest income is recognised using the effective rate of interest that was used to discount the future cash flows for the purpose of measuring the impairment loss. When a loan is uncollectable, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the income statement. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement. Equity securities or properties acquired in exchange for loans in order to achieve an orderly realisation are accounted for as a disposal of the loan and an acquisition of equity securities or investment properties. Where control is obtained over an entity as a result of the transaction, the entity is consolidated. Any further impairment of the assets or business acquired is treated as an impairment of the relevant asset or business and not as an impairment of the original instrument. --- In the case of available for sale equity securities, a significant or prolonged decline in the fair value of the security below its cost is also considered in determining whether impairment exists. Where such evidence exists, the cumulative net loss that has been previously recognised directly in equity is removed from equity and recognised in the income statement. In the case of debt instruments classified as available for sale, impairment is assessed based on the same criteria as all other financial assets. Reversals of impairment of debt instruments are recognised in the income statement. Reversals of impairment of equity shares are not recognised in the income statement, increases in the fair value of equity shares after impairment are recognised directly in equity. The table below shows an analysis of impaired exposures, past due exposures and allowance for impairment. Impaired exposures comprise loans where individual identified impairment allowance has been raised and also include loans that are fully collateralised or where indebtedness has already been written down to the expected realisable value. The impaired loan category may include loans, which, while impaired, are still performing. Loans are past due when a counterparty has failed to make a payment when contractually due. Impairment allowances are a provision held on the balance sheet as a result of the raising of a charge against profit for the incurred loss inherent in the lending book. An impairment allowance may either be identified or unidentified and individual or collective. Table 31: Analysis of impaired and past due exposures and allowance for impairment by exposure type | As at 31.12.10 | Impaired Exposures (£m) | Past Due Exposures (£m) | Allowance for Impairment (£m) | | :--- | :--- | :--- | :--- | | Financial assets designated at fair value | - | 79 | - | | Loans and advanced to banks | 35 | 663 | 48 | | Home Loans | 2,513 | 9,488 | 854 | | Credit card receivables | 3,112 | 1,253 | 2,441 | | Other personal lending | 3,397 | 2,098 | 3,127 | | Wholesale and Corporate loans and advances | 18,010 | 6,623 | 5,611 | | Finance lease receivables | 427 | 589 | 351 | | **Total** | **27,494** | **20,793** | **12,432** | | As at 31.12.09 | Impaired Exposures (£m) | Past Due Exposures (£m) | Allowance for Impairment (£m) | | :--- | :--- | :--- | :--- | | Financial assets designated at fair value | - | 180 | - | | Loans and advanced to banks | 57 | 2,280 | 61 | | Home Loans$^1$ | 1,854 | 8,839 | 639 | | Credit card receivables | 2,459 | 1,544 | 2,309 | | Other personal lending | 2,372 | 2,175 | 2,908 | | Wholesale and Corporate loans and advances | 10,088 | 7,598 | 4,558 | | Finance lease receivables | 402 | 664 | 321 | | **Total** | **17,232** | **23,280** | **10,796** | The £7.9bn increase in wholesale and corporate impaired exposures to £18.0bn (2009: £10.1bn) is driven by the impairment related to Protium loan. The £0.6bn increase in home loans impaired exposures to £2.5bn (2009: £1.9bn) and the £0.3bn increase in the allowance for impairment to £0.9bn (2009: £0.6bn) are primarily attributable to the deteriorating property market in Spain, the acquisition of Standard Life Bank and increased lending within UK Retail Banking. The increases in other personal lending are all driven by impairment charges raised on unsecured lending. The decrease in past due exposures to banks is a result of reduced settlement balances at the end of 2010. Note on table 31: $^1$ The 2009 figures have been restated – see page 105 of the Annual Report. --- The following table gives a geographic analysis of impaired exposures, past due exposures and allowances for impairment. Table 32: Geographic analysis of impaired and past due exposures and allowance for impairment | As at 31.12.10 | Impaired Exposures (£m) | Past Due Exposures (£m) | Allowance for Impairment (£m) | | :--- | :--- | :--- | :--- | | UK | 6,406 | 9,531 | 4,429 | | Other European Union | 5,218 | 3,298 | 2,760 | | United States | 12,056 | 3,725 | 2,958 | | Africa | 2,917 | 3,699 | 1,631 | | Rest of the World | 897 | 540 | 654 | | **Total** | **27,494** | **20,793** | **12,432** | | As at 31.12.09 | Impaired Exposures (£m) | Past Due Exposures (£m) | Allowance for Impairment (£m) | | :--- | :--- | :--- | :--- | | UK$^1$ | 5,262 | 10,607 | 4,083 | | Other European Union | 4,045 | 5,198 | 2,014 | | United States | 4,792 | 3,098 | 2,518 | | Africa | 2,192 | 3,777 | 1,349 | | Rest of the World | 941 | 600 | 832 | | **Total** | **17,232** | **23,280** | **10,796** | The £7.3bn increase in impaired exposures within the United States to £12.1bn (2009: £4.8bn) is driven by the loan to Protium. The £1.2bn increase in impaired exposures within Other European Union to £5.2bn (2009 £4.0bn) is driven by the deteriorating property market in Spain and impairment on unsecured lending. The £1.1bn increase in impaired exposures within the United Kingdom to £6.4bn (2009: £5.3bn) is driven by the acquisition of Standard Life Bank, increased lending within UK Retail Banking and impairment raised on unsecured lending. Note on table 32: $^1$ The 2009 figures have been restated– see page 105 of the Annual Report. --- The table below shows the movement of impairment in 2010 as well as amounts directly written off or recovered to profit and loss. Table 33: Analysis of movement on impairment and amounts taken directly to profit and loss | Impairment Movement | As at 31.12.10 (£m) | As at 31.12.09 (£m) | | :--- | :--- | :--- | | Starting period | 10,796 | 6,574 | | Acquisitions & Disposals | 78 | 434 | | Exchange and other adjustments | 331 | (127) | | Unwind of discount | (213) | (185) | | Amounts written off | (4,310) | (3,380) | | Recoveries | 201 | 150 | | Amounts charged against profit | 5,549 | 7,330 | | **Ending period** | **12,432** | **10,796** | | Direct P&L Impacts | As at 31.12.10 (£m) | As at 31.12.09 (£m) | | :--- | :--- | :--- | | Direct write-offs | 126 | 2,522 | | Direct recoveries | - | - | The £2.4bn decrease in direct write offs to £0.1bn (2009: £ 2.5bn) is driven by reduced value adjustments, primarily within Barclays Capital. --- ### Credit rating agencies Under the Standardised approach, the Group makes limited use of credit ratings assigned by credit rating agencies in its calculation of credit RWAs. The FSA determines which agencies may be relied upon in the determination of this risk weight. Barclays uses ratings assigned by the following agencies: * Standard & Poor’s * Moody’s * Fitch These ratings are used in the calculation of the following exposure classes: * Central governments and central banks * Institutions * Corporates * Short term claims on institutions and corporates ### Unrated and Rated Counterparties Where a rating is not available, Barclays follows the provisions of the regulations that cover this state. The following is a summary of the rules governing the Standardised approach. Each exposure must be assigned to one of six credit quality steps if a rating is available as defined in the table below. Table 34: Credit rating agencies and credit quality steps under the Standardised approach | Standard and Poor's | Moody's | Fitch | Credit Quality Step | | :--- | :--- | :--- | :--- | | AAA to AA- | Aaa to Aa3 | AAA to AA- | Credit Quality Step 1 | | A+ to A- | A1 to A3 | A+ to A- | Credit Quality Step 2 | | BBB+ to BBB- | Baa1 to Baa3 | BBB+ to BBB- | Credit Quality Step 3 | | BB+ to BB- | Ba1 to Ba3 | BB+ to BB- | Credit Quality Step 4 | | B+ to B- | B1 to B3 | B+ to B- | Credit Quality Step 5 | | CCC+ and below | Caa1 and below | CCC+ and below | Credit Quality Step 6 | After each unrated exposure has been assigned a quality step, exposure class and maturity are then used to determine the risk weight percentage. Exposures cannot be assigned a risk weight that is lower than that of the sovereign risk of the country in which the asset is located. Where a rating is not available, in most cases the treatment is approximately equivalent to that which is applied to credit quality step 3. The following table is a simplified version of the risk weight allocation process. Table 35: Credit quality steps and risk weights under the Standardised approach | Credit quality Step | Central governments and central banks | Corporates | Institutions greater than 3 months maturity | | :--- | :--- | :--- | :--- | | Credit quality Step 1 | 0% | 20% | 20% | | Credit quality Step 2 | 20% | 50% | 50% | | Credit quality Step 3 | 50% | 100% | 50% | | Credit quality Step 4 | 100% | 100% | 100% | | Credit quality Step 5 | 100% | 150% | 100% | | Credit quality Step 6 | 150% | 150% | 150% | Retail exposures are generally assigned a risk weight of 75%. More detailed criteria are applied for exposures secured on residential or commercial property to include the credit risk mitigation. --- ### Credit Quality Assessment Scale The following table shows the exposures calculated under the Standardised approach broken down by credit quality step as specified by the Standardised approach rules (further detail on this may be obtained from the FSA’s BIPRU regulations, Section 3). Table 36: Credit quality step analysis of pre-CRM exposure and capital deductions under the Standardised approach | As at 31.12.10 | Credit Quality Step 1 (£m) | Credit Quality Step 2 (£m) | Credit Quality Step 3 (£m) | Credit Quality Step 4 (£m) | Credit Quality Step 5 (£m) | Credit Quality Step 6 (£m) | Unrated (£m) | Total (£m) | Capital Deducted from Capital Resources (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 5,202 | 1,109 | 4,979 | 1,085 | 911 | - | 906 | 14,192 | - | | Regional governments or local authorities | 12 | 0 | - | - | - | - | 139 | 151 | - | | Administrative bodies and non-commercial undertakings | - | - | - | - | - | - | 288 | 288 | - | | Institutions | 426 | 352 | 65 | 17 | 14 | - | 1,988 | 2,862 | - | | Corporates | 29 | 1,268 | 372 | 161 | 123 | 4 | 42,665 | 44,622 | - | | Retail | N/A | N/A | N/A | N/A | N/A | N/A | 25,232 | 25,232 | - | | Secured on real estate property | N/A | N/A | N/A | N/A | N/A | N/A | 27,752 | 27,752 | - | | Past due items | N/A | N/A | N/A | N/A | N/A | N/A | 4,001 | 4,001 | - | | Private Equity | N/A | N/A | N/A | N/A | N/A | N/A | 1,214 | 1,214 | 982 | | Covered Bonds | - | 285 | - | - | - | - | - | 285 | - | | Collective investment undertakings | 557 | 41 | 52 | - | - | - | 3 | 653 | - | | Other items | N/A | N/A | N/A | N/A | N/A | N/A | 3,653 | 3,653 | - | | Securitisation positions | - | 300 | - | - | - | - | 107 | 407 | 974 | | **Total Standardised Approach Credit Exposure/ Capital** | **6,226** | **3,355** | **5,468** | **1,263** | **1,048** | **4** | **107,948** | **125,312** | **1,956** | | As at 31.12.09 | Credit Quality Step 1 (£m) | Credit Quality Step 2 (£m) | Credit Quality Step 3 (£m) | Credit Quality Step 4 (£m) | Credit Quality Step 5 (£m) | Credit Quality Step 6 (£m) | Unrated (£m) | Total (£m) | Capital Deducted from Capital Resources (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 3,692 | 846 | 3,312 | 1,066 | 535 | - | 878 | 10,329 | - | | Regional governments or local authorities | 1 | 7 | 42 | - | - | - | 210 | 260 | - | | Administrative bodies and non-commercial undertakings | - | - | - | - | - | - | 384 | 384 | - | | Institutions | 328 | 482 | 61 | 41 | - | - | 1,997 | 2,909 | - | | Corporates | 83 | 675 | 486 | 90 | 64 | 76 | 43,303 | 44,777 | - | | Retail | N/A | N/A | N/A | N/A | N/A | N/A | 26,130 | 26,130 | - | | Secured on real estate property | N/A | N/A | N/A | N/A | N/A | N/A | 26,881 | 26,881 | - | | Past due items | N/A | N/A | N/A | N/A | N/A | N/A | 4,116 | 4,116 | - | | Private Equity | N/A | N/A | N/A | N/A | N/A | N/A | 2,138 | 2,138 | - | | Covered Bonds | - | - | - | - | - | - | - | - | - | | Collective investment undertakings | 762 | 155 | - | - | - | - | 4 | 921 | - | | Other items | N/A | N/A | N/A | N/A | N/A | N/A | 3,643 | 3,643 | - | | Securitisation positions | - | - | - | - | - | - | - | - | 1,237 | | **Total Standardised Approach Credit Exposure / Capital** | **4,866** | **2,165** | **3,901** | **1,197** | **599** | **76** | **109,684** | **122,488** | **1,237** | Under the Basel rules most of the exposures under the Standardised approach are classified as “unrated”. Information on the drivers of the £2.8bn increase to £125.3bn (2009: £122.5bn) can be found in tables 20, 22, 25 and 28. --- Table 37: Credit quality step analysis of post-CRM exposure and capital deductions under the Standardised approach | As at 31.12.10 | Credit Quality Step 1 (£m) | Credit Quality Step 2 (£m) | Credit Quality Step 3 (£m) | Credit Quality Step 4 (£m) | Credit Quality Step 5 (£m) | Credit Quality Step 6 (£m) | Unrated (£m) | Total (£m) | Capital Deducted from Capital Resources (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 5,202 | 1,109 | 4,979 | 1,085 | 911 | - | 905 | 14,191 | - | | Regional governments or local authorities | 12 | 0 | - | - | - | - | 139 | 151 | - | | Administrative bodies and non-commercial undertakings | - | - | - | - | - | - | 288 | 288 | - | | Institutions | 426 | 352 | 65 | 17 | 14 | - | 1,946 | 2,820 | - | | Corporates | 29 | 1,203 | 372 | 161 | 123 | 4 | 40,350 | 42,242 | - | | Retail | N/A | N/A | N/A | N/A | N/A | N/A | 24,931 | 24,931 | - | | Secured on real estate property | - | N/A | N/A | N/A | N/A | N/A | 27,449 | 27,449 | - | | Past due items | - | N/A | N/A | N/A | N/A | N/A | 3,982 | 3,982 | - | | Private Equity | N/A | N/A | N/A | N/A | N/A | N/A | 1,214 | 1,214 | 982 | | Covered Bonds | - | 285 | - | - | - | - | - | 285 | - | | Collective investment undertakings | 557 | 41 | 52 | - | - | - | 2 | 652 | - | | Other items | N/A | N/A | N/A | N/A | N/A | N/A | 3,653 | 3,653 | - | | Securitisation positions | - | 300 | - | - | - | - | 107 | 407 | 974 | | **Total Standardised Approach Credit Exposure/ Capital** | **6,226** | **3,290** | **5,468** | **1,263** | **1,048** | **4** | **104,966** | **122,265** | **1,956** | | As at 31.12.09 | Credit Quality Step 1 (£m) | Credit Quality Step 2 (£m) | Credit Quality Step 3 (£m) | Credit Quality Step 4 (£m) | Credit Quality Step 5 (£m) | Credit Quality Step 6 (£m) | Unrated (£m) | Total (£m) | Capital Deducted from Capital Resources (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Central governments or central banks | 3,692 | 846 | 3,312 | 1,066 | 535 | - | 878 | 10,329 | - | | Regional governments or local authorities | 1 | 7 | 42 | - | - | - | 210 | 260 | - | | Administrative bodies and non-commercial undertakings | - | - | - | - | - | - | 384 | 384 | - | | Institutions | 328 | 482 | 61 | 41 | - | - | 1,921 | 2,833 | - | | Corporates | 83 | 675 | 486 | 90 | 64 | 76 | 41,121 | 42,595 | - | | Retail | N/A | N/A | N/A | N/A | N/A | N/A | 25,860 | 25,860 | - | | Secured on real estate property | N/A | N/A | N/A | N/A | N/A | N/A | 26,735 | 26,735 | - | | Past due items | N/A | N/A | N/A | N/A | N/A | N/A | 4,103 | 4,103 | - | | Private Equity | N/A | N/A | N/A | N/A | N/A | N/A | 2,138 | 2,138 | - | | Covered Bonds | - | - | - | - | - | - | - | - | - | | Collective investment undertakings | 762 | 155 | - | - | - | - | 4 | 921 | - | | Other items | N/A | N/A | N/A | N/A | N/A | N/A | 3,643 | 3,643 | - | | Securitisation positions | - | - | - | - | - | - | - | - | 1,237 | | **Total Standardised Approach Credit Exposure / Capital** | **4,866** | **2,165** | **3,901** | **1,197** | **599** | **76** | **106,997** | **119,801** | **1,237** | Exposures have moved broadly in line with the pre-CRM exposures, shown in the preceding table. --- ## Credit Risk Mitigation ### Credit Risk Mitigation Barclays employs a range of techniques and strategies to actively mitigate credit risks to which it is exposed. These can broadly be divided into three types: * netting and set-off; * collateral; and * risk transfer. In many jurisdictions in which Barclays operates, credit risk exposures can be reduced by applying netting and set off which uses Barclays obligations to a counterparty to produce a lower, net, credit exposure. This technique is commonly used in derivative transactions. Barclays will often seek to take a security interest in a tangible or financial asset to provide an alternative source of repayment in the event that customers, clients or counterparties are unable to meet their obligations. Assets taken as collateral include cash, financial assets (subject to an appropriate margin or ‘haircut’ to reflect their price volatility) and physical assets, particularly property but also vehicles, aircraft, ships and physical commodities amongst many others. Assets other than cash are subject to regular revaluation to ensure they continue to achieve appropriate mitigation of risk. Customer agreements often include requirements for provision of additional collateral should valuations decline or credit exposure increase (for example due to market moves impacting a derivative exposure). Finally, 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 that is more creditworthy than the original counterparty, then overall credit risk will be reduced; and * secondly, where recourse to the first counterparty remains, a default of both counterparties is required 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. --- ### Collateral and Guarantees Table 38 shows the Group’s exposure for assets in Standardised approach portfolios after eligible financial collateral and guarantees. Barclays has no credit exposure in its Standardised approach portfolios which has been reduced through the application of other (non-financial) collateral or by guarantees or credit derivatives. Table 38: Collateral and guarantees for Standardised approach | Standardised Approach Credit Risk Exposure Class | Total Exposure after netting and volatility adjustments covered by Eligible Financial Collateral As at 31.12.10 (£m) | Total Exposure after netting and volatility adjustments covered by Eligible Financial Collateral As at 31.12.09 (£m) | | :--- | :--- | :--- | | Central governments or central banks | - | - | | Regional governments or local authorities | - | - | | Administrative bodies and non-commercial undertakings | - | - | | Institutions | 6 | 76 | | Corporates | 2,566 | 2,182 | | Retail | 316 | 270 | | Secured on real estate property | 303 | 146 | | Past due items | 0 | 13 | | Private equity positions | - | - | | Covered Bonds | - | - | | Collective investment undertakings | - | - | | Other items | - | - | | **Total** | **3,191** | **2,687** | Collateral and guarantees under the Standardised approach mainly relate to Barclays Wealth business. The £0.5bn increase to £3.2bn (2009: £2.7bn) was driven by new lending secured by eligible collateral types, market movements affecting the value of collateral and increased recognition of collateral within existing lending. --- Table 39 shows the Group’s exposure for assets in its Advanced and Foundation portfolios covered by collateral, guarantees and credit derivatives. Table 39: Collateral and guarantees for Advanced and Foundation IRB approach | Advanced IRB | | | | | | :--- | :--- | :--- | :--- | :--- | | IRB Exposure Class | Total Exposure - after netting covered by Guarantees and Credit Derivatives (£m) | Total Exposure - after netting and volatility adjustments covered by Eligible Financial Collateral (£m) | Total Exposure - after netting and volatility adjustments covered by Other Eligible Collateral (£m) | Total Exposure - after netting covered by Guarantees and Credit Derivatives (£m) | | **As at 31.12.10** | | | | | | Central governments or central banks | - | - | - | - | | Institutions | - | 62 | - | - | | Corporates | - | 12,415 | - | - | | Retail | - | N/A | N/A | N/A | | Equity | | | | | | - Exchange traded exposures | - | N/A | N/A | N/A | | - Private equity exposures | - | N/A | N/A | N/A | | - Other Exposures | - | N/A | N/A | N/A | | Securitisation positions | - | - | - | - | | Non-credit obligation assets | N/A | N/A | N/A | N/A | | **Total** | **-** | **12,477** | **-** | **-** | | Foundation IRB | | | | | | :--- | :--- | :--- | :--- | :--- | | IRB Exposure Class | Total Exposure - after netting covered by Guarantees and Credit Derivatives (£m) | Total Exposure - after netting and volatility adjustments covered by Eligible Financial Collateral (£m) | Total Exposure - after netting and volatility adjustments covered by Other Eligible Collateral (£m) | Total Exposure - after netting covered by Guarantees and Credit Derivatives (£m) | | **As at 31.12.09** | | | | | | Central governments or central banks | - | - | - | - | | Institutions$^1$ | - | 1,490 | - | - | | Corporates$^1$ | - | 7,126 | - | - | | Retail | - | N/A | N/A | N/A | | Equity | | | | | | - Exchange traded exposures | - | N/A | N/A | N/A | | - Private equity exposures | - | N/A | N/A | N/A | | - Other exposures | - | N/A | N/A | N/A | | Securitisation positions | - | - | - | - | | Non-credit obligation assets | N/A | N/A | N/A | N/A | | **Total** | **-** | **8,616** | **-** | **-** | The Foundation IRB figures above relate to wholesale credit risk in Absa. The £3.9bn increase to £12.5bn (2009: £8.6bn) was principally driven by business growth and the appreciation in the value of the Rand against Sterling. The table includes collateral applied against exposures and does not include collateral that has been applied against loss given default or risk weights. Collateral balances within the Annual Report generally refer to securities financing transactions which are not part of the credit exposures above. Note on Table 39 $^1$ Figures were restated. --- ## Securitisations This section discloses information about Barclays securitisation activities distinguishing between the various roles Barclays plays in this business. It includes traditional securitisations as well as synthetic transactions effected through the use of derivatives. ### Objectives in relation to securitisation activities In the course of its business, Barclays has traditionally undertaken securitisations of its own originated assets as well as the securitisation of third party assets via sponsored conduit vehicles and shelf programmes. Barclays has securitised its own originated assets in order to manage the Group’s credit risk position and to generate term liquidity for the Group balance sheet. ### The role Barclays plays in the securitisation process Barclays adopts the following roles in the securitisation processes in which it is involved: * originator of securitised assets; * executor of securitisation trades including bond marketing and syndication; * provider of securitisation trade servicing, including data management, investor payments and reporting; * purchaser of third-party securitisations (i.e. where Barclays would not be defined as an originator or a sponsor for regulatory purposes) to support client franchise. As at the end 2010, Barclays has securitised some of its own originated retail and commercial mortgages, as well as corporate loans across both funded traditional and synthetic transactions. Barclays acts as an administrator and manager of multi-seller conduits through which interests in third-party-originated assets are securitised and funded via the issuance of asset backed commercial paper. From a regulatory perspective, Barclays would be defined primarily as a sponsor of these conduits. In relation to such conduit activity, Barclays may provide all or a portion of the backstop liquidity to the commercial paper, programme-wide credit enhancement and, as appropriate, interest rate and foreign currency hedging facilities. Barclays receives fees for the provision of these services. In addition to the above, Barclays has provided swaps to securitisation vehicles, both those sponsored by Barclays and those sponsored by third parties, in order to provide hedges against interest rate and/or currency movements. This forms part of Barclays Capital’s market making activity in interest rate and foreign exchange products. Third party securitisations in which Barclays acts as investor include positions in ABS CDO Super Senior, other US Sub Prime & Alt A, commercial mortgages, loans and bonds. ### Barclays involvement in securitisation in 2010 Due to a strong overall capital and liquidity position, Barclays has undertaken selective securitisation activity in all forms during 2010, taking advantage of market conditions when it has been attractive to do so. ### Approaches to calculating RWAs RWAs reported for securitised assets at 31st December 2010 are calculated in line with FSA regulations. Barclays has approval to use the IRB Approach for the calculation of RWAs. Within this, the Group uses the Internal Assessment Approach and the Supervisory Formula Approach to calculate its regulatory capital requirements arising from its securitisation exposures. Barclays also makes extensive use of ratings based approach while some items are calculated on a standard rules basis. ### Summary of the accounting policies for securitisation activities Certain Group sponsored entities have issued debt securities or have entered into funding arrangements with lenders in order to finance specific assets. Such entities will typically be considered to be special purpose entities (SPEs) for accounting purposes. SPEs are consolidated when the substance of the relationship between the Group and that entity indicates control. Potential indicators of control include, amongst other things, an assessment of the Group’s exposure to the risks and benefits of the assets of the SPE. This assessment of risks and benefits is based on arrangements in place and the assessed risk exposures at inception. This initial assessment is reconsidered at a later date if: * the Group acquires additional interests in the entity; * the contractual arrangements of the entity are amended such that the relative exposure to risks and benefits change; or * if the Group acquires control over the main operating and financial decisions of the entity. Assets that have been transferred to an unconsolidated entity will nonetheless remain on the Group balance sheet, with a liability recognised for the proceeds received, unless the following cases apply: --- a) substantially all the risks and rewards associated with the assets have been transferred, in which case, they are derecognised in full; or b) if a significant portion, but not all, of the risks and rewards have been transferred, the asset is derecognised entirely if the transferee has the ability to sell the financial asset, otherwise the asset continues to be recognised only to the extent of the Group’s continuing involvement. Where either case above applies to a fully proportionate share of all or specifically identified cash flows, the relevant accounting treatment is applied to that proportion of the asset. Other than where (a) or (b) apply, securitisation transactions are treated as financing in the financial statements. When (a) or (b) do apply, the transaction will result in sale treatment or partial sale treatment to the extent the Group has no continuing involvement. Gains are recognised to the extent that proceeds that can be measured using observable market data exceed the assets derecognised. Any retained interests, which will consist of loans and/or securities depending on the nature of the transaction, are valued in accordance with the Group’s Accounting Policies, as set out in the 2010 Annual Report. To the extent that these interests are measured at fair value, they will be included within the fair value disclosures in Note 41 to the financial statements in the Annual Report. As outlined in these disclosures, key valuation assumptions for retained interests of this nature will include spreads to discount rates, default and recovery rates and prepayment rates that may be observable or unobservable. In a synthetic securitisation transaction, the underlying assets are not sold into the relevant SPE. Instead, their performance is transferred into the vehicle through a synthetic instrument such as a credit default swap, a credit linked note or a financial guarantee. The accounting policies outlined above will apply to synthetic securitisations. However, derecognition will be possible only if asset cash flows are transferred into the SPE under arrangements satisfying the pass-through criteria of paragraph 19 of IAS 39 Financial Instruments: Recognition and Measurement. ### ECAIs used for securitisations Barclays employs External Credit Assessment Institutions to provide ratings for its asset backed securities. Their use is dependent on the transaction or asset class involved. For existing transactions, we employ Standard & Poor’s, Moody’s and Fitch for securitisations of corporate, residential mortgage and other retail exposures and Standard & Poor’s and Moody’s for securitisations of small and medium-sized entity and revolving retail exposures. ### Quantitative tables The securitisations disclosed below are those whose capital requirement has been calculated by reference to the BIPRU 9 securitisation framework under FSA regulations. The amounts are typically higher than those shown in the Annual Report as disclosure guidance requires all underlying exposures to be shown where a securitisation has been created during the year regardless of any accounting de-recognition treatment. The exposures are calculated on the basis of financial statement values, gross of the application of provisions. --- Table 40: Outstanding amount of exposures securitised | As at 31.12.10 | Traditional Transactions: Originator (£m) | Traditional Transactions: Sponsor (£m) | Synthetic Transactions: Originator (£m) | Synthetic Transactions: Sponsor (£m) | | :--- | :--- | :--- | :--- | :--- | | Residential Mortgages | 10,610 | - | - | - | | Commercial Mortgages | 9,695 | - | - | - | | Credit Card Receivables | - | - | - | - | | Leasing | - | - | - | - | | Loans to Corporates or SMEs | 4,691 | - | 1,403 | - | | Consumer Loans | - | 7,871 | - | - | | Trade Receivables | - | - | - | - | | Securitisations/ Re-securitisations | 1,050 | - | - | - | | Other Assets | 249 | - | - | - | | **Total** | **26,295** | **7,871** | **1,403** | **-** | | As at 31.12.09 | Traditional Transactions: Originator (£m) | Traditional Transactions: Sponsor (£m) | Synthetic Transactions: Originator (£m) | Synthetic Transactions: Sponsor (£m) | | :--- | :--- | :--- | :--- | :--- | | Residential Mortgages$^1$ | 14,468 | - | - | - | | Commercial Mortgages$^1$ | 10,217 | - | - | - | | Credit Card Receivables | 8,533 | - | - | - | | Leasing | 94 | - | - | - | | Loans to Corporates or SMEs$^1$ | 4,570 | - | 5,003 | - | | Consumer Loans | - | 8,793 | - | - | | Trade Receivables | - | - | - | - | | Securitisations/ Re-securitisations | 1,214 | - | - | - | | Other Assets | 480 | - | - | - | | **Total** | **39,576** | **8,793** | **5,003** | **-** | During 2010 the total amount of securitised exposures subject to Pillar 3 reporting decreased £17.8bn to £35.6bn (2009: £53.4bn) across both traditional and synthetic transactions. This includes transactions of third-party assets where Barclays acts as a sponsor. The £14.2bn reduction in traditional securitisations exposures to £34.2bn (2009: £48.4bn) was primarily driven by the credit card and residential mortgage asset classes, which decreased due to bond amortisation and maturities in 2010. The £3.6bn reduction in synthetic securitisation exposures to £1.4bn (31 December 2010: £5.0bn) is principally due to bond maturities in securitisations of loans to corporates or SMEs. Note on Table 40 $^1$ Figures were restated. --- Table 41: Analysis of impaired, past due and losses recognised on exposures securitised | As at 31.12.10 | Past Due: Originator (£m) | Past Due: Sponsor (£m) | Recognised Losses: Originator (£m) | Recognised Losses: Sponsor (£m) | | :--- | :--- | :--- | :--- | :--- | | Residential Mortgages | 925 | - | 97 | - | | Commercial Mortgages | 949 | - | 5 | - | | Credit Card Receivables | - | - | - | - | | Leasing | - | - | - | - | | Loans to Corporates or SMEs | 14 | - | 3 | - | | Consumer Loans | - | 179 | - | - | | Trade Receivables | - | - | - | - | | Securitisations/ Re-securitisations | 237 | - | 23 | - | | Other Assets | - | - | - | - | | **Total** | **2,125** | **179** | **128** | **-** | | As at 31.12.09 | Past Due: Originator (£m) | Past Due: Sponsor (£m) | Recognised Losses: Originator (£m) | Recognised Losses: Sponsor (£m) | | :--- | :--- | :--- | :--- | :--- | | Residential Mortgages$^1$ | 1,113 | - | 1,144 | - | | Commercial Mortgages$^1$ | 13 | - | - | - | | Credit Card Receivables | 581 | - | - | - | | Leasing | 6 | - | - | - | | Loans to Corporates or SMEs$^1$ | 106 | - | - | - | | Consumer Loans | - | 263 | - | - | | Trade Receivables | - | - | - | - | | Securitisations/ Re-securitisations | 436 | - | 338 | - | | Other Assets | - | - | - | - | | **Total** | **2,255** | **263** | **1,482** | **-** | During 2010, the most marked movement has been a £1.4bn reduction in the value of recognised losses to £0.1bn (2009: £1.5bn) reflecting a stabilisation in market conditions and improved asset impairment performance. Note on Table 41: $^1$ Figures were restated. --- Table 42: Aggregate amount of securitised positions retained or purchased | As at 31.12.10 | Retained (£m) | Purchased (£m) | Total (£m) | | :--- | :--- | :--- | :--- | | Residential Mortgages | 912 | 33,878 | 34,790 | | Commercial Mortgages | 677 | 1,144 | 1,821 | | Credit Card Receivables | - | 100 | 100 | | Leasing | - | 58 | 58 | | Loans to Corporates or SMEs | 2,398 | 7,169 | 9,568 | | Consumer Loans | 7,530 | 376 | 7,906 | | Trade Receivables | - | 14 | 14 | | Securitisations/ Re-securitisations | 640 | 7,811 | 8,450 | | Other Assets | 23 | 418 | 442 | | **Total** | **12,180** | **50,968** | **63,149** | | As at 31.12.09 | Retained (£m) | Purchased (£m) | Total (£m) | | :--- | :--- | :--- | :--- | | Residential Mortgages | 2,332 | 26,372 | 28,704 | | Commercial Mortgages | 63 | 980 | 1,043 | | Credit Card Receivables | 13 | 42 | 55 | | Leasing | - | 41 | 41 | | Loans to Corporates or SMEs | 3,092 | 6,469 | 9,561 | | Consumer Loans | 8,941 | 2,393 | 11,334 | | Trade Receivables | - | - | - | | Securitisations/ Re-securitisations | 202 | 219 | 421 | | Other Assets | 12 | 2,186 | 2,198 | | **Total** | **14,655** | **38,702** | **53,357** | During 2010 the total amount of securitisation positions increased by £9.7bn to £63.1bn (2009: £53.4bn). This was driven by a £12.3bn increase in purchased positions to £51.0bn (2009: £38.7bn), principally due to an updated regulatory calculation of Exposure at Default (EAD) for existing CDO positions held; the approach now references the underlying collateral pool rather than the ABS positions making up the CDO. The increase in purchased positions was partially offset by a £2.5bn decrease in retained positions to £12.2bn (2009: £14.7bn) driven by bond amortisation and maturities in 2010 relating to residential mortgage, loans to corporates or SMEs and consumer loan asset classes. Purchased securitisations / re-securitisations increased by £7.6bn to £7.8bn (2009:£0.2bn) following reclassifications due to a change in the regulatory treatment of the Protium transaction. --- Table 43: Analysis of securitised positions retained or purchased by risk weight | As at 31.12.10 | Retained (£m) | Purchased (£m) | Guidance for Risk Weight Bands (IRB S&P Equiv Rating) | Guidance for Risk Weight Bands (STD S&P Equiv Rating) | | :--- | :--- | :--- | :--- | :--- | | <= 10% | 9,864 | 9,542 | AAA to A+ (Senior Positions Only) | N/A | | > 10% <= 20% | 1,130 | 2,636 | A to A- (Senior Positions Only) / AAA to A+ (Base Case) | N/A | | > 20% <= 50% | 485 | 2,341 | A to A- (Base Case) | AAA to AA- | | > 50% <= 100% | 34 | 5,960 | BBB+ to BBB (Base Case) | A+ to A- | | >100% <= 650% | 68 | 489 | BBB- (Base Case) to BB (Base Case) | BBB+ to BB- | | > 650% <= 1250% | - | 32 | BB- (Base Case) | N/A | | > 1250% / Deducted | 599 | 29,968 | B+ & Below (Base Case) | B+ & Below | | **Total** | **12,180** | **50,968** | | | | As at 31.12.09 | Retained (£m) | Purchased (£m) | Guidance for Risk Weight Bands (IRB S&P Equiv Rating) | Guidance for Risk Weight Bands (STD S&P Equiv Rating) | | :--- | :--- | :--- | :--- | :--- | | <= 10% | 10,466 | 12,410 | AAA to A+ (Senior Positions Only) | N/A | | > 10% <= 20% | 896 | 5,488 | A to A- (Senior Positions Only) / AAA to A+ (Base Case) | N/A | | > 20% <= 50% | 501 | 489 | A to A- (Base Case) | AAA to AA- | | > 50% <= 100% | 1,695 | 337 | BBB+ to BBB (Base Case) | A+ to A- | | >100% <= 650% | 94 | 277 | BBB- (Base Case) to BB (Base Case) | BBB+ to BB- | | > 650% <= 1250% | 41 | 58 | BB- (Base Case) | N/A | | > 1250% / Deducted | 962 | 19,643 | B+ & Below (Base Case) | B+ & Below | | **Total** | **14,655** | **38,702** | | | The increase of £10.4bn in the 1250%/Deducted risk weight band for the purchased positions to £30.0bn (2009: £19.6bn) is mainly due to the change in the reporting treatment of existing CDO positions, as explained under Table 42. --- Table 44: Aggregate amount of securitised revolving exposures | As at 31.12.10 | Originator's Amount (£m) | Investor's Interest (£m) | | :--- | :--- | :--- | | Retail | - | - | | Non-retail | - | - | | **Total** | **-** | **-** | | As at 31.12.09 | Originator's Amount (£m) | Investor's Interest (£m) | | :--- | :--- | :--- | | Retail | 7,446 | 1,087 | | Non-retail | - | - | | **Total** | **7,446** | **1,087** | The securitised revolving exposures reportable under the Pillar 3 framework have reduced to zero during 2010. The prior year exposures related to our Gracechurch Cards programme and other trades comprised in the 2009 totals have been repaid in 2010. --- Table 45: Analysis of securitisation activity | As at 31.12.10 | Traditional: Originator (£m) | Traditional: Sponsor (£m) | Recognised Gain / Loss on Traditional Securitisation (£m) | Synthetic: Originator (£m) | Synthetic: Sponsor (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | | Residential Mortgages | 169 | - | - | - | - | | Commercial Mortgages | - | - | - | - | - | | Credit Card Receivables | - | - | - | - | - | | Leasing | - | - | - | - | - | | Loans to Corporates or SMEs | - | - | - | - | - | | Consumer Loans | - | - | - | - | - | | Trade Receivables | - | - | - | - | - | | Securitisations/ Re-securitisations | 798 | - | - | - | - | | Other Assets | - | - | - | - | - | | **Total** | **967** | **-** | **-** | **-** | **-** | | As at 31.12.09 | Traditional: Originator (£m) | Traditional: Sponsor (£m) | Recognised Gain / Loss on Traditional Securitisation (£m) | Synthetic: Originator (£m) | Synthetic: Sponsor (£m) | | :--- | :--- | :--- | :--- | :--- | :--- | | Residential Mortgages | 2,029 | - | - | - | - | | Commercial Mortgages | - | - | - | - | - | | Credit Card Receivables | - | - | - | - | - | | Leasing | - | - | - | - | - | | Loans to Corporates or SMEs | 329 | - | - | - | - | | Consumer Loans | - | - | - | - | - | | Trade Receivables | - | - | - | - | - | | Securitisations/ Re-securitisations | - | - | - | - | - | | Other Assets | - | - | - | - | - | | **Total** | **2,358** | **-** | **-** | **-** | **-** | Activity in new securitisation trades decreased in 2010 compared to prior year. This trend reflects both a lack of material investor demand for the higher risk securitisation tranches, which would support a transfer of significant risk and RWA relief, and Barclays strong overall capital position. --- ## Market Risk Management ### Market risk management strategy Market Risk is the risk that Barclays earnings or capital, or its ability to meet business objectives, will be adversely affected by changes in the level or volatility of market rates or prices such as interest rates, credit spreads, commodity prices, equity prices and foreign exchange rates. The main sources of risk are traded market risk, non-traded interest rate risk, translational foreign exchange risk and pension risk. Traded risk resides primarily in Barclays Capital while non-traded market risk resides mainly in Global Retail Banking, Barclays Corporate, Barclays Wealth and Group Treasury. Translational foreign exchange risk is managed by Group Treasury. Pension risk is managed centrally with the cost borne by respective businesses. Barclays market risk objectives are to: * understand and control market risk by robust measurement and the setting of limits; * facilitate business growth within a controlled and transparent risk management framework; * ensure traded market risk resides primarily in Barclays Capital; and * minimise non-traded market risk. ### Organisation and structure The Board approves market risk appetite for trading and non-trading activities. The Group Market Risk Director is responsible for the Barclays Market Risk Control Framework and, under delegated authority from the Chief Risk Officer, sets a limit framework within the context of the approved market risk appetite. A daily market risk report summarises Barclays market risk exposures against agreed limits. This daily report is sent to the Chief Risk Officer, the Group Market Risk Director, the Group Finance Director and the appropriate Business Risk Directors. Market Risk Committee approves, and makes recommendations concerning the market risk profile across Barclays. This includes approving Barclays Market Risk Control Framework and Group Policies; reviewing current and forward issues, limits and utilisation; and proposing risk appetite levels for the Board. The Committee is chaired by the Group Market Risk Director and attendees include the Chief Risk Officer, respective business risk managers and senior managers from Group Market Risk. The head of each business, assisted by the business market risk management team, is accountable for all market risks associated with its activities. The head of each business market risk team is responsible for implementing the Barclays Market Risk Control Framework setting out how market risk should be identified, measured, controlled, reported and reviewed. The framework also outlines and references Group market risk policies. Market risk oversight and challenge is provided by business committees, Group Committees including Market Risk Committee and the Group Market Risk team. The chart on page 118 of the Annual Report gives an overview of the business control structure. ### Traded market risk Traded market risk is predominantly the result of client facilitation in wholesale markets. This involves market making, offering hedge solutions, pre-hedging and assisting clients to execute large trades. Not all client trades are hedged completely, giving rise to market risk. In Barclays Capital, trading risk is measured for the trading book, as defined for regulatory purposes, and certain banking books. Barclays policy is to concentrate trading activities in Barclays Capital. #### Risk Measurement Barclays uses a range of complementary technical approaches to measure and control traded market risk including: Daily Value at Risk (DVaR), Expected Shortfall, 3W, Primary and Secondary risk factor stress testing and Combined scenario stress testing. DVaR is an estimate of the potential loss arising from unfavourable market movements, if the current positions were to be held unchanged for one business day. Barclays Capital uses the historical simulation methodology with a two-year equally weighted historical period, at the 95% confidence level. The historical simulation methodology can be split into three parts: * calculate hypothetical daily profit or loss for each position over the most recent two years, using observed daily market moves; * sum all hypothetical profits or losses for day one across all positions, giving one total profit or loss. Repeat for all other days in the two-year history; and * DVaR is the 95th percentile selected from the two-year history of daily hypothetical total profit or loss. Market volatility in 2010 was impacted by concerns over future economic growth and the sovereign debt crisis, but remained below the high levels observed in 2008. During 2010, the high volatility observations of 2008 rolled out of the two year DVaR historical data set and were replaced in the data time series by less volatile 2010 observations. --- Barclays Capital’s DVaR model has been approved by the FSA to calculate regulatory capital for certain trading book portfolios. The approval covers general market risk in interest rate, foreign exchange, commodities and equity products, and issuer specific risk for the majority of single name and portfolio traded credit products. For internal management purposes DVaR is also calculated for certain banking books as well as all trading book portfolios. The FSA categorises a DVaR model as green, amber or red. A green model is consistent with a good working DVaR model and is achieved for models that have four or less back-testing exceptions in a 12-month period. Back-testing counts the number of days when a loss (as defined by the FSA) exceeds the corresponding DVaR estimate, measured at the 99% confidence level. For Barclays Capital’s DVaR model, green model status was maintained for 2010 and 2009. The DVaR model is regularly assessed and reviewed internally by the Group Executive Models Committee and the Barclays Capital Model Committee. When reviewing DVaR estimates, a number of considerations should be taken into account. These are: * historical simulation uses the most recent two years of past data to generate possible future market moves but the past may not be a good indicator of the future; * the one-day time horizon does not fully capture the market risk of positions that cannot be closed out or hedged within one day; * DVaR is based on positions as at close of business and consequently intra-day risk, the risk from a position bought and sold on the same day, is not captured; and * DVaR does not indicate the potential loss beyond the 95th percentile. In part due to the points above, and in part due to the desire to measure risk beyond DVaR, Barclays uses additional metrics. These include Expected Shortfall, 3W, Primary risk factor stress testing, Secondary risk factor stress testing and Combined scenario stress testing. Both Expected Shortfall and 3W metrics use the same two-year historical simulation data set as used to calculate DVaR. Expected Shortfall is the average of all one day hypothetical losses beyond the 95% confidence level DVaR while 3W is the average of the three largest one day estimated losses. Stress testing provides an estimate of potential significant future losses that might arise from extreme market moves or scenarios. Primary stress testing applies stress moves to key liquid risk factors for each of the major trading asset classes including interest rate, credit spread, commodity, equity and foreign exchange. Secondary stress testing applies stress moves to less liquid risks such as option volatility skew. Combined scenario stress testing applies simultaneous shocks to several risk factors, reflecting a defined extraordinary, but plausible scenario e.g. what is the estimated impact on profits of a fixed exchange rate becoming floating. This is assessed by applying respective changes on foreign exchange rates, interest rates, credit spreads and equities to the portfolio. ### Risk Control Market Risk is controlled through the use of limits, where appropriate, on the above risk measures. Limits are set at the total Barclays Capital level, risk factor level e.g. interest rate risk, and business line level e.g. Emerging Markets. Stress limits and many book limits, such as foreign exchange and interest rate sensitivity limits, are also in place. The total DVaR limit, risk factor DVaR limits, and 3W limit are approved by the Board Risk Committee. Primary stress limits are approved by the Chief Risk Officer and are tabled for noting by the Board Risk Committee. Compliance with limits is monitored by Barclays Capital’s Market Risk team with oversight provided by Group Market Risk. In 2010, to further improve the application of the market risk control framework, Group Market Risk initiated an ongoing programme of conformance visits to Barclays Capital business areas. These visits review both the current market risk profile and potential market risk developments, as well as verifying conformance with Barclays Market Risk Control Framework. The oversight and governance of Barclays Capital’s market risk models was also improved in 2010. This included making the model committee more granular by having two distinct committees, one specifically for model methodology and the other specifically for data integrity and infrastructure. Group Market Risk is a member of both these committees. ### Risk Reporting Barclays Capital Market Risk team produces a number of detailed and summary market risk reports daily, weekly, fortnightly and monthly. These include, new for 2010, the Executive Key Risk Report (daily) and the Senior Management Significant Risk Pack (monthly). These reports summarise the positions, risks and top stresses covering interest rate, credit spread, commodity, equity and foreign exchange. Barclays Capital market risk reports are sent to Group Market Risk for review and inclusion in the Group Daily Market Risk Report. ### Equity investments Barclays holds equity positions in non-trading books to generate capital gains for private equity subsidiaries. It can also hold positions as a result of debt to equity conversions, or to maintain strategic relationships. The following table shows the Group exposure to equities not held in the trading book. All equities are held at fair value. --- Within these disclosures the Group has adopted a definition of equity that is consistent with the IFRS definition used within the Annual Report. Barclays reports non trading book equities under the Advanced IRB approach and the Standardised approach. (The Advanced IRB approach is only available where regulatory approval has been given.) The following table shows the Group’s exposure to equities where it uses the Simple Risk Weight approach under the Advanced IRB approach to determine the credit exposure. Table 46: Risk weighted exposures of equity investments | Risk Weight Category | As at 31.12.10 (£m) | As at 31.12.09 (£m) | | :--- | :--- | :--- | | Exchange Traded Exposures | 300 | 427 | | Non Exchange Traded Exposures | 2,236 | 1,980 | | Other Exposures | - | - | | **Total Risk Weighted Exposure Amount for Equities** | **2,536** | **2,407** | These exposures relate to the Absa book. The increase reflects the appreciation in the value of the Rand against Sterling. In Rand terms, exposures have decreased almost 10% following revaluation of the listed equity books and sales. The £4.6bn stake that Barclays retains in BlackRock, Inc. following the sale of BGI is deducted from capital requirements, hence not risk weighted. Table 47: Fair value of and gains and losses on equity investments | Non Trading Book Equity Investments | As at 31.12.10 (£m) | As at 31.12.09 (£m) | | :--- | :--- | :--- | | **Fair Value** | | | | Exchange Traded | 154 | 194 | | Private Equity | 1,648 | 2,633 | | Other | 502 | 491 | | **Total** | **2,304** | **3,318** | | **Cumulative Realised Gains / Losses from Sale and Liquidations of equity investments** | **65** | **(169)** | | **Unrealised gains/(losses)** | | | | Total Gains or Losses | (749) | 309 | | Amount included in Tier 1, 2 or 3 Capital | (749) | 309 | The decrease in private equity is driven by a change in the treatment of certain private equity exposures, which are now deducted from capital rather than risk weighted. --- ### Non-traded interest rate risk Non-traded interest rate risk arises from the provision of retail and wholesale (non-traded) banking products and services, when the interest rate repricing date for loans (assets) is different to the repricing date for deposits (liabilities). This includes current accounts and equity balances which do not have a defined maturity date and an interest rate that does not change when the base rate changes. The risk resides mainly in Global Retail Banking, Barclays Corporate, Barclays Wealth and Group Treasury. Barclays objective is to minimise non-traded interest rate risk and this is achieved by transferring interest rate risk from the business to a local treasury or Group Treasury, which in turn hedges the net exposure with the external market. Limits exist to ensure no material risk is retained within any business or product area. #### Risk measurement The risk in each business is measured and controlled using both an income metric (Annual Earnings at Risk) and a present value metric (Economic Value of Equity, Economic Capital, Daily Value at Risk, risk factor stress testing, scenario stress testing). Annual Earnings at Risk (AEaR) measures the sensitivity of net interest income over the next 12 months. It is calculated as the difference between the estimated income using the current yield curve and the lowest estimated income following a 100 basis points increase or decrease in interest rates, subject to a minimum interest rate of 0%. The main model assumptions are: * the balance sheet is kept at the current level i.e. no growth is assumed; * balances are adjusted for an assumed behavioural profile. This includes the treatment of fixed rate loans including mortgages. Economic Value of Equity (EVE) calculates the change in the present value of the banking book for a 100 basis point upward and downward rate shock. This calculation is equivalent to that of AEaR except Economic Value of Equity is a present value sensitivity while AEaR is an income sensitivity. Economic Capital (EC) consistent models are used to measure: recruitment risk, the risk from customers not taking up their fixed rate loan offer; and prepayment risk, the risk of a customer deciding not to carry on with their fixed rate loan. Behavioural profiles are also used when modelling the balance sheet. Daily Value at Risk (DVaR) and risk factor stress testing methodologies are consistent with those used by Barclays Capital. DVaR and stress testing are used by Treasury functions that operate within liquid currencies such as Sterling, US Dollar and Euros while for those that operate in less liquid currencies, stress risk is the only present value metric used. #### Risk Control Market Risk is controlled through the use of limits on the above risk measures. Limits are set at the total business level and then cascaded down. The total business level limits for AEaR, EVE, EC, DVaR and stress tests are agreed by Market Risk Committee. In 2010, a range of formal present value limits was extended to include stress and EVE limits. Compliance with limits is monitored by the respective business market risk team with oversight provided by Group Market Risk. Market Risk is also controlled through an ongoing programme of conformance visits by both the business market risk departments and Group Market Risk. These visits review both the current market risk profile and potential market risk developments, as well as verifying conformance with Barclays policies and standards as detailed in the Barclays Market Risk Control Framework. The interest rate risk for balances with no defined maturity date and an interest rate that is not linked to the base rate is managed by Group Treasury. A series of continuous equity and product structural hedges is used to mitigate the interest rate risk, as described below. #### Risk Reporting Each business area is responsible for their respective market risk reports. A combination of daily and monthly risk reports are produced and used by the business. These are also sent to Group Market Risk for review and inclusion in the Group Daily Market Risk Report. A risk summary is also presented at Market Risk Committee and respective Asset and Liability Committees. --- Table 48: Sensitivity of the banking book to interest rate changes | As at 31.12.10 | Change in Economic Value of Equity (£m) + 200 basis points | Change in Economic Value of Equity (£m) - 200 basis points | | :--- | :--- | :--- | | GBP | (1,115) | 592 | | USD | (341) | 379 | | Euro | (413) | 459 | | Rand | (271) | 294 | | Other | (51) | (25) | | **Total Economic Value of Equity (EVE)** | **(2,191)** | **1,699** | | **Percentage of EVE to Tier 1 and Tier 2 Capital** | **-3.25%** | **3.25%** | | As at 31.12.09 | Change in Economic Value of Equity (£m) + 200 basis points | Change in Economic Value of Equity (£m) - 200 basis points | | :--- | :--- | :--- | | GBP | (1,357) | 1,287 | | USD | (710) | 720 | | Euro | (55) | 194 | | Rand | (183) | 203 | | Other | (98) | (4) | | **Total Economic Value of Equity (EVE)** | **(2,403)** | **2,400** | | **Percentage of EVE to Tier 1 and Tier 2 Capital** | **-3.73%** | **3.73%** | Enhancement to the modelling of margin compression exposure is the retail bank are the primary driver in the observed reduction in EVE sensitivity from 2009 to 2010. This is due to the offset between this risk and the group equity hedge under an EVE sensitivity framework. A contributory factor to the overall reduction in EVE sensitivity was the temporary sale of gilts, used for hedging group equity, following concerns surrounding economic conditions in Q3 2010 and Q4 2010. --- ### “Backtesting” of DVaR models The Backtesting is performed at a legal entity level and at sub-portfolio levels. Regulatory backtesting compares Regulatory VaR at 99% confidence level (1 day holding period) to a clean P&L as defined in BIPRU 7.10. The consolidated Barclays Bank plc and Barclays Capital Securities Ltd is the highest level of consolidation for the VaR models that are used in the calculation of regulatory capital. Below this level, there is backtesting performed at sub-portfolio level on legal entity agnostic basis: Fixed Income Rates, Foreign Exchange, Equities, Commodities Emerging Markets and Consolidated Credit Businesses. The number of exceptions in these portfolios do not have to add up to the number of exceptions in the consolidated portfolio. The two tables below show the basic statistics on VaR and their corresponding backtesting exceptions. Subsequently the graphs show the comparison of VaR history to the corresponding P&L. A backtesting exception is generated when a loss is greater than the VaR for a given day. Table 49: Analysis of regulatory DVaR | Entity / Business Area As at 31.12.10 | Regulatory Daily Value-at-risk (DVaR), Un-Diversified: Year-end (£m) | Regulatory Daily Value-at-risk (DVaR), Un-Diversified: Average (£m) | Regulatory Daily Value-at-risk (DVaR), Un-Diversified: Maximum (£m) | Regulatory Daily Value-at-risk (DVaR), Un-Diversified: Minimum (£m) | | :--- | :--- | :--- | :--- | :--- | | Barclays Bank PLC Trading and Barclays Capital Securities Ltd | 62 | 89 | 202 | 47 | | - Fixed Income Rates | 26 | 35 | 54 | 23 | | - Foreign Exchange | 10 | 10 | 22 | 4 | | - Equities | 37 | 24 | 51 | 11 | | - Commodities | 24 | 25 | 41 | 15 | | - Emerging Markets | 17 | 35 | 58 | 15 | | - Consolidated Credit Businesses | 21 | 39 | 73 | 19 | Note that the DVaR shown above is at the 99% confidence level, and hence will be higher than the measures shown in the results announcement. Commentary on year-on-year movements in Barclays market risk profile based on 95% DVaR can be found on page 120 of the Annual Report. Note that in the table below, sub-portfolios feed up to the consolidated portfolio and the exceptions do not have to add up to the number of exceptions in the consolidated portfolio. Table 50: Regulatory DVaR – exceptions and model status | Entity / Business Area As at 31.12.10 | Exceptions | Model Status | | :--- | :--- | :--- | | Barclays Bank PLC Trading and Barclays Capital Securities Ltd | 0 | Green | | - Fixed Income Rates | 0 | Green | | - Foreign Exchange | 2 | Green | | - Equities | 4 | Green | | - Commodities | 0 | Green | | - Emerging Markets | 0 | Green | | - Consolidated Credit Businesses | 0 | Green | Note: Green = 4 exceptions or below, Amber = 5 to 9 exceptions, Red = 10 or more exceptions --- Figure 1: Regulatory DVaR against associated P/L *(Graphs for Barclays Bank PLC Trading and Barclays Capital Securities Ltd, Fixed Income Rates, Foreign Exchange, Equities, Commodities, Emerging Markets, and Consolidated Credit Businesses)* Legend: - DVaR - Loss greater than 75% of DVaR Exceptions occur on days where a loss exceeds the DVaR. The graphs show when this occurred within foreign exchange and equities. --- ### Other market risks Barclays maintains a number of defined benefit pension schemes for past and current employees. The ability of the Pension Fund to meet the projected pension payments is maintained through investments and regular bank contributions. Pension risk arises because the estimated market value of the pension fund assets might decline; or their investment returns might reduce; or the estimated value of the pension liabilities might increase. In these circumstances, Barclays could be required or might choose to make extra contributions to the pension fund. Financial details of the pension fund are in Note 28 of the Annual Report. Asset management structural risk arises where the fee and commission income earned by asset management products and businesses is affected by a change in market levels, primarily through the link between income and the value of assets under management. Asset management structural risk mainly resides in Barclays Wealth. It is Barclays policy that businesses monitor and report this risk against a defined risk appetite and regularly assess potential hedging strategies. --- ## Operational Risk Management Operational Risk is defined as the risk of direct or indirect impacts resulting from human factors, inadequate or failed internal processes and systems or external events. Operational risks are inherent in the Group’s business activities and are typical of any large enterprise. It is not cost effective to attempt to eliminate all operational risks and in any event it would not be possible to do so. Losses from operational risks of small significance are expected to occur and are accepted as part of the normal course of business. Those of material significance are rare and the Group seeks to reduce the likelihood of these in accordance with its Risk Appetite. The management of Operational Risk has two key objectives: * to minimise the impact of losses suffered in the normal course of business (expected losses) and to avoid or reduce the likelihood of suffering a large extreme (or unexpected) loss; * to improve the effective management of the Barclays Group and strengthen its brand and external reputation. Barclays is committed to the management and measurement of Operational Risk and was granted a waiver to operate an Advanced Measurement Approach (AMA) for Operational Risk under Basel II, which commenced in January 2008. The majority of the Group calculates regulatory capital using AMA, however in specific areas we apply the Standardised approach or Basic Indicator approach. In certain joint ventures and associates, Barclays may not be able to apply the AMA. Areas where the roll-out of AMA is still continuing and the Standardised approach is currently applied are Barclays Bank Mozambique, National Bank of Commerce (Tanzania), and the portfolio of assets purchased from Woolworths Financial Services in South Africa, Citi Cards and Standard Life Bank, while these are integrated into our infrastructure. Areas where the Group is working towards the rollout of AMA and the Basic Indicator approach is applied are Barclays Bank PLC Pakistan, Barclays Bank LLC Russia, Barclays Investment and Loans India Limited, the ABSA Africa businesses and the ‘new-to bank’ business activities acquired from Lehman Brothers. Barclays works to benchmark its internal operational risk practices with peer banks and to drive the development of advanced operational risk techniques across the industry. ### Structure and governance The Operational Risk framework comprises a number of elements that allow Barclays to manage and measure its Operational Risk profile and to calculate the amount of Operational Risk capital that Barclays needs to hold to absorb potential losses. The minimum, mandatory requirements for each of these elements are set out in the Group Operational Risk policies. This framework is implemented: vertically, through the organisational structure with all Business Units required to implement and operate an operational risk framework that meets, as a minimum, the requirements detailed in these operational risk policies; and laterally, with Group Principal Risk Owners required to ensure that the Group Operational Risk policies are reflected in the Control Framework for their Principal Risk. Barclays operates within a robust system of internal control that enables business to be transacted and risk taken without exposure to unacceptable potential losses or reputational damage. To this end, Barclays has implemented the Group Internal Control and Assurance Framework (GICAF) that is aligned with the internationally recognised Committee of Sponsoring Organisations of the Treadway Commission Framework (COSO). The prime responsibility for the management of Operational Risk and the compliance with control requirements rests with the business and functional units where the risk arises. Front line risk managers are widely distributed throughout the Group. They service and support these areas, assisting line managers in managing their risks. The Operational Risk Director (or equivalent) for each Business Unit is responsible for ensuring the implementation of and compliance with Group Operational Risk policies. The Group Operational Risk Director is responsible for establishing, owning and maintaining an appropriate Group-wide Operational Risk Framework and for overseeing the portfolio of Operational Risk across the Group. The Group Operational Risk Executive Committee (GOREC) assists with the oversight of Operational Risk. GOREC is a sub committee of the Group Risk Oversight Committee (GROC), which presents to the Board Risk Committee (BRC). In addition, Governance and Control Committees (G&CCs) in each business monitor control effectiveness. The Group G&CC receives reports from these committees and considers Group-significant control issues and their remediation. The Group G&CC presents to the Board Audit Committee (BAC). Business units are required to report their Operational Risks on both a regular and an event-driven basis. The reports include a profile of the material risks to their business objectives and the effectiveness of key controls, control issues of Group-level significance, operational risk events and a review of scenarios and capital. Specific reports are prepared on a regular basis for GOREC, GROC, BRC and BAC. The Internal Audit function provides further independent review and challenge of the Group’s operational risk management controls, processes and systems and reports to the Board and senior management. --- ### Operational risk management The Barclays Operational Risk Framework is a key component of GICAF and has been designed to meet a number of external governance requirements, including Basel II and Turnbull. It also supports the Sarbanes-Oxley requirements. The Operational Risk framework includes the following elements. #### Risk Assessments Barclays identifies and assesses all material risks within each business unit and evaluates the key controls in place to mitigate those risks. Managers in the business units use self-assessment techniques to identify risks, evaluate the effectiveness of controls in place and assess whether the risks are effectively managed to within business risk appetite. The businesses are then able to make decisions on what, if any, action is required to reduce the level of risk to Barclays. These risk assessments are monitored on a regular basis to ensure that each business continually understands the risks it faces. #### Risk Events An operational risk event is any circumstance where, through the lack or failure of a control, Barclays has actually, or could have, made a loss. The definition includes situations in which Barclays could have made a loss, but in fact made a gain, as well as incidents resulting in reputational damage or regulatory impact only. A standard threshold is used across the Group for reporting risk events and as part of our analysis we seek to identify where improvements are needed to processes or controls, to reduce the recurrence and/or magnitude of risk events. Barclays also uses a database of external risk events that are publicly available and is a member of the Operational Risk data eXchange (ORX), a not-for-profit association of international banks formed to share anonymous loss data information. Barclays uses this external loss information to support and inform risk identification, assessment and measurement. #### Key indicators Key Indicators (KIs) are metrics that allow Barclays to monitor its operational risk profile. KIs include measurable thresholds that reflect the risk appetite of the business. KIs are monitored to alert management when risk levels exceed acceptable ranges or risk appetite levels and drive timely decision making and actions. #### Key Risk Scenarios By combining data from risk events, risk assessments and key indicators with that from audit findings, expert management judgement and other internal data sources, Barclays is able to generate Key Risk Scenarios (KRSs). These scenarios identify the most significant operational risks across the Group. The KRSs are validated at business unit and Group level to ensure that they appropriately reflect the level of operational risk the business faces. #### Insurance As part of its risk management approach, the Group also uses insurance to mitigate the impact of some operational risks. #### Reporting The ongoing monitoring and reporting of Operational Risk is a key component of an effective Operational Risk Framework. Reports are used by the Operational Risk function and by business management to understand, monitor, manage and control operational risks and losses. ### Operational risk measurement The Operational Risk capital model uses the outputs of the risk management tools to measure Barclays operational risk exposure. KRSs are the main input to the model, which also uses the frequency and severity of operational risk losses to provide a distribution of potential losses over a year for Barclays as a whole. This process takes into account the possibility of correlations i.e. the likelihood of two key risks occurring within the same year. The model generates a regulatory capital requirement, which is determined to a level of 99.9% confidence. Once the overall level of regulatory capital for the Group has been established it is allocated, on a risk sensitive basis, to business units. This provides an incentive for the business to manage its risks within appetite levels. More information on operational risk can be found on pages 137 and 138 of the Annual Report. --- ## Liquidity Risk Management Liquidity risk is the risk that the Group is unable to meet its obligations when they fall due as a result of a sudden, and potentially protracted, increase in net cash outflows. Such outflows would deplete available cash resources for client lending, trading activities, investments and deposits. In extreme circumstances lack of liquidity could result in reductions in balance sheet and sales of assets, or potentially an inability to fulfil lending commitments. The risk that it will be unable to do so is inherent in all banking operations and can be affected by a range of institutionspecific and market-wide events. ### Organisation and structure Barclays Treasury operates a centralised governance and control process that covers all of the Group’s liquidity risk management activities. Businesses assist Barclays Treasury in policy formation and limit setting by providing relevant and expert input for their local markets and customers. Execution of the Group’s liquidity risk management strategy is carried out at country level within agreed policies, controls and limits, with the Country Treasurer providing reports directly to Barclays Treasury to evidence conformance with the agreed risk profile. Liquidity risk is a standing agenda item at Country and Cluster Asset and Liability Committees and on a consolidated basis is reported to the Group’s Treasury Committee. The objective of the Group’s liquidity risk management strategy is to ensure that the funding profile of individual businesses and the Group as a whole is appropriate to underlying market conditions and the profile of our business in each given country. Liquidity risk limits and controls are flexed to achieve that profile and are based on regular qualitative and quantitative assessments of conditions under both normal and stressed conditions. Businesses are only allowed to have funding exposure to wholesale markets where they can demonstrate that their market is sufficiently deep and liquid and then only relative to the size and complexity of their business. Liquidity limits reflect both local regulatory requirements as well as the behavioural characteristics of their balance sheets. Breaches of limits are reported to Treasury Committee together with details of the requirements to return to compliance. ### Liquidity risk framework Barclays has a comprehensive Liquidity Risk Management Framework (the Liquidity Framework) for managing the Group’s liquidity risk. The objective of the Liquidity Framework is for the Group to have sufficient liquidity to continue to operate for at least the minimum period specified by the FSA in the event that the wholesale funding markets are neither open to Barclays nor to the market as a whole. Stress tests applied under the Liquidity Framework consider a range of possible wholesale and retail factors leading to loss of financing including: * maturing of wholesale liabilities; * loss of secured financing and widened haircuts on remaining book; * retail and commercial outflows from savings and deposit accounts; * drawdown of loans and commitments; * potential impact of a 2 notch ratings downgrade$^c$; and * withdrawal of initial margin amounts by counterparties. These stressed scenarios are used to assess the appropriate level for the Group’s liquidity pool, which comprises unencumbered assets and central bank deposits. Barclays regularly uses these assets to access secured funding markets, thereby testing the liquidity assumptions underlying pool composition. The Group does not presume the availability of central bank borrowing facilities to monetise the liquidity pool in any of the stress scenarios under the Liquidity Framework. ### Liquidity pool The Group liquidity pool as at 31st December 2010 was £154bn gross (2009: £127bn) and comprised the cash and unencumbered assets detail on page 131 of the Annual Report (of which £140bn are FSA eligible). The Group maintains additional liquid assets to support ongoing business requirements such as payment services. The cost of the Group liquidity pool for 2010 has been allocated on the basis of the projected stress outflows arising in