Notes to the accounts

For the year ended 31st December 2007


44 Share-based payments (continued)

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AGLESAS c, d
Number Weighted average
(000s) ex. price (£)
2007  2006  2007  2006 
Outstanding at beginning of 
year/acquisition date  37  –  –  – 
Granted in the year  –  37  –  – 
Exercised/released in the year  –  –  –  – 
Less: forfeited in the year  –  –  –  – 
Less: expired in the year  –  –  –  – 
Outstanding at end of year  37  37  –  – 
Of which exercisable:  –  –  –  – 

Excel File Download table as excel file
ISOP a ESOS a
Number Weighted average Number Weighted average
(000s) ex. price (£) (000s) ex. price (£)
2007  2006  2007  2006  2007  2006  2007  2006 
Outstanding at beginning of year  77,507  105,081  4.59  4.46  1,748  2,552  4.14  4.16 
Granted in the year  –  –  –  –  –  –  –  – 
Exercised/released in the year  (9,718) (25,122) 4.35  4.04  (325) (768) 4.20  4.20 
Less: forfeited in the year  (47,240) (2,452) 4.66  4.75  –  (36) –  4.71 
Less: expired in the year  –  –  –  –  –  –  –  – 
Outstanding at end of year  20,549  77,507  4.56  4.59  1,423  1,748  4.13  4.14 
Of which exercisable:  20,238  14,544  4.54  4.29  1,423  1,748  4.13  4.14 

Excel File Download table as excel file
Woolwich ESOP a Woolwich SAYE a
Number Weighted average Number Weighted average
(000s) ex. price (£) (000s) ex. price (£)
2007  2006  2007  2006  2007  2006  2007  2006 
Outstanding at beginning of year  700  1,260  3.81  3.80  –  3  –  3.32 
Granted in the year  –  –  –  –  –  –  –  – 
Exercised/released in the year  (160) (560) 3.84  3.79  –  (1) –  3.32 
Less: forfeited in the year  –  –  –  –  –  (2) –  3.32 
Less: expired in the year  –  –  –  –  –  –  –  – 
Outstanding at end of year  540  700  3.81  3.81  –  –  –  – 
Of which exercisable:  540  700  3.81  3.81  –  –  –  – 

The table below shows the weighted average share price at the date of exercise/release of shares:

Excel File Download table as excel file
2007  2006 
£  £ 
Sharesave a   5.72  6.95 
Sharepurchase a, d   6.74  6.59 
ESAS a, d   6.71  6.78 
BGI EOP b   97.06  81.08 
AGLSIT c   9.52  8.81 
ISOP a   7.31  6.75 
ESOS a   7.26  6.64 
Woolwich ESOP a   7.24  6.65 
Woolwich SAYE a   n/a  6.09 

The exercise price range, the weighted average contractual remaining life and number of options outstanding (including those exercisable) at the balance sheet date are as follows:

Notes
a
Options/award granted over Barclays PLC shares.
b
Options/award granted over Barclays Global Investors UK Holdings Limited shares.
c
Options/award granted over Absa Group Limited shares.
d
Nil cost award.

44 Share-based payments (continued)

Excel File Download table as excel file
2007 2006
Weighted  Weighted 
average  average 
remaining  Number  remaining  Number 
contractual  of options  contractual  of options 
Exercise Price Range  life in years  outstanding  life in years  outstanding 
Sharesave a  
£2.50-£3.49  –  328,822  1  2,177,121 
£3.50-£4.49  2  40,371,606  2  59,531,668 
£4.50-£5.49  4  33,327,119  4  17,220,043 
Sharepurchase c, d   2  3,824,021  3  2,472,304 
ESAS a, d   3  182,200,170  3  142,359,494 
PSP a, d   1  63,162,894  2  42,832,026 
BGI EOP b  
£6.11-£13.99  4  239,717  5  602,914 
£14.00-£20.11  6  285,671  7  771,553 
£20.12-£56.94  7  1,059,430  8  1,716,714 
£56.95-£95.33  9  5,916,863  9  3,838,000 
Absa BEE c  
£3.40-£4.89  2  73,152,300  3  73,152,300 
AGLSIT c  
£3.60-£7.62  7  13,618,000  7  18,778,473 
AGLSOT c  
£3.40-£4.89  2  946,000  3  4,847,400 
AGLESAS c, d   3  37,059  3  37,059 
ISOP a  
£2.50-£3.49  5  3,965,300  6  11,055,352 
£3.50-£4.49  3  1,409,828  4  2,411,828 
£4.50-£5.49  5  14,896,227  7  63,746,456 
£5.50-£6.49  7  277,096  8  293,096 
ESOS a  
£2.50-£3.49  –  4,000  1  45,288 
£3.50-£4.49  1  1,418,818  2  1,702,612 
Woolwich ESOP a  
£2.50-£3.49  2  110,616  3  128,624 
£3.50-£4.49  2  429,584  3  571,836 

There were no modifications to the share-based payment arrangements in the years 2007, 2006 and 2005. As at 31st December 2007, the total liability arising from cash-settled share-based payment transactions was £16m (2006: £7m).

At 31st December 2007, 7.5 million (2006: 6.9 million) options were outstanding under the terms of the BGI EOP (which would represent a 8.1% interest if exercised). Employees in BGI own 5.9% of the shares in Barclays Global Investors UK Holdings Limited (2006: 9.4%). If all the current options were exercised, £567.6m (2006: £400.5m) would be subscribed. Since the scheme was introduced, options over 20.9 million (2006: 19.3 million) shares have been exercised, of which 5.0 million are still held by employees and represent a minority interest in the Group.

At 31st December 2007, there were 73.2 million, 13.6 million and 0.9 million options granted over Absa Group Limited shares under the Absa Group Limited Black Economic Empowerment Transaction, Absa Group Limited Share Incentive Trust and Absa Group Limited Share Ownership Trust respectively. In aggregate, these options would represent a 13.1% interest in Absa Group Limited if exercised.

Notes
a
Options/award granted over Barclays PLC shares.
b
Options/award granted over Barclays Global Investors UK Holdings Limited shares.
c
Options/award granted over Absa Group Limited shares.
d
Nil cost award.

Notes to the accounts

For the year ended 31st December 2007


45 Financial risks

Financial risk management

Barclays PLC is a major global financial services provider engaged in retail and commercial banking, credit cards, investment banking, wealth management and investment management services. Financial instruments are fundamental to the Group’s business and managing financial risks, especially credit risk, is a fundamental part of its business activity. Barclays achieves its risk management goals by keeping risk management at the centre of the executive agenda and by building a culture where risk management is part of everyday business decision-making. Barclays ensures that it has the capacity to manage the risk in its established businesses as well as new and growing ones, and that its business plans are consistent with risk appetite, that is, the level of risk Barclays is willing to accept in fulfilling its business objectives.

Barclays risk management policies and processes are designed to identify and analyse risk, to set appropriate risk appetite, limits, and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date data. Risk management policies, models and systems are regularly reviewed to reflect changes to markets, products and best market practice. Individual responsibility and accountability, instilled through training, are designed to deliver a disciplined, conservative and constructive culture of risk management and control.

Risk responsibilities

The Board approves risk appetite and the Board Risk Committee monitors the Group’s risk profile against this appetite:

  • – The Group Risk Director, under delegated authority from the Group Chief Executive and Group Finance Director, has responsibility for ensuring effective risk management and control;
  • – Business Heads are responsible for the identification and management of risk in their businesses;
  • – Business risk teams, each under the management of a Business Risk Director, are responsible for assisting Business Heads in the identification and management of their business risk profiles for implementing appropriate controls. These risk management teams also assist Group Risk in the formulation of Group Risk policy and the implementation of it across the businesses;
  • – Within Group risk, Risk-Type Heads and their teams are responsible for establishing a risk control framework and risk oversight; and
  • – Internal Audit is responsible for the independent review of risk management and the control environment.

Oversight of risk management is exercised by the Risk Oversight Committee which is chaired by the Group Risk Director under authority delegated by the Group Finance Director. The Risk Oversight Committee oversees management of the Group’s risk profile, exercised through the setting, review and challenge of the size and constitution of the profile when viewed against the Group risk appetite.

The Group Executive Committee monitors and manages risk-adjusted performance of businesses and receives a regularly quarterly risk update including a copy of the Group Risk Profile Report.

The Board Risk Committee (BRC) reviews the Group risk profile, approves the Group Control Framework and approves minimum control requirements for principal risks.

The Board Audit Committee (BAC) considers the adequacy and effectiveness of the Group Control Framework and receives quarterly reports on control issues of significance and half-yearly reports on impairment allowances and regulatory reports.

Both BRC and BAC also receive reports dealing in more depth with specific issues relevant at the time. The proceedings of both Committees are reported to the full Board. The Board approves the overall Group risk appetite.

The Risk Oversight Committee is chaired by the Group Risk Director and oversees the management of the Group’s risk profile and all of its significant risks. Oversight is exercised through the setting, review and challenge of the size and constitution of the profile when viewed against the Group’s risk appetite. It has delegated and apportioned responsibility for credit risk management to the Retail and Wholesale Credit Risk Management Committees.

The main financial risks affecting the Group are discussed in Notes 46 to 48.

46 Market risk

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.

Most market risk arises from trading activities. Barclays is also exposed to interest rate and potential foreign exchange risks arising from financial assets and liabilities not held for trading.

Market risk management and control responsibilities

The Board approves the overall market risk appetite. The Market Risk Director is responsible for the market risk control framework and, under delegated authority from the Group Risk Director, sets a limit framework within the context of the approved market risk appetite.

The head of each business, assisted by the business risk management team, is accountable for identifying, measuring and managing all market risks associated with the business’ activities. Oversight and support is provided by the Market Risk Director, assisted by the central market risk team.

Market risk measurement

The measurement techniques used to measure and control market risk include:

  • – Daily Value at Risk;
  • – Stress Tests; and
  • – Annual Earnings at Risk.
Daily Value at Risk (DVaR)

DVaR is an estimate of the potential loss which might arise from unfavourable market movements, if the current positions were to be held unchanged for one business day, measured to a confidence level of 98%. Daily losses exceeding the DVaR figure are likely to occur, on average, twice in every 100 business days.

In Barclays Capital, DVaR is an important market risk measurement and control tool. DVaR is calculated using the historical simulation method with a historical sample of two years.

46 Market risk (continued)

DVaR Back-testing

The DVaR model is regularly assessed. The main approach employed is the technique known as back-testing which counts the number of days when trading losses exceed the corresponding DVaR estimate.

On the basis of DVaR estimated to a 98% confidence level, on average there would be five days each year when trading losses would be expected to exceed DVaR and would therefore be reflected as back-testing exceptions. For Barclays Capital’s trading book, there were seven instances of a daily trading loss exceeding the corresponding 98% back-testing DVaR. These back-testing exceptions in 2007 reflected the increased volatility across a number of markets in which Barclays Capital operates. There were no instances of back-testing exceptions on a similar basis in 2006.

Annual Earnings at Risk (AEaR)

AEaR measures the sensitivity of net interest income (NII) 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 50 basis points increase or decrease in interest rates.

AEaR is used primarily to measure interest rate risk arising on non-trading assets and liabilities.

Traded market risk

Traded market risk management

Barclays policy is to concentrate trading activities in Barclays Capital. This includes transactions where Barclays Capital acts as principal with clients or with the market. For maximum efficiency, client and market activities are managed together.

In Barclays Capital, the Head of Market Risk is responsible for implementing the market risk control framework. Day to day responsibility for market risk lies with the senior management of Barclays Capital, supported by the Market Risk Management team that operates independently of the trading areas. Daily market risk reports are produced for the main Barclays Capital business areas covering the different risk categories including: interest rate, credit spread, commodity, equity and foreign exchange. A more detailed trading market risk presentation is produced fortnightly and discussed at Barclays Capital’s Traded Products Risk Review meeting. This meeting is attended by the senior managers from Barclays Capital and the central market risk team.

Analysis of trading market risk exposures

The table below shows the DVaR statistics for Barclays Capital’s trading and non-trading activities. DVaR is the main measure for internal risk management within Barclays Capital.

Barclays Capital's market risk exposure, as measured by average total Daily Value at Risk (DVaR), increased by 13% to £42.0m (2006: £37.1m). Interest rate and credit spread risks were broadly unchanged while commodity DVaR and equity DVaR increased by £8.9m and £3.4m respectively. The growth in both these risks is consistent with Barclays Capital’s business plan. Diversification across risk types remained significant, reflecting the broad product mix. Total DVaR as at 31st December 2007 was £53.9m (31st December 2006 £41.9m). This growth reflected the increased market volatility in the second half of the year.

Barclays Capital DVaR: Summary table for 2007 and 2006
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12 months to
31st December 2007
Average  High  Low 
£m  £m  £m 
Interest rate risk  20.0  33.3  12.6 
Credit spread risk  24.9  43.3  14.6 
Commodities risk  20.2  27.2  14.8 
Equities risk  11.2  17.6  7.3 
Foreign exchange risk  4.9  9.6  2.9 
Diversification effect a   (39.2) n/a  n/a 
Total DVaR  42.0  59.3  33.1 

Excel File Download table as excel file
12 months to
31st December 2006
Average  High  Low 
£m  £m  £m 
Interest rate risk  20.1  28.8  12.3 
Credit spread risk  24.3  33.1  17.9 
Commodities risk  11.3  21.6  5.7 
Equities risk  7.8  11.6  5.8 
Foreign exchange risk  4.0  7.7  1.8 
Diversification effect a   (30.4) n/a  n/a 
Total DVaR  37.1  43.2  31.3 
Note
a
The high (and low) DVaR figures reported for each category did not necessarily occur on the same day as the high (and low) DVaR reported as a whole. Consequently, a diversification effect number for the high (and low) DVaR figures would not be meaningful and it is therefore omitted from the above table.

Notes to the accounts

For the year ended 31st December 2007


46 Market risk (continued)

Non-trading interest rate risk

Asset and liability market risk

Interest rate risk arises from the provision of retail and wholesale (non-trading) banking products and services, as well as foreign currency translational exposures within the Group’s balance sheet.

The Group’s approach is to transfer risk from the businesses either into local treasuries or to Group Treasury using an internal transfer price or interest rate swap. The methodology used to transfer this risk depends on whether the product contains yield curve risk, basis risk or customer optionality. Limits exist to ensure there is no material risk retained within any business or product area.

Sensitivity analysis

Set out below are the impacts on net interest income and equity of a reasonably possible change in market rates of interest, based on the AEaR model described above.

(a) Impact on net interest income

The sensitivity of the income statement is the effect of the assumed changes in interest rates on the net interest income for one year, based on the non-trading financial assets and financial liabilities held at 31st December 2007, including the effect of hedging instruments.

The effect on net interest income, and therefore profit before tax, of a 50 basis points change would be as follows:

Excel File Download table as excel file
+50 basis  –50 basis  +50 basis  –50 basis 
points  points  points  points 
2007  2007  2006  2006 
£m  £m  £m  £m 
GBP  19  (19) 11  (11)
USD  (1) 1  (4) 4 
EUR  (11) 11  (9) 9 
ZAR  9  (9) 12  (12)
Others  2  (2) 1  (1)
Total  18  (18) 11  (11)
As percentage of net interest income  0.19%  (0.19%) 0.12%  (0.12%)

Note: This table excludes exposures held or issued by Barclays Capital as these are measured and managed using DVaR.

(b) Impact on equity

Interest rate changes affect equity in the following three ways:

  • – Higher or lower profit after tax resulting from higher or lower net interest income
  • – Higher or lower available for sale reserves reflecting higher or lower fair values of available for sale financial instruments
  • – Higher or lower values of derivatives held in the cash flow hedging reserves

The sensitivities of equity shown below are based on scenarios constructed from actual exposures and consider the impact on the cash flow hedging reserve and the available for sale reserve only. They are calculated by revaluing fixed rate available-for-sale financial assets, including the effect of any associated hedges, and derivatives designated as cash flow hedges, for the effect of the assumed changes in interest rates. They are based on the assumption that there are parallel shifts in the yield curve. The effects of taxation have been estimated using the Group’s effective tax rate of 28% (2006: 27%).

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+50 basis  –50 basis  +50 basis  –50 basis 
points  points  points  points 
2007  2007  2006  2006 
£m  £m  £m  £m 
Net interest income  18  (18) 11  (11)
Taxation effects on the above  (5) 5  (3) 3 
Effect on profit for the year  13  (13) 8  (8)
As percentage of net profit after tax  0.26%  (0.26%) 0.15%  (0.15%)
Effect on profit for year (per above) 13  (13) 8  (8)
Available for sale reserve  (150) 150  (185) 185 
Cashflow hedging reserve  (225) 225  (304) 304 
Taxation effects on the above  105  (105) 132  (132)
Effect on equity  (257) 257  (349) 349 
As a percentage of equity  (0.79%) 0.79%  (1.28%) 1.28% 

46 Market risk (continued)

Concentrations of interest rate risk

The table below summarises the repricing profiles of the Group’s financial instruments and other assets and liabilities at their carrying value on 31st December 2007. Items are allocated to time periods by reference to the earlier of the next contractual interest rate repricing date and the maturity date.

As at 31st December 2007
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Over  Over  Over 
three  six  Over  three  Over 
Not  months  months  one year  years  five years 
more  but not  but not  but not  but not  but not  Trading 
than  more  more  more  more  more  Over  portfolio  Non- 
three  than six  than one  than three  than five  than ten  ten  and  interest 
months  months  year  years  years  years  years  derivatives  bearing  Total 
£m  £m  £m  £m  £m  £m  £m  £m  £m  £m 
Assets 
Cash and balances at central banks  4,370  –  –  –  –  –  –  –  1,431  5,801 
Items in course of collection from 
other banks  194  –  –  –  –  –  –  –  1,642  1,836 
Trading portfolio assets  –  –  –  –  –  –  –  193,691  –  193,691 
Financial assets designated 
at fair value: 
Held on own account  21,436  12,587  9,208  3,526  2,706  1,339  2,753  –  3,074  56,629 
Derivative financial instruments  –  –  –  –  –  –  248,088  –  248,088 
Loans and advances to banks  33,770  501  500  164  181  158  –  –  4,846  40,120 
Loans and advances to customers  246,776  20,481  14,452  20,312  10,864  10,082  5,193  –  17,238  345,398 
Available for sale financial 
instruments  25,989  2,370  2,223  3,632  1,466  4,414  2,057  –  921  43,072 
Reverse repurchase 
agreements and cash 
collateral on securities 
borrowed  175,679  3,307  2,032  802  191  118  946  –  –  183,075 
Total financial assets  508,214  39,246  28,415  28,436  15,408  16,111  10,949  441,779  29,152  1,117,710 
Other assets  –  –  –  –  –  –  –  –  109,651  109,651 
Total assets  508,214  39,246  28,415  28,436  15,408  16,111  10,949  441,779  138,803  1,227,361 
Liabilities 
Deposits from other banks  81,802  2,244  907  235  1  21  181  –  5,155  90,546 
Items in course of collection 
due to other banks  76  –  –  –  –  –  –  –  1,716  1,792 
Customer accounts  233,474  8,812  3,844  2,511  377  59  1,217  –  44,693  294,987 
Trading portfolio liabilities  –  –  –  –  –  –  –  65,402  –  65,402 
Financial liabilities 
designated at fair value: 
Held on own account  27,030  7,993  3,874  3,122  2,323  724  766  –  28,657  74,489 
Derivative financial instruments  –  –  –  –  –  –  –  248,288  –  248,288 
Debt securities in issue  102,883  10,034  4,529  1,821  632  209  120  –  –  120,228 
Repurchase agreements and 
cash collateral on securities lent  163,112  1,789  2,085  37  92  4  –  –  2,310  169,429 
Subordinated liabilities  5,735  695  59  650  1,134  5,465  4,410  –  2  18,150 
Total financial liabilities  614,112  31,567  15,298  8,376  4,559  6,482  6,694  313,690  82,533  1,083,311 
Other liabilities  –  –  –  –  –  –  –  –  111,574  111,574 
Total liabilities  614,112  31,567  15,298  8,376  4,559  6,482  6,694  313,690  194,107  1,194,885 
Interest rate repricing gap  (105,898) 7,679  13,117  20,060  10,849  9,629  4,255 
Cumulative gap  (105,898) (98,219) (85,102) (65,042) (54,193) (44,564) (40,309)

Financial assets designated at fair value held in respect of linked liabilities to customers under investment contracts, and the related liabilities, have been omitted from the above analysis as the Group is not exposed to the interest rate risk inherent in these assets or liabilities.

Notes to the accounts

For the year ended 31st December 2007


46 Market risk (continued)

As at 31st December 2006
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Over  Over  Over 
three  six  Over  three  Over 
Not  months  months  one year  years  five years 
more  but not  but not  but not  but not  but not  Trading 
than  more  more  more  more  more  Over  portfolio  Non- 
three  than six  than one  than three  than five  than ten  ten  and  interest 
months  months  year  years  years  years  years  derivatives  bearing  Total 
£m  £m  £m  £m  £m  £m  £m  £m  £m  £m 
Assets 
Cash and balances at central banks  7,012  –  –  –  –  –  –  –  333  7,345 
Items in course of collection from 
other banks  654  –  –  –  –  –  –  –  1,754  2,408 
Trading portfolio assets  –  –  –  –  –  –  –  177,867  –  177,867 
Financial assets designated 
at fair value: 
Held on own account  17,831  834  387  1,121  2,544  1,131  6,231  –  1,720  31,799 
Derivative financial instruments  –  –  –  –  –  –  –  138,353  –  138,353 
Loans and advances to banks  25,012  483  233  211  69  36  1  –  4,881  30,926 
Loans and advances to customers  195,500  15,048  14,225  24,850  9,485  6,399  7,699  –  9,094  282,300 
Available for sale financial 
instruments  25,899  2,427  7,780  3,737  3,234  6,701  1,091  –  834  51,703 
Reverse repurchase 
agreements and cash 
collateral on securities 
borrowed  157,592  4,721  8,338  –  3,431  –  –  –  8  174,090 
Total financial assets  429,500  23,513  30,963  29,919  18,763  14,267  15,022  316,220  18,624  896,791 
Other assets  –  –  –  –  –  –  –  –  99,996  99,996 
Total assets  429,500  23,513  30,963  29,919  18,763  14,267  15,022  316,220  118,620  996,787 
Liabilities 
Deposits from other banks  72,353  1,377  763  351  –  7  199  –  4,512  79,562 
Items in course of collection 
due to other banks  20  –  –  –  –  –  –  –  2,201  2,221 
Customer accounts  207,023  3,965  3,963  2,371  506  43  216  –  38,667  256,754 
Trading portfolio liabilities  –  –  –  –  –  –  –  71,874  –  71,874 
Financial liabilities 
designated at fair value: 
Held on own account  20,186  5,635  3,800  1,538  1,607  1,843  774  –  18,604  53,987 
Derivative financial instruments  –  –  –  –  –  –  –  140,697  –  140,697 
Debt securities in issue  92,649  5,624  2,430  4,020  1,630  3,249  1,535  –  –  111,137 
Repurchase agreements and 
cash collateral on securities lent  122,612  6,132  2,348  1,662  –  –  2,818  –  1,384  136,956 
Subordinated liabilities  3,192  377  21  1,074  783  3,475  4,842  –  22  13,786 
Total financial liabilities  518,035  23,110  13,325  11,016  4,526  8,617  10,384  212,571  65,390  866,974 
Other liabilities  –  –  –  –  –  –  –  –  102,423  102,423 
Total liabilities  518,035  23,110  13,325  11,016  4,526  8,617  10,384  212,571  167,813  969,397 
Interest rate repricing gap  (88,535) 403  17,638  18,903  14,237  5,650  4,638 
Cumulative gap  (88,535) (88,132) (70,494) (51,591) (37,354) (31,704) (27,066)

Financial assets designated at fair value held in respect of linked liabilities to customers under investment contracts, and the related liabilities, have been omitted from the above analysis as the Group is not exposed to the interest rate risk inherent in these assets or liabilities.

46 Market risk (continued)

Effective interest rates

Weighted average effective interest rates were as follows:

Excel File Download table as excel file
2007  2006 
%  % 
As at 31st December 
Assets 
Cash and balances at central banks  4.2  4.1 
Loans and advances to banks  4.5  4.1 
Loans and advances to customers  7.1  6.5 
Available for sale financial instruments  5.0  4.6 
Reverse repurchase agreements and cash collateral on securities borrowed  4.2  4.2 
Liabilities 
Deposits from other banks  4.2  4.3 
Customer accounts  3.8  3.4 
Debt securities in issue  5.3  5.0 
Repurchase agreements and cash collateral on securities lent  3.9  4.2 
Subordinated liabilities  5.9  5.9 

Foreign exchange risk

The group is exposed to two sources of foreign exchange risk.

(a) Transactional foreign currency exposure

Transactional foreign exchange exposures represent exposure on banking assets and liabilities, denominated in currencies other than the functional currency of the transacting entity.

The Group’s risk management policies prevent the holding of significant open positions in foreign currencies outside the trading portfolio managed by Barclays Capital which is monitored through DVaR.

There were no material net transactional foreign currency exposures outside the trading portfolio at either 31st December 2007 or 2006. Due to the low level of non-trading exposures no reasonably possible change in foreign exchange rates would have a material effect on either the Group’s profit or movements in equity for the year ended 31st December 2007 or 2006.

(b) Translational foreign exchange exposure

The Group operates in a number of economic environments resulting in structural foreign exchange exposures on net investments in branches, subsidiaries or associated undertakings, the functional currencies of which are currencies other than Sterling.

Exchange differences are created by the translation of these net assets measured in their functional currencies to Sterling, the Group’s presentational currency. These exchange differences are recorded in the consolidated translation reserve and reflected in the statement of recognised income and expense.

Additionally the Group’s regulatory capital ratios are sensitive to foreign exchange movements in reserves, goodwill, minority interests and other non-Sterling debt capital as well as non sterling risk weighted assets.

The Group’s policy is to economically hedge foreign currency net investments, where practical, after taking consideration of available markets to conduct hedging, the size of the investment and the cost of hedging; unless doing so would result in capital ratios which are overly sensitive to foreign exchange movements.

Notes to the accounts

For the year ended 31st December 2007


46 Market risk (continued)

The Group uses foreign currency borrowings and derivatives to hedge its foreign currency net investments. There was no ineffectiveness arising from these hedges in the year ended 31st December 2007. The carrying value of the Group’s foreign currency net investments and the foreign currency borrowings and derivatives used to hedge them as at 31st December 2007 were as follows:

Excel File Download table as excel file
Structural 
Foreign  Borrowings  Derivatives  currency  Remaining 
currency  which hedge  which hedge  exposures  structural 
net  the net  the net  pre economic  Economic  currency 
At 31st December 2007  investments  investments  investments  hedges  hedges  exposures 
Functional currency of the operation involved  £m  £m  £m  £m  £m  £m 
United States Dollar  3,273  1,000  –  2,273  3,575  (1,302)
Euro  3,690  1,506  –  2,184  2,387  (203)
Rand  3,205  –  2,599  606  165  441 
Japanese Yen  2,986  180  2,773  33  –  33 
Swiss Franc  2,140  –  2,131  9  –  9 
Other  1,847  53  465  1,329  –  1,329 
Total  17,141  2,739  7,968  6,434  6,127  307 

Excel File Download table as excel file
Structural 
Foreign  Borrowings  Derivatives  currency  Remaining 
currency  which hedge  which hedge  exposures  structural 
net  the net  the net  pre economic  Economic  currency 
At 31st December 2006  investments  investments  investments  hedges  hedges  exposures 
Functional currency of the operation involved  £m  £m  £m  £m  £m  £m 
United States Dollar  4,462  2,141  –  2,321  2,361  (40)
Euro  3,409  1,185  –  2,224  2,180  44 
Rand  2,849  –  2,665  184  165  19 
Japanese Yen  2,754  202  2,527  25  –  25 
Swiss Franc  2,071  158  1,900  13  –  13 
Other  2,069  205  410  1,454  742  712 
Total  17,614  3,891  7,502  6,221  5,448  773 

The economic hedges represent the US Dollar and Euro Preference Shares and Reserve Capital Instruments in issue that are treated as equity under IFRS, and do not qualify as hedges for accounting purposes.

The impact of a change in the exchange rate between Sterling and any of the major currencies would be:

  • – A higher or lower profit after tax, arising from changes in the exchange rates used to translate items in the consolidated income statement
  • – A higher or lower currency translation reserve within equity, representing the retranslation of non Sterling subsidiaries, branches and associated undertakings net of the revaluation of the hedges of net investments.
  • – A higher or lower value of available for sale investments denominated in foreign currencies, impacting the available for sale reserve.

The impact of foreign exchange rate changes on derivatives and borrowings designated as IFRS net investment hedges would be fully offset by the impact on the hedged net investments, resulting in no impact on the Group profit or equity.

47 Credit risk

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. Credit risk arises mainly from commercial and consumer loans and advances, credit cards, and loan commitments arising from such lending activities, but can also arise from credit enhancement provided, such as financial guarantees, letters of credit, endorsements and acceptances.

Barclays is also exposed to other credit risks arising from investments in debt securities and other exposures arising from its trading activities (‘trading exposures’) including, non- equity trading portfolio assets, derivatives as well as settlement balances with market counterparties and reverse repo loans.

Losses arising from exposures held for trading (derivatives, debt securities) are accounted for as trading losses, rather than impairment charges, even though the fall in value causing the loss may be attributable to credit deterioration.

Credit risk management and control responsibilities

The granting of credit is one of the Group's major sources of income and is therefore one of its most significant risks, and the Group dedicates considerable resources to controlling it effectively.

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 Group Risk Director.

The Credit Risk function provides Group-wide direction of credit risk-taking. The teams within this function manage the resolution of all significant credit policy issues and run the Credit Committee, which approves major credit decisions.

Each business segment has an embedded credit risk management team. These teams assist Group Risk in the formulation of Group Risk policy and the implementation of it across the businesses. Examples include ensuring that:

  • – Maximum exposure guidelines are in place relating to the exposures to any individual customer or counterparty;
  • – Country risk policy specifies risk appetite by country and avoids excessive concentration of credit risk by country; and
  • – Policies are in place to monitor exposures to individual industrial sectors.

The principal committees that review credit risk management, formulate overall Group credit policy and resolve all significant credit policy issues are the Wholesale Credit Risk Management Committee, the Retail Credit Risk Management Committee, the Risk Oversight Committee and the Board Risk Committee. All these Committees receive regular and comprehensive reports on risk issues.

The Retail Credit Risk Management Committee (RCRMC) oversees exposures, which comprise unsecured personal lending (including small businesses), mortgages and credit cards. The RCRMC monitors the risk profile and performance of the retail portfolios by receipt of key risk measures and indicators at an individual portfolio level, ensuring mitigating actions taken to address performance are appropriate and timely. Metrics reviewed will consider portfolio composition and both an overall stock and new flow level.

The Wholesale Credit Risk Management Committee (WCRMC) oversees wholesale exposures, comprising lending to businesses, banks and other financial institutions. The WCRMC monitors exposure by country, industry sector, individual large exposures and exposures to sub-investment grade countries.

The monthly Wholesale and Retail Credit Risk Management Committees exercise oversight through review and challenge of the size and constitution of the portfolios when viewed against Group risk appetite for wholesale and retail credit risks. They are chaired by the Group Wholesale and Retail Credit Risk Directors.

Corporate and commercial lending

Corporate accounts which are deemed to contain heightened levels of risk are recorded on graded problem loan lists known as early-warning or watch lists. These are updated monthly and circulated to the relevant risk control points. Once listing has taken place, exposures are closely monitored and, where appropriate, reduced.

These lists are graded in line with the perceived severity of the risk attached to the lending, and its probability of default. Businesses with exposure to corporate customers all work to three categories of increasing concern. By the time an account becomes impaired it will normally have passed through all three categories, which reflect the need for ever-increasing caution and control.

Where an obligor’s financial health gives grounds for concern, it is immediately placed into the appropriate category. All obligors, regardless of financial health, are subject to a full review of all facilities on, at least, an annual basis. More frequent interim reviews may be undertaken should circumstances dictate.

Retail lending

Within the retail portfolios, which tend to comprise homogeneous assets, statistical techniques more readily allow the risk of impairment to be monitored on a portfolio basis. This applies to UK Retail Banking, Barclays Wealth, International Retail and Commercial Banking and Barclaycard.

Within Local Business, accounts that are deemed to have a heightened level of risk, or that exhibit some unsatisfactory features which could affect viability in the short or medium term, are transferred to a separate ‘Caution’ refer stream where a cautious approach is appropriate. Accounts on the Caution refer stream are reviewed on at least a quarterly basis at which time consideration will be given to continuing with the agreed strategy, returning the customer to a lower risk refer stream, or instigating recovery or exit action if the strategy has failed.

Debt securities

Managing credit risk associated with debt securities differs in important respects from the process for loans originated by the Group. Firstly, market prices are generally available for listed bonds and securities and these prices are a good indicator of the credit standing of the issuer. Secondly, most listed and some unlisted securities are rated by external rating agencies which is another strong indicator of overall credit quality. Where such ratings are not available or are not current, the Group will have regard to its own internal ratings for the securities.

Notes to the accounts

For the year ended 31st December 2007


47 Credit risk (continued)

Settlement risk

The Group is exposed to settlement risk in its dealings with market counterparties (predominantly other financial institutions). These risks arise, for example, in foreign exchange transactions when Barclays pays away its side of the transaction to another bank or other counterparty before receiving payment from the other side. The risk is that the counterparty may not meet its obligation. It also arises on derivative contracts where the carrying value of the financial asset is related to the credit condition of the counterparty.

Settlement risk also arises through the operation of a number of systems through which Barclays makes and receives payments on behalf of its customers.

While these exposures are of short duration, they can be large. In recent years, settlement risk has been reduced by several industry initiatives that have enabled simultaneous and final settlement of transactions to be made (such as payment-versus-payment through Continuous Linked Settlement and delivery-versus-payment in central bank money).

Barclays has worked with its peers in the development of these arrangements. Increasingly the majority of high value transactions are settled by such mechanisms. Where these mechanisms are not available, the risk is further reduced by dealing predominantly with highly-rated counterparties, holding collateral and limiting the size of the exposures according to the rating of the counterparty, with smaller exposures to those of higher risk.

Country risk

Credit risk is manifested as country risk where difficulties may arise in the country in which the exposure is domiciled, thus impeding or reducing the value of the asset, or where the counterparty is the country itself.

Barclays manages country risk by setting a country risk appetite, which is known as the Country Guideline and agreed at the Group Credit Committee. All cross-border or domestic foreign currency transactions are aggregated to give the current utilisation, in terms of country loss given default (CLGD), against country appetite. The level of CLGD incurred by a counterparty transaction will largely depend on three main factors: the country severity, the product severity and counterparty grade. The calculation and loss given default is described under ‘Credit Risk measurement’ below.

CLGD is incurred in the country of direct risk, defined as where the majority of operating assets are held. This may differ from the country of incorporation. However, where transactions are secured with collateral, the country risk can be transferred from the country of the borrower to the country of the collateral provider. This is only permitted where the collateral definitely covers the borrowing and is not expected to decrease over time.

Credit risk measurement

Barclays uses statistical modelling techniques throughout its business in its credit rating systems. These systems assist the Bank in frontline credit decisions on new commitments and in managing the portfolio of existing exposures. They enable a coherent approach to risk measurement across all credit exposures, retail and wholesale. The key building blocks in the measurement system are the probability of customer default (PD), exposure in the event of default (EAD), and severity of loss-given-default (LGD). Using these, Barclays builds the analyses that lead to its decision support systems in the Risk Appetite context described previously.

Where financial models are used to monitor credit risk, they are based upon customers’ personal and financial performance information over recent periods as a predictor for future performance. The models are reviewed regularly to monitor their robustness relative to actual performance and amended as necessary to optimise their effectiveness.

For corporate and wholesale customers, Barclays also assesses the credit quality of borrowers and other counterparties and assigns them an internal risk rating. There are two different categories of default rating used. The first reflects the statistical probability of a customer in a rating class defaulting within the next 12-month period, and is referred to as a point in time rating (PIT). The second also reflects the statistical probability of a customer in a rating class defaulting, but the period of assessment is 12 months of average credit conditions for the customer typ