Strategic Shareholder Climate and Risk Financial Financial Barclays PLC 290 report information sustainability report Governance review review statements Annual Report 2022 Principal risk management (continued) credit risk measurement models. The • wholesale lending: a fixed charge over i) Impairment policy requirements are set credit risk management teams in each commercial property and other physical and reviewed regularly, at a minimum legal entity are accountable to the relevant assets, in various forms annually, to maintain adherence to Legal Entity CRO, who reports to the accounting standards. Key judgements • other retail lending: includes charges Group CRO. inherent in policy, including the estimated over motor vehicles and other physical life of revolving credit facilities and the For wholesale portfolios, credit risk assets; second lien charges over quantitative criteria for assessing the managers are organised in sanctioning residential property; and finance lease significant increase in credit risk (SICR), are teams by geography, industry and/or receivables separately supported by analytical study. In product. In wholesale portfolios, credit risk • derivatives: the Group also often seeks particular, the quantitative thresholds used approval is undertaken by experienced to enter into a margin agreement (e.g. for assessing SICR are subject to a number credit risk professionals operating within a Credit Support Annex) with of internal validation criteria, particularly in clearly defined delegated authority counterparties with which the Group has retail portfolios where thresholds decrease framework, with only the most senior master netting agreements in place. as the origination Probability of Default credit officers assigned the higher levels of These annexes to master agreements (PD) of each facility increases. Key policy delegated authority. The largest credit provide a mechanism for further requirements are also typically aligned to exposures, which are outside the Risk reducing credit risk, whereby collateral the Group’s credit risk management Sanctioning Unit or Risk Distribution (margin) is posted on a regular basis strategy and practices, for example, Committee authority, require the support (typically daily) to collateralise the mark wholesale customers that are risk of a legal entity Senior Credit Officer. For to market exposure of a derivative managed on an individual basis are exposures in excess of the legal entity portfolio measured on a net basis assessed for ECL on an individual basis Senior Credit Officer’s authority, approval • reverse repurchase agreements: upon entering Stage 3; furthermore, key by Group Senior Credit Officer/Board Risk collateral typically comprises highly liquid internal risk management indicators of Committee is also required. The Group securities which have been legally high risk are used to set SICR policy, for Credit Risk Committee, attended by legal transferred to the Group subject to an example, retail customers identified as entity Senior Credit Officers, provides a agreement to return them for a fixed high risk account management are formal mechanism for the Group Senior price automatically deemed to have met the Credit Officer to exercise the highest level SICR criteria. • financial guarantees and similar off- of credit authority over the most material balance sheet commitments: cash Group single name exposures. ii) ECL is estimated in line with internal collateral may be held against these policy requirements using models which Credit risk mitigation arrangements. are validated by a qualified independent The Group employs a range of techniques party to the model development area, the Risk transfer and strategies to actively mitigate credit Independent Validation Unit (IVU), before A range of instruments including risks. These can broadly be divided into first use and on a regular basis, at a guarantees, credit insurance, credit three types: minimum every three years. Each model is derivatives and securitisation can be used • netting and set-off designated an owner who is responsible to transfer credit risk from one for: • collateral counterparty to another. These mitigate • model maintenance: monitoring of • risk transfer. credit risk in two main ways: model performance including Netting and set-off • if the risk is transferred to a backtesting by comparing predicted counterparty which is more Credit risk exposures can be reduced by ECL versus flow into stage 3 and creditworthy than the original applying netting and set-off. For derivative coverage ratios; proposing material counterparty, then overall credit risk is transactions, the Group’s normal practice changes for independent IVU approval; reduced is, on a legal entity basis, to enter into and recalibrating model parameters on standard master agreements with • where recourse to the first counterparty more timely data counterparties (e.g. ISDAs). These master remains, both counterparties must • proposing post-model adjustments agreements typically allow for netting of default before a loss materialises. This is (PMA) to address model weaknesses or credit risk exposure to a counterparty less likely than the default of either to account for situations where known resulting from derivative transactions counterparty individually so credit risk is against the obligations to the counterparty or expected risk factors and information reduced. in the event of default, and so produce a have not been considered in the Detailed policies are in place to appropriately + lower net credit exposure. These modelling process. All PMAs relating to recognise and record credit risk mitigation. For more information, refer to pages 118 to 120 of the Barclays agreements may also reduce settlement model deficiencies, regardless of value PLC Pillar 3 Report 2022 (unaudited). exposure (e.g. for foreign exchange are approved by IVU for a set time transactions) by allowing payments on the period. PMAs representing Expert Governance and oversight of ECLs under same day in the same currency to be set- Judgement are validated by Risk, as the IFRS 9 off against one another. second line of defence and approved for The Group’s organisational structure and a set time period. The most material internal governance processes oversee Collateral PMAs are also approved by the CRO. the estimation of ECL across several The Group has the ability to call on areas, including: i) setting requirements in Models must also assess ECL across a collateral in the event of default of the policy, including key assumptions and the range of future economic conditions. counterparty, comprising: application of key judgements; ii) the These economic scenarios are generated • home loans: a fixed charge over design and execution of models; and iii) via an independent model and ultimately residential property in the form of review of ECL results. set by the Senior Scenario Review houses, flats and other dwellings