Credit risk

We classify a claim as impaired if we consider it probable that we will suffer a loss on that claim as a result of the obligor's inability to meet commitments (including interest payments, principal repayments or other payments due, for example, on a derivative product or under a guarantee) according to the contractual terms, and after realization of any available collateral. We classify loans carried at amortized cost as non-performing where payment of interest, principal or fees is overdue by more than 90 days and there is no firm evidence that they will be made good by later payments or the liquidation of collateral, or when insolvency proceedings have commenced or obligations have been restructured on concessionary terms.

The recognition of impairment in the financial statements depends on the accounting treatment of the claim. For products carried at amortized cost, impairment is recognized through the creation of an allowance or provision, which is charged to the income statement as credit loss expense. For products recorded at fair value, impairment is recognized through a credit valuation adjustment, which is charged to the income statement through the net trading income line.

We have policies and processes to ensure that the carrying values of impaired claims are determined on a consistent and fair basis, especially for those impaired claims for which no market estimate or benchmark for the likely recovery value is available. The credit controls applied to valuation and workout are the same for both amortized cost and fair-valued credit products. Each case is assessed on its merits, and the workout strategy and estimation of cash flows considered recoverable are independently approved by the credit risk control organization.

We also assess portfolios of claims carried at amortized cost with similar credit risk characteristics for collective impairment. A portfolio is considered impaired on a collective basis if there is objective evidence to suggest that it contains impaired obligations but the individual impaired items cannot yet be identified. Note that such portfolios are not included in the totals of impaired loans in the tables on pages 68, 69 and 74 / 75 or in note 10c in the financial statements.

The assessment of collective impairment differs by sub-portfolio. In our retail businesses, where we routinely see delayed payments, we typically review individual positions for impairment only after they have been in arrears for a certain time. To cover the time lag between the occurrence of the impairment event and its identification, we establish collective loan loss allowances based on the expected loss measured for the portfolio over the average period between the trigger event and identification of the individual impairment. Collective loan loss allowances of this kind are not required for our corporate and investment banking businesses because counterparties and exposures are constantly monitored and impairment events are identified at an early stage.

Additionally, for all sub-portfolios we assess each quarter – or on an ad hoc basis if necessary – whether there has been any unforeseen development possibly resulting in impairments which we cannot immediately identify individually. Such events could be stress situations such as a natural disaster or a country crisis, or they could result from structural changes in, for example, the legal or regulatory environment. To determine whether an event-driven collective impairment exists, we regularly assess a set of global economic drivers and the most vulnerable countries and, on a case by case basis, review the impact of specific potential impairment events since the last assessment. Again, we use the expected loss parameters of the affected sub-portfolios as the starting point for determining the collective impairment, adjusting them as necessary to reflect the severity of the event in question.