IBRC annual report for 2011 - Irish Bank Resolution Corporation ...

Notes to the financial statements continued50. Risk management continuedCredit risk continuedNetting arrangementsThe Group has entered into master netting agreements with counterparties with which it undertakes a significant amount oftransactions, primarily in the interbank markets for derivative instruments. As these transactions usually settle on a gross basis,the ability to settle on a net basis in the event of a default substantially reduces the overall credit risk. Netting of debtor andcreditor balances will be undertaken in accordance with relevant regulatory and internal policies.Settlement riskSettlement risk on many transactions, particularly those involving securities, is substantially mitigated when effected via assuredpayment systems or on a delivery-versus-payment basis. Each counterparty's credit profile is assessed and clearing agents,correspondent banks and custodians are selected with a view to minimising settlement risk. The most significant portion of theGroup’s settlement risk exposure arises from foreign exchange transactions. Daily settlement limits are established for eachcounterparty to cover the aggregate of all settlement risk arising from foreign exchange transactions on a single day.For the majority of the Group's interbank counterparties, settlement risk is reduced through the use of Continuous LinkedSettlement ('CLS'). CLS is a real-time, global settlement system which minimises settlement risk and is operated by CLS Bank,which is supervised and regulated by the US Federal Reserve.Maximum exposure to credit riskThe following table presents the Group's maximum exposure to credit risk before collateral or other credit enhancements.Included below are contingent liabilities and commitments to lend, which are not recognised in the consolidated statement offinancial position.Exposures in the consolidated statement of financial positionCash and balances with central banks2011 2010€m €m100 181Financial assets at fair value through profit or loss - held on own account * - -Derivative financial instrumentsLoans and advances to banksAssets classified as held for saleAvailable-for-sale financial assets *Promissory notesGovernment debt securities at amortised costLoans and advances to customersThe Group1,096 1,9362,301 3,512276 1,6551,332 2,21929,934 25,704947 10,62318,413 25,113Exposures not recognised in the consolidated statement of financial positionContingent liabilitiesCommitments to lend181 223237 552Maximum exposure to credit risk54,817 71,718* Excludes equity sharesWhere financial instruments are recorded at fair value, the amounts shown above represent the credit risk exposure as at yearend but not the maximum risk exposure that could arise as a result of changes in fair value.In addition to the above, other assets at 31 December 2010 includes financial assets of €67m which settled in earlyJanuary 2011.Loans and advances to customers and assets classified as held for sale include €724m (2010: €749m) and €14m (2010: €15m)respectively lent to fund assets held by the Group's assurance business in respect of liabilities to customers under investmentcontracts (note 40) as the Group is exposed to credit risk in respect of this lending.Assets classified as held for sale exclude investment property of €109m (2010: €nil) and property, plant and equipment of€21m (2010: €nil).110