HSBC 2008 Annual Report Download - page 17

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the decision of the Federal Reserve to reduce interest
rates to unprecedentedly low levels, appear to be
having an impact on the trading of both guaranteed
and non-guaranteed debt in early 2009. A prolonged
period of low Federal funds rates will put pressure
on deposit spreads earned on HSBC’s deposit base.
It is likely that these conditions will continue to
adversely affect the Group’s results into 2010, the
degree to which remains uncertain.
Latin America
Markets in Latin America are expected to be affected
by recession in the developed world, particularly in
the US. Output will fall as a decline in the demand
for exports will adversely affect the export sector,
and these factors are likely to combine with currency
volatility to weaken the balance sheets of financial
institutions. This may lead to a further contraction in
the availability of credit, increasing the likelihood of
bankruptcies and unemployment and reducing
economic activity and consumption. Lower
commodity prices and reduced remittance inflows
are likely to affect economies in the region,
particularly in Mexico and Central America.
Exchange rates are likely to remain under pressure as
growth stalls, and inflation may rise. The possibility
of a combined credit crunch and stagflation in Latin
America cannot be ruled out. The authorities may
react with stricter prudential regulation and price
controls. Public finances will come under strain if oil
and other commodity prices remain low, restricting
the authorities’ room for manoeuvre.
Risks associated with liquidity and funding,
which are inherent in HSBC’s business, have
been greatly increased by the current global
market conditions
HSBC’s business model depends upon its ability
to access financial resources whenever required
to meet its obligations. To this end, HSBC seeks to
maintain a diversified and stable funding base
comprising core retail and corporate customer
deposits and institutional balances and to augment
this with wholesale funding and portfolios of highly
liquid assets diversified by currency and maturity
which are held to enable HSBC to respond to
unforeseen liquidity requirements. HSBC’s earnings
are affected by its ability to properly value financial
instruments. In certain illiquid markets, determining
the value at which financial instruments can be
realised is highly subjective, and processes to
ascertain value and estimates of value, both of which
require substantial elements of judgement,
assumptions and estimates (which may change over
time), are required. Increased illiquidity adds to
uncertainty over the accessibility of financial
resources and may reduce capital resources as
valuations decline. Rating agencies, which determine
HSBC’s own credit ratings and thereby influence the
Group’s cost of funds, take into consideration
management effectiveness and the success with
which HSBC’s liquidity risk factors are managed.
Actions by third parties and independent market
participants, such as rating agency downgrades of
instruments to which HSBC has exposure, can result
in reduced liquidity and valuations of those
instruments. HSBC’s liquidity could also be
constrained by an inability to access the debt capital
markets due to a variety of unforeseen market
dislocations or interruptions.
The extreme market conditions facing the
financial services industry have been reflected in
shortages of liquidity, lack of funding, pressure on
capital and extreme price volatility across a wide
range of asset classes. Illiquidity of these assets has
prevented the realisation of existing asset positions
and has constrained risk distribution in ongoing
banking activities. The extreme market conditions,
which have highlighted the importance of a strong
diversified core deposit base, have lead to increased
competition for such deposits and the risk of deposit
migration. HSBC’s Global Banking and Markets
business operates in the markets affected by
illiquidity and extreme price volatility, either directly
or indirectly, through exposures to securities, loans,
derivatives and other commitments, and HSBC has
made substantial write-downs and impairments on
illiquid legacy credit and structured credit positions.
While it is difficult to predict how long the
conditions described above will exist and which of
HSBC’s markets, products and other businesses will
be affected, continuation of these factors could have
an adverse effect on the Group’s results.
HSBC has significant exposure to
counterparty risk
HSBC’s ability to engage in routine transactions to
fund its operations and manage its risks could be
adversely affected by the actions and commercial
soundness of other financial services institutions.
Financial institutions are extremely interdependent
because of trading, clearing, counterparty or other
relationships. As a consequence, a default by, or
decline in market confidence in, individual
institutions, or anxiety about the financial services
industry generally, can lead to further individual
and/or systemic difficulties, defaults and losses.
HSBC has exposure to virtually all major industries
and counterparties, and it routinely executes