HSBC 2008 Annual Report Download - page 241

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In times of market stress, the Group may choose
to provide non-contractual liquidity support to
certain HSBC-sponsored vehicles or HSBC-
promoted products. This support would only be
provided after careful consideration of the potential
funding requirement and the impact on the entity’s
overall liquidity.
The impact of market turmoil on the Group’s
liquidity risk position
(Audited)
A significant aspect of the market turmoil continues
to be its adverse effects on the liquidity and funding
risk profile of the banking system.
At a systemic level, these may be characterised
as follows:
• interbank funding costs increased as banks
became reluctant to lend to each other beyond
the very short-term;
• many asset classes previously considered to be
liquid became illiquid;
• the ability of many market participants to issue
either unsecured or secured debt has been
restricted, although this has been partly
mitigated following the introduction by some
governments and central banks of term debt
guarantee schemes; and
• special purpose entities with investments linked
to US sub-prime mortgages, or to ABSs where
the underlying credit exposures were not fully
transparent, found it increasingly difficult to
raise wholesale funding.
In general terms, the strains arising from the
credit crisis were concentrated in the wholesale
market. The retail market, the market from which
HSBC derives its core current and savings accounts,
(the importance of which as a source of funding for
the Group is discussed under ‘Advances to deposits
ratio’ above) was relatively unaffected. The Group’s
limited dependence on wholesale markets for
funding has been a significant competitive advantage
to HSBC through the recent period of dislocation in
the financial markets.
HSBC’s customer deposit base has grown
between 30 June 2007, the reporting date closest to
the onset of the market turmoil, and 31 December
2008 by US$134 billion. This growth in US dollar
equivalent terms has been diluted by the significant
strengthening of US dollar against other major
currencies between these two reporting dates, and
therefore under represents the growth in customer
deposits on an underlying currency basis. As a net
provider of funds to the interbank market, the Group
has not been significantly affected by the scarcity of
interbank funding.
A number of central banks and governments
have taken action to alleviate the effects of the
market turmoil, these actions have included making
available government guaranteed term funding
facilities. In the US, bank issuance under such
programmes became normal market practice during
2008. To date, only HSBC’s US based operations
have participated in government guaranteed term
debt issuance schemes. At 31 December 2008,
US$2.65 billion had been issued by HSBC USA,
Inc. under the Federal Deposit Insurance
Corporation Temporary Liquidity Guarantee
Programme.
The deterioration of the US sub-prime credit
market has reduced the availability of term financing
to entities with exposures to the US sub-prime
market. However, HSBC Finance, by virtue of its
position within the Group, continued to enjoy
committed financing facilities, albeit at a lower
level, and access to commercial paper markets at
interest rates below interbank rates. Through planned
balance sheet reductions, the issuance of cost
effective retail debt, capital infusions from the
HSBC Group, and the utilisation of alternative
sources of funding, including funding from other
members of the HSBC Group, HSBC Finance was
able to eliminate the need to issue institutional term
debt in 2008. Funding plans are in place to enable
HSBC Finance to deal with continued stress in the
credit markets. As part of these plans, asset
portfolios totalling US$15.3 billion were transferred
from HSBC Finance to HSBC Bank USA in January
2009, resulting in US$8.0 billion of net funding
benefit to HSBC Finance.
HSBC Finance is eligible to participate in the
US Federal Reserve’s Commercial Paper Funding
Facility (CPFF), a new scheme aimed at providing
support to US issuers in the commercial paper
market. At 31 December 2008, HSBC Finance had
issued US$520 million under the CPFF and is
eligible to issue a maximum of US$12.0 billion prior
to 30 October 2009, the current expiry date for the
scheme.
The effect of the market turmoil on liquidity and
funding elsewhere in HSBC was largely restricted to
the Group’s activities that historically depended
upon the asset-backed commercial paper markets for
funding, specifically SIVs and conduits, and certain
money market funds. This is discussed in detail on
page 174.