HSBC 2009 Annual Report Download - page 246

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Liquidity and funding > Policies and procedures / Primary sources of funding / Liquidity risk management
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Liquidity and funding
(Audited)
Liquidity risk is the risk that HSBC does not have
sufficient financial resources to meet its obligations
as they fall due, or will have to do so at an excessive
cost. This risk arises from mismatches in the timing
of cash flows. Funding risk (a form of liquidity risk)
arises when the liquidity needed to fund illiquid asset
positions cannot be obtained at the expected terms
and when required.
The objective of HSBC’s liquidity and funding
management framework is to ensure that all
foreseeable funding commitments can be met when
due, and that access to the wholesale markets is
co-ordinated and cost-effective. To this end, HSBC
maintains a diversified funding base comprising
core retail and corporate customer deposits and
institutional balances. This is augmented with
wholesale funding and portfolios of highly liquid
assets diversified by currency and maturity which
are held to enable HSBC to respond quickly and
smoothly to unforeseen liquidity requirements.
HSBC requires its operating entities to maintain
strong liquidity positions and to manage the liquidity
profiles of their assets, liabilities and commitments
with the objective of ensuring that their cash flows
are balanced appropriately and that all their
anticipated obligations can be met when due.
HSBC adapts its liquidity and funding risk
management framework in response to changes in
the mix of business that it undertakes, and to changes
in the nature of the markets in which it operates. The
Group has continuously monitored the impact of
recent market events on its liquidity positions and
has changed customer behavioural assumptions and
assumed asset liquidity characteristics where
justified. The liquidity and funding risk management
framework will continue to evolve as the Group
assimilates knowledge from the recent market events,
the effects of which are discussed more fully below.
Policies and procedures
(Audited)
The management of liquidity and funding is
primarily undertaken locally in HSBC’s operating
entities in compliance with practices and limits set
by the Risk Management Meeting (‘RMM’). These
limits vary according to the depth and liquidity of
the market in which the entities operate. It is HSBC’s
general policy that each banking entity should be
self-sufficient when funding its own operations.
Exceptions are permitted for certain short-term
treasury requirements and start-up operations or for
branches which do not have access to local deposit
markets. These entities are funded from HSBC’s
largest banking operations and within clearly defined
internal and regulatory guidelines and limits. The
limits place formal restrictions on the transfer of
resources between HSBC entities and reflect the
broad range of currencies, markets and time zones
within which HSBC operates.
HSBC’s liquidity and funding management
process includes:
• projecting cash flows by major currency under
various stress scenarios and considering the
level of liquid assets necessary in relation thereto;
• monitoring balance sheet liquidity and advances
to deposits ratios against internal and regulatory
requirements;
• maintaining a diverse range of funding sources
with back-up facilities;
• managing the concentration and profile of debt
maturities;
• managing contingent liquidity commitment
exposures within pre-determined caps;
• maintaining debt financing plans;
• monitoring depositor concentration in order to
avoid undue reliance on large individual
depositors and ensure a satisfactory overall
funding mix; and
• maintaining liquidity and funding contingency
plans. These plans identify early indicators of
stress conditions and describe actions to be
taken in the event of difficulties arising from
systemic or other crises, while minimising
adverse long-term implications for the business.
Primary sources of funding
(Audited)
Current accounts and savings deposits payable on
demand or at short notice form a significant part of
HSBC’s funding, and the Group places considerable
importance on maintaining their stability. For
deposits, stability depends upon preserving depositor
confidence in HSBC’s capital strength and liquidity,
and on competitive and transparent pricing.
HSBC also accesses professional markets
in order to provide funding for non-banking
subsidiaries that do not accept deposits, to maintain a
presence in local money markets and to optimise the
funding of asset maturities not naturally matched by
core deposit funding. In aggregate, HSBC’s banking
entities are liquidity providers to the interbank market,
placing significantly more funds with other banks
than they themselves borrow.