HSBC 2010 Annual Report Download - page 142

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Liquidity and funding > Policies and procedures / Primary sources of funding
140
Liquidity and funding
(Audited)
HSBC expects its operating entities to manage
liquidity and funding risk on a standalone basis
employing a centrally imposed framework and limit
structure which is adapted to variations in business
mix and underlying markets. Our operating entities
are required 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 under
various severe stress scenarios and that all their
anticipated obligations can be met when due.
The objective of our liquidity framework is to
be very conservative and adaptable to
changing business models, markets and
regulation.
The objective of our 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, we
maintain a diversified funding base comprising
core retail and corporate customer deposits and
institutional balances. We augment this with
wholesale funding and portfolios of highly liquid
assets diversified by currency and maturity which
are held to enable us to respond quickly and
smoothly to unforeseen liquidity requirements.
We adapt our liquidity and funding risk
management framework in response to changes
in the mix of business that we undertake, and to
changes in the nature of the markets in which
we operate. We also seek to continuously evolve
and strengthen our liquidity and funding risk
management framework. As part of this process,
we have refined the way in which we characterise
core deposits. The characterisation takes into
account the activities and operating environment in
the entity originating the deposit, the nature of the
customer and the size and pricing of the deposit.
This exercise has resulted in a revised internal
calculation of advances to core funding ratio
(discussed more fully below), and comparatives have
been restated accordingly. While total core deposits
at the Group consolidated level have not changed
materially, there have been some revisions to
individual entities.
We employ a number of measures to monitor
liquidity risk. The emphasis on the ‘ratio of net
liquid assets to customer deposits’, as reported in the
Annual Report and Accounts 2009, has been reduced
and a ‘stressed one month coverage ratio’, an
extension of our projected cash flow scenario
analysis, is now used as a simple and more useful
metric to express liquidity risk. The bank also
manages its intra-day liquidity positions so that it
is able to meet payment and settlement obligations
on a timely basis. Payment flows in real time gross
settlement systems, expected peak payment flows
and large time-critical payments are monitored
during the day and the intra-day collateral position is
managed so that there is liquidity available to meet
payments.
Policies and procedures
(Audited)
The management of liquidity and funding is
primarily undertaken locally in our operating entities
in compliance with practices and limits set by the
Risk Management Meeting. These limits vary
according to the depth and liquidity of the market in
which the entities operate. It is our 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 our largest banking operations and
within clearly defined internal and regulatory
guidelines and limits. The limits place formal
restrictions on the transfer of resources between our
entities and reflect the broad range of currencies,
markets and time zones within which we operate.
Elements of our liquidity and funding management process
• 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 core
funding 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.