HSBC 2011 Annual Report Download - page 431

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Term Definition
IRB foundation approach A method of calculating credit risk capital requirements using internal PD models but with supervisory
estimates of LGD and conversion factors for the calculation of EAD.
ISDA International Swaps and Derivatives Association.
ISDA Master agreement Standardised contract developed by ISDA used as an umbrella under which bilateral derivatives contracts
are entered into.
K
Key management personnel Directors and Group Managing Directors of HSBC Holdings.
L
Legacy credit A portfolio of assets comprising Solitaire, SICs, ABS trading and correlation portfolios and derivative
transactions entered into with monoline insurers.
Legal proceedings Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC
companies (whether by way of claim or counterclaim) or civil disputes that may, if not settled, result in
court, arbitration or tribunal proceedings.
Level 1 – quoted market price Financial instruments with quoted prices for identical instruments in active markets.
Level 2 – valuation technique
using observable inputs
Financial instruments with quoted prices for similar instruments in active markets or quoted prices for
identical or similar instruments in inactive markets and financial instruments valued using models
where all significant inputs are observable.
Level 3 – valuation technique
with significant unobservable
inputs
Financial instruments valued using valuation techniques where one or more significant inputs are
unobservable.
Leveraged finance Funding provided for entities with higher than average indebtedness, which typically arises from sub-
investment grade acquisitions or event-driven financing.
Leverage ratio A measure, prescribed by regulators under Basel III, which is the ratio of tier 1 capital to total exposures.
Total exposures include on-balance sheet items, off-balance sheet items and derivatives, and should
generally follow the accounting measure of exposure. This supplementary measure to the risk-based
capital requirements is intended to constrain the build-up of excess leverage in the banking sector.
Liquidity risk 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.
Loan modification An account management action that results in a change to the original terms and conditions of a loan
either temporarily or permanently without resetting its delinquency status, except in case of a
‘modification re-age’ where delinquency status is also reset to up-to-date. Account modifications may
include revisions to one or more terms of the loan including, but not limited to, a change in interest rate,
extension of the amortisation period, reduction in payment amount and partial forgiveness or deferment
of principal.
Loan re-age An account management action that results in the resetting of the contractual delinquency status of an
account to up-to-date upon fulfilment of certain requirements which indicate that payments are
expected to be made in accordance with the contractual terms.
Loans past due Loans on which repayments are overdue.
Loan-to-value ratio (‘LTV’) A mathematical calculation that expresses the amount of the loan as a percentage of the value of security.
A high LTV indicates that there is less cushion to protect the lender against house price falls or
increases in the loan if repayments are not made and interest is added to the outstanding loan balance.
Loss given default (‘LGD’) The estimated ratio (percentage) of the loss on an exposure to the amount outstanding at default (EAD)
upon default of a counterparty.
Loss severity The realised amount of losses incurred (including ancillary amounts owed) when a loan is foreclosed or
disposed of through the arrangement with the borrower. The loss severity is represented as a
percentage of the outstanding loan balance.
M
Market risk The risk that movements in market risk factors, including foreign exchange rates and commodity prices,
interest rates, credit spreads and equity prices will reduce income or portfolio values.
Medium term notes (‘MTN’s) Notes issued by corporates across a range of maturities. MTNs are frequently issued by corporates under
MTN Programmes whereby notes are offered on a regular and continuous basis to investors.
Monoline insurers
(‘monolines’)
Entities which specialise in providing credit protection to the holders of debt instruments in the event of
default by the debt security counterparty. This protection is typically held in the form of derivatives
such as CDSs referencing the underlying exposures held.
Mortgage-backed securities
(‘MBS’s)
Securities that represent interests in groups of mortgages, which may be on residential or commercial
properties. Investors in these securities have the right to cash received from future mortgage payments
(interest and/or principal). When the MBS references mortgages with different risk profiles, the MBS
is classified according to the highest risk class.
Mortgage-related assets Assets which are referenced to underlying mortgages.
Mortgage vintage The year a mortgage was originated.
N
Negative equity mortgages Equity is the value of the asset less the outstanding balance on the loan. Negative equity arises when the
value of the property purchased is below the balance outstanding on the loan.