HSBC 2012 Annual Report Download - page 261

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Write-off of loans and advances
For details of our policy on the write-off of loans and advances, see Note 2g on the Financial Statements.
In HSBC Finance, the carrying amounts of residential mortgage and second lien loans in excess of net realisable
value are written off at or before the time foreclosure is completed or settlement is reached with the borrower. If there
is no reasonable expectation of recovery, and foreclosure is pursued, the loan is normally written off no later than the
end of the month in which the loan becomes 180 days contractually past due.
Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due,
the standard period being the end of the month in which the account becomes 180 days contractually delinquent.
Write-off periods may be extended, generally to no more than 360 days past due but, in very exceptional
circumstances, exceeding that figure in a few countries where local regulation or legislation constrain earlier
write-off, or where the realisation of collateral for secured real estate lending extends to this time.
In the event of bankruptcy or analogous proceedings, write-off may occur earlier than at the periods stated above.
Collections procedures may continue after write-off.
Concentration of exposure
(Audited)
Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic
characteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas or
industry sectors, so that their collective ability to meet contractual obligations is uniformly affected by changes in
economic, political or other conditions. We use a number of controls and measures to minimise undue concentration
of exposure in our portfolios across industry, country and global businesses. These include portfolio and counterparty
limits, approval and review controls, and stress testing.
Wrong-way risk is an aggravated form of concentration risk and arises when there is a strong correlation between the
counterparty’s probability of default and the mark-to-market value of the underlying transaction. We use a range of
procedures to monitor and control wrong-way risk, including requiring entities to obtain prior approval before
undertaking wrong-way risk transactions outside pre-agreed guidelines.
Cross-border exposures
We assess the vulnerability of countries to foreign currency payment restrictions, including economic and political
factors, when considering impairment allowances on cross-border exposures. Impairment allowances are assessed in
respect of all qualifying exposures within vulnerable countries unless these exposures and the inherent risks are:
• performing, trade-related and of less than one year’s maturity;
• mitigated by acceptable security cover which is, other than in exceptional cases, held outside the country
concerned;
• in the form of securities held for trading purposes for which a liquid and active market exists, and which are
measured at fair value daily; and
• performing facilities with a principal (excluding security) of US$1m or below and/or with maturity dates shorter
than three months.
Nature of HSBC’s securitisation and other structured exposures
(Audited)
Mortgage-backed securities (‘MBS’s) are securities that represent interests in groups of mortgages and provide
investors with the right to receive cash from future mortgage payments (interest and/or principal). An MBS which
references mortgages with different risk profiles is classified according to the highest risk class.
Collateralised debt obligations (‘CDO’s) are securities backed by a pool of bonds, loans or other assets such as asset-
backed securities (‘ABS’s). CDOs may include exposure to sub-prime or Alt-A mortgage assets where these are part
of the underlying assets or reference assets. As there is often uncertainty surrounding the precise nature of the
underlying collateral supporting CDOs, all CDOs supported by residential mortgage-related assets are classified as
sub-prime. Our holdings of ABSs and CDOs and direct lending positions, and the categories of mortgage collateral
and lending activity, are described overleaf.