HSBC 2012 Annual Report Download - page 263

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
When a security benefits from a contract provided by a monoline insurer that insures payments of principal and
interest, the expected recovery on the contract is assessed in determining the total expected credit support available
to the ABS.
Liquidity and funding
(Audited)
The management of liquidity and funding is primarily undertaken locally (by country) in our operating entities in
compliance with the Group’s liquidity and funding risk management framework (the ‘LFRF’), and with practices
and limits set by the GMB through the Risk Management Meeting and approved by the Board. These limits vary
according to the depth and the liquidity of the markets in which the entities operate. Our general policy is that each
defined operating entity should be self-sufficient in funding its own activities. Where transactions exist between
operating entities, they are reflected symmetrically in both entities.
As part of our Asset, Liability and Capital Management (‘ALCM’) structure, we have established ALCOs at Group
level, in the regions and in operating entities. The terms of reference of all ALCOs include the monitoring and
control of liquidity and funding.
The primary responsibility for managing liquidity and funding within the Group’s framework and risk appetite
resides with the local operating entity ALCO. Our most significant operating entities are overseen by regional
ALCOs, Group ALCO and the Risk Management Meeting. The remaining smaller operating entities are overseen
by regional ALCOs, with appropriate escalation of significant issues to Group ALCO and the Risk Management
Meeting.
Operating entities are predominately defined on a country basis to reflect our local management of liquidity and
funding. Typically, an operating entity will be defined as a single legal entity. However, to take account of the
situation where operations in a country are booked across multiple subsidiaries or branches:
• an operating entity may be defined as a wider sub-consolidated group of legal entities if they are incorporated
in the same country, liquidity and funding are freely fungible between the entities and permitted by local
regulation, and the definition reflects how liquidity and funding are managed locally; or
• an operating entity may be defined more narrowly as a principal office (branch) of a wider legal entity operating
in multiple countries, reflecting the local country management of liquidity and funding.
The list of entities it directly oversees and the composition of these entities is reviewed and agreed annually by the
Risk Management Meeting.
Primary sources of funding
(Audited)
Customer deposits in the form of current accounts and savings deposits payable on demand or at short notice form
a significant part of our funding, and we place considerable importance on maintaining their stability. For deposits,
stability depends upon maintaining depositor confidence in our capital strength and liquidity, and on competitive and
transparent pricing.
We also access wholesale funding markets by issuing senior secured and unsecured debt securities (publically and
privately) and borrowing from the secured repo markets against high quality collateral, in order to obtain funding for
non-banking subsidiaries that do not accept deposits, to align asset and liability maturities and currencies and to
maintain a presence in local wholesale markets.
The management of funding and liquidity risk
Inherent liquidity risk categorisation
We place our operating entities into one of three categories (low, medium and high) to reflect our assessment of their
inherent liquidity risk, considering political, economic and regulatory factors within the host country and factors
specific to the operating entities themselves, such as the local market, market share and balance sheet strength. The
categorisation involves management judgement and is based on the perceived liquidity risk of an operating entity
relative to other entities in the Group. The categorisation is intended to reflect the possible impact of a liquidity
event, not the probability of an event. The categorisation is part of our risk appetite and is used to determine the
prescribed stress scenario that we require our operating entities to be able to withstand, and to manage to.