HSBC 2012 Annual Report Download - page 266

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Liquidity and funding / Market risk
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Internal categorisation Cash inflow recognised Asset classes
Level 1 Within one month Central government
Central bank (including confirmed withdrawable reserves)
Supranationals
Multilateral development banks
Level 2 Within one month but capped Local and regional government
Public sector entities
Secured covered bonds and pass-through ABSs
Gold
Level 3 From one to three months Unsecured non-financial entity securities
Equities listed on recognised exchanges and within liquid indices
Any entity owned and controlled by central or local/regional government but not explicitly guaranteed is treated as a
public sector entity.
Any exposure explicitly guaranteed is reflected as an exposure to the ultimate guarantor.
In terms of the criteria used to ensure liquid assets are of a high quality, the Group’s liquid asset policy sets out the
following additional criteria:
1. Central bank and central government exposures denominated in the domestic currency of the related sovereign
and held onshore in the domestic banking system qualify as level 1 liquid assets.
2. Central bank and central government exposures denominated in the domestic currency of the related sovereign
and held offshore must be risk weighted 20% or lower under the Basel standardised risk weighting methodology,
to qualify as level 1 liquid assets.
3. Central bank and central government exposures denominated in a currency other than the currency of the related
sovereign (i.e. foreign currency) must be risk weighted 20% or lower under the Basel standardised risk
weighting methodology and issued in a limited number of major currencies, to qualify as level 1 liquid assets.
The treatment of eurozone countries using the euro as their domestic currency depends on whether the exposures
are held onshore in the domestic banking system or offshore. Central bank and central government exposures held
onshore in the domestic banking system qualify as level 1 liquid assets under criteria 1, but central bank and central
government exposures held offshore are considered to be denominated in a foreign currency and considered under
criteria 3.
4. Local/regional government exposures held onshore and considered by the local regulator to be the same risk as
central government exposures can be considered central government exposures.
5. Supranationals and multilateral development banks must be 0% risk weighted under the Basel standardised risk
weighting methodology, to qualify as level 1 liquid assets.
6. To qualify as a level 2 liquid asset the exposure must be risk weighted 20% or lower under the Basel
standardised risk weighting methodology.
7. To qualify as a level 3 liquid asset an unsecured non-financial corporate debt exposure must satisfy a minimum
internal rating requirement.
Wholesale debt monitoring
Where wholesale debt term markets are accessed to raise funding, ALCO is required to establish cumulative rolling
three-month and 12-month debt maturity limits to ensure no concentration of maturities within these timeframes.
Liquidity behaviouralisation
Liquidity behaviouralisation is applied to reflect our assessment of the expected period for which we are confident
that we will have access to our liabilities, even under a severe liquidity stress scenario, and the expected period for
which we must assume that we will need to fund our assets. Behaviouralisation is applied when the contractual terms
do not reflect the expected behaviour. Liquidity behaviouralisation is reviewed and approved by local ALCO in
compliance with policies set by the Risk Management Meeting. Our approach to liquidity risk management will often