HSBC 2015 Annual Report Download - page 157

HSBC HOLDINGS PLC
155
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Liquidity and funding
Liquidity risk is the risk that the Group will not have
sufficient financial resources to meet its obligations as
they fall due, or will have to do so at an excessive cost.
The risk arises from mismatches in the timing of cash
flows.
The risk arises when the funding needed for illiquid
asset positions cannot be obtained at the expected
terms and when required.
A summary of our current policies and practices regarding liquidity
and funding is provided in the Appendix to Risk on page 204.
Liquidity and funding risk management framework
The objective of our liquidity framework is to allow us to
withstand very severe liquidity stresses. It is designed to be
adaptable to changing business models, markets and
regulations.
Our Liquidity and Funding Risk Management Framework
(‘LFRF’) requires:
• liquidity to be managed by operating entities on a
stand-alone basis with no implicit reliance on the Group
or central banks;
• all operating entities to comply with their limits for the
advances to core funding ratio; and
• all operating entities to maintain a positive stressed
cash flow position out to three months under prescribed
Group stress scenarios.
Liquidity and funding in 2015
The liquidity position of the Group remained strong in
2015. Our ratio of customer advances to customer deposits
was 72% (2014: 72%). Both customer loans and customer
accounts fell on a reported basis with these movements
including:
• the transfer to ‘Assets held for sale’ and ‘Liabilities of
disposal groups held for sale’ of balances relating to the
planned disposal of our operations in Brazil;
• a reduction in corporate overdraft and current account
balances relating to a small number of clients in our
Payments and Cash Management business in the UK
who settled their overdraft and deposit balances on a
net basis, with customers increasing the frequency with
which they settled their positions; and
• movements in currency markets, which changed the
value of our customer loans and customer accounts
when translated from their local currency into US
dollars.
The HSBC UK liquidity group recorded an increase in
its advances to core funding (‘ACF’) ratio to 101%
at 31 December 2015 (2014: 97%), mainly because of
higher wholesale lending while core funding remained
unchanged.
The Hongkong and Shanghai Banking Corporation recorded
a decrease in its ACF ratio to 69% at 31 December 2015
(2014: 75%), mainly because of an increase in core deposits
coupled with a decrease in corporate loans.
HSBC USA recorded a decrease in its ACF ratio to 89%
at 31 December 2015 (2014: 100%), mainly because of
growth in core funding, which was partially offset by higher
loans to customers.
The HSBC UK liquidity group, The Hongkong and Shanghai Banking
Corporation and HSBC USA are defined in footnotes 19 to 21 on
page 191. The ACF ratio is discussed on page 205.
Wholesale senior funding markets
Conditions in the bank wholesale debt markets were
generally positive in 2015. Periods of volatility remained,
however, particularly during the latter months of the year
when concerns over the decline in oil prices and economic
growth in Europe and mainland China combined with a
variety of other factors to leave the outlook uncertain,
affecting market confidence.
In 2015, a number of Group entities issued the equivalent
of $22bn (2014: $20bn) of long-term debt securities in the
public capital markets in a range of currencies and
maturities.
Liquidity regulation
Under European Commission (‘EC’) Delegated Regulation
2015/61, the consolidated liquidity coverage ratio (‘LCR’)
became a minimum regulatory standard from 1 October
2015.
The European calibration of the net stable funding ratio
(‘NSFR’) is still pending following the Basel Committee’s
final recommendation in October 2014, and therefore
external disclosure of this metric is currently on hold.
Non-EU regulators are expected to apply the LCR and NSFR
reporting requirement locally and there is the potential for
local requirements to diverge from the rules applicable to
the Group.
Liquidity coverage ratio – EC LCR Delegated
Regulation
The calculation of the EC LCR metric involves two key
assumptions: the definition of operational deposits and the
ability to transfer liquidity from non-EU legal entities.
• We define operational deposits as transactional
(current) accounts arising from the provision of custody
services by HSBC Security Services or Payments and
Cash Management services, where the operational
component is assessed to be the lower of the current
balance and the separate notional values of debits and
credits across the account in the previous calculation
period.
• No transferability of liquidity from non-EU entities is
assumed other than to the extent currently permitted.
This results in $94bn of high-quality liquid assets
(‘HQLA’) being excluded from the Group’s LCR.
On the basis of these assumptions, we reported to the PRA
a Group EC LCR at 31 December 2015 (on the basis of the
Delegated Regulation) of 116%.
The ratio of total consolidated HQLAs to the EC LCR
denominator at 31 December 2015 was 142%, reflecting
the additional $94bn of HQLAs excluded from the Group
LCR.