HSBC 2015 Annual Report Download - page 208

Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
HSBC HOLDINGS PLC
206
• the ability to access interbank funding and unsecured term debt markets ceases for the duration of the scenario;
• the ability to generate funds from illiquid asset portfolios (securitisation and secured borrowing) is restricted to 25-75% of
the lower of issues in the last six months or expected issues in the next six months. The restriction is based on current
market conditions and is dependent on the operating entity’s inherent liquidity risk categorisation;
• the ability to access repo funding ceases for any asset not classified as liquid under our liquid asset policy for the duration of
the scenario;
• drawdowns on committed lending facilities must be consistent with the severity of the market stress being modelled and
dependent on the inherent liquidity risk categorisation of the operating entity;
• outflows are triggered by a defined downgrade in long-term ratings. We maintain an ongoing assessment of the appropriate
number of notches to reflect;
• customer loans are assumed to be renewed at contractual maturity;
• interbank loans and reverse repos are assumed to run off contractually; and
• assets defined as liquid assets are assumed to be realised in cash ahead of their contractual maturity, after applying a
defined stressed haircut of up to 20%.
Liquid assets of HSBC’s principal operating entities
Stressed scenario analysis and the numerator of the coverage ratio include the assumed cash inflows that would be generated
from the realisation of liquid assets, after applying the appropriate stressed haircut. These assumptions are made on the basis
of management’s expectation of when an asset is deemed to be realisable.
Liquid assets are unencumbered assets that meet the Group’s definition of liquid assets and are either held outright or as a
consequence of a reverse repo transaction with a residual contractual maturity beyond the time horizon of the stressed
coverage ratio being monitored. Any unencumbered asset held as a result of reverse repo transactions with a contractual
maturity within the time horizon of the stressed coverage ratio being monitored is excluded from the stock of liquid assets and
is instead reflected as a contractual cash inflow.
Our framework defines the asset classes that can be assessed locally as high quality and realisable within one month and
between one month and three months. Each local ALCO has to be satisfied that any asset which may be treated as liquid in
accordance with the Group’s liquid asset policy will remain liquid under the stress scenario being managed to.
Inflows from the utilisation of liquid assets within one month can generally only be based on confirmed withdrawable central
bank deposits or the sale or repo of government and quasi-government exposures generally restricted to those denominated
in the sovereign’s domestic currency. High quality ABSs (predominantly US MBSs) and covered bonds are also included but
inflows assumed for these assets are capped.
Inflows after one month are also reflected for high quality non-financial and non-structured corporate bonds and equities
within the most liquid indices.
Internal categorisation Cash inflow recognised Asset classes
Level 1 Within one month • Central government
• Central bank (including confirmed withdrawable reserves)
• Supranationals
• Multilateral development banks
• Coins and banknotes
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.