HSBC 2007 Annual Report Download - page 245

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Liquidity and funding management
(Audited)
Liquidity risk is the risk that HSBC does not have
sufficient financial resources to meet its obligations
as they fall due, or will have to do so at an excessive
cost. This risk arises from mismatches in the timing
of cash flows. Funding risk (a form of liquidity risk)
arises when the necessary liquidity to fund illiquid
asset positions cannot be obtained at the expected
terms and when required.
The objective of HSBC’s liquidity and funding
management is to ensure that all foreseeable funding
commitments, including deposit withdrawals, can be
met when due, and that access to the wholesale
markets is co-ordinated and cost-effective. It is
HSBC’s objective to maintain a diversified and
stable funding base comprising core retail and
corporate customer deposits and institutional
balances. This is augmented by wholesale funding
and maintaining portfolios of highly liquid assets
which are diversified by currency and maturity, with
the objective of enabling HSBC to respond quickly
and smoothly to unforeseen liquidity requirements.
HSBC requires its operating entities to maintain
a strong liquidity position and to manage the
liquidity profile of their assets, liabilities and
commitments with the objective of ensuring that
cash flows are appropriately balanced and all
obligations can be met when due.
Policies and procedures
(Audited)
The management of liquidity and funding is
primarily carried out locally in the operating entities
of HSBC in accordance with practices and limits set
by the Group Management Board. These limits vary
by entity to take account of the depth and liquidity of
the market in which the entity operates. It is HSBC’s
general policy that each banking entity should be
self-sufficient with regards to funding its own
operations. Exceptions are permitted to facilitate the
efficient funding of certain short-term treasury
requirements and start-up operations or branches
which do not have access to local deposit markets,
all of which are funded under clearly defined internal
and regulatory guidelines and limits from HSBC’s
largest banking operations. These internal and
regulatory limits and guidelines serve to place
formal limitations on the transfer of resources
between HSBC entities and are necessary to reflect
the broad range of currencies, markets and time
zones within which HSBC operates.
The Group’s liquidity and funding management
process includes:
• projecting cash flows by major currency under
various stress scenarios and considering the
level of liquid assets necessary in relation
thereto;
• monitoring balance sheet liquidity ratios against
internal and regulatory requirements;
• maintaining a diverse range of funding sources
with adequate back-up facilities;
• managing the concentration and profile of debt
maturities;
• managing contingent liquidity commitment
exposures within pre-determined caps;
• maintaining debt financing plans;
• monitoring depositor concentration in order to
avoid undue reliance on large individual
depositors and ensuring a satisfactory overall
funding mix; and
• maintaining liquidity and funding contingency
plans. These plans identify early indicators of
stress conditions and describe actions to be
taken in the event of difficulties arising from
systemic or other crises, while minimising
adverse long-term implications for the business.
Primary sources of funding
(Audited)
Current accounts and savings deposits payable on
demand or at short notice form a significant part of
HSBC’s funding. HSBC places considerable
importance on maintaining the stability of these
deposits.
The stability of deposits, which are a primary
source of funding, depends upon preserving
depositor confidence in HSBC’s capital strength and
liquidity, and on competitive and transparent
deposit-pricing strategies.
HSBC also accesses professional markets in
order to provide funding for non-banking
subsidiaries that do not accept deposits, to maintain a
presence in local money markets and to optimise the
funding of asset maturities not naturally matched by
core deposit funding. In aggregate, HSBC’s banking
entities are liquidity providers to the inter-bank
market, placing significantly more funds with other
banks than they themselves borrow.
The main operating subsidiary that does not
accept deposits is HSBC Finance, which funds itself
principally by taking term funding in the
professional markets and by securitising assets.