HSBC 2009 Annual Report Download - page 153

HSBC HOLDINGS PLC
Report of the Directors: Impact of Market Turmoil
151
Background and disclosure policy
(Audited)
As a result of the widespread deterioration in the
markets for securitised and structured financial
assets and consequent disruption to the global
financial system which began in mid-2007, the
markets for these assets have remained illiquid and
it has remained difficult to observe prices for
structured credit risk, including senior tranches of
such risk. The ensuing constraint on the ability of
financial institutions to access wholesale markets to
fund such assets has put additional downward
pressure on asset prices. As a consequence, since
2007 many financial institutions have recorded
considerable reductions in the fair values of asset
values, including their asset-backed securities
(‘ABS’s) and leveraged structured transactions, most
significantly for sub-prime and Alt-A mortgage-
backed securities (‘MBS’s) and collateralised debt
obligations (‘CDO’s) referencing these securities.
A further constraint on liquidity within the
market for securitised assets emerged in 2009 as
rating agencies changed their rating methodologies
in response to changed circumstances, precipitating
widespread downgrades and the fear of further
downgrades across all tranches of securitised paper.
This accentuated illiquidity, particularly for those
institutions subject to the Basel II framework, which
ties capital requirements to external credit ratings
without reference to the actual level of expected loss
on the securities. In light of these issues around
liquidity and the risk to capital from further write-
downs, ratings changes and realised losses and
impairments in 2009, many financial institutions
took steps to reduce leveraged exposures, build their
liquidity and raise additional capital.
Volatility in financial markets, particularly in
the first half of 2009, resulted in wider transaction
spreads, although these narrowed during the second
half of the year. Markets for securitised and
structured financial assets continued to be severely
constrained, and the primary market for all but US
government-sponsored issues remained weak.
Notwithstanding these developments, the severe
deterioration in the fair value of assets supported by
sub-prime and Alt-A mortgages experienced in 2008
began to reverse in 2009 as buyers sought higher
yields in the low interest rate environment. For
example, spreads tightened modestly on Alt-A assets
and sub-prime assets as greater clarity of ultimate
losses emerged.
This section contains disclosures about the
effect of the ongoing market turmoil on HSBC’s
securitisation exposures and other structured
products. HSBC’s principal exposures to the US and
the UK mortgage markets take the form of credit risk
from direct loans and advances to customers which
were originated to be held to maturity or refinancing,
details of which are provided on page 218.
Financial instruments which were most affected
by the market turmoil include those exposures to
direct lending which are held at fair value through
profit or loss, or are classified as available for sale,
which are also held at fair value. Financial
instruments included in these categories comprise
ABSs, including MBSs and CDOs, and exposures to
and contingent claims on monoline insurers
(‘monolines’) in respect of structured credit activities
and leveraged finance transactions which were
originated to be distributed.
In accordance with HSBC’s policy to provide
meaningful disclosures that help investors
and other stakeholders understand the
Group’s performance, financial position and
changes thereto, the information provided in
this section goes beyond the minimum
levels required by accounting standards,
statutory and regulatory requirements and
listing rules.
HSBC has voluntarily adopted the draft British
Bankers’ Association Code on Financial Reporting
Disclosure (‘the draft BBA Code’) for its 2009
Financial Statements. This sets out five disclosure
principles together with supporting guidance. The
principles are that UK banks will:
• provide high quality and meaningful disclosures
useful to decision-making;
• review and enhance their financial instrument
disclosures for key areas of interest;
• assess the applicability and relevance of good
practice recommendations to their disclosures,
acknowledging the importance of such
guidance;
• seek to enhance the comparability of financial
statement disclosures across the UK banking
sector; and
• clearly differentiate in their annual reports
between information that is audited and
information that is unaudited.
In the context of facilitating an understanding
of the ongoing turmoil in markets for securitised and
structured assets and in line with the principles of the
draft BBA Code, HSBC has continued to assess
good practice recommendations issued from time to
time by relevant regulators and standard setters.