HSBC 2009 Annual Report Download - page 18

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Challenges and uncertainties
16
liquidity and valuations of those instruments. The
liquidity of those HSBC entities that utilise
long-term wholesale markets could be constrained
by an inability to access them due to a variety of
unforeseen market dislocations or interruptions.
Rating agencies which determine HSBC’s credit
ratings and thereby influence the Group’s cost of
funds, take into consideration the effectiveness of
HSBC’s liquidity risk management framework.
The market conditions that the financial services
industry experienced during the height of the crisis
were reflected in decreased liquidity, reduced
availability of long-term wholesale market funding,
pressure on capital and extreme price volatility
across a wide range of asset classes. Illiquidity
prevented the realisation of some asset positions and
constrained risk distribution in ongoing banking
activities. The market conditions also highlighted the
significant benefits of a diversified core deposit base,
leading to increased competition for such deposits
and the greater risk of deposit migration between
competitors.
HSBC’s Global Banking and Markets business
operates in many markets affected by illiquidity and
is subject to the threat of extreme price volatility,
either directly or indirectly, through exposures to
securities, loans, derivatives and other commitments.
At the height of the financial crisis, HSBC made
substantial write-downs and recognised impairments
on illiquid legacy credit and structured credit
positions. Although during 2009 there was some
moderation in market conditions, it is difficult to
predict if this trend will continue and, if conditions
worsen, which of HSBC’s markets, products and
other businesses will be affected. Any repeat of these
factors could have an adverse effect on the Group’s
results.
Reform of the regulatory environment
presents risks to HSBC
There are potential strategic and structural risks to
the organisation, nature and scope of the Group’s
business activities and opportunities posed by many
of the proposals for regulatory reform being debated
both internationally and domestically in response to
the recent financial crisis. A consensus has emerged
among the G-20 nations that institutions that would
pose a systemic risk if they were to fail should be
subject to enhanced regulation in markets in which
they have a substantial presence. HSBC is likely to
be considered a systemically significant institution in
its key markets. The Basel Committee on Banking
Supervision (‘The Committee’) has issued a
comprehensive reform package to address the
lessons of the crisis which includes proposals on
strengthening global capital and liquidity regulations
and the resolution of systemically significant cross-
border banks. The Committee’s paper entitled
‘Strengthening the Resilience of the Banking Sector’
proposes changes to both the composition of capital
and the risk coverage of the capital framework, as
well as the introduction of a leverage ratio and
measures to promote the build up of capital buffers.
The stated intention of these proposals is to promote
a more resilient banking sector, to improve the
banking sector’s ability to absorb shocks, to
improve risk management and to strengthen bank
transparency and disclosure. The proposals
on liquidity aim to elevate the resilience of
internationally active banks to liquidity stresses, as
well as increasing international harmonisation of
liquidity risk supervision. A study of the impact of
all these proposals on individual banks, and the
financial services industry as a whole, is taking
place in the first half of 2010 in parallel with a
consultation process. The Committee is then seeking
to agree proposals by the end of 2010 for
implementation by the end of 2012.
At the same time, the European Commission,
the UK Tripartite Authorities (HM Treasury, the
Bank of England and the Financial Services
Authority (‘FSA’)), the US Government and others
have made a number of proposals for adjustments in
their regulatory regimes which could affect entities
in the HSBC Group. HSBC is engaged actively in
discussions with its regulators, both directly and
through industry bodies, on the appropriate regime to
be applied to various activities and entities, taking
into account the interaction of global and local
regulations. The precise nature, extent, form and
timing of any regulatory changes, as well as the
degree to which there will be effective consultation
among the various jurisdictions involved, are highly
uncertain and thus it is not possible to determine or
estimate the likely actual impact on the Group’s
business and activities. Major areas where reform is
being actively discussed, all of which could affect
HSBC’s business and activities, are possible capital
surcharges for systemically important banks, greater
emphasis on standalone national subsidiaries,
reduced interconnectedness within the system,
changes to capital regulations affecting both capital
and capital requirements, changes in compensation
practices, restrictions on certain types of financial
products, and greater separation of retail and
wholesale activities.
HSBC Bank, like all authorised institutions in
the UK, is subject to a ‘Special Resolutions Regime’
under the Banking Act 2009 which gives wide
powers in respect of UK banks and their parent