HSBC 2011 Annual Report Download - page 198

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Liquidity and funding
196
Liquidity and funding
(Audited)
The management of liquidity and funding is primarily undertaken locally in our operating entities in compliance with
policies and limits set by the Risk Management Meeting. These limits vary according to the depth and the liquidity of
the markets in which the entities operate. Our general policy is that each banking entity should manage its liquidity
and funding risk on a standalone basis.
The objective of our liquidity and funding management framework is to ensure that all foreseeable funding
commitments can be met when due, and that access to the wholesale markets is co-ordinated and cost-effective.
To this end, we maintain a diversified funding base comprising core retail and corporate customer deposits and
institutional balances. We augment this with wholesale funding and portfolios of highly liquid assets diversified
by currency and maturity which are held to enable us to respond quickly and smoothly to unforeseen liquidity
requirements.
We adapt our liquidity and funding risk management framework in response to changes in the mix of business that
we undertake, and to changes in the nature of the markets in which we operate. We also seek to continuously evolve
and strengthen our liquidity and funding risk management framework.
We employ a number of measures to monitor liquidity risk. We also manage our intra-day liquidity positions so
that we are able to meet payment and settlement obligations on a timely basis. Payment flows in real time gross
settlement systems, expected peak payment flows and large time-critical payments are monitored during the day
and the intra-day collateral position is managed so that there is liquidity available to meet payments.
Policies and procedures
(Audited)
It is our policy that each banking entity should manage its liquidity and funding risk on a standalone basis.
Exceptions are permitted for certain short-term treasury requirements and start-up operations or for branches which
do not have access to local deposit markets. These entities are funded from our largest banking operations and within
clearly defined internal and regulatory guidelines and limits. The limits place formal restrictions on the transfer of
resources between our entities and reflect the broad range of currencies, markets and time zones within which we
operate.
Elements of our liquidity and funding management process
• 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 and advances to core funding ratios against internal and regulatory requirements;
• maintaining a diverse range of funding sources with 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 ensure 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 our funding,
and we place considerable importance on maintaining their stability. For deposits, stability depends upon preserving
depositor confidence in our capital strength and liquidity, and on competitive and transparent pricing.
We also access professional markets in order to obtain funding for non-banking subsidiaries that do not accept
deposits, to align asset and liability maturities and currencies and to maintain a presence in local money markets. In
aggregate, our banking entities are liquidity providers to the interbank market, placing significantly more funds with
other banks than they borrow. The main operating subsidiary that does not accept deposits is HSBC Finance, which
is funded principally by taking term funding in the professional markets.