HSBC 2014 Annual Report Download - page 182

HSBC BANK PLC
Notes on the Financial Statements (continued)
180
34 Contingent liabilities, contractual commitments and guarantees
Accounting policy
Contingent liabilities
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security as well as contingent
liabilities related to legal proceedings or regulatory matters (see Note 37), are possible obligations that arise from past events whose
existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the
control of the group; or are present obligations that have arisen from past events but are not recognised because it is not probable
that settlement will require the outflow of economic benefits, or because the amount of the obligations cannot be reliably measured.
Contingent liabilities are not recognised in the financial statements but are disclosed unless the probability of settlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts which are not classified as insurance contracts are recorded initially at their fair value,
which is generally the fee received or present value of the fee receivable. Subsequently, financial guarantee liabilities are measured at
the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure required to settle the
obligations.
The group has issued financial guarantees and similar contracts to other group entities. The group elects to account for certain
guarantees as insurance contracts, in which case they are measured and recognised as insurance liabilities. This election is made on a
contract by contract basis, and is irrevocable.
The group
The bank
2014
2013
2014
2013
£m
£m
£m
£m
Guarantees and other contingent liabilities
Guarantees
17,012
15,529
13,459
11,606
Other contingent liabilities
71
40
70
39
17,083
15,569
13,529
11,645
Commitments1
Documentary credits and short-term trade-related transactions
3,073
2,814
1,814
1,475
Forward asset purchases and forward deposits placed
335
18
–
–
Undrawn formal standby facilities, credit lines and other
commitments to lend
2
132,114
120,185
94,971
78,942
135,522
123,017
96,785
80,417
1 Excluding capital commitments, which are separately disclosed below.
2 Based on original contractual maturity.
The table above discloses the nominal principal amounts of commitments, guarantees and other contingent liabilities.
They are mainly credit-related instruments which include both financial and non-financial guarantees and commitments
to extend credit. Nominal principal amounts represent the amounts at risk should contracts be fully drawn upon and
clients default. As a significant portion of guarantees and commitments is expected to expire without being drawn upon,
the total of these nominal principal amounts is not representative of future liquidity requirements.
Contingent liabilities arising from litigation against the group are disclosed in Note 37.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (‘FSCS’) has provided compensation to consumers following the collapse of a
number of deposit takers. The compensation paid out to consumers is currently funded through loans from the Bank of
England and HM Treasury which at 31 December 2014 stood at approximately £16 billion.
In order to repay the loan principal that is not expected to be recovered, the FSCS levies participating financial institutions.
In January 2015, the FSCS announced that the expected levy on participating financial institutions for Scheme Year
2015/2016 would be £347 million (2014/15: £399 million).
The bank could be liable to pay a further proportion of the outstanding borrowings that the FSCS has borrowed from HM
Treasury.
The ultimate FSCS levy to the industry as a result of the collapses cannot currently be estimated reliably as it is dependent
on various uncertain factors including the potential recoveries of assets by the FSCS and changes in the level of protected
deposits and the population of FSCS members at the time.
Guarantees
The group provides guarantees and similar undertakings on behalf of both third party customers and other entities within
the group. These guarantees are generally provided in the normal course of the group’s banking business. The principal
types of guarantees provided, and the maximum potential amount of future payments which the group could be required
to make at 31 December, were as follows: