HSBC 2015 Annual Report Download - page 207

HSBC HOLDINGS PLC
205
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
risk categorisation of the operating entity originating the deposit, the nature of the customer and the size and pricing of the
deposit. No deposit is considered to be core in its entirety unless it is contractually collateralising a loan. The core deposit base
in each operating entity is considered to be a long-term source of funding and therefore is assumed not to be withdrawn in the
liquidity stress scenario that we use to calculate our principal liquidity risk metrics.
The three filters considered in assessing whether a deposit in any operating entity is core are:
• price: any deposit priced significantly above market or benchmark rates is generally treated as entirely non-core;
• size: depositors with total funds above certain monetary thresholds are excluded. Thresholds are established by considering
the business line and inherent liquidity risk categorisation; and
• line of business: the element of any deposit remaining after the application of the price and size filters is assessed on the
basis of the line of business with which the deposit is associated. The proportion of any customer deposit that can be
considered core under this filter is between 35% and 90%.
Repo transactions and bank deposits cannot be classified as core deposits.
Advances to core funding ratio
Core customer deposits are an important source of funding to finance lending to customers, and mitigate against reliance on
short-term wholesale funding. Limits are placed on operating entities to restrict their ability to increase loans and advances to
customers without corresponding growth in core customer deposits or long-term debt funding with a residual maturity beyond
one year; this measure is referred to as the ‘advances to core funding’ ratio.
Advances to core funding ratio limits are set by the RMM for the most significant operating entities, and by regional ALCOs
for smaller operating entities, and are monitored by ALCM teams. The ratio describes loans and advances to customers as a
percentage of the total of core customer deposits and term funding with a remaining term to maturity in excess of one year.
In general, customer loans are assumed to be renewed and are included in the numerator of the ratio, irrespective of the
contractual maturity date. Reverse repo arrangements are excluded from the advances to core funding ratio.
Stressed coverage ratios
Stressed coverage ratios are derived from stressed cash flow scenario analyses and express stressed cash inflows as a
percentage of stressed cash outflows over one-month and three-month time horizons.
The stressed cash inflows include:
• inflows (net of assumed haircuts) expected to be generated from the realisation of liquid assets; and
• contractual cash inflows from maturing assets that are not already reflected as a utilisation of liquid assets.
In line with the approach adopted for the advances to core funding ratio, customer loans are generally assumed not to
generate any cash inflows under stress scenarios and are therefore excluded from the numerator of the stressed coverage
ratio, irrespective of the contractual maturity date.
A stressed coverage ratio of 100% or higher reflects a positive cumulative cash flow under the stress scenario being monitored.
Group operating entities are required to maintain a ratio of 100% or more out to three months under the combined market-
wide and HSBC-specific stress scenario defined by the inherent liquidity risk categorisation of the operating entity concerned.
Compliance with operating entity limits is monitored by ALCM teams and reported monthly to the RMM for the main
operating entities and to regional ALCOs for the smaller operating entities.
Stressed scenario analysis
We use a number of standard Group stress scenarios designed to model:
• combined market-wide and HSBC-specific liquidity crisis scenarios; and
• market-wide liquidity crisis scenario.
These scenarios are modelled by all operating entities. The appropriateness of the assumptions for each scenario is reviewed
by ALCM regularly and formally approved by the RMM and the Board annually as part of the liquidity and funding risk appetite
approval process.
Stressed cash outflows are determined by applying a standard set of prescribed stress assumptions to the Group’s cash flow
model. Our framework prescribes the use of two market-wide scenarios and two further combined market-wide and HSBC-
specific stress scenarios of increasing severity. In addition to our standard stress scenarios, individual operating entities are
required to design their own scenarios to reflect specific local market conditions, products and funding bases.
The two combined market-wide and HSBC-specific scenarios model a more severe scenario than the market-wide scenario.
The relevant combined market-wide and HSBC-specific stress scenario that an operating entity manages to is based upon its
inherent liquidity risk categorisation. The key assumptions factored into the two combined market-wide and HSBC-specific
stress scenarios are summarised as follows:
• all non-core deposits are deemed to be withdrawn within three months (80% within one month), with the level of non-core
deposits dependent on the operating entity’s inherent liquidity risk categorisation;