HSBC 2002 Annual Report Download - page 268

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
266
Guarantee Type
Maximum potential amount of future payments
Guarantees in favour
of third parties
Guarantees by HSB
C
Holdings in favour
of other HSB
C
Group entities
US$m US$m
Acceptances and endorsements.................................................... 4,711 48
Financial guarantees .................................................................... 15,980 35,370
Standby letters of credit which are financial guarantees.............. 3,144 87
Other direct credit substitutes ...................................................... 7,002 16
Performance bonds ...................................................................... 4,464 209
Bid bonds..................................................................................... 191 34
Standby letters of credit related to particular transactions ........... 4,075 122
Other transaction-related guarantees............................................ 11,659 169
Other items................................................................................... 16
–
51,242 36,055
Acceptances and endorsements arise where HSBC agrees to guarantee payment on a negotiable instrument
drawn up by a customer. The accepted instrument is then sold into the market on a discounted basis.
Financial guarantees include undertakings to stand behind the obligations of customers or other HSBC entities
and to undertake these obligations if the other entity fails to do so. Intra-group items of this type will also
include guarantees of a capital nature, given to another HSBC entity and intended to be considered as capital by
the relevant regulatory authority.
Standby letters of credit which are financial guarantees are irrevocable obligations to pay a third party where a
customer fails to repay an outstanding commitment.
Other direct credit substitutes include re-insurance letters of credit and trade-related letters of credit which have
been issued without provision for the issuing entity to retain title to the underlying shipment.
Performance bonds, bid bonds, standby letters of credit and other transaction related guarantees are undertakings
where the requirement to make payment under the guarantee depends on the outcome of a future event, which is
independent of the creditworthiness of the customer.
Approximately two thirds of the above guarantees have terms of less than one year. Guarantees with a term of
more than one year will be subject to HSBC’ s annual credit review process.
Where HSBC has given a guarantee on behalf of a customer, HSBC will have the right to recover from that
customer any amounts paid under the guarantee. At 31 December 2002, HSBC held collateral amounted to some
US$9.4 billion which could be used to recover amounts paid under the above guarantees.
The above maximum amounts payable reflect HSBC’ s maximum exposure under a large number of individual
guarantee undertakings. The risks and exposures arising from guarantees are captured and managed in
accordance with HSBC’ s overall credit risk management policies and procedures.
In general, HSBC recognises fee income in respect of guarantee exposures over the period for which the risk is
borne. Where such income is received in advance, it is initially recorded as deferred income and is recognised as
income in the profit and loss account over the period of the guarantee.
The current carrying amount of these liabilities reflects HSBC’ s best estimate of the amount which will be
required to settle its obligation under guarantees which it has given. A liability is recognised only where HSBC
considers that it is more likely than not that an obligation exists under the guarantees.