HSBC 2008 Annual Report Download - page 251

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249
with the primary objective of ensuring, where
practical, that HSBC’s consolidated capital ratios
and the capital ratios of individual banking
subsidiaries are largely protected from the effect of
changes in exchange rates. This is usually achieved
by ensuring that, for each subsidiary bank, the ratio
of structural exposures in a given currency to risk-
weighted assets denominated in that currency is
broadly equal to the capital ratio of the subsidiary
in question.
The Group’s capital ratios were affected by the
strengthening US dollar in the latter part of 2008.
The effect on the Group’s consolidated tier 1 and
total ratios is estimated to have been a reduction of
approximately 40 basis points and approximately
50 basis points respectively. These movements
were within approved tolerance levels.
HSBC may also transact hedges where a
currency in which it has structural exposures is
considered to be significantly overvalued and it is
possible in practice to transact a hedge. Selective
hedges were in place during 2007 and 2008.
Hedging is undertaken using forward foreign
exchange contracts which are accounted for under
IFRSs as hedges of a net investment in a foreign
operation, or by financing with borrowings in the
same currencies as the functional currencies
involved. There was no ineffectiveness arising from
these hedges in the year ended 31 December 2008.
HSBC Holdings
(Audited)
As a financial services holding company, HSBC
Holdings has limited market risk activity. Its
activities predominantly involve maintaining
sufficient capital resources to support the Group’s
diverse activities; allocating these capital resources
across the Group’s businesses; earning dividend
and interest income on its investments in the
Group’s businesses; providing dividend payments
to HSBC Holding’s equity shareholders and interest
payments to providers of debt capital; and
maintaining a supply of short-term cash resources.
It does not take proprietary trading positions.
The main market risks to which HSBC
Holdings is exposed are interest rate risk and
foreign currency risk. Exposure to these risks arises
from short-term cash balances, funding positions
held, loans to subsidiaries, investments in long-
term financial assets and financial liabilities
including debt capital issued. The objective of
HSBC Holding’s market risk management strategy
is to reduce exposure to these risks and minimise
volatility in reported income, cash flows and
distributable reserves. Market risk for HSBC
Holdings is monitored by its Structural Positions
Review Group.
A number of cross currency interest rate
swaps entered into as part of HSBC Holdings’
management of interest rate risk arising on certain
long-term debt capital issues do not qualify for
hedge accounting treatment. Changes in the market
values of these swaps are taken directly to the
income statement. HSBC Holdings expects that
these swaps will be held to final maturity with the
accumulated changes in market value consequently
trending to zero.
Certain loans to subsidiaries of a capital nature
that are not denominated in the functional currency
of either the provider or the recipient are accounted
for as financial assets. Changes in the carrying
amount of these assets due to exchange differences
are taken directly to the income statement. These
loans, and the associated foreign exchange
exposures, are eliminated on a Group consolidated
basis.
The principal tools used in the management of
market risk are the projected sensitivity of HSBC
Holdings’ net interest income to future changes in
yield curves and interest rate gap re-pricing tables
for interest rate risk, and VAR for foreign exchange
rate risk.
Net interest income sensitivity
HSBC Holdings monitors net interest income
sensitivity over a 5-year time horizon reflecting the
longer-term perspective on interest rate risk
management appropriate to a financial services
holding company. The table below sets out the
effect on HSBC Holdings’ future net interest
income over a 5-year time horizon of an
incremental 25 basis point parallel fall or rise in all
yield curves worldwide at the beginning of each
quarter during the 12 months from 1 January 2009.
Assuming no management action, a series
of such rises would decrease HSBC Holdings’
planned net interest income for 2009 by
US$60 million (2008: decrease of US$23 million)
and decrease cumulative net interest income by
US$554 million over a 5-year period from
1 January 2009 (2008: decrease of US$104 million),
while a series of such falls would increase planned
net interest income by US$60 million (2008:
increase of US$23 million) and increase cumulative
net interest income by US$554 million over a
5-year period from 1 January 2009 (2008: increase
of US$104 million). These figures incorporate the
impact of any option features in the underlying
exposures.