HSBC 2011 Annual Report Download - page 118

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Areas of special interest > Wholesale lending
116
Summary balance sheet exposures to core eurozone countries – sovereigns and agencies
(Audited)
France Germany
The
Netherlands Total
US$bn US$bn US$bn US$bn
At 31 December 2011 .............................................................................. 27 20 40 87
Eurozone banks
(Unaudited)
As a direct result of the eurozone sovereign debt
crisis, economic slowdown, uncertain property
markets and low credit growth, banks in the
eurozone area continue to face severe stress.
During the year, banks with direct exposure to
eurozone sovereigns saw their costs and access to
funding deteriorate. The concern about solvency of
weaker banks intensified further following the rescue
of Dexia Bank Belgium and the failure of MF Global
Holdings in the US, which lost access to the funding
markets due to its significant exposures to eurozone
sovereign debt. Market volatility and funding issues
were further exacerbated due to downgrades of
European banks by the major credit rating agencies,
citing concerns over their ability to absorb losses
due to possible sovereign debt default, reliance on
volatile wholesale funding markets and a perceived
weakening in government support. A crisis of
confidence emerged and banks became increasingly
reluctant to lend to each other through the inter-bank
market, prompting the ECB to take a number of
extraordinary measures to ease funding pressures in
the banking system. These included two unlimited
liquidity operations with a three-year maturity, the
widening of eligibility criteria for collateral,
assistance in providing access to liquidity for
more (medium-sized) banks and lowering reserve
requirements from 2% to 1%. The slowdown in the
inter-bank funding market and the ECB’s liquidity
measures resulted in the provision of a large part
of eurozone market liquidity being transferred to
central banks of highly rated countries, which was
a further indicator of de-risking by banks in the
eurozone. These measures helped to ease the
liquidity crisis in the short term, though medium-
term funding challenges remain.
The measures taken by policymakers and banks
to strengthen the sector have had mixed results.
Banks have deleveraged by selling certain types of
assets and investing in safe haven assets in a flight to
quality. The EBA conducted an industry-wide stress
test exercise in July 2011 with further updates in
October and December 2011. Those banks in which
a capital shortfall was identified were required to
submit plans to respective national regulators by
20 January 2012 and reach a minimum core tier 1
capital ratio of 9% by the end of June 2012. The
total capital shortfall covering 71 large banks was
calculated as €109bn (US$146bn) within the
peripheral eurozone countries, with Greece, Italy,
Portugal and Spain comprising 68% of the estimate.
HSBC successfully passed these stress tests
with a core tier 1 ratio of 10.5% under the modelled
adverse scenario, exceeding the post-stress minimum
core tier 1 capital requirement of 5% used in the
December 2011 update to the exercise.
We expect challenging market conditions for
eurozone banks to persist for most of 2012. There
are significant sovereign and bank refinancing
requirements and private sector deleveraging will
continue, the eurozone sovereign debt crisis will
remain and growth will stay low with the risk of
recession in some developed economies. In addition,
the pace of a multitude of regulatory reforms and
related initiatives that have been launched and/or
outlined by various policymakers will gather speed
in 2012, most notably in the areas of capital,
liquidity and systemic risk (Basel III, CRD IV and
capital surcharges), new banking structures in the
UK and revised supervisory structures.
Our exposure within the eurozone is largely
to the banks in stronger countries. We continue to
closely monitor and manage eurozone bank
exposures in the peripheral eurozone countries, and
are cautious in lending to this sector. We regularly
update our assessment of higher-risk eurozone banks
and adjust our risk appetite accordingly. Where
possible, we also seek to play a positive role in
maintaining credit and liquidity supply. We have
not recognised any impairment as a result of the
eurozone crisis, in respect of the exposures outlined
below.