HSBC 2012 Annual Report Download - page 264

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Credit risk / Liquidity and funding
262
Core deposits
A key assumption of our internal framework is the categorisation of customer deposits into core and non-core based
on our expectation of the behaviour of these deposits during liquidity stress. This characterisation takes into account
the inherent liquidity 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and therefore is assumed not to be withdrawn in the liquidity stress scenario that we use to calculate our principal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 to 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 categorised 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 Risk Management Meeting for the most significant operating
entities, and by regional ALCOs for smaller operating entities, and are monitored by ALCM teams. The ratio
describes current 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 advances to core funding 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 the 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, in general, assumed not
to generate any cash inflows under stress scenarios and are therefore excluded from the numerator of the stressed
coverage ratios, 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 greater 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 Risk Management
Meeting 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 scenarios.