HSBC 2012 Annual Report Download - page 265

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
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 Risk Management Meeting 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 three 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 three combined market-wide and HSBC-specific scenarios model a more severe scenario than the two market-
wide scenarios. 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 three
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• all non-core deposits are deemed to be withdrawn within three months (80% within one month), with the level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;
• the ability to access interbank funding and unsecured term debt markets ceases for the duration of the scenario;
• the ability to generate funds from illiquid asset portfolios (securitisation and secured borrowing) is restricted to
25-75% of the lower of issues in the last six months or the expected issues in the next six months. The restriction
is based on current market conditions and is dependent on the operating entity’s inherent liquidity risk
categorisation;
• the ability to access repo funding ceases for any asset not classified as liquid under our liquid asset policy for
the duration of the scenario;
• drawdowns on committed lending facilities must be consistent with the severity of the market stress being
modelled and dependent on the inherent liquidity risk categorisation of the operating entity;
• outflows are triggered by a defined downgrade in long-term ratings. We maintain an on-going assessment of
the appropriate number of notches to reflect;
• customer loans are assumed to be renewed at contractual maturity;
• interbank loans and reverse repos are assumed to run off contractually; and
• assets defined as liquid assets are assumed to be realised in cash ahead of their contractual maturity, after
applying a defined stressed haircut of up to 20%.
Liquid assets of HSBC’s principal operating entities
Stressed scenario analysis and the numerator of the coverage ratio include the assumed cash inflows that would be
generated from the realisation of liquid assets, after applying the appropriate stressed haircut. These assumptions are
made based on management’s expectation of when an asset is deemed to be realisable.
Liquid assets are unencumbered assets that meet the Group’s definition of liquid assets and are either held outright
or as a consequence of a reverse repo transaction with a residual contractual maturity beyond the time horizon of the
stressed coverage ratio being monitored. Any unencumbered asset held as a result of reverse repo transactions with a
contractual maturity within the time horizon of the stressed coverage ratio being monitored is excluded from the
stock of liquid assets and instead reflected as a contractual cash inflow.
Our framework defines the asset classes that can be assessed locally as high quality and realisable within one month
and between one month and three months. Each local ALCO has to be satisfied that any asset which may be treated
as liquid in accordance with the Group’s liquid asset policy will remain liquid under the stress scenario being
managed to.
Inflows from the utilisation of liquid assets within one month can generally only be based on confirmed
withdrawable central bank deposits, gold or the sale or repo of government and quasi-government exposures
generally restricted to those denominated in the sovereign’s domestic currency. High quality ABSs (predominantly
US MBSs) and covered bonds are also included but inflows assumed for these assets are capped.
Inflows after one month are also reflected for high quality non-financial and non-structured corporate bonds and
equities within the most liquid indices.