HSBC 2015 Annual Report Download - page 174

Report of the Directors: Risk (continued)
Market risk
HSBC HOLDINGS PLC
172
• to define the rules and metrics for monitoring the
residual interest rate risk in the global businesses,
including any market risk that cannot be neutralised.
The different types of non-trading interest rate risk and the
controls which we use to quantify and limit exposure to
these risks can be categorised as follows:
• risk which is transferred to BSM and managed by BSM
within a defined market risk mandate, predominantly
through the use of fixed-rate liquid assets (government
bonds) held in held to maturity or available-for-sale
portfolios and/or interest rate derivatives which are
part of fair value hedging or cash flow hedging
relationships. This non-trading interest rate risk is
reflected in non-trading VaR, as well as in our net
interest income (see below) or economic value of
equity (‘EVE’) sensitivity;
• risk which remains outside BSM because it cannot be
hedged or which arises due to our behaviouralised
transfer pricing assumptions. This risk is not reflected
in non-trading VaR, but is captured by our net interest
income or EVE sensitivity and corresponding limits
are part of our global and regional risk appetite
statements for non-trading interest rate risk. A typical
example would be margin compression created by
unusually low rates in key currencies;
• basis risk which is transferred to BSM when it can be
hedged. Any residual basis risk remaining in the global
businesses is reported to ALCO. This risk is not reflected
in non-trading VaR, but is captured by our net interest
income or EVE sensitivity. A typical example would be a
managed rate savings product transfer-priced using a
Libor-based interest rate curve; and
• model risks which cannot be captured by non-trading
VaR, net interest income or EVE sensitivity, but are
controlled by our stress testing framework. A typical
example would be prepayment risk on residential
mortgages or pipeline risk.
Interest rate risk behaviouralisation
For our policies regarding interest risk behaviouralisation, see page
215 of the Appendix to Risk.
Third-party assets in Balance Sheet Management
For our BSM governance framework, see page 216 of the Appendix
to Risk.
Third-party assets in BSM decreased by 9% during 2015.
Deposits with central banks reduced by $32bn,
predominantly in North America and Europe, in line with
reduced repo and reverse repo activity. This reduced
activity is also reflected in a reduction of $29bn in
non-trading reverse repurchase agreements. Financial
investments increased by $29bn mainly due to increased
deployment of funds into securities in Asia.
Third-party assets in Balance Sheet Management
2015 2014
$m $m
Cash and balances at central banks 71,116 103,008
Trading assets 639 4,610
Loans and advances:
–
to banks 42,059 53,842
–
to customers 2,773 1,931
Reverse repurchase agreements 29,760 59,172
Financial investments 335,543 306,763
Other 4,277 2,470
At 31 December 486,167 531,796
Sensitivity of net interest income
The table on the next page sets out the effect on our
accounting net interest income (excluding insurance)
projections of a series of four quarterly parallel shocks of
25 basis points to the current market-implied path of
interest rates worldwide at the beginning of each quarter
from 1 January 2016. The sensitivities shown represent the
change in the expected base case net interest income that
would be expected under the two rate scenarios assuming
that all other non-interest rate risk variables remain
constant, and there are no management actions. In
deriving our base case net interest income projections, the
re-pricing rates of assets and liabilities used are derived
from current yield curves, thereby reflecting current
market expectations of the future path of interest rates.
The scenarios therefore represent interest rate shocks
which occur to the current market implied path of rates.
The interest rate sensitivities are indicative and based on
simplified scenarios. The limitations of this analysis are
discussed in the Appendix to Risk on page 216.
Assuming no management response, a sequence of such
rises (‘up-shock’) would increase expected net interest
income for 2016 by $1,251m (2015: $885m), while a
sequence of such falls (‘down-shock’) would decrease
planned net interest income by $2,258m (2015: $2,089m).
The net interest income (‘NII’) sensitivity of the Group can
be split into three key components; the structural sensitivity
arising from the four global businesses excluding BSM and
Markets, the sensitivity of the funding of the trading book
(Markets) and the sensitivity of BSM.
The structural sensitivity is positive in a rising rate
environment and negative in a falling rate environment.
The sensitivity of the funding of the trading book is
negative in a rising rate environment and positive in a
falling rate environment, and in terms of the impact on
profit the change in NII would be expected to be offset by
a similar change in net trading income. The sensitivity of
BSM will depend on its position. Typically, assuming no
management response, the sensitivity of BSM is negative
in a rising rate environment and positive in a falling rate
environment.
The NII sensitivity figures on the next page also incorporate
the effect of any interest rate behaviouralisation applied
and the effect of any assumed repricing across products
under the specific interest rate scenario. They do not
incorporate the effect of any management decision
to change the HSBC balance sheet composition.