HSBC 2006 Annual Report Download - page 215

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Liquidity and funding management
(Audited)
Liquidity risk is the risk that HSBC does not have
sufficient financial resources to meet its obligations
when they fall due, or will have to do so at excessive
cost. This risk can arise from mismatches in the
timing of cash flows. Funding risk (a particular form
of liquidity risk) arises when the necessary liquidity
to fund illiquid asset positions cannot be obtained at
the expected terms and when required.
The objective of HSBC’s liquidity and funding
management is to ensure that all foreseeable funding
commitments and deposit withdrawals can be met
when due, and that wholesale market access is
co-ordinated and cost effective. It is HSBC’s
objective to maintain a diversified and stable funding
base comprising core retail and corporate customer
deposits and institutional balances. This is
augmented by wholesale funding and portfolios of
highly liquid assets which are diversified by
currency and maturity, with the objective of enabling
HSBC to respond quickly and smoothly to
unforeseen liquidity requirements.
HSBC requires operating entities to maintain a
strong liquidity position and to manage the liquidity
profile of their assets, liabilities and commitments
with the objective of ensuring that cash flows are
appropriately balanced and all obligations are met
when due.
Policies and procedures
(Audited)
The management of liquidity and funding is
primarily carried out locally in the operating
companies of HSBC in accordance with practices
and limits set by the Group Management Board.
These limits vary by local financial unit to take
account of the depth and liquidity of the market in
which the entity operates. It is HSBC’s general
policy that each banking entity should be self-
sufficient with regards to funding its own operations.
Exceptions are permitted to facilitate the efficient
funding of certain short-term treasury requirements
and start-up operations or branches which do not
have access to local deposit markets, all of which are
funded under clearly defined internal and regulatory
guidelines and limits from HSBC’s largest banking
operations. These internal and regulatory limits and
guidelines serve to place formal limitations on the
transfer of resources between HSBC entities and are
necessary to reflect the broad range of currencies,
markets and time zones within which HSBC
operates.
The Group’s liquidity and funding management
process includes:
• projecting cash flows by major currency and
considering the level of liquid assets necessary
in relation thereto;
• monitoring balance sheet liquidity ratios against
internal and regulatory requirements;
• maintaining a diverse range of funding sources
with adequate back-up facilities;
• managing the concentration and profile of debt
maturities;
• maintaining debt financing plans;
• monitoring depositor concentration in order to
avoid undue reliance on large individual
depositors and ensuring a satisfactory overall
funding mix; and
• maintaining liquidity and funding contingency
plans. These plans identify early indicators of
stress conditions and describe actions to be
taken in the event of difficulties arising from
systemic or other crises, while minimising
adverse long-term implications for the business.
Primary sources of funding
(Audited)
Current accounts and savings deposits payable on
demand or at short notice form a significant part of
HSBC’s funding. HSBC places considerable
importance on maintaining the stability of these
deposits.
The stability of deposits, which are a primary
source of funding, depends upon maintaining
depositor confidence in HSBC’s capital strength and
liquidity, and on competitive and transparent
deposit-pricing strategies.
HSBC also accesses professional markets in
order to provide funding for non-banking
subsidiaries that do not accept deposits, to maintain a
presence in local money markets and to optimise the
funding of asset maturities not naturally matched by
core deposit funding. In aggregate, HSBC’s banking
entities are liquidity providers to the inter-bank
market, placing significantly more funds with other
banks than they borrow.
The main operating subsidiary that does not
accept deposits is HSBC Finance, which funds itself
principally through taking term funding in the
professional markets and through the securitisation
of assets. At 31 December 2006, US$150 billion
(2005: US$132 billion) of HSBC Finance’s liabilities
were drawn from professional markets, utilising a