HSBC 2008 Annual Report Download - page 146

HSBC HOLDINGS PLC
Report of the Directors: Impact of Market Turmoil
Background / Overview > Reclassification
144
Background and disclosure policy
(Audited)
As a result of the widespread deterioration in the
markets for securitised and structured financial
assets, and consequent disruption to the global
financial system since mid-2007, it has become
increasingly difficult to observe prices for structured
credit risk, including prime tranches of such risk as
the markets for these assets became illiquid. The
resulting constraint on the ability of financial
institutions to access wholesale markets to fund such
assets added additional downward pressure on all
asset prices. As a consequence, many financial
institutions have recorded considerable reductions in
the fair values of their asset-backed securities
(‘ABS’s) and leveraged structured transactions, most
significantly in sub-prime mortgages but in other
asset classes too.
In light of increasing illiquidity and the risk to
capital from further write-downs, many financial
institutions took steps during 2008 to reduce
leveraged exposures, build liquidity and raise
additional capital. However, credit conditions
suffered additional deterioration in the second half of
the year, as the economic outlook worsened and
unemployment rose, intensifying the pressure on the
global financial system. Volatility in money markets
also increased during the second half of 2008,
resulting in wider interest spreads, and markets for
securitised and structured financial assets continued
to be thoroughly constrained. This instability
triggered a series of significant events including the
default of a number of major financial institutions,
and the taking into public ownership of banks in a
number of countries.
Deterioration in the measured fair value of
assets supported by sub-prime mortgages continued
in 2008 with the primary market for all but US
government-sponsored issues remaining weak.
Spreads widened due to credit and liquidity concerns
as delinquencies on the underlying mortgages
continued to increase beyond the levels priced into
securitisations issued in recent years. The impact
widened beyond sub-prime related assets, with the
measured fair value of securities backed by Alt-A
collateral, in particular, suffering significant
deterioration.
During 2008, governments and central banks
worldwide took unprecedented measures designed to
stabilise and increase confidence in financial
markets. These measures included providing vast
amounts of liquidity via emergency funding,
extending guarantees of financial assets, and
launching various forms of rescue plans.
This section contains disclosures about the
effect of the recent market turmoil on HSBC’s
securitisation activities and other structured
products. HSBC’s principal exposures to the US and
the UK mortgage markets primarily take the form
of credit risk from direct loans and advances to
customers which were originated to be held to
maturity or refinancing, details of which are
provided on page 208.
Financial instruments which were most affected
by the market turmoil include exposures to direct
lending held at fair value through profit or loss and
ABSs, including mortgage-backed securities
(‘MBS’s) and collateralised debt obligations
(‘CDO’s), and exposures to and contingent claims
on monoline insurers in respect of structured credit
activities and leveraged finance transactions which
were originated to be distributed.
In accordance with HSBC’s policy to provide
meaningful disclosures that help investors and other
stakeholders understand the financial position,
performance and changes in the financial position of
the Group, the information provided in this section
goes beyond the minimum levels required by
accounting standards, statutory and regulatory
requirements and listing rules. In the specific context
of facilitating an understanding of the recent market
turmoil in markets for securitised and structured
assets, HSBC has considered the recommendations
relating to disclosure contained within the reports
issued by the Financial Stability Forum on
‘Enhancing Market and Institutional Resilience’
(April and October 2008), the Committee of
European Banking Supervisors on ‘Banks’
Transparency on Activities and Products Affected by
the Recent Market Turmoil’ (June and October
2008) and the International Accounting Standards
Board Expert Advisory Panel on ‘Measuring and
disclosing the fair value of financial instruments in
markets that are no longer active’ (October 2008). In
addition, HSBC has considered feedback from
investors, regulators and other stakeholders on the
disclosures that investors would find most useful.
The specific topics covered in respect of
HSBC’s securitisation activities and exposure to
structured products are as follows:
• overview of exposure;
• business model;
• risk management;
• accounting policies;
• nature and extent of HSBC’s exposures;
• fair values of financial instruments; and
• special purpose entities.