HSBC 2008 Annual Report Download - page 161

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protection purchased were to be wholly ineffective
because, for example, the monoline insurer was
unable to meet its obligations. In order to illustrate
that risk, the value of protection purchased is shown
subdivided between those monolines that were rated
by S&P at ‘BBB or above’ at 31 December 2008,
and those that were ‘below BBB’ (‘BBB’ is the S&P
cut-off for an investment grade classification). As
certain monolines were downgraded during 2008,
exposure to monolines rated ‘below BBB’ at
31 December 2008 increased from the position as at
31 December 2007. The ‘Credit risk adjustment’
column indicates the valuation adjustment (the
provision) taken against the net exposures, and
reflects the assessed loss of value on purchased
protection arising from the deterioration in
creditworthiness of the monolines. These valuation
adjustments, which reflect a measure of the
irrecoverability of the protection purchased, have
been charged to the income statement.
HSBC’s exposure to derivative transactions entered into directly with monoline insurers
Notional
amount
Net exposure
before credit
risk adjustment12
Credit risk
adjustment13
Net exposure
after credit
risk adjustment
US$m US$m US$m US$m
At 31 December 2008
Derivative transactions with monoline counterparties
Monoline – BBB or above ....................................... 9,627 2,829 (740) 2,089
Monoline – below BBB ........................................... 2,731 1,104 (752) 352
12,358 3,933 (1,492) 2,441
At 31 December 2007
Derivative transactions with monoline counterparties
Monoline – BBB or above ....................................... 14,314 1,342 (133) 1,209
Monoline – below BBB ........................................... 1,120 214 (214) –
15,434 1,556 (347) 1,209
For footnotes, see page 162.
The above table can be analysed as follows.
HSBC has derivative transactions referenced to
underlying securities with a nominal value of
US$12.4 billion, whose value at 31 December 2008
indicated a potential claim against the protection
purchased from the monolines of some
US$3.9 billion. On the basis of a credit assessment
of the standing of the monolines, a provision of
US$1.5 billion has been taken, leaving
US$2.4 billion exposed, of which US$2.1 billion is
recoverable from monolines rated investment grade
at 31 December 2008. The provisions taken imply in
aggregate that 74 cents in the dollar will be
recoverable from investment grade monolines and
32 cents in the dollar from non-investment grade
monolines.
HSBC’s exposure to direct lending and
irrevocable commitments to lend to
monoline insurers
HSBC has outstanding liquidity facilities totalling
US$47 million to monoline insurers, of which
US$2 million was drawn at 31 December 2008
(2007: US$158 million, none drawn).
HSBC’s exposure to debt securities which
benefit from guarantees provided by
monoline insurers
Within both the trading and available-for-sale
portfolios, HSBC holds bonds that are ‘wrapped’
with a credit enhancement from a monoline insurer.
As the bonds are traded explicitly with the benefit of
this enhancement, any deterioration in the credit
profile of the monoline insurer is reflected in market
prices and, therefore, in the carrying amount of these
securities on HSBC’s balance sheet at 31 December
2008. For wrapped bonds held in the trading
portfolio, the mark-to-market movement has been
reflected through the income statement. For wrapped
bonds held in the available-for-sale portfolio, the
mark-to-market movement is reflected in equity
unless there is objective evidence of impairment, in
which case the impairment loss is reflected in the
income statement. No wrapped bonds were included
in the reclassification of financial assets described on
page 145.