HSBC 2011 Annual Report Download - page 199

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
The management of liquidity risk
(Audited)
We use a number of principal measures to manage liquidity risk, as described below.
Inherent liquidity risk categorisation
We categorise our operating entities into one of three categories to reflect our assessment of their inherent liquidity
risk, considering political, economic and regulatory factors within the operating entities’ host country, and also
factors specific to the entity itself, such as the local footprint, market share, balance sheet strength and control
framework. This assessment is used to determine the severity of the liquidity stress that we expect our operating
entities to be able to withstand, as expressed in our principal liquidity risk metrics, being the stressed one month
coverage ratio and the advances to core funding ratio.
Core deposits
Our internal framework is based on our categorisation of customer deposits into core and non-core based on our
expectation of the behaviour of these deposits during a liquidity stress. This characterisation takes into account the
inherent liquidity risk categorisation of the entity originating the deposit, the nature of the customer and the size and
pricing of the deposit. Deposits deemed to be core are considered to be a long-term source of funding and are
assumed to not be withdrawn in the liquidity stress we use for our principal liquidity risk metrics.
Advances to core funding ratio
We emphasise the importance of core customer deposits as a source of funds to finance lending to customers, and
discourage reliance on short-term professional funding. This is achieved by placing limits on banking entities which
restrict their ability to increase loans and advances to customers without corresponding growth in core customer
deposits or long-term debt funding; this measure is referred to as the ‘advances to core funding’ ratio.
Advances to core funding ratio limits are set by the Risk Management Meeting for the major Group banking entities
and monitored by Group Finance. Limits for other Group banking entities are set by the relevant regional ALCO
meeting. The ratio describes current loans and advances to customers as a percentage of the total of core customer
deposits and term funding with a remaining term to maturity in excess of one year. Loans and advances to customers
which are part of reverse repurchase arrangements, and where we receive securities which are deemed to be liquid,
are excluded from the advances to core funding ratio.
Stressed one month coverage ratio
The stressed one month coverage ratios are derived from projected cash flow scenario analyses, and express the
stressed cash inflows as a percentage of stressed cash outflows over a one month time horizon. Group sites are
required to target a ratio of 100% or greater.
Projected cash flow scenario analysis
We use a number of standard projected cash flow scenarios designed to model both Group-specific and market-wide
liquidity crises in which the rate and timing of deposit withdrawals and drawdowns on committed lending facilities
are varied, and the ability to access interbank funding and term debt markets and to generate funds from asset
portfolios are restricted. The scenarios are modelled by all Group banking entities and by HSBC Finance. The
appropriateness of the assumptions under each scenario is regularly reviewed. In addition to our standard projected
cash flow scenarios, individual entities are required to design their own scenarios to reflect specific local market
conditions, products and funding bases.
Limits for cumulative net cash flows under stress scenarios are set for each banking entity and for HSBC Finance.
Both ratio and cash flow limits reflect the local market place, the diversity of funding sources available and the
concentration risk from large depositors. Compliance with entity level limits is monitored centrally by Group Finance
and reported regularly to the Risk Management Meeting.
Liquidity behaviouralisation
Liquidity behaviouralisation will be applied to reflect our conservative assessment of the expected period for which
we are confident that we will have access to our liabilities, even under a severe liquidity stress scenario, and the