HSBC 2012 Annual Report Download - page 267

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
mean a different approach is applied to assets and liabilities. For example, management may assume a shorter life for
liabilities and a longer-term funding requirement for assets.
Contingent liquidity risk
Operating entities provide customers with committed facilities and committed backstop lines to the conduit vehicles
we sponsor. These facilities increase our funding requirements when customers draw down. The liquidity risk
associated with the potential drawdown on non-cancellable committed facilities is factored into our stressed scenarios
and limits are set for these facilities.
Management of cross-currency liquidity and funding risk
Our liquidity and funding risk framework also considers the ability of each entity to continue to access foreign
exchange markets under stress when a surplus in one currency is used to meet a deficit in another currency, for
example, by the use of the foreign currency swap markets. Where appropriate, operating entities are required to
monitor stressed coverage ratios and advances to core funding ratios for non-local currencies.
HSBC Holdings
(Audited)
HSBC Holdings’ primary sources of cash are dividends received from subsidiaries, interest on and repayment of
intra-group loans and interest earned on its own liquid funds. HSBC Holdings also raises ancillary funds in the debt
capital markets through subordinated and senior debt issuance. Cash is primarily used for the provision of capital to
subsidiaries, interest payments to debt holders and dividend payments to shareholders.
HSBC Holdings is also subject to contingent liquidity risk by virtue of loan and other credit-related commitments and
guarantees and similar contracts issued. Such commitments and guarantees are only issued after due consideration of
HSBC Holdings’ ability to finance the commitments and guarantees and the likelihood of the need arising.
HSBC Holdings actively manages the cash flows from its subsidiaries to optimise the amount of cash held at the
holding company level. The ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends
on, among other things, their respective regulatory capital requirements, statutory reserves, and financial and
operating performance. The wide range of our activities means that HSBC Holdings is not dependent on a single
source of profits to fund its dividend payments to shareholders.
Market risk
Overview of market risk in global businesses
The diagram below illustrates the main business areas where trading and non-trading market risks reside.
Trading risk
Risk
types
Non-trading risk
– Interest rates
– Foreign exchange and commodities
– Credit spreads
– Equities
Global
businesses
– Interest rates
– Credit spreads
– Foreign exchange (structural)
–GB&M
(including Balance Sheet Management
(‘BSM’))
GB&M
(including
BSM)
GPB CMB RBWM
Monitoring and limiting market risk exposures
(Audited)
We employ a range of tools to monitor and limit market risk exposures. These include sensitivity analysis, value at
risk (‘VAR’), stressed VAR and stress testing. While VAR provides the GMB with a measure of the market risk in
the Group, sensitivity analysis and VAR are more commonly utilised for the management of the business units.
Stress testing and stressed VAR complement these measures with potential losses arising from market turmoil.