HSBC 2014 Annual Report Download - page 65

HSBC BANK PLC
Report of the Directors: Risk (continued)
63
Unencumbered assets held as a consequence of a
reverse repo transaction with a residual contractual
maturity within the stressed coverage ratio time period
and unsecured interbank loans maturing within three
months are not included in liquid assets, but are treated
as contractual cash inflows. This table is prepared on a
different basis to the liquid asset disclosure for HSBC UK
in the Group Annual Report and Accounts (‘ARA’), which
shows the stock of unencumbered liquid assets as at the
reporting date, adjusted for the impact of repos, reverse
repos and collateral swaps maturing within three
months, as for the Group ARA the liquidity value of these
transactions is reflected as a contractual cash flow
reported in the net contractual cash flow table.
Liquid assets are held and managed on a standalone
operating entity basis. The vast majority of liquid assets
shown are held directly by each operating entity’s
Balance Sheet Management function, primarily for the
purpose of managing liquidity risk, in line with the LFRF.
Liquid assets also include any unencumbered liquid
assets held outside Balance Sheet Management for any
other purpose. The Group’s liquidity risk management
framework gives ultimate control of all unencumbered
assets and sources of liquidity to Balance Sheet
Management.
Liquid assets
(Audited)
Estimated liquidity value
at 31 December
2014
2013
£m
£m
HSBC UK
Level 1
94,478
90,980
Level 2
2,069
317
Level 3
20,091
19,594
116,638
110,891
HSBC France
Level 1
10,838
12,087
Level 2
241
98
Level 3
2,221
2,268
13,300
14,453
Total of other principal group entities
Level 1
7,442
8,091
Level 2
490
614
Level 3
1,987
1,144
9,919
9,849
The Group’s liquid asset policy is to apply a more
granular classification of liquid assets. These
classifications are as follows:
• Level 1 - Central banks, central government securities
of countries and currencies with a highly liquid
market and certain supranationals and multilateral
development banks;
• Level 2 – Local and regional governments, public
sector entities, secured covered bonds, pass-through
ABSs, and gold; and
• Level 3 – Unsecured non-financial entity securities
and equities listed on recognised exchanges and
within liquid indices.
All assets held within the liquid asset portfolio are
unencumbered.
Liquid assets held by HSBC UK increased as a result of a
rise in non-core customer accounts, from which the
funds were placed in liquid assets.
Liquidity behaviouralisation
(Unaudited)
Liquidity behaviouralisation is applied to reflect our
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
expected period for which we must assume that we will
need to fund our assets. Behaviouralisation is applied
when the contractual terms do not reflect the expected
behaviour. Liquidity behaviouralisation is reviewed and
approved by local ALCO in compliance with policies set
by the RMM. Our approach to liquidity risk management
will often mean different behaviouralisation assumptions
are applied to assets and liabilities. For example,
management may assume a shorter life for liabilities and
a longer-term funding requirement for assets. All core
deposits are assumed under the Group’s core/non-core
and advances to core funding frameworks to have a
liquidity behaviouralised life beyond one year and to
represent a homogeneous source of core funding. The
behaviouralisation of assets is more granular and seeks
to differentiate the period for which we assume that we
will need to fund the asset.
Funds transfer pricing
(Unaudited)
Our funds transfer pricing policies give rise to a two-
stage funds transfer pricing approach, reflecting the fact
that we separately manage interest rate risk and liquidity
and funding risk under different assumptions. They have
been developed to be consistent with our risk
management frameworks. Each operating entity is
required to apply the Group’s transfer pricing policy
framework to determine for each material currency the
most appropriate interest rate risk transfer pricing curve,
a liquidity premium curve (which is the spread over the
interest rate risk transfer pricing curve) and a liquidity
recharge assessment (which is the spread under or over
the interest rate risk transfer pricing curve).
The interest rate risk transfer pricing policy seeks to
ensure that all market interest rate risk arising
structurally from non-trading (banking book) assets and
liabilities, which is capable of being neutralised
externally in the market or neutralised internally by off-
setting transfers, is transferred to Balance Sheet
Management (‘BSM’) to be managed centrally as non-
traded market risk. For each material currency each
operating entity employs a single interest rate risk
transfer pricing curve. The transfer price curve used for
this purpose reflects how BSM in each operating entity is
best able to neutralise the interest rate risk in the market
at the point of transfer. Where basis risk can be
identified between the re-pricing basis of an external
asset or external liability and the re-pricing basis of the
interest rate risk transfer pricing curve, this basis risk
may be transferred to BSM provided it can neutralise the
basis risk in the market.
Liquidity and funding risk is transfer priced
independently from interest rate risk because the
liquidity and funding risk of an operating entity is