HSBC 2014 Annual Report Download - page 66

HSBC BANK PLC
Report of the Directors: Risk (continued)
64
transferred to ALCO to be managed centrally. ALCO
monitors and manages the advances to core funding
ratio and delegates the management of the liquid asset
portfolio and execution of the wholesale term debt
funding plan to BSM, requiring BSM to ensure the
group’s stressed coverage ratios remain above 100 per
cent out to three months.
The liquidity and funding risk transfer price consists of
two components:
• Liquidity recharge: the cost of holding the benchmark
liquid asset (the yield under the transfer price) to
meet stressed cash outflows. The benchmark liquid
asset is decided by ALCO and based on the weighted
average duration that can be achieved by investing in
level 1 liquid assets, with a residual duration of up to
one year.
• Liquidity premium: the assessed cost/value of term
funding (the yield over the transfer price) to pay for
term debt and core deposits.
The assessed cost of holding liquid assets is allocated to
the outflows modelled by the internal stressed coverage
ratio framework.
Liquidity premium is charged to any asset that affects the
three-month stressed coverage ratios based on the
assessed behaviouralised liquidity life of the asset, with
any asset affecting the ACF metric required to have a
minimum behaviouralised life of at least one year, and
the prevailing liquidity premium curve rate set by ALCO
(calibrated in line with Group principles). Core deposits
therefore share equally in the liquidity premiums
charged to the assets they support, after deducting the
cost of any term funding.
Contingent liquidity risk arising from
committed lending facilities
(Audited)
The group provides customers with committed facilities,
including committed backstop lines to conduit vehicles
sponsored by the group and standby facilities to
corporate customers. These facilities increase the
funding requirements of the group when customers
choose to raise drawdown levels above their normal
utilisation rates. The liquidity risk consequences of
increased levels of drawdown are analysed in the form of
projected cash flows under different stress scenarios.
The RMM sets limits for non-cancellable contingent
funding commitments by entity after due consideration
of each entity’s ability to fund them. The limits are split
according to the borrower, the liquidity of the underlying
assets and the size of the committed line.
The group’s consolidated securities investment conduits
include Solitaire and Mazarin Funding Limited (‘Mazarin’)
(see note 36). They issue asset-backed commercial paper
secured against the portfolio of securities held by them.
Although HSBC UK provides a liquidity facility, Solitaire
and Mazarin have no need to draw on it so long as HSBC
purchases the CP issued, which it intends to do for the
foreseeable future. At 31 December 2014, the
commercial paper issued by Solitaire and Mazarin was
entirely held by HSBC UK. Since HSBC controls the size of
the portfolio of securities held by these conduits, no
contingent liquidity risk exposure arises as a result
of these undrawn committed lending facilities.
In relation to commitment to customers, the table below
shows the level of undrawn commitments outstanding in
terms of the five largest single facilities and the largest
market sector.
The group’s contractual exposures as at 31 December monitored under the contingent liquidity risk limit structure
(Audited)
The group
2014
2013
£bn £bn
Commitments to conduits
Consolidated multi-seller conduits1
– total lines
7.9
7.6
– largest individual lines
0.6
0.4
Consolidated securities investment conduits – total lines
7.1
7.8
Commitments to customers
– five largest2
2.6
2.7
– largest market sector3
10.6
5.8
1. These exposures relate to the Regency multi-seller conduit. This vehicle provides funding to group customers by issuing debt secured by a
diversified pool of customer-originated assets.
2. These figures represent the undrawn balance for the five largest committed liquidity facilities provided to customers, other than those facilities
to conduits.
3. These figures represent the undrawn balance for the total of all committed liquidity facilities provided to the largest market sector, other than
those facilities to conduits.
Sources of funding
(Audited)
Our primary sources of funding are customer current
accounts and customer savings deposits payable on
demand or at short notice. The group issues wholesale
securities (secured and unsecured), including
subordinated debt to supplement its customer deposits
and change the currency mix, maturity profile or location
of liabilities. The ‘Funding sources and uses’ table below,
which provides a consolidated view of how the group’s
balance sheet is funded, should be read in the light
of the LFRF, which requires the group to manage liquidity
and funding risk on a stand-alone basis.
The table analyses the group consolidated balance sheet
according to the assets that primarily arise from
operating activities and the sources of funding primarily
supporting these activities. The assets and liabilities that