Annual Financial Report - 29 of 48

RNS Number : 3835B

HSBC Holdings PLC

03 April 2013

 



Liquidity and funding

	Page		App1		Tables	Page
Liquidity and funding ................................			261
Primary sources of funding ............................			261
Liquidity and funding in 2012 ..................	204
Customer deposit markets ..............................	204
Wholesale funding market .............................	205
Management of liquidity and funding risk ...................................................................	205		261
Inherent liquidity risk categorisation ..............			261
Core deposits .................................................			262
Advances to core funding ratio ......................	205		262		Advances to core funding ratios ...................................	205
Stressed coverage ratios .................................	205		262		Stressed one-month and three-month coverage ratios ..	206
Stressed scenario analysis ...............................			262
Liquid assets of HSBC's principal operating entities .......................................	206		263		Liquid assets of HSBC's principal entities .....................	207
Net contractual cash flows .............................	207				Net cash flows for intra-bank loans and intra-group deposits and reverse repo, repo and short positions ..	208
Wholesale debt monitoring ............................			264
Liquidity behaviouralisation ...........................			264
Contingent liquidity risk arising from committed lending facilities .................	208		265		Group's contractual undrawn exposures monitored under  the contingent liquidity risk limit structure ...............	209
Sources of funding .....................................	209		261		Funding sources and uses ............................................	210
					Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities .................................................................	210
Funding of HSBC Finance ..............................	211
Encumbered and unencumbered assets ...	211				Summary of assets available to support potential future funding and collateral needs (on and off-balance sheet)........................................................................	211
The effect of active collateral management ...	212
Off-balance sheet collateral received and pledged for reverse repo and stock borrowing transactions ...............................................	212
Off-balance sheet non-cash collateral received and pledged for derivative transactions .......	212
Analysis of on-balance sheet encumbered and unencumbered assets ...................................	212				Analysis of on-balance sheet encumbered and unencumbered assets ...............................................	213
Additional contractual obligations ..................	213
Additional information ..................................	214
Contractual maturity of financial liabilities .................................................	214				Cash flows payable by HSBC under financial liabilities by remaining contractual maturities ........................	215
Management of cross-currency liquidity and funding risk ..........................................			265
HSBC Holdings ..........................................	215		265		Cash flows payable by HSBC Holdings under financial liabilities by remaining contractual maturities .........	216
Liquidity regulation ..................................	216
1. Appendix to Risk - risk policies and practices

Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due, or will have to do so at an excessive cost. The risk arises from mismatches in the timing of cash flows.

There were no material changes to our policies and practices for the management of liquidity and funding risks in 2012.

A summary of our current policies and practices regarding liquidity and funding is provided in the Appendix to Risk on page 261.

Our liquidity and funding risk management framework

The objective of our liquidity framework is to allow us to withstand very severe liquidity stresses. It is designed to be adaptable to changing business models, markets and regulations.

Our liquidity and funding risk management framework requires:

·  liquidity to be managed by operating entities on a stand-alone basis with no implicit reliance on the Group or central banks;

·  all operating entities to comply with their limits for the advances to core funding ratio; and

·  all operating entities to maintain a positive stressed cash flow position out to three months under prescribed Group stress scenarios.

Further details of the metrics are provided in the Appendix to Risk on page 261.

Liquidity and funding in 2012

(Unaudited)

The liquidity position of the Group strengthened in 2012, and we continued to enjoy strong inflows of customer deposits and maintained good access to wholesale markets. During 2012, customer accounts grew by 7% (US$86bn) while loans and advances to customers increased by 6% (US$57bn), leading to a small decrease in our advances to deposits ratio to 74% (2011: 75%).

HSBC UK (see footnote 40 on page 249) recorded an increase in its advances to core funding ratio to 106% at 31 December 2012 (2011: 100%). During 2012, HSBC UK continued to fund the majority of its growth in advances with growth in core deposits and remained within its advances to core funding limit.

The Hongkong and Shanghai Banking Corporation (see footnote 41 on page 249)

recorded a decrease in its advances to core funding ratio to 73% at 31 December 2012 (2011: 75%), mainly as a result of its core deposits increasing more than advances.

The completion of the sale of the US cards business and branch network during 2012 improved the liquidity and funding position of both HSBC Finance and HSBC USA (see footnote 42 on page 249), the latter recording a decrease in its advances to core funding ratio to 78% as at 31 December 2012 (2011: 86%).

Customer deposit markets

Customer accounts increased by 7% year on year. After excluding repo balances, the year-on-year increase was 7%.

Retail Banking and Wealth Management

We continued to grow our RBWM customer accounts, which increased by 6%, by providing differentiated products and services to different segments. The growth in retail deposits benefited from the wider macroeconomic trend of expanded money supply, customer deleveraging and weak loan growth, which partially offset the competitive pressure in some of our key markets for retail deposits and savers' reluctance to place funds into low-rate deposits.

Global Private Banking

As economic conditions remained subdued and interest rates continued to fall, part of the GPB customer base realigned its risk appetite and made use of the wide range of products available, with some asset reallocation to higher yielding off-balance sheet products including equities, funds and bonds. As a result, customer accounts decreased by 5% year on year.

Commercial Banking

Customer accounts increased by 11% year on year, with the majority of this increase resulting from increases in Payments and Cash Management accounts. The growth in these customer accounts and the strong growth in payment volumes demonstrated a funding source that is correlated to the operational services that HSBC provides to the CMB customer base.

Global Banking and Markets

Customer accounts increased by 8% year on year. After excluding repo balances with customers, GB&M deposits increased by 10% year on year, with the majority of this rise resulting from increases in Payments and Cash Management accounts. The growth in these customer accounts and the strong growth in payment volumes demonstrated a funding source that is strongly linked to the operational

services that HSBC provides to the GB&M customer base.

Wholesale funding markets

Wholesale funding markets gradually improved during 2012, although the volume of term debt issued by banks was low by recent standards, influenced to a significant extent by reduced bank funding requirements. Globally, market conditions across public wholesale funding markets were predominantly driven by sovereign-related and more general events in the eurozone.

HSBC continued to have good access to debt capital markets throughout 2012 with Group entities issuing US$10.5bn of public transactions of which US$9.8bn was senior unsecured debt.

In January 2013 the Group repaid €5bn (US$6.6bn) of funding raised through the ECB's Long Term Repo Operations ('LTRO'), leaving only €473m (US$624m) outstanding.

Management of liquidity and funding risk

(Audited)

Our liquidity and funding risk management framework ('LFRF') employs two key measures to define, monitor and control the liquidity and funding risk of each of our operating entities. The advances to core funding ratio is used to monitor the structural long-term funding position, and the stressed coverage ratio, incorporating Group-defined stress scenarios, is used to monitor the resilience to severe liquidity stresses.

The three principal entities listed in the tables below represented 62% (2011: 61%) of the Group's customer accounts (excluding repos). Including other principal entities, the percentage was 94% (2011: 96%).

Advances to core funding ratio

The table below shows the extent to which loans and advances to customers in our principal banking entities were financed by reliable and stable sources of funding.

Advances to core funding limits set for operating entities at 31 December 2012 ranged between 70% and 115%, except for one operating entity reported within the total of HSBC's other principal entities which operated with a limit of 125% during 2012. This limit has been reduced to 115% for 2013.

Advances to core funding ratios³⁹

(Audited)

	At 31 December
	2012		2011
	%		%
HSBC UK40
Year-end .............................	106		100
Maximum ............................	106		103
Minimum ............................	100		98
Average ...............................	103		101
The Hongkong and Shanghai Banking Corporation41
Year-end .............................	73		75
Maximum ............................	75		79
Minimum ............................	71		70
Average ...............................	73		76
HSBC USA42
Year-end .............................	78		86
Maximum ............................	86		90
Minimum ............................	68		80
Average ...............................	78		85
Total of HSBC's other principal entities43
Year-end .............................	91		86
Maximum ............................	92		90
Minimum ............................	85		86
Average ...............................	88		89

For footnotes, see page 249.

Stressed coverage ratios

The stressed coverage ratios tabulated below express stressed cash inflows as a percentage of stressed cash outflows over both one-month and three-month time horizons. Operating entities are required to maintain a ratio of 100% or greater out to three months.

Inflows included in the numerator of the stressed coverage ratio are those that are assumed to be generated from liquid assets net of assumed haircuts, and cash inflows related to assets contractually maturing within the time period.

In general, customer advances are assumed to be renewed and as a result do not generate a cash inflow.

Stressed one-month and three-month coverage ratios³⁹

(Audited)

	Stressed one-month coverage ratios at 31 December				Stressed three-month coverage Ratios at 31 December
	2012		2011		2012		2011
HSBC UK40	%		%		%		%
Year-end ........................................................................	114		116		103		102
Maximum .......................................................................	117		118		103		102
Minimum .......................................................................	108		109		101		99
Average ..........................................................................	112		113		102		100
The Hongkong and Shanghai Banking Corporation41
Year-end ........................................................................	129		123		126		118
Maximum .......................................................................	134		145		126		126
Minimum .......................................................................	123		116		118		110
Average ..........................................................................	129		124		123		116
HSBC USA42
Year-end ........................................................................	126		118		119		113
Maximum .......................................................................	137		128		130		122
Minimum .......................................................................	115		109		113		105
Average ..........................................................................	127		119		123		116
Total of HSBC's other principal entities43
Year-end ........................................................................	127		118		117		108
Maximum .......................................................................	127		120		117		113
Minimum .......................................................................	117		116		108		107
Average ..........................................................................	121		118		111		109

For footnotes, see page 249.

The stressed coverage ratios for HSBC UK remained broadly unchanged.

The stressed coverage ratios for The Hongkong and Shanghai Banking Corporation improved as the increase in core deposits exceeded the increase in loans and advances to customers. The resulting surplus was deployed in liquid assets, thereby improving the stressed coverage ratios.

The stressed coverage ratios for HSBC USA improved as a result of the net effect of selling the US Card and Retail Services business and non-strategic branches during 2012, which resulted in a reduction in core deposits that was lower than the reduction in loans and advances to customers. The resulting surplus was deployed in liquid assets, thereby improving the stressed coverage ratios.

The three-month stressed coverage ratio for the total of HSBC's other principal entities remained broadly unchanged. The one-month stressed coverage ratio improved as a result of an increase in contractual maturities between one month and three months.

Liquid assets of HSBC's principal operating entities

The table below shows the estimated liquidity value (before assumed haircuts) of assets categorised as liquid used for the purposes of calculating the three-month stressed coverage ratios, as defined under the LFRF.

Any unencumbered asset 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, as these assets are reflected as contractual cash inflows.

Liquid assets are held and managed on a standalone operating entity basis. Most of the 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 LFRF gives ultimate control of all unencumbered assets and sources of liquidity to Balance Sheet Management.

Liquid assets of HSBC's principal entities

	Estimated liquidity value44
	31 Dec 2012		30 Jun 2012		31 Dec 2011
	Audited		Unaudited		Audited
	US$m		US$m		US$m
HSBC UK40
Level 1 .....................................................................................................	138,812		120,690		114,596
Level 2 .....................................................................................................	374		475		344
Level 3 .....................................................................................................	27,656		9,320		-
Non-government assets ............................................................................	-		-		23,007
	166,842		130,485		137,947
The Hongkong and Shanghai Banking Corporation41
Level 1 .....................................................................................................	112,167		104,943		107,056
Level 2 .....................................................................................................	5,740		5,929
Level 3 .....................................................................................................	3,968		4,889		-
Non-government assets ............................................................................	-		-		2,151
	121,875		115,761		109,207
HSBC USA42
Level 1 .....................................................................................................	60,981		62,966		86,060
Level 2 .....................................................................................................	15,609		16,511		1,369
Level 3 .....................................................................................................	5,350		8,405		-
Other ........................................................................................................	6,521		6,238		-
Non-government assets ............................................................................	-		-		19,093
	88,461		94,120		106,522
Total of HSBC's other principal entities43
Level 1 .....................................................................................................	154,445		118,616		138,085
Level 2 .....................................................................................................	18,048		36,713		2,827
Level 3 .....................................................................................................	6,468		11,205		-
Other ........................................................................................................	2,447		-		-
Non-government assets ............................................................................	-		-		23,584
	181,408		166,534		164,496

For footnotes, see page 249.

Our liquid asset policy was refined at 1 January 2012 to apply a more granular classification of liquid assets, as described in the Appendix to Risk on page 261. Under the previous framework, liquid assets were classified into two categories: central government, central bank and US agency MBS exposures; and all other non-government exposures. Central government, central bank and US agency MBS exposures qualify as Level 1 or Level 2 under the new policy and are shown as such in the comparatives.

All assets held within the liquid asset portfolio are unencumbered.

Liquid assets held by HSBC UK increased as a result of a rise in customer accounts, which led to an increase in the level of non-core deposits and, consequently, liquid assets.

Liquid assets held by The Hongkong and Shanghai Banking Corporation also rose as a result of an increase in customer accounts. As the growth in core deposits exceeded the increases in loans and advances to customers, the difference was deployed into liquid assets and the level of liquid assets held grew accordingly.

Liquid assets held by HSBC USA decreased as a result of the sale of the US Card and Retail Services business and non‑strategic branches during 2012.

Net contractual cash flows

The following table quantifies the contractual cash flows from interbank and intergroup loans and deposits, and reverse repo, repo (including intergroup transactions) and short positions for the principal entities shown. These contractual cash inflows and outflows are reflected gross in the numerator and denominator, respectively, of the one and three-month stressed coverage ratios and should be considered alongside the level of liquid assets.

Outflows included in the denominator of the stressed coverage ratios include the principal outflows associated with the contractual maturity of wholesale debt securities reported in the table headed 'Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities' on page 210.

Net cash inflows/(outflows) for interbank and intra-group loans and deposits and reverse repo, repo and short positions

(Audited)

	At 31 December 2012				At 31 December 2011
	Cash flows within one month		Cash flows from one to three months		Cash flows within one month		Cash flows from one to three months
	US$m		US$m		US$m		US$m
Interbank and intra-group loans and deposits
HSBC UK40 ........................................................................	(16,464)		(1,429)		(12,832)		446
The Hongkong and Shanghai Banking Corporation41 .........	4,402		9,685		8,715		9,246
HSBC USA42 ......................................................................	(30,269)		(473)		(32,154)		213
Total of HSBC's other principal entities43 .........................	5,419		10,511		14,053		2,589
Reverse repo, repo, stock borrowing, stock lending and outright short positions (including intra-group)
HSBC UK40 ........................................................................	(4,184)		(13,776)		(558)		(171)
The Hongkong and Shanghai Banking Corporation41 .........	13,672		2,501		7,393		(487)
HSBC USA42 ......................................................................	(4,003)		62		(3,872)		(377)
Total of HSBC's other principal entities43 .........................	(31,951)		(231)		(6,597)		10,162

For footnotes, see page 249.

Net cash flow arising from interbank and intra-group loans and deposits

Under the LFRF, a net cash inflow within three months arising from interbank and intra-group loans and deposits will give rise to a lower liquid asset requirement. Conversely, a net cash outflow within three months arising from interbank and intra-group loans and deposits will give rise to a higher liquid assets requirement.

Net cash flow arising from reverse repo, repo, stock borrowing, stock lending and outright short positions (including intra-group)

A net cash inflow represents additional liquid resources, in addition to liquid assets, because any unencumbered asset held as a consequence of a reverse repo transaction with a residual contractual maturity within the stressed coverage ratio time period is not reflected as a liquid asset.

The impact of net cash outflow depends on whether the underlying collateral encumbered as a result will qualify as a liquid asset when released at the maturity of the repo. The majority of the Group's repo transactions are collateralised by liquid assets and, as such, any net cash outflow shown is offset by the return of liquid assets, which are excluded from the liquid asset table above.

Contingent liquidity risk arising from

committed lending facilities

(Audited)

The Group's operating entities provide commitments to various counterparts. In terms of liquidity risk, the most significant risk relates to committed lending facilities which, whilst undrawn, give rise to contingent liquidity risk, as these could be drawn during a period of liquidity stress. Commitments are given to customers and committed lending facilities are provided to consolidated multi-seller conduits, established to enable clients to access a flexible market-based source of finance (see page 209), consolidated securities investment conduits and third‑party sponsored conduits.

The consolidated securities investment conduits primarily represent Solitaire and Mazarin (see pages 186). These conduits issue asset-backed commercial paper secured against the portfolio of securities held by these conduits. At 31 December 2012, HSBC UK had undrawn committed lending facilities to these conduits of US$18bn (2011: US$22bn), of which Solitaire represented US$13bn (2011: US$16bn) and the remaining US$5.1bn (2011: US$6.2bn) pertained to Mazarin. At 31 December 2012, 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.

The table below shows the level of undrawn commitments to customers outstanding for the five largest single facilities and the largest market sector, and the extent to which they are undrawn.

The Group's contractual undrawn exposures at 31 December monitored under the contingent liquidity risk limit structure

(Audited)

	HSBC UK				HSBC USA				HSBC Canada				The Hongkong and Shanghai Banking Corporation
	2012		2011		2012		2011		2012		2011		2012		2011
	US$bn		US$bn		US$bn		US$bn		US$bn		US$bn		US$bn		US$bn
Commitments to conduits
Consolidated multi-seller conduits
-  total lines ......................	7.8		11.4		2.3		0.9		1.0		0.7		-		-
-  largest individual lines ...	0.7		0.7		0.5		0.3		0.8		0.5		-		-
Consolidated securities investment conduits - total lines .......................	18.1		22.1		-		-		-		-		-		-
Third party conduits - total lines .......................	-		-		0.8		1.4		-		-		-		-
Commitments to customers
-  five largest45 .................	6.0		3.4		6.0		5.7		1.7		1.8		2.1		1.9
-  largest market sector46 ..	11.0		7.5		7.5		6.5		4.5		3.8		2.4		2.5

For footnotes, see page 249.

Sources of funding

(Audited)

Our primary sources of funding are customer current accounts and customer savings deposits payable on demand or at short notice. We issue wholesale securities (secured and unsecured) to supplement our customer deposits and change the currency mix, maturity profile or location of our liabilities. 

The funding sources and uses table, which provides a consolidated view of how our balance sheet is funded, should be read in the light of the LFRF, which requires operating entities to manage liquidity and funding risk on a stand-alone basis.

The table analyses our 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 do not arise from operating activities are presented as a net balancing source or deployment of funds.

The level of customer accounts continued to exceed the level of loans and advances to customers. Excluding the effect of repos from customer accounts and reverse repos from loans and advances to customers, the adjusted advances to deposits ratio at 31 December 2012 was 73.4% (2011: 73.5%). The positive funding gap was predominantly deployed into liquid assets; cash and balances with central banks and financial investments, as required by the LFRF.

Loans and other receivables due from banks continued to exceed deposits taken from banks. The Group remained a net unsecured lender to the banking sector.

Funding sources and uses

(Audited)

	2012		2011			2012		2011
	US$m		US$m			US$m		US$m
Sources					Uses
Customer accounts ..................	1,340,014		1,253,925		Loans and advances to customers .............................................	997,623		940,429
- repos ....................................	28,618		30,785		- reverse repos ........................	34,651		41,419
- cash deposits ........................	1,311,396		1,223,140		- loans or other receivables .....	962,972		899,010
Deposits by banks ...................	107,429		112,822		Loans and advances to banks ...	152,546		180,987
- repos ....................................	11,949		17,617		- reverse repos ........................	35,461		41,909
- cash deposits ........................	95,480		95,205		- loans or other receivables .....	117,085		139,078
Debt securities issued ...............	119,461		131,013		Assets held for sale ..................	19,269		39,558
Liabilities of disposal groups					Trading assets .........................	408,811		330,451
held for sale ..........................	5,018		22,200		- reverse repos ........................	118,681		79,848
					- stock borrowing ...................	16,071		9,459
Subordinated liabilities .............	29,479		30,606		- other trading assets ..............	274,059		241,144
Financial liabilities designated at fair value ..............................	87,720		85,724		Financial investments .............	421,101		400,044
Liabilities under insurance					Cash and balances with
contracts ..............................	68,195		61,259		central banks ........................	141,532		129,902
Trading liabilities ....................	304,563		265,192		Net deployment in other
- repos ....................................	130,223		86,838		balance sheet assets and
- stock lending ........................	6,818		4,595		liabilities ...............................	104,126		107,463
- other trading liabilities .........	167,522		173,759
Total equity ............................	183,129		166,093
	2,245,008		2,128,834			2,245,008		2,128,834

Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities

(Unaudited)

	On demand		Due within 3 months		Due within 3 to 12 months		Total due within 1 year		Due between 1 and 5 years		Due after 5 years		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Debt securities issued ..............	2,419		41,139		50,697		94,255		97,198		31,217		222,670
Unsecured CDs and CP ...........	-		22,158		10,125		32,283		5,344		-		37,627
Unsecured senior MTNs .........	1		6,306		33,363		39,670		68,949		23,478		132,097
Unsecured senior structured notes ..................................	2,234		1,329		3,978		7,541		6,942		5,325		19,808
Secured covered bonds ............	-		51		2,467		2,518		8,840		542		11,900
Secured ABCP ........................	-		10,358		-		10,358		-		-		10,358
Secured ABS ...........................	16		782		646		1,444		4,557		707		6,708
Others ....................................	168		155		118		441		2,566		1,165		4,172
Subordinated liabilities ............	7		838		1,864		2,709		14,641		77,930		95,280
Subordinated debt securities ....	7		573		1,509		2,089		12,625		57,503		72,217
Preferred securities .................	-		265		355		620		2,016		20,427		23,063
	2,426		41,977		52,561		96,964		111,839		109,147		317,950

	On demand		Due within 3 months		Due within 3 to 12 months		Total due within 1 year		Due between 1 and 5 years		Due after 5 years		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Debt securities issued ..............	1,907		49,923		39,011		90,841		104,689		37,028		232,558
Unsecured CDs and CP ...........	280		28,918		8,143		37,341		9,713		26		47,080
Unsecured senior MTNs .........	122		3,704		26,541		30,367		80,884		29,081		140,332
Unsecured senior structured notes ..................................	1,505		575		1,858		3,938		1,878		1,156		6,972
Secured covered bonds ............	-		607		1,549		2,156		7,649		3,694		13,499
Secured ABCP ........................	-		10,446		-		10,446		-		-		10,446
Secured ABS ...........................	-		326		546		872		3,071		1,779		5,722
Others ....................................	-		5,347		374		5,721		1,494		1,292		8,507
Subordinated liabilities ............	6		913		6,004		6,923		15,134		78,569		100,626
Subordinated debt securities ....	6		694		5,552		6,252		12,908		58,051		77,211
Preferred securities .................	-		219		452		671		2,226		20,518		23,415
	1,913		50,836		45,015		97,764		119,823		115,597		333,184

The balances in the table above will not agree directly with those in our consolidated balance sheet as the table incorporates, on an undiscounted basis, all cash flows relating to principal and future coupon payments.

Funding of HSBC Finance

We do not expect the professional markets to be a source of funding for HSBC Finance in the future in view of the sale of the Card and Retail Services business and the run-off of its remaining portfolio. HSBC Finance expects to meet future funding needs by asset sales and affiliate funding. As a consequence, no new external third-party funding, including commercial paper, is being originated by HSBC Finance.

Encumbered and unencumbered assets

(Unaudited)

The objective of this disclosure is to facilitate an understanding of available and unrestricted assets that could be used to support potential future funding and collateral needs.

An asset is defined as encumbered if it has been pledged as collateral against an existing liability, and as a result is no longer available to the bank to secure funding, satisfy collateral needs or be sold to reduce the funding requirement. An asset is therefore categorised as unencumbered if it has not been pledged against an existing liability. Unencumbered assets are then further analysed into four separate sub-categories; 'readily realisable assets', 'other realisable assets', 'reverse repo/stock borrowing receivables and derivative assets' and 'cannot be pledged as collateral'.

The disclosure is not designed to identify assets which would be available to meet the claims of creditors or to predict assets that would be available to creditors in the event of a resolution or bankruptcy.

The table below summarises the total on and off-balance sheet assets that are capable of supporting future funding and collateral needs and shows the extent to which these assets are currently pledged for this purpose.

Summary of assets available to support potential future funding and collateral needs (on and off-balance sheet)

(Unaudited)

	2012
	US$bn
Total on-balance sheet assets .................	2,693
Less:
Reverse repo/stock borrowing receivables and derivative assets ......	562
Other assets that cannot be pledged as collateral ........................................	247
Total on-balance sheet assets that can support funding and collateral needs ....	1,884
Add off-balance sheet assets:
Fair value of collateral received from reverse repo/stock borrowing that is available to sell or repledge .............	296
Fair value of collateral received from derivatives that is available to sell or repledge ..........................................	6
Total assets that can support funding and collateral needs (on and off-balance sheet)	2,186
Less:
On-balance sheet assets pledged ..........	233
Off-balance sheet collateral received from reverse repo/stock borrowing which has been repledged or sold .....	203
Off-balance sheet collateral received from derivative transactions which has been repledged or sold ...............	1
Assets available to support funding and collateral needs ...................................	1,749

At 31 December 2012, the Group held US$1,749bn of unencumbered assets that could be used to support potential future funding and collateral needs, representing 80% of the total assets that can support funding and collateral needs (on and off-balance sheet). Of this amount, US$764bn (US$666bn on-balance sheet) were assessed to be readily realisable.

The effect of active collateral management

Collateral is managed on an operating entity basis, consistent with the operating entity management of liquidity and funding. The available collateral held by each operating entity is managed as a single collateral pool. In managing this collateral and deciding which collateral to pledge, each operating entity will seek to optimise the use of the available collateral pool, within the confines of the LFRF, irrespective of whether the collateral pledged is recognised on-balance sheet or was received in respect of reverse repo, stock borrowing or derivative transactions.

As a result of managing collateral in this manner, in terms of asset encumbrance presentation, we may encumber on-balance sheet holdings while maintaining available unencumbered off-balance sheet holdings, even though we are not seeking to directly finance the on-balance sheet holdings pledged.

In quantifying the level of encumbrance of negotiable securities, the encumbrance has been analysed on an individual security basis. In doing so where a particular security has been encumbered and HSBC has holdings of the security both on-balance sheet and off-balance sheet with the right to repledge, it is assumed for the purpose of this disclosure that the off-balance sheet holding is encumbered ahead of the on-balance sheet holding.

An on balance-sheet encumbered and off-balance sheet unencumbered asset will occur, for example, if we receive a specific security as a result of a reverse repo/stock borrow transaction, but finance the cash lent by pledging a generic collateral basket, even if the security received is eligible for the collateral basket pledged. This will also occur if we receive a generic collateral basket as a result of a reverse repo transaction but finance the cash lent by pledging specific securities, even if the securities pledged are eligible for the collateral basket.

Off-balance sheet collateral received and pledged for reverse repo and stock borrowing transactions

The fair value of assets accepted as collateral that HSBC is permitted to sell or repledge in the absence of default was US$296bn at 31 December 2012 (2011: US$302bn). The fair value of any such collateral that has been sold or repledged was US$203bn (2011: US$189bn). HSBC is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard reverse repo and stock borrowing transactions.

The fair value of collateral received and repledged in relation to reverse repo and stock borrowing are reported on a gross basis. The related balance sheet receivables and payables are reported on a net basis where required under IFRS netting criteria.

As a result of reverse repo and stock borrowing transactions where the collateral received can be sold or re-pledged, but has not been sold or re-pledged, we held US$93bn of unencumbered collateral available to support potential future funding and collateral needs at 31 December 2012.

Off-balance sheet non-cash collateral received and pledged for derivative transactions

The fair value of assets accepted as collateral related to derivative transactions that we are permitted to sell or repledge in the absence of default was US$6.0bn. The fair value of any such collateral that has been sold or repledged was US$0.8bn. We are obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to derivative transactions.

Analysis of on-balance sheet encumbered and unencumbered assets

The table on page 213 presents an analysis of on‑balance sheet holdings only, and shows the amounts of balance sheet assets that are encumbered. The table therefore excludes any available off-balance sheet holdings received in respect of reverse repo, stock borrowing or derivatives.

Analysis of on-balance sheet encumbered and unencumbered assets

(Unaudited)

	Encumbered		Unencumbered				Unencumbered - cannot be pledged as collateral
	Assets   pledged as    collateral		Readily   realisable          assets		Other   realisable          assets		Reverse   repo/stock   borrowing receivables & derivative          assets		Cannot be pledged as collateral		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Cash and balances at central banks .......	-		139,963		220		-		1,349		141,532
Items in the course of collection from other banks ......................................	-		-		-		-		7,303		7,303
Hong Kong Government certificates of indebtedness .....................................	-		-		-		-		22,743		22,743
Trading assets ......................................	143,019		116,395		10,330		134,752		4,315		408,811
- Treasury and other eligible bills ....	2,309		23,973		-		-		-		26,282
- debt securities ...............................	97,157		47,311		205		-		4		144,677
- equity securities ............................	5,592		35,420		622		-		-		41,634
- loans and advances to banks .........	20,588		1,909		2,582		50,376		2,816		78,271
- loans and advances to customers ..	17,373		7,782		6,921		84,376		1,495		117,947
Financial assets designated at fair value	-		447		610		-		32,525		33,582
- Treasury and other eligible bills ....	-		14		-		-		40		54
- debt securities ...............................	-		431		128		-		11,992		12,551
- equity securities ............................	-		2		482		-		20,384		20,868
- loans and advances to banks .........	-		-		-		-		55		55
- loans and advances to customers ..	-		-		-		-		54		54
Derivatives ..........................................	-		-		-		357,450		-		357,450
Loans and advances to banks ...............	1,191		4,722		81,802		35,461		29,370		152,546
Loans and advances to customers .........	40,792		85,626		827,903		34,664		8,638		997,623
Financial investments ..........................	46,678		300,255		7,990		-		66,178		421,101
- Treasury and other eligible bills ....	2,024		84,991		156		-		379		87,550
- debt securities ...............................	44,654		214,545		4,112		-		64,451		327,762
- equity securities ............................	-		719		3,722		-		1,348		5,789
Assets held for sale ..............................	-		-		19,269		-		-		19,269
Other assets .........................................	1,600		18,601		11,621		-		22,894		54,716
Current tax assets ................................	-		-		-		-		515		515
Prepayments and accrued income ........	-		-		-		-		9,502		9,502
Interest in associates and joint ventures .	-		-		17,480		-		354		17,834
Goodwill and intangible assets ..............	-		-		-		-		29,853		29,853
Property, plant and equipment ............	-		-		6,772		-		3,816		10,588
Deferred tax ........................................	-		-		-		-		7,570		7,570
	233,280		666,009		983,997		562,327		246,925		2,692,538

Cash collateral posted to satisfy margin requirements on derivatives, is reported as encumbered under trading assets within loans or advances to banks and loans and advances to customers.

The US$41bn of loans and advances to customers reported in the table above as encumbered have been pledged predominantly to support the issuance of secured debt instruments, such as covered bonds and ABSs including asset-backed commercial paper issued by consolidated multi-seller conduits. It also includes those pledged in relation to any other form of secured borrowing.

In total, the Group has pledged US$152bn of negotiable securities, predominantly as a result of market-making in securities financing to our clients.

Additional contractual obligations

Under the terms of our current collateral obligations under derivative contracts, we estimate based on the positions as at 31 December 2012 that HSBC could be required to post additional collateral of up to US$1.5bn (2011: US$3bn) in the event of a one notch downgrade in credit ratings, which would increase to US$2.5bn (2011: US$3.8bn) in the event of a two notch downgrade.

Definitions of the categories included in the table 'Analysis of encumbered and unencumbered assets':

·  Encumbered assets are assets on our balance sheet which have been pledged as collateral against an existing liability, and as a result are assets which are unavailable to the bank to secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements.

·  Unencumbered - readily realisable assets are assets regarded by the bank to be readily realisable in the normal course of business, to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for these purposes.

·  Unencumbered - other realisable assets are assets where there are no restrictions on their use to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, but are not readily realisable in the normal course of business in their current form.

·  Unencumbered - reverse repo/stock borrow receivables and derivative assets are assets related specifically to reverse repo, stock borrowing and derivative transactions. These are shown separately as these on-balance sheet assets cannot be pledged, but often give rise to the receipt of non-cash assets which are not recognised on the balance sheet, and can additionally be used to raise secured funding, meet additional collateral requirements or be sold.

·  Unencumbered - cannot be pledged as collateral are assets that have not been pledged but which we have assessed could not be pledged and therefore could not be used to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, for example assets held by the Group's insurance subsidiaries that back liabilities to policyholders and support the solvency of these entities.

Historically, the Group has not recognised any contingent liquidity value for assets other than those assets defined under the LFRF as being liquid assets, and any other negotiable instruments that under stress are assumed to be realisable after three months, even though they may currently be realisable. This approach has generally been driven by our risk appetite not to place any reliance on central banks. In a few cases, we have recognised the contingent value of discrete pools of assets, but the amounts involved are insignificant. As a result, we have reported the majority of our loans and advances to customers and banks in the category 'Other realisable assets' as management would need to perform additional actions in order to make the assets transferable and readily realisable.

Additional information

The amount of such assets reported in Note 36 on the Financial Statements may be greater than the book value of assets reported as being encumbered in the table on page 213. Examples of where such differences will occur are:

·    
ABSs and covered bonds where the amount of liabilities issued plus the required mandatory over-collateralisation is lower than the book value of assets pledged to the pool. Any difference is categorised in the table above as 'Unencumbered - readily realisable assets;'

·     negotiable securities held by custodians or settlement agents, where a floating charge has been given over the entire holding to secure intra-day settlement liabilities, are only reported as encumbered to the extent that we have a liability to the custodian or settlement agent at the reporting date, with the balance reported as 'Unencumbered - readily realisable assets;' and

·     assets pre-positioned with central banks or government agencies are only reported as encumbered to the extent that we have secured funding with the collateral. The unutilised pre‑positioned collateral is reported as 'Unencumbered - readily realisable assets.'

Contractual maturity of financial liabilities

(Audited)

The balances in the table below will not agree directly with those in our consolidated balance sheet as the table incorporates, on an undiscounted basis, all cash flows relating to principal and future coupon payments (except for trading liabilities and derivatives not treated as hedging derivatives). Undiscounted cash flows payable in relation to hedging derivative liabilities are classified according to their contractual maturities. Trading liabilities and derivatives not treated as hedging derivatives are included in the 'On demand' time bucket and not by contractual maturity. A maturity analysis of repos and debt securities in issue included in trading liabilities is presented on page 485.

In addition, loan and other credit-related commitments and financial guarantees and similar contracts are generally not recognised on our balance sheet. The undiscounted cash flows potentially payable under financial guarantees and similar contracts are classified on the basis of the earliest date they can be called.

Cash flows payable by HSBC under financial liabilities by remaining contractual maturities

(Audited)

	On        demand           US$m		Due within     3 months          US$m		Due between      3 and 12         months           US$m		Due between         1 and 5 years           US$m		Due after        5 years           US$m
At 31 December 2012
Deposits by banks ................................................	45,290		51,321		4,495		11,718		789
Customer accounts ...............................................	1,035,636		229,642		62,650		17,508		720
Trading liabilities .................................................	304,564		-		-		-		-
Financial liabilities designated at fair value ...........	7,778		1,211		7,825		42,683		62,279
Derivatives ..........................................................	351,367		355		995		4,785		1,855
Debt securities in issue ..........................................	64		37,938		37,167		45,433		6,034
Subordinated liabilities ..........................................	7		386		1,149		9,058		46,322
Liabilities of disposal groups held for sale47 ..........	1,416		993		707		201		24
Other financial liabilities ......................................	26,963		31,557		5,381		3,467		829
	1,773,085		353,403		120,369		134,853		118,852
Loan and other credit-related commitments .........	375,818		76,394		51,330		57,506		18,421
Financial guarantees and similar contracts ............	14,321		5,506		12,104		9,266		3,796
	2,163,224		435,303		183,803		201,625		141,069
At 31 December 2011
Deposits by banks ................................................	47,659		59,096		3,578		11,048		997
Customer accounts ...............................................	914,762		252,226		72,993		20,508		1,094
Trading liabilities .................................................	265,192		-		-		-		-
Financial liabilities designated at fair value ...........	7,066		930		9,789		39,915		57,295
Derivatives ..........................................................	340,394		394		497		2,858		1,007
Debt securities in issue ..........................................	117		48,465		27,520		57,507		7,019
Subordinated liabilities ..........................................	6		528		1,834		9,616		47,715
Liabilities of disposal groups held for sale47 ..........	3,108		1,721		1,045		211		150
Other financial liabilities ......................................	25,452		28,137		5,845		2,023		1,377
	1,603,756		391,497		123,101		143,686		116,654
Loan and other credit-related commitments .........	355,366		65,245		94,120		111,061		29,113
Financial guarantees and similar contracts ............	12,460		7,585		12,107		5,899		1,273
	1,971,582		464,327		229,328		260,646		147,040

For footnote, see page 249.

HSBC Holdings

(Audited)

During 2012, HSBC Holdings issued US$2.0bn of senior debt (2011: US$5.3bn). The eligibility requirements for non-equity instruments under Basel III rules have not been clearly defined in the UK, so HSBC Holdings issued no debt instruments which qualified as capital in 2012 (2011: nil).

The balances in the table below will not agree directly with those on the balance sheet of HSBC Holdings as the table incorporates, on an undiscounted basis, all cash flows relating to principal and future coupon payments (except for
derivatives not treated as hedging derivatives). Undiscounted cash flows payable in relation to hedging derivative liabilities are classified according to their contractual maturities. Derivatives not treated as hedging derivatives are included in the 'On demand' time bucket.

In addition, loan commitments and financial guarantees and similar contracts are generally not recognised on our balance sheet. The undiscounted cash flows potentially payable under financial guarantees and similar contracts are classified on the basis of the earliest date they can be called.

Cash flows payable by HSBC Holdings under financial liabilities by remaining contractual maturities

(Audited)

	On        demand		Due within      3 months		Due between       3 and 12         months		Due between 1 and 5 years		Due after        5 years
	US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Amounts owed to HSBC undertakings ..............	3,032		604		1,096		1,918		7,570
Financial liabilities designated at fair value ......	-		269		807		5,345		31,970
Derivatives .....................................................	760		-		-		-		-
Debt securities in issue .....................................	-		36		107		1,946		1,487
Subordinated liabilities .....................................	-		205		614		3,273		25,049
Other financial liabilities .................................	-		394		211		-		-
	3,792		1,508		2,835		12,482		66,076
Loan commitments .........................................	1,200		-		-		-		-
Financial guarantees and similar contracts .......	49,402		-		-		-		-
	54,394		1,508		2,835		12,482		66,076
At 31 December 2011
Amounts owed to HSBC undertakings ..............	-		1,110		81		1,428		-
Financial liabilities designated at fair value ......	-		281		3,530		4,987		28,988
Derivatives .....................................................	1,067		-		-		-		-
Debt securities in issue .....................................	-		35		104		1,975		1,490
Subordinated liabilities .....................................	-		216		649		3,461		27,558
Other financial liabilities .................................	-		1,252		208		-		-
	1,067		2,894		4,572		11,851		58,036
Loan commitments .........................................	1,810		-		-		-		-
Financial guarantees and similar contracts .......	49,402		-		-		-		-
	52,279		2,894		4,572		11,851		58,036

Liquidity regulation

(Unaudited)

In December 2010, the Basel Committee published the 'International framework for liquidity risk measurement, standards and monitoring'. The framework comprises two liquidity metrics: the liquidity coverage ratio ('LCR') and the net stable funding ratio ('NSFR'). The ratios are subject to an observation period that began in 2011, and are expected to become established standards by 2015 and 2018, respectively. During the observation period, the standards are under review by the Basel Committee. In January 2013, the Basel Committee announced several changes to the calibration of the LCR which

included reducing the outflow applied to non-operational non-financial corporate deposits from 75% to 40% and reducing the outflow applied to committed liquidity facilities from 100% to 30%.

A significant level of interpretation is required applying the definitions as currently drafted, in particular, the definition of operational deposits. Uncertainty around LCR also arises from the fact that the implementation of the Basel LCR framework still requires EU endorsement. In addition, the final calibration of the NSFR is highly uncertain and is expected to remain so, with no announcement on this expected from the Basel Committee until 2014.

 

END

 

 

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