Annual Financial Report - Part 4

RNS Number : 4599C

HSBC Holdings PLC

22 February 2022

 

Risk
Our risk review outlines our approach to risk management, how we identify and monitor top and emerging risks, and the actions we take to mitigate them. In addition, it explains our material banking risks, including how we manage capital.
	Page
Our approach to risk	121
Our risk appetite	121
Risk management	121
Key developments in 2021	124
Top and emerging risks	124
Externally driven	124
Internally driven	129
Areas of special interest	131
Risks related to Covid-19	131
Climate-related risks	131
Our material banking risks	135
Credit risk	137
Treasury risk	189
Market risk	203
Resilience risk	207
Regulatory compliance risk	208
Financial crime risk	208
Model risk	209
Insurance manufacturing operations risk	210

Investing in technology to screen suspicious activities

We screen the names of more than 112 million personal and corporate customers every day against external and internal watchlists to identify potential financial crime risks and their impact on our customers and organisation. This currently generates approximately 350,000 alerts for our colleagues to review each month. In October, working with technology company Silent Eight, we launched a global automated alert adjudication tool for name screening, which will be able to close 50% of the false positives without human intervention. This will help us increase the speed and accuracy of monitoring adherence to risk appetite, while reducing the cost of compliance.

Our approach to risk

Our risk appetite

We recognise the importance of a strong culture, which refers to our shared attitudes, values and standards that shape behaviours related to risk awareness, risk taking and risk management. All our people are responsible for the management of risk, with the ultimate accountability residing with the Board.

We seek to build our business for the long term by balancing social, environmental and economic considerations in the decisions we make. Our strategic priorities are underpinned by our endeavour to operate in a sustainable way. This helps us to carry out our social responsibility and manage the risk profile of the business. We are committed to managing and mitigating climate-related risks, both physical and transition risks, and continue to incorporate consideration of these into how we manage and oversee risks internally and with our customers.

The following principles guide the Group's overarching appetite for risk and determine how our businesses and risks are managed.

Financial position

• We aim to maintain a strong capital position, defined by regulatory and internal capital ratios.

• We carry out liquidity and funding management for each operating entity, on a stand-alone basis.

Operating model

• We seek to generate returns in line with our risk appetite and strong risk management capability.

• We aim to deliver sustainable and diversified earnings and consistent returns for shareholders.

Business practice

• We have zero tolerance for any of our people knowingly engaging in any business, activity or association where foreseeable reputational risk or damage has not been considered and/or mitigated.

• We have no appetite for deliberately or knowingly causing detriment to consumers, or incurring a breach of the letter or spirit of regulatory requirements.

• We have no appetite for inappropriate market conduct by any member of staff or by any Group business.

• We are committed to managing the climate risks that have an impact on our financial position, and delivering on our net zero ambition.

Enterprise-wide application

Our risk appetite encapsulates the consideration of financial and non-financial risks. We define financial risk as the risk of a financial loss as a result of business activities. We actively take these types of risks to maximise shareholder value and profits. Non-financial risk is the risk to achieving our strategy or objectives as the result of failed internal processes, people and systems, or from external events.

Our risk appetite is expressed in both quantitative and qualitative terms and applied at the global business level, at the regional level and to material operating entities. Every three years, the Global Risk and Compliance function commissions an external independent firm to review the Group's approach to risk appetite and to help ensure that it remains in line with market best practice and regulatory expectations. This review was last carried out in 2019 and confirmed the Group's risk appetite statement ('RAS') remains aligned to best practices, regulatory expectations and strategic goals. Our risk appetite continues to evolve and expand its scope as part of our regular review process.

The Board reviews and approves the Group's risk appetite twice a year to make sure it remains fit for purpose. The Group's risk appetite is considered, developed and enhanced through:

• an alignment with our strategy, purpose, values and customer needs;

• trends highlighted in other Group risk reports;

• communication with risk stewards on the developing risk landscape;

• strength of our capital, liquidity and balance sheet;

• compliance with applicable laws and regulations;

• effectiveness of the applicable control environment to mitigate risk, informed by risk ratings from risk control assessments;

• functionality, capacity and resilience of available systems to manage risk; and

• the level of available staff with the required competencies to manage risks.

We formally articulate our risk appetite through our RAS. Setting out our risk appetite ensures that we agree a suitable level of risk for our strategy. In this way, risk appetite informs our financial planning process and helps senior management to allocate capital to business activities, services and products.

The RAS consists of qualitative statements and quantitative metrics, covering financial and non-financial risks. It is applied to the development of business line strategies, strategic and business planning and remuneration. At a Group level, performance against the RAS is reported to the Group Risk Management Meeting ('RMM') alongside key risk indicators to support targeted insight and discussion on breaches of risk appetite and any associated mitigating actions. This reporting allows risks to be promptly identified and mitigated, and informs risk-adjusted remuneration to drive a strong risk culture.

Each global business, region and strategically important country and territory is required to have its own RAS, which is monitored to help ensure it remains aligned with the Group's RAS. Each RAS and business activity is guided and underpinned by qualitative principles and/or quantitative metrics.

Risk management

We recognise that the primary role of risk management is to protect our customers, business, colleagues, shareholders and the communities that we serve, while ensuring we are able to support our strategy and provide sustainable growth. This is supported through our three lines of defence model described on page 123.

The implementation of our business strategy, which includes a major transformation programme, remains a key focus. As we implement change initiatives, we actively manage the execution risks. We also perform periodic risk assessments, including against strategies, to help ensure retention of key personnel for our continued safe operation.

We aim to use a comprehensive risk management approach across the organisation and across all risk types, underpinned by our culture and values. This is outlined in our risk management framework, including the key principles and practices that we employ in managing material risks, both financial and non-financial. The framework fosters continual monitoring, promotes risk awareness and encourages a sound operational and strategic decision-making and escalation process. It also supports a consistent approach to identifying, assessing, managing and reporting the risks we accept and incur in our activities, with clear accountabilities. We continue to actively review and develop our risk management framework and enhance our approach to managing risk, through our activities with regard to: people and capabilities; governance; reporting and management information; credit risk management models; and data.

We merged our Group Risk and Compliance functions on 1 July 2021 to take an increasingly comprehensive view of risk, and enhance cross-discipline collaboration on key areas such as fraud, credit and conduct risk. This merger did not have an impact on our policies and practices regarding the management of risk. Led by the Group Chief Risk and Compliance Officer, this merged function plays an important role in reinforcing our culture and values. It focuses on creating an environment that encourages our people to speak up and do the right thing.

Group Risk and Compliance is independent from the global businesses, including our sales and trading functions, to provide challenge, oversight and appropriate balance in risk/reward decisions.

Our risk management framework

The following diagram and descriptions summarise key aspects of the risk management framework, including governance, structure, risk management tools and our culture, which together help align employee behaviour with risk appetite.

Key components of our risk management framework
Risk governance		Non-executive risk governance								The Board approves the Group's risk appetite, plans and performance targets. It sets the 'tone from the top' and is advised by the Group Risk Committee (see page 232).
		Executive risk governance								Our executive risk governance structure is responsible for the enterprise-wide management of all risks, including key policies and frameworks for the management of risk within the Group (see pages 123 and 135).
Roles and responsibilities		Three lines of defence model								Our 'three lines of defence' model defines roles and responsibilities for risk management. An independent Global Risk and Compliance function helps ensure the necessary balance in risk/return decisions (see page 123).
Processes and tools		Risk appetite								The Group has processes in place to identify/assess, monitor, manage and report risks to help ensure we remain within our risk appetite.
		Enterprise-wide risk management tools
		Active risk management: identification/assessment, monitoring, management and reporting
Internal controls		Policies and procedures								Policies and procedures define the minimum requirements for the controls required to manage our risks.
		Control activities								Operational and resilience risk management defines minimum standards and processes for managing operational risks and internal controls.
		Systems and infrastructure								The Group has systems and/or processes that support the identification, capture and exchange of information to support risk management activities.

Risk governance

The Board has ultimate responsibility for the effective management of risk and approves our risk appetite.

The Group Chief Risk and Compliance Officer, supported by the RMM, holds executive accountability for the ongoing monitoring, assessment and management of the risk environment and the effectiveness of the risk management framework.

The Group Chief Risk and Compliance Officer is also responsible for the oversight of reputational risk, with the support of the Group Reputational Risk Committee. The Group Reputational Risk Committee considers matters arising from customers, transactions and third parties that either present a serious potential reputational risk to the Group or merit a Group-led decision to ensure a consistent risk management approach across the regions, global

businesses and global functions. Our reputational risk policy sets out our risk appetite and the principles for managing reputational risk. Further details can be found under the 'Reputational risk' section of www.hsbc.com/our-approach/risk-and-responsibility.

Day-to-day responsibility for risk management is delegated to senior managers with individual accountability for decision making. All our people have a role to play in risk management. These roles are defined using the three lines of defence model, which takes into account our business and functional structures as described in the following commentary, 'Our responsibilities'.

We use a defined executive risk governance structure to help ensure there is appropriate oversight and accountability of risk, which facilitates reporting and escalation to the Group RMM. This structure is summarised in the following table.

Governance structure for the management of risk and compliance
Risk Management Meeting	Group Chief Risk and Compliance Officer Group Chief Legal Officer Group Chief Executive Group Chief Financial Officer All other Group Executive Committee members	• Supporting the Group Chief Risk and Compliance Officer in exercising Board-delegated risk management authority • Overseeing the implementation of risk appetite and the risk management framework • Forward-looking assessment of the risk environment, analysing possible risk impacts and taking appropriate action • Monitoring all categories of risk and determining appropriate mitigating action • Promoting a supportive Group culture in relation to risk management and conduct
Global Risk Executive Committee	Group Chief Risk and Compliance Officer Chief risk officers of HSBC's global businesses and regions Heads of Global Risk and Compliance sub-functions	• Supporting the Group Chief Risk and Compliance Officer in providing strategic direction for the Global Risk and Compliance function, setting priorities and providing oversight • Overseeing a consistent approach to accountability for, and mitigation of, risk and compliance across the Group
Global business/regional risk management meetings	Global business/regional chief risk officer Global business/regional chief executive officer Global business/regional chief financial officer Global business/regional heads of global functions	• Supporting the Group Chief Risk and Compliance Officer in exercising Board-delegated risk management authority • Forward-looking Group assessment of the risk environment, analysing the possible risk impact and taking appropriate action • Implementation of risk appetite and the risk management framework • Monitoring all categories of risk and determining appropriate mitigating actions • Embedding a supportive culture in relation to risk management and controls

The Board committees with responsibility for oversight of risk-related matters are set out on page 237.

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Our responsibilities

All our people are responsible for identifying and managing risk within the scope of their roles. Roles are defined using the three lines of defence model, which takes into account our business and functional structures as described below.

Three lines of defence

To create a robust control environment to manage risks, we use an activity-based three lines of defence model. This model delineates management accountabilities and responsibilities for risk management and the control environment.

The model underpins our approach to risk management by clarifying responsibility and encouraging collaboration, as well as enabling efficient coordination of risk and control activities. The three lines of defence are summarised below:

• The first line of defence owns the risks and is responsible for identifying, recording, reporting and managing them in line with risk appetite, and ensuring that the right controls and assessments are in place to mitigate them.

• The second line of defence challenges the first line of defence on effective risk management, and provides advice and guidance in relation to the risk.

• The third line of defence is our Global Internal Audit function, which provides independent assurance as to whether our risk management approach and processes are designed and operating effectively.

Global Risk and Compliance function

Our Global Risk and Compliance function is responsible for the Group's risk management framework. This responsibility includes establishing global policy, monitoring risk profiles, and identifying and managing forward-looking risk. Global Risk and Compliance is made up of sub-functions covering all risks to our business. Forming part of the second line of defence, the Global Risk and Compliance function is independent from the global businesses, including sales and trading functions, to provide challenge, appropriate oversight and balance in risk/return decisions.

Responsibility for minimising both financial and non-financial risk lies with our people. They are required to manage the risks of the business and operational activities for which they are responsible. We maintain adequate oversight of our risks through our various specialist risk stewards and the collective accountability held by our chief risk officers.

We have continued to strengthen the control environment and our approach to the management of non-financial risk, as broadly set out in our risk management framework. The management of non-financial risk focuses on governance and risk appetite, and provides a single view of the non-financial risks that matter the most and the associated controls. It incorporates a risk management system designed to enable the active management of non-financial risk. Our ongoing focus is on simplifying our approach to non-financial risk management, while driving more effective oversight and better end-to-end identification and management of non-financial risks. This is overseen by the Operational and Resilience Risk function, headed by the Group Head of Operational and Resilience Risk.

Stress testing and recovery planning

We operate a wide-ranging stress testing programme that is a key part of our risk management and capital and liquidity planning. Stress testing provides management with key insights into the impact of severely adverse events on the Group, and provides confidence to regulators on the Group's financial stability.

Our stress testing programme assesses our capital and liquidity strength through a rigorous examination of our resilience to external shocks. As well as undertaking regulatory-driven stress tests, we conduct our own internal stress tests in order to understand the nature and level of all material risks, quantify the impact of such risks and develop plausible business-as-usual mitigating actions.

Internal stress tests

Our internal capital assessment uses a range of stress scenarios that explore risks identified by management. They include potential adverse macroeconomic, geopolitical and operational risk events, as well as other potential events that are specific to HSBC.

The selection of stress scenarios is based upon the output of our identified top and emerging risks and our risk appetite. Stress testing analysis helps management understand the nature and extent of vulnerabilities to which the Group is exposed. Using this information, management decides whether risks can or should be mitigated through management actions or, if they were to crystallise, be absorbed through capital and liquidity. This in turn informs decisions about preferred capital and liquidity levels and allocations.

In addition to the Group-wide stress testing scenarios, each major subsidiary conducts regular macroeconomic and event-driven scenario analyses specific to its region. They also participate, as required, in the regulatory stress testing programmes of the jurisdictions in which they operate, such as the Bank of England ('BoE') stress tests required in the UK, Comprehensive Capital Analysis and Review and Dodd-Frank Act Stress Testing programmes in the US, and the stress tests of the Hong Kong Monetary Authority ('HKMA'). Global functions and businesses also perform bespoke stress testing to inform their assessment of risks to potential scenarios.

We also conduct reverse stress tests each year at Group level and, where required, at subsidiary entity level to understand potential extreme conditions that would make our business model non-viable. Reverse stress testing identifies potential stresses and vulnerabilities we might face, and helps inform early warning triggers, management actions and contingency plans designed to mitigate risks.

Recovery and resolution plans

Recovery and resolution plans form part of the integral framework safeguarding the Group's financial stability. The Group recovery plan, together with stress testing, helps us understand the likely outcomes of adverse business or economic conditions and in the identification of appropriate risk mitigating actions. The Group is committed to further developing its recovery and resolution capabilities in line with the BoE resolvability assessment framework requirements.

Key developments in 2021

We continued to actively manage the risks resulting from the Covid-19 pandemic and its impacts on our customers and operations during 2021, as well as other key risks described in this section. In addition, we enhanced our risk management in the following areas:

• We streamlined the articulation of our risk appetite framework, providing further clarity on how risk appetite interacts with strategic planning and recovery planning processes.

• We continued to simplify our approach to non-financial risk management, with the implementation of more effective oversight tools and techniques to improve end-to-end identification and management of these risks.

• We accelerated the transformation of our approach to managing financial risks across the businesses and risk functions, including initiatives to enhance portfolio monitoring and analytics, credit risk management, traded risk management, treasury risk management and models used to manage financial risks.

• We are progressing with a comprehensive regulatory reporting programme to strengthen our global processes, improve consistency, and enhance controls.

• We launched an enhanced approach to conduct for all colleagues, businesses and geographies, establishing the outcomes to be achieved for customers and markets in all risk disciplines, operations and technologies and integrating it into our approach to culture and our risk management arrangements. 

• We continued to enhance our approach to portfolio risk management, through clearly defined roles and responsibilities, and improving our data and management information reporting capabilities.

• The Climate Risk Oversight Forum continued to shape and oversee our approach to climate risk. We appointed a Head of Climate Risk in support of our climate change strategy and to oversee the development of our climate risk management capabilities. The climate risk programme continues to drive the delivery of our enhanced climate risk management approach.

• We continued to improve the effectiveness of our financial crime controls with a targeted update of our fraud controls. We refreshed our financial crime policies, ensuring they remained up to date and addressed changing and emerging risks, and we continued to meet our regulatory obligations.

• We introduced enhanced governance and oversight around management judgemental adjustments and related processes for IFRS 9 models and Sarbanes-Oxley controls.

Top and emerging risks

We use a top and emerging risks process to provide a forward-looking view of issues with the potential to threaten the execution of our strategy or operations over the medium to long term.

We proactively assess the internal and external risk environment, as well as review the themes identified across our regions and global businesses, for any risks that may require global escalation. We update our top and emerging risks as necessary.

Our current top and emerging risks are as follows.

Externally driven

Geopolitical and macroeconomic risks

Our operations and portfolios are exposed to risks associated with political instability, civil unrest and military conflict, which could lead to disruption of our operations, physical risk to our staff and/or physical damage to our assets.

Global tensions over trade, technology and ideology are manifesting themselves in divergent regulatory standards and compliance regimes, presenting long-term strategic challenges for multinational businesses.

The Covid-19 pandemic brought supply chain issues into focus, with shortages appearing across several regions and products throughout 2020 and 2021, and it is not expected that these issues will ease significantly before mid-2022. 

The pandemic has also heightened geopolitical tensions, which could have implications for the Group and its customers.

The Group will continue to need to consider potential regulatory, reputational and market risks arising from the evolving geopolitical landscape. In 2021, there was an escalation of diplomatic tensions between China and the US, and increasingly extending to the UK, the EU, India and other countries. 

The US-China relationship in particular remains complex, with tensions over a number of critical issues. The US, the UK, the EU, Canada and other countries have imposed various sanctions and trade restrictions on Chinese individuals or companies, and the US continues to develop its approach to perceived strategic competition with China.

Among these, the US Hong Kong Autonomy Act authorises the imposition of secondary sanctions against non-US financial institutions found to be knowingly engaged in significant transactions with individuals and entities subject to US sanctions for engaging in certain activities that undermine Hong Kong's autonomy. In addition, the US has imposed restrictions on US persons' ability to buy or sell certain publicly traded securities linked to a number of prominent Chinese companies.

There is also a risk of increased sanctions being imposed by the US and other governments in relation to human rights, technology and other issues with China, and this could create a more complex operating environment for the Group and its customers. Notably, alongside the EU, UK, and Canada, the US has increasingly imposed sanctions and other measures in response to allegations of human rights abuses in Xinjiang.

China, in turn, has announced a number of its own sanctions and trade restrictions that target, or provide authority to target, foreign individuals or companies. These have been imposed mainly against certain public officials associated with the implementation of foreign sanctions against China. China has also promulgated new laws that provide a legal framework for imposing further sanctions and export restrictions, including laws prohibiting implementation of - or compliance with - foreign sanctions against China and creating a private right of action in Chinese courts for damages caused by third parties implementing foreign sanctions or other discriminatory measures.

These and any future measures and countermeasures that may be taken by the US, China and other countries may affect the Group, its customers and the markets in which the Group operates.

As the geopolitical landscape evolves, compliance by multinational corporations with their legal or regulatory obligations in one jurisdiction may be seen as supporting the law or policy objectives of that jurisdiction over another, creating additional compliance, reputational and political risks for the Group. We maintain dialogue with our regulators in various jurisdictions on the impact of legal and regulatory obligations on our business and customers.

Tensions between Russia and the US and a number of European states have heightened significantly following the increasing risk of hostilities between Russia and Ukraine. While negotiations are ongoing to seek a resolution, a continuation of or any further deterioration to the situation could have significant geopolitical implications, including economic, social and political repercussions on a number of regions that may impact HSBC and its customers. In addition, the US, the UK and the EU have threatened a significant expansion of sanctions and trade restrictions against Russia in the event of a Russian incursion into Ukraine, and Russian countermeasures are also possible.

Expanding data privacy and cybersecurity laws in a number of markets could pose potential challenges to intra-group data sharing. These developments could increase financial institutions' compliance burdens in respect of cross-border transfers of personal information.

Political disagreements between the UK and the EU, notably over the future operation of the Northern Ireland Protocol, have meant work on the creation of a framework for voluntary regulatory cooperation in financial services following the UK's withdrawal from the EU has stalled. While negotiations are continuing, it is unclear whether or when an agreement will be reached, and this has led to speculation that the UK may trigger Article 16 of the Protocol, which could suspend the operation of the Protocol in certain respects. Any decision to do so could be met with retaliatory action by the EU, complicating the terms of trade between the UK and the EU and potentially preventing progress in other areas such as financial services. We are monitoring the situation closely, including the potential impacts on our customers. 

Our global presence and diversified customer base should help mitigate the direct impacts on our financial position of the absence of a comprehensive EU-UK agreement on financial services. Our wholesale and markets footprint in the EU provides a strong foundation for us to build upon. Over the medium to long term, the UK's withdrawal from the EU may impact markets and increase economic risk, particularly in the UK, which could adversely impact our profitability and prospects for growth in this market.

Monetary and fiscal policies in developed markets will likely remain broadly accommodative for some time owing to uncertainty over the economic outlook, although rising global inflation - partly on the back of higher energy prices - is putting pressure on central banks to tighten monetary policy. The US Federal Reserve Board began tapering its asset purchases in November 2021 and financial markets currently expect it to raise the Federal Funds rate over the next year. The European Central Bank is on course to end its extraordinary asset purchase programme in March 2022.

Persistent supply issues or further increases in energy prices - for instance as a result of escalation in the Russia-Ukraine crisis - could keep inflation high and force central banks to tighten monetary policies faster than currently envisaged. Conversely, monetary policy tightening may be constrained by the emergence and spread of new Covid-19 variants that dampen economic recovery. We continue to monitor our risk profile closely in the context of uncertainty over monetary policy.

The global economic recovery in 2021 eased financial difficulties for some of our customers, which contributed to a reduction in ECL charges. For further details on customer relief programmes, see page 159.

Mitigating actions

• We closely monitor geopolitical and economic developments in key markets and sectors and undertake scenario analysis where appropriate. This helps us to take portfolio actions where necessary, including enhanced monitoring, amending our risk appetite and/or reducing limits and exposures.

• We stress test portfolios of particular concern to identify sensitivity to loss under a range of scenarios, with management actions being taken to rebalance exposures and manage risk appetite where necessary.

• We regularly review key portfolios to help ensure that individual customer or portfolio risks are understood and our ability to manage the level of facilities offered through any downturn is appropriate.

• We continue to monitor the UK's relationship with the EU, and assess the potential impact on our people, operations and portfolios.

• We have taken steps, where necessary, to enhance physical security in geographical areas deemed to be at high risk from terrorism and military conflicts.

Environmental, social and governance risk

We are subject to financial and non-financial risks associated with environmental, social and governance ('ESG') related matters. Our current areas of focus are climate risk, nature-related risks and human rights risks. These can impact us both directly and indirectly through our customers. For details on how we govern ESG, see page 80.

Climate-related risk increased over 2021, owing to the pace and volume of policy and regulatory changes globally particularly on climate risk management, stress testing and scenario analysis and disclosures. If we fail to meet evolving regulatory expectations or requirements on climate risk management, this could have regulatory compliance and reputational impacts.

We face increased reputational, legal and regulatory risk as we make progress towards our net zero ambition, with stakeholders likely to place greater focus on our actions such as the development of climate-related policies, our disclosures and financing and investment decisions relating to our ambition. We will face additional risks if we are perceived to mislead stakeholders in respect of our climate strategy, the climate impact of a product or service, or the commitments of our customers.

To track and report on progress towards achieving our ambition, we rely on internal and, where appropriate and available, external data, guided by certain industry standards. While emissions reporting has improved over time, data remains of limited quality and consistency. Methodologies we have used may develop over time in line with market practice and regulations, as well as owing to developments in climate science. Any developments in data and methodologies could result in revisions to reported data going forward, including on financed emissions, meaning that reported figures may not be reconcilable or comparable year-on-year. We may also have to reevaluate our progress towards our climate-related targets in future and this could result in reputational, legal and regulatory risks.

Climate risk will also have an impact on model risk, as models play an important role in risk management and the financial reporting of climate-related risks. The uncertain impacts of climate change and data limitations present challenges to creating reliable and accurate model outputs.

We could also face increased resilience risk, retail credit risk and wholesale credit risk owing to the increase in frequency and severity of weather events and chronic shifts in weather patterns. These risks could affect our own critical operations, impacting our customers and resulting in losses to our operations. Our customers' operations and assets could also be affected, reducing their ability to afford mortgage or loan repayments, and leading to credit risk impacts.

There is increasing evidence that a number of nature-related risks beyond climate change - which include risks that can be represented more broadly by economic dependence on nature - can and will have significant economic impact. These risks arise when the provision of natural services - such as water availability, air quality, and soil quality - is compromised by overpopulation, urban development, natural habitat and ecosystem loss, and other environmental stresses beyond climate change. They can show themselves in various ways, including through macroeconomic, market, credit, reputational, legal and regulatory risks, for both HSBC and our customers. In 2021, we added nature-related risks as a new emerging risk driver, under the umbrella theme of ESG risks and we continue to engage with investors, regulators and customers on nature-related risks to evolve our approach and understand best practice risk mitigation.

Regulation and disclosure requirements in relation to human rights, and to modern slavery in particular, are increasing. Businesses are expected to explain more about their efforts to identify and respond to the risk of negative human rights impacts arising from the actions of their employees, suppliers, customers and those in whom they invest.

Mitigating actions

• We continue to deepen our understanding of the drivers of climate risk as well as manage our exposure. A dedicated Climate Risk Oversight Forum is responsible for shaping and overseeing our approach and providing support in managing climate risk. For further details on the Group's ESG governance structure, see page 80.

• Our climate risk programme continues to accelerate the development of our climate risk management capabilities across four key pillars - governance and risk appetite, risk management, stress testing and scenario analysis, and disclosures. We are also enhancing our approach to greenwashing risk management.

• In December, we published our thermal coal phase-out policy, which committed to phase out the financing of coal-fired power and thermal coal mining in EU/OECD markets by 2030, and globally by 2040. The policy helps us chart the path to net zero and is a component of our approach towards managing the climate risk of our lending portfolio.

• Climate stress tests and scenarios are being used to further improve our understanding of our risk exposures for use in risk management and business decision making.

• We are undertaking training and adding additional roles with specialist skills to manage climate-related model risk.

• We have delivered climate risk training to our legal entity boards and wider target audiences.

• With the help of external stakeholders, we continued to review and improve our approach to human rights issues, following the UN Guiding Principles on Business and Human Rights.

• In 2021, we joined several industry working groups dedicated to helping us assess and manage nature-related risks, such as the Taskforce on Nature-related Financial Disclosure ('TNFD'). Our asset management business also published its biodiversity policy to publicly explain how our analysts address nature-related issues.

• We continue to engage with our customers, investors and regulators proactively on the management of ESG risks. We also engage with initiatives, including the Climate Financial Risk Forum, Equator Principles, Taskforce on Climate-related Financial Disclosures and CDP (formerly the Carbon Disclosure Project) to drive best practice for climate risk management.

For further details on our approach to climate risk management, see 'Areas of special interest' on page 131.

For further details on ESG risk management see 'Financial crime risk environment and 'Regulatory compliance risk environment including conduct'   on page 129.

Our ESG review can be found on page 43.

Ibor transition

Interbank offered rates ('Ibors') have historically been used extensively to set interest rates on different types of financial transactions and for valuation purposes, risk measurement and performance benchmarking.

Following the UK's Financial Conduct Authority ('FCA') announcement in July 2017 that it would no longer continue to persuade or require panel banks to submit rates for the London interbank offered rate ('Libor') after 2021, we have been actively working to transition legacy contracts from Ibors to products linked to near risk-free replacement rates ('RFRs') or alternative reference rates. In March 2021, in accordance with the 2017 FCA announcement, ICE Benchmark Administration Limited ('IBA') announced that it would cease publication of 24 of the 35 main Libor currency interest rate benchmark settings from the end of 2021, and that the most widely used US dollar Libor settings would cease from 30 June 2023. The FCA subsequently used its regulatory powers to compel IBA to publish the remaining six sterling and Japanese yen settings, from 1 January 2022, under an amended methodology, commonly known as 'synthetic' Libor. As a result, our focus during 2021 was on the transition of legacy contracts referencing the Euro Overnight Index average ('Eonia') and the Libor settings that demised from the end of 2021, including those settings subsequently being published on a 'synthetic' basis.

During 2021, we continued the development of IT and RFR product capabilities, implemented supporting operational processes, and engaged with our clients to discuss options for the transition of their legacy contracts. The successful implementation of new processes and controls, as well as the transition of contracts away from Ibors, reduced the heightened financial and non-financial risks to which we were exposed. However, while all but exceptional new Libor contract issuance ceased during 2021, or from the end of 2021 for US dollar Libor, we remain exposed to material risks. These include from so-called 'tough legacy' contracts, which have not been able to be transition to a new RFR rate and will use a 'synthetic' Libor or a contractual fallback rate, and from legacy contracts that reference the remaining US dollar Libor tenors, which are expected to demise from June 2023.

Financial risks have been largely mitigated as a result of the implementation of model and pricing changes. However, differences in US dollar Libor and its replacement RFR, Secured Overnight Funding Rate ('SOFR'), create a basis risk in the trading book and banking book due to the asymmetric adoption of SOFR across assets, liabilities and products that we need to actively manage through appropriate financial hedging. Additionally, the comparatively limited use of the SOFR benchmark for new RFR products to date and lack of alignment around conventions could potentially delay transition of some US dollar contracts into 2023. This would compress the amount of time to transition these contracts, which could lead to heightened operational and conduct-related risk.

Additional non-financial risks, including regulatory compliance risk, resilience risk, financial reporting risk, and legal risk also remain for 'tough legacy' contracts, and the US dollar legacy portfolio. These risks continue to be actively managed and mitigated with a focus on ensuring that fair outcomes for our clients are achieved.

These risks are present in different degrees across our product offering.

Transition of legacy contracts  

During 2021 we successfully transitioned over 90% of legacy Ibor lending contracts in sterling, Swiss franc, euro and Japanese yen Libor interest rates, as well as Eonia, directly or via appropriate fallback mechanisms. The majority of the remaining contracts will transition in advance of their next interest payment date, with only a small proportion of 'tough legacy' contracts remaining. We expect that out of approximately 5,000 lending contracts there will be less than 50 'tough legacy' contracts, the majority of which will be transitioned to alternative rates during 2022. Our approach to transition 'tough legacy' and US dollar Libor legacy contracts will differ by product and business area, but will be based on the lessons learned from the successful transition of contracts during 2021. We will continue to communicate with our clients and investors in a structured manner and be client led in the timing and nature of the transition.

For derivatives, approximately 99% of our sterling, Swiss franc, euro and Japanese yen Libor interest rate exposures at the end of 2021 had successfully transitioned directly or via appropriate fallback mechanisms, leaving a small number of 'tough legacy' contracts. Out of the approximately 13,000 bilateral derivatives trades there are expected to be less than 20 that remain 'tough legacy', the majority of which are expected to mature or transition in 2022. We anticipate our 'tough legacy' and US dollar exposure will continue to reduce through 2022 as a result of contract maturities, and active transition. We will continue to look to actively reduce our US dollar exposure by transitioning trades ahead of the demise date of 30 June 2023, by working with our clients to determine their needs and discuss how we transition their contracts. Additionally, we are working with market participants, including clearing houses, to ensure we are able to transition our cleared derivative contracts as the US dollar Libor benchmark demise date approaches.

For our loan book, approximately 85% of our reported exposure at the end of 2021 linked to sterling, Swiss franc, euro and Japanese yen Libor interest rate contracts required no further client negotiation but remained drawn as they have yet to reach their next interest payment date. The majority of the remaining exposure linked to benchmarks that demised from the end of 2021 relates to contracts where discussions with our clients and other market participants, for syndicated transactions, have continued into early 2022, in advance of their next scheduled interest payment date, and this has led to further transitions being completed. A small number of 'tough legacy' contracts, less than 50, that were unable to transition prior to their first interest payment date in 2022, are expected to use legislative reliefs, such as 'synthetic' Libor, or an alternative rate determined by the contractual fallback language, and in the main will be transitioned during 2022. For the remaining demising Ibors, notably US dollar Libor, we have implemented new products and processes and updated our systems in readiness for transition. In our US retail bank, our mortgage products are offered in SOFR, and the transition of legacy contracts will occur once an industry spread adjustment is available. Global Banking, Commercial Banking and Global Private Banking have begun to engage with clients who have upcoming contract maturities with a view to refinancing using an appropriate replacement rate. Further communications and outreach to customers with US dollar Libor contracts with later maturities will occur in due course.

For the Group's own debt securities issuances, in 2021 HSBC launched a consent solicitation to remediate Ibor references in five of its English law governed regulatory capital and MREL sterling and Singapore dollar instruments. The proposed amendments were successfully adopted on all of the sterling instruments, but were not adopted with respect to the Singapore dollar instruments as the minimum quorum requirements were not met. The terms of these two instruments provide for an Ibor benchmark being used to reset the coupon rate if HSBC chooses not to redeem the instruments on the respective call date, or dates, for each series. We remain mindful of the various factors that impact on the Ibor remediation strategy for our regulatory capital and MREL instruments, including - but not limited to - timescales for

cessation of relevant Ibor rates, constraints relating to the governing law of outstanding instruments, and the potential relevance of legislative solutions. We remain committed in seeking to remediate or mitigate relevant risks relating to Ibor-demise, as appropriate, on our outstanding regulatory capital and MREL instruments before the relevant calculation dates, which may occur post-cessation of the relevant Ibor rate or rates. Where we hold bonds issued by other institutions, we have remained dependent on the issuer's agents to engage in the transition process, although analysis will be undertaken of the issuers in US dollar Libor bonds to reduce our exposure, as occurred through 2021.

The completion of an orderly transition from the remaining Ibors, notably US dollar Libor, continues to be our programme's key objective through 2022 and 2023, with the aim of putting systems and processes in place to help achieve this.

Mitigating actions  

• Our global Ibor transition programme, which is overseen by the Group Chief Risk and Compliance Officer, will continue to deliver IT and operational processes to meet its objectives.

• We carry out extensive training, communication and client engagement to facilitate appropriate selection of new rates and products.

• We have dedicated teams in place to support the transition.

• We actively transitioned legacy contracts and ceased new issuance of Libor-based contracts, other than those allowed under regulatory exemptions, with associated monitoring and controls.

• We assess, monitor and dynamically manage risks arising from Ibor transition, and implement specific mitigating controls when required.

• We continue to actively engage with regulatory and industry bodies to mitigate risks relating to 'tough legacy' contracts.

Financial instruments impacted by Ibor reform

(Audited)

Interest Rate Benchmark Reform Phase 2, the amendments to IFRSs issued in August 2020, represents the second phase of the IASB's project on the effects of interest rate benchmark reform. The amendments address issues affecting financial statements when changes are made to contractual cash flows and hedging relationships.

Under these amendments, changes made to a financial instrument measured at other than fair value through profit or loss that are economically equivalent and required by interest rate benchmark reform, do not result in the derecognition or a change in the carrying amount of the financial instrument. Instead they require the effective interest rate to be updated to reflect the change in the interest rate benchmark. In addition, hedge accounting will not be discontinued solely because of the replacement of the interest rate benchmark if the hedge meets other hedge accounting criteria.

	Financial instruments yet to transition to alternative benchmarks, by main benchmark
	USD Libor	GBP Libor	JPY Libor	Others1
At 31 Dec 2021	$m	$m	$m	$m
Non-derivative financial assets
Loans and advances to customers	70,932	18,307	370	8,259
Other financial assets	5,131	1,098	-	2
Total non-derivative financial assets2	76,063	19,405	370	8,261
Non-derivative financial liabilities
Financial liabilities designated at fair value	20,219	4,019	1,399	1
Debt securities in issue	5,255	-	-	-
Other financial liabilities	2,998	78	-	-
Total non-derivative financial liabilities	28,472	4,097	1,399	1
Derivative notional contract amount
Foreign exchange	137,188	5,157	31,470	9,652
Interest rate	2,318,613	284,898	72,229	133,667
Others	-	-	-	-
Total derivative notional contract amount	2,455,801	290,055	103,699	143,319

At 31 Dec 2020
Non-derivative financial assets
Loans and advances to customers	85,378	43,681	371	10,751
Other financial assets	8,770	2,906	-	12
Total non-derivative financial assets2	94,148	46,587	371	10,763
Non-derivative financial liabilities
Financial liabilities designated at fair value	24,350	6,219	1,548	128
Debt securities in issue	5,840	-	-	416
Other financial liabilities	3,412	964	-	5
Total non-derivative financial liabilities	33,602	7,183	1,548	549
Derivative notional contract amount
Foreign exchange	196,774	6,374	28,411	22,762
Interest rate	2,848,552	1,190,491	479,789	492,197
Others	11	-	-	-
Total derivative notional contract amount	3,045,337	1,196,865	508,200	514,959

1  Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (euro Libor, Swiss franc Libor, Eonia, SOR, THBFIX and Sibor).

2  Gross carrying amount excluding allowances for expected credit losses.

The amounts in the above table relate to HSBC's main operating entities where HSBC has material exposures impacted by Ibor reform, including in the UK, Hong Kong, France, the US, Mexico, Canada, Singapore, the UAE, Bermuda, Australia, Qatar, Germany, Japan and Thailand. The amounts provide an indication of the extent of the Group's exposure to the Ibor benchmarks that are due to be replaced. Amounts are in respect of financial instruments that:

• contractually reference an interest rate benchmark that is planned to transition to an alternative benchmark;

• have a contractual maturity date beyond the date by which the reference interest rate benchmark is expected to cease; and

• are recognised on HSBC's consolidated balance sheet.

In March 2021, the administrator of Libor, IBA, announced that the publication date of most US dollar Libor tenors has been extended from 31 December 2021 to 30 June 2023. Publication of one-week and two-month tenors ceased after 31 December 2021. This change, together with the extended publication dates of Sibor, SOR and THBFIX, reduce the amounts presented at 31 December 2021 in the above table as some financial instruments included at 31 December 2020 will reach their contractual maturity date prior to the extended publication dates. Comparative data have not been re-presented.

Financial crime risk environment

Financial institutions remain under considerable regulatory scrutiny regarding their ability to prevent and detect financial crime. The financial crime threats we face have continued to evolve, often in tandem with broader geopolitical, socioeconomic and technological shifts in our markets, leading to challenges such as managing conflicting laws and approaches to legal and regulatory regimes.

Financial crime risk evolved during the Covid-19 pandemic, notably with the manifestation of fraud risks linked to the economic slowdown and resulting deployment of government relief measures. The accelerated digitisation of financial services has fostered significant changes to the payments ecosystem, including a multiplicity of providers and new payment mechanisms, not all of which are subject to the same level of regulatory scrutiny or regulations as financial institutions. This is presenting increasing challenges to the industry in terms of maintaining required levels of transparency, notably where institutions serve as intermediaries. Developments around digital assets and currencies, notably the role of stablecoins and central bank digital currencies, have continued at pace, with an increasing regulatory and enforcement focus on the financial crimes linked to these types of assets.

Expectations with respect to the intersection of ESG issues and financial crime as our organisation, customers and suppliers transition to net zero, are increasing, not least with respect to potential 'greenwashing'. Companies also face a heightened regulatory focus on both human rights issues and environmental crimes from a financial crime perspective. We also continue to face increasing challenges presented by national data privacy requirements, which may affect our ability to manage financial crime risks holistically and effectively.   

Mitigating actions

• We are strengthening our fraud and surveillance controls, and investing in next generation capabilities to fight financial crime through the application of advanced analytics and artificial intelligence ('AI').

• We are looking at the impact of a rapidly changing payments ecosystem to ensure our financial crime controls remain appropriate for changes in customer behaviour and gaps in regulatory coverage, including the development of procedures and controls to manage the risks associated with direct and indirect exposure to digital assets and currencies.

• We are assessing our existing policies and control framework to ensure that developments in the ESG space are considered and the risks mitigated.

• We work with jurisdictions and relevant international bodies to address data privacy challenges through international standards, guidance, and legislation to help enable effective management of financial crime risk.

• We work closely with our regulators and engage in public-private partnerships, playing an active role in shaping the industry's financial crime controls for the future, notably with respect to the enhanced, and transparent, use of technology.

Regulatory compliance risk environment including conduct

We keep abreast of the emerging regulatory compliance and conduct agenda, which currently includes, but is not limited to: ESG matters; operational resilience; how digital and technology changes, including payments, are impacting financial institutions; how we are ensuring good customer outcomes, including addressing customer vulnerabilities; regulatory reporting; and employee compliance. We monitor regulatory developments closely and engage with regulators, as appropriate, to help ensure new regulatory requirements are implemented effectively and in a timely way.

The competitive landscape in which the Group operates may be impacted by future regulatory changes and government intervention. In the UK, potential regulatory developments include any legislative changes resulting from a statutory review of ring-fencing, which has been undertaken by an independent panel appointed by HM Treasury. The panel has recommended several adjustments to the regime and HM Treasury is reviewing these recommendations. Legislative amendments may be proposed in due course.

Mitigating actions

• We monitor for regulatory developments to understand the evolving regulatory landscape and respond with changes in a timely way.

• We engage, wherever possible, with governments and regulators to make a positive contribution to regulations and ensure that new requirements are considered properly and can be implemented effectively. We hold regular meetings with relevant authorities to discuss strategic contingency plans, including those arising from geopolitical issues. 

• We launched our simplified conduct approach to align to our new purpose and values, in particular the value 'we take responsibility'.

Cyber threat and unauthorised access to systems

Together with other organisations, we continue to operate in an increasingly hostile cyber threat environment. This requires ongoing investment in business and technical controls to defend against these threats, including potential unauthorised access to customer accounts, attacks on our systems, and attacks on our third-party suppliers.

Mitigating actions

• We continually evaluate threat levels for the most prevalent attack types and their potential outcomes. To further protect HSBC and our customers and help ensure the safe expansion of our global business lines, we strengthen our controls to reduce the likelihood and impact of advanced malware, data leakage, exposure through third parties and security vulnerabilities.

• We continue to enhance our cybersecurity capabilities, including Cloud security, identity and access management, metrics and data analytics, and third-party security reviews. An important part of our defence strategy is ensuring our colleagues remain aware of cybersecurity issues and know how to report incidents.

• We report and review cyber risk and control effectiveness at executive and non-executive Board level. We also report across our global businesses, functions and regions to help ensure appropriate visibility and governance of the risk and mitigating actions.

• We participate globally in industry bodies and working groups to collaborate on tactics employed by cyber-crime groups and to collaborate in fighting, detecting and preventing cyber-attacks on financial organisations.

Digitalisation and technological advances

Developments in technology and changes in regulations are enabling new entrants to the industry. This challenges HSBC to continue to innovate and optimise in order to take advantage of new digital capabilities to best serve our customers, and adapt our products to attract and retain customers. As a result, we may need to increase our investment in our business to modify or adapt our existing products and services or develop new products and services to respond to our customers' needs.

Mitigating actions:

• We continue to monitor this emerging risk, as well as the advances in technology, and changes in customer behaviours to understand how these may impact our business.

• We closely monitor and assess financial crime and the impact on payment transparency and architecture.

Internally driven

Data management

We use a large number of systems and growing quantities of data to support our customers. Risk arises if data is incorrect, unavailable, misused, or unprotected. Along with other banks and financial institutions, we need to meet external regulatory obligations and laws that cover data, such as the Basel Committee on Banking Supervision's 239 guidelines and the General Data Protection Regulation ('GDPR').

Mitigating actions

• Through our global data management framework, we monitor proactively the quality, availability and security of data that supports our customers and internal processes. We resolve any identified data issues in a timely manner.

• We have made improvements to our data policies and are implementing an updated control framework to enhance the end-to-end management of data risk by our global businesses, global functions and regions.

• We protect customer data via our data privacy framework, which establishes practices, design principles and guidelines that enable us to demonstrate compliance with data privacy laws and regulations.

• We continue to modernise our data and analytics infrastructure through investments in Cloud technology, data visualisation, machine learning and AI.

• We educate our employees on data risk and data management and have delivered global mandatory training on the importance of protecting data and managing data appropriately.

Model risk management

Model risk arises whenever business decision making includes reliance on models. We use models in both financial and non-financial contexts, as well as in a range of business applications such as customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting. Assessing model performance is a continuous undertaking. Models can need redevelopment as market conditions change. This was required following the outbreak of Covid-19 as some models used for estimating credit losses needed to be redeveloped due to the dramatic change to inputs. This included GDP; unemployment rates; housing prices; and the varying government support measures introduced.

We prioritised the redevelopment of internal ratings-based ('IRB') and internal model methods ('IMM') models, in relation to counterparty credit, as part of the IRB repair and Basel III programmes with a key focus on enhancing the quality of data used as model inputs. Submission of these models to the UK's Prudential Regulation Authority ('PRA') and other key regulators for feedback and approval is in progress. Some IMM and internal model approach ('IMA') models have been approved for use and feedback has been received for some IRB models. Climate risk modelling is a key focus for the Group as HSBC's commitment to sustainability has become a critical part of the Group's strategy.

Mitigating actions

• We further enhanced the monitoring, review and challenge of loss model performance through our Model Risk Management function as part of a broader quarterly process to determine loss levels. The Model Risk Management team aims to provide strong and effective review and challenge of any future redevelopment of these models.

• Model Risk Management works closely with businesses to ensure that IRB/IMM/IMA models in development meet risk management, pricing and capital management needs. Global Internal Audit provides assurance over the risk management framework for models.

• Additional assurance work is performed by the model risk governance teams, which act as second lines of defence. The teams test whether controls implemented by model users comply with model risk policy and if model risk standards are adequate.

• Models using advanced machine learning techniques are validated and monitored to ensure that risks that are determined by the algorithms have adequate oversight and review.

Risks arising from the receipt of services from third parties

We use third parties to provide a range of goods and services. Risks arising from the use of third-party providers and their supply chain may be harder to identify. It is critical that we ensure we have appropriate risk management policies, processes and practices over the selection, governance and oversight of third parties and their supply chain, particularly for key activities that could affect our operational resilience. Any deficiency in the management of risks associated with our third parties could affect our ability to support our customers and meet regulatory expectations.

Mitigating actions

• We have enhanced our control framework for external supplier arrangements to ensure the risks associated with third-party arrangements are understood and managed effectively by our global businesses, global functions and regions. 

• We have applied the same control standards to intra-group arrangements as we have for external third-party arrangements to ensure we are managing them effectively.

• We are implementing the changes required by the new global third-party risk policy to comply with new regulations as defined by our regulators.

Risks associated with workforce capability, capacity and environmental factors with potential impact on growth

Our success in delivering our strategic priorities and managing the regulatory environment proactively depends on the development and retention of our leadership and high-performing employees. A very competitive employment market will continue to test our ability to attract and retain talent. Changed working arrangements, local Covid-19 restrictions and health concerns during the pandemic have also impacted on employee mental health and well-being.

Mitigating actions

• We have put in place measures to help support our people so they are able to work safely during the Covid-19 pandemic. While our approach to workplace recovery around the world is consistent, the measures we take in different locations are specific to their environment.

• We promote a diverse and inclusive workforce and provide active support across a wide range of health and well-being activities. We continue to build our speak-up culture through active campaigns.

• We monitor people risks that could arise due to organisational restructuring, helping to ensure we manage redundancies sensitively and support impacted employees. We encourage our people leaders to focus on talent retention at all levels, with an empathetic mindset and approach, while ensuring the whole proposition of working at HSBC is well understood.

• Our Future Skills curriculum helps provide critical skills that will enable employees and HSBC to be successful in the future.

• We continue to develop succession plans for key management roles, with actions agreed and reviewed on a regular basis by the Group Executive Committee.

IT systems infrastructure and resilience

We operate an extensive and complex technology landscape, which must remain resilient in order to support customers, the organisation and markets globally. Risks arise where technology is not understood or maintained, and development of technology is not controlled. 

Mitigating actions

• We continue to invest in transforming how software solutions are developed, delivered and maintained. We concentrate on improving system resilience and service continuity testing. We continue to ensure security is built into our software development life cycle and improve our testing processes and tools.

• We continue to upgrade many of our IT systems, simplify our service provision and replace older IT infrastructure and applications. These enhancements supported global improvements in service availability during 2021 for both our customers and colleagues.

Change execution risk

We have continued our increased investment in strategic change to support the delivery of our strategic priorities and regulatory commitments. This requires change to be executed safely and efficiently.

Mitigating actions

• A global transformation programme is progressing with the delivery of strategic change commitments made in February 2020 to restructure our business, reallocate capital into higher growth and higher return businesses and markets, and to simplify our organisation to improve operational resilience and reduce costs.

• The remit of the Transformation Oversight Executive Committee, established in 2020 to oversee the global transformation programme, was expanded in 2021 to oversee the prioritisation, strategic alignment and management of execution risk for all change portfolios and initiatives.

• We continue to work to strengthen our change management practices to deliver sustainable change, increased adoption of Agile ways of working, and a more consistent standard of delivery. The Transformation Oversight Executive Committee oversees the continued embedding of our improved Group-wide change framework released in May 2021, which sets out the mandatory principles and standards relating to leading and delivering change.

Areas of special interest

During 2021, a number of areas were identified and considered as part of our top and emerging risks because of the effect they may have on the Group. While considered under the themes captured under top and emerging risks, in this section we have placed a particular focus on the Covid-19 pandemic and climate-related risks.

Risks related to Covid-19

Despite the successful roll-out of vaccines around the world, the Covid-19 pandemic and its effect on the global economy have continued to impact our customers and organisation. The global vaccination roll-out in 2021 helped reduce the social and economic impact of the Covid-19 pandemic, although there has been significant divergence in the speed at which vaccines have been deployed around the world. Most developed countries have now vaccinated a large proportion of their populations, but many less developed countries have struggled to secure supplies and are at an earlier stage of their roll-out. By the end of 2021, high vaccination rates had ensured that many Covid-19-related restrictions on activity in developed markets had been lifted and travel constraints were easing. However, the emergence of the Omicron variant in late 2021 demonstrated the continued risk new variants pose.

The pandemic necessitated governments to respond at unprecedented levels to protect public health, and to support local economies and livelihoods. The resulting government support measures and restrictions created additional challenges, given the rapid pace of change and significant operational demands. Renewed outbreaks, particularly those resulting from the emergence of variants of the virus, emphasise the ongoing threat of Covid-19 and could result in further tightening of government restrictions. There remains a divergence in approach taken by countries to the level of restrictions on activity and travel. Such diverging approaches to future pandemic waves could prolong or worsen supply chain and international travel disruptions. The evolving Covid-19 restrictions in Hong Kong, including travel, public gathering and social distancing restrictions, are impacting the Hong Kong economy, and may affect the ability to attract and retain staff.

We continue to support our personal and business customers through market-specific measures initiated during the Covid-19 pandemic, and by supporting those remaining national government schemes that focus on the parts of the economy most impacted by the pandemic. For further details of our customer relief programmes, see page 159.

The rapid introduction and varying nature of the government support schemes introduced throughout the Covid-19 pandemic led to increased operational risks, including complex conduct considerations, increased reputational risk and increased risk of fraud. These risks are likely to be heightened further as and when those remaining government support schemes are unwound. These events have also led to increased litigation risk.

The impact of the pandemic on the long-term prospects of businesses in the most vulnerable sectors of the economy - such as retail, hospitality, travel and commercial real estate - remains uncertain and may lead to significant credit losses on specific exposures, which may not be fully captured in ECL estimates. In addition, in times of stress, fraudulent activity is often more prevalent, leading to potentially significant credit or operational losses.

As economic conditions improve, and government support measures come to an end, there is a risk that the outputs of IFRS 9 models may have a tendency to underestimate loan losses. To help mitigate this risk, model outputs and management adjustments are closely monitored and independently reviewed at the Group and country level for reliability and appropriateness. For further details on model risk, see page 209.

Despite the ongoing economic recovery, significant uncertainties remain in assessing the duration and impact of the Covid-19 pandemic, including whether any subsequent outbreaks result in a reimposition of government restrictions. There is a risk that economic activity remains below pre-pandemic levels for a prolonged period, increasing inequality across markets, and it will likely be some time before societies return to pre-pandemic levels of social interactions. As a result, there may still be a requirement for additional mitigating actions including further use of adjustments, overlays and model redevelopment.

Governments and central banks in major economies have deployed extensive measures to support their local populations. This is expected to reverse partially in 2022. Central banks in major markets are expected to raise interest rates, but such increases are expected to be gradual and monetary policy is expected to remain accommodative overall. Policy tightening in major emerging markets has already begun in order to counteract rising inflation and the risk of capital outflows. Governments are also expected to reduce the level of fiscal support they offer households and businesses as the appetite for broad lockdowns and public health restrictions decreases. Government debt has risen in most advanced economies, and is expected to remain high into the medium term. High government debt burdens have raised fiscal vulnerabilities, increasing the sensitivity of debt service costs to interest rate increases and potentially reducing the fiscal space available to address future economic downturns. Our Central scenario used to calculate impairment assumes that economic activity will continue to recover through 2022, surpassing peak pre-pandemic levels of GDP in all our key markets. It is assumed that private sector growth accelerates, ensuring a strong recovery is sustained even as pandemic-related fiscal support is withdrawn. However, there is a high degree of uncertainty associated with economic forecasts in the current environment and there are significant risks to our Central scenario. The degree of uncertainty varies by market, driven by country-specific trends in the evolution of the pandemic and associated policy responses. As a result, our Central scenario for impairment has not been assigned an equal likelihood of occurrence across our key markets. For further details of our Central and other scenarios, see 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 144.

We continue to monitor the situation closely, and given the novel and prolonged nature of the pandemic, additional mitigating actions may be required.

Climate-related risks

Climate change can have an impact across HSBC's risk taxonomy through both transition and physical channels. Transition risk can arise from the move to a net zero economy, such as through policy, regulatory and technological changes. Physical risk can arise through increasing severity and/or frequency of severe weather or other climatic events, such as rising sea levels and flooding.

These have the potential to cause both idiosyncratic and systemic risks, resulting in potential financial and non-financial impacts for HSBC. Financial impacts could materialise if transition and physical risks impact the ability of our customers to repay their loans. Non-financial impacts could materialise if our own assets or operations are impacted by extreme weather or chronic changes in weather patterns, or as a result of business decisions to achieve our climate ambition.

How climate risk can impact our customers

Climate change could impact our customers in two main ways. Firstly, customer business models may fail to align to a net zero economy, which could mean that new climate-related regulation would have a material impact on their business. Secondly, extreme weather events or chronic changes in weather patterns may damage our customers' assets leaving them unable to operate their business or potentially even live in their home.

One of the most valuable ways we can help our customers navigate the transition challenges and to become more resilient to the physical impacts of climate change is through financing and investment. To do this effectively, we must understand the risks they are facing.

The table below summarises the key categories of transition and physical risk, with examples of how our customers might be affected financially by climate change and the shift to a low-carbon economy.

Transition	Policy and legal	Mandates on, and regulation of, existing products and services Litigation from parties who have suffered from the effects of climate change
	Technology	Replacement of existing products with lower emission options
	End-demand (market)	Changing consumer behaviour
	Reputational	Increased scrutiny following a change in stakeholder perceptions of climate-related action or inaction
Physical	Acute	Increased frequency and severity of weather events
	Chronic	Changes in precipitation patterns Rising temperatures

For further details on how we manage climate risk for our other stakeholders, see the ESG review on page 56.

Integrating climate into enterprise-wide risk management

Our approach to climate risk management is aligned to our Group-wide risk management framework and three lines of defence model, which sets out how we identify, assess and manage our risks. This approach ensures the Board and senior management have visibility and oversight of our key climate risks.

Climate risk appetite

Our developing climate risk appetite measures support the oversight and management of the financial and non-financial risks from climate change, meet regulatory expectations and support the business to deliver our climate ambition in a safe and sustainable way. Our initial measures are focused on the oversight and management of our key climate risks: wholesale credit risk, retail credit risk, reputational risk, resilience risk and regulatory compliance. These measures are implemented at a global and regional level. We continue to develop climate risk appetite measures and our future ambition for our climate risk appetite is to:

• adapt the risk appetite metrics to incorporate forward-looking transition plans and net zero commitments;

• expand metrics to consider other financial and non-financial risks; and

• use enhanced scenario analysis capabilities.

Climate risk policies, processes and controls

We are integrating climate risk into the policies, processes and controls for our key climate risks and we will continue to update these as our climate risk management capabilities mature over time. We have updated our policy on product management, and developed the first version of a climate risk scoring tool for our corporate portfolios. In addition, we published and started to implement our new thermal coal phase-out policy. For further details on our thermal coal phase-out policy, see page 62.

Climate risk governance and reporting

Our global and regional Climate Risk Oversight Forums are responsible for the oversight, management and escalation of climate risks across the Group and are supported by specific forums for our global businesses, as well as for our Risk and Compliance function. These include the Sustainability Risk Oversight Forum, the WPB Risk Management Meeting and the Regulatory Compliance ESG and Climate Risk Working Group.

Our climate risk management information dashboard includes metrics relating to our key climate risks, and is reported to the Group Climate Risk Oversight Forum. The Group Risk Management Meeting and the Group Risk Committee receive scheduled updates on climate risk, and receive regular updates on our climate risk appetite and top and emerging climate risks.

For further details on the Group's ESG governance structure, see page 80.

The Group Chief Risk and Compliance Officer is the key senior manager responsible for the management of climate-related financial risks under the UK Senior Managers Regime. The Group Chief Risk and Compliance Officer is the overall accountable executive for the Group's climate risk programme, including responsibility for governance, risk management, stress testing and scenario analysis and disclosures.

Climate risk programme

Our dedicated programme continues to accelerate the development of our climate risk management capabilities. The key achievements in 2021 include:

• We delivered tailored training sessions to our legal entity boards.

• We delivered training to colleagues across the three lines of defence so they can understand climate risk as part of their role, and we also included an introduction to our climate ambition in our global mandatory training.

• We developed our climate risk scoring tool for corporate customers for use in priority regions, which builds on our corporate transition questionnaire.

• We introduced a risk appetite based on monitoring climate risk exposure at property level across the UK mortgage portfolio.

• We have continued to develop our climate stress testing and scenarios capabilities, including model development and delivered regulatory climate stress tests. These are being used to further improve our understanding of our risk exposures for use in risk management and business decision making. For more detail on our approach to climate stress testing and scenario analysis, see page 57.

We will continue to enhance our climate risk management capabilities throughout 2022. This will include the further roll-out of training, refinement of our risk appetite, enhancement of our climate risk scoring tool and increasing the availability and quality of data so that new metrics can be developed.

How climate risk can impact HSBC

Below, we provide details on how climate risk impacts to our customers might manifest across our key climate risks, and the potential timeframes involved using the TCFD's four main drivers of transition climate risk - policy and legal, technology, end-demand (market) and reputational - and two physical risk drivers - acute and chronic.

	Financial risks			Non-financial risk
Risk type	Wholesale credit	Retail credit	Strategic risk (reputational)	Resilience risk	Regulatory compliance risk
Timescale1	All term periods	Medium-long term	All term periods	All term periods	Short-medium
Transition risk drivers2
-  policy and legal	l	l			l
-  technology	l
-  end-demand (market)	l	l
-  reputational	l	l	l
Physical risk drivers2
-  acute - increased frequency and severity of weather events	l	l		l
-  chronic - changes in weather patterns	l	l		l

1  Short-term: less than one year; medium term: period to 2030; long term: period to 2050.

2  Transition and physical risk drivers defined by TCFD.

Wholesale credit risk

Identification and assessment

We have identified six key sectors where our wholesale credit customers have the highest climate risk, based on their carbon emissions. These are oil and gas, building and construction, chemicals, automotive, power and utilities, and metals and mining. We continue to roll out our transition and physical risk questionnaire to our largest customers in high-risk sectors, with the addition of four more sectors: agriculture, manufacturing, real estate and transportation. The questionnaires will help us to assess and improve our understanding of the impact of climate changes on our customers' business models and any related transition strategies. It also helps us to identify potential business opportunities to support the transition. In 2022, we intend to increase the scope of the questionnaires by adding more countries to the scope.

Management

In 2021, we developed a scoring tool, which provides a climate risk score for each customer based on questionnaire responses. The climate risk score will then be used in portfolio level management information to assess and compare clients. The scoring tool will be enhanced and refined over time as more data becomes available. The results of the tool have been provided to business and risk management teams. During 2021, we also performed a climate-related stress test, as explained further on page 58. In 2022 we aim to further embed climate risk considerations in our credit risk management processes.

Aggregation and reporting

We currently internally report our transition risk exposure and RWAs consumed by the six high-risk sectors in the wholesale portfolio.

We also report the proportion of questionnaire responses that reported either having a board policy or management plan for transition risk. Our key wholesale credit exposures are included as part of our broader ESG management information dashboard, which is presented to the Group Executive Committee each quarter. In addition, a representative from wholesale credit risk attends the Global Climate Risk Oversight Forum to ensure consideration of this risk type, and we report our exposure through the climate risk management information dashboard at this meeting.

We will continue to report these metrics in 2022 and will aim to cascade these measures to global businesses and to provide insight on the climate risk profile of our portfolio and customers.

In the table below, we capture our lending activity, including environmentally responsible and sustainable finance activities, to customers within the six high risk sectors. Green financing for large companies that work in high transition sectors is also included. The overall exposure has increased slightly to 20.0% (2020:19.6%). For further details on how we designate counterparties as high transition risk, see footnote 2.

Since 2019, we have received responses from customers within the six high transition risk sectors, which represent 56% of our exposure, an increase in coverage of 15% since last year. The breakdown of our customer responses is presented by sector in the table below.

Within the power and utilities, and metals and mining sectors shown in the table below, and recognising external third-party assessments of power generation and mining capacity, our exposure to thermal coal is 0.2% of the total wholesale loans and advances figures.

Wholesale loan exposure to transition risk sectors and customer questionnaire responses at 31 December 2021

	Automotive	Chemicals	Construction and building materials	Metals and mining	Oil and gas	Power and utilities	Total
	%	%	%	%	%	%	%
Wholesale loan exposure as % of total wholesale loans and advances to customers and banks1,2,3	≤ 2.8	≤ 3.4	≤ 4.5	≤ 2.4	≤ 3.4	≤ 3.5	≤ 20.0
Proportion of sector for which questionnaires were completed4	59	44	56	52	64	59	56
Proportion of questionnaire responses that reported either having a board policy or a management plan4	65	76	76	57	77	90	75
Sector weight as proportion of high transition risk sector4	14	17	22	12	17	18	100

1  Amounts shown in the table also include green and other sustainable finance loans, which support the transition to the net zero economy. The methodology for quantifying our exposure to high transition risk sectors and the transition risk metrics will evolve over time as more data becomes available and is incorporated in our risk management systems and processes.

2  Counterparties are allocated to the high transition risk sectors via a two-step approach. Firstly, where the main business of a group of connected counterparties is in a high transition risk sector, all lending to the group is included irrespective of the sector of each individual obligor within the group. Secondly, where the main business of a group of connected counterparties is not in a high transition risk sector, only lending to individual obligors in the high transition risk sectors is included. For Global Banking and Markets clients, the main business of a group of connected counterparties is identified by the relationship manager for the group. For Commercial Banking clients, the main business of a group of connected counterparties is identified based on the largest industry of HSBC's total lending limits to the group.

3  Total wholesale loans and advances to customers and banks amount to $662bn (2020: $673bn).

4  All percentages are weighted by exposure.

Retail credit risk

Identification and assessment

We manage retail credit risk under a framework of controls that enable the identification and assessment of credit risk across the retail portfolio.

In 2021, we completed a Group-wide climate scenario analysis and stress testing exercise. This enabled us to enhance our understanding and assess the impact of physical risk to our mortgage portfolio under three potential future climate scenarios, with a focus on the UK, Hong Kong and Canada.

Additionally, for the UK mortgage portfolio, we considered the impact of potential minimum energy performance certificate ('EPC') rating requirements, as well as changes to the availability of buildings insurance following the demise of FloodRe. These factors were considered alongside macroeconomic drivers, given the supplemental data available for the UK.

FloodRe is a scheme between the UK Government and the insurance industry that aims to improve the availability and affordability of flood cover for properties in high flood risk areas. It is currently in place until 2039.

Understanding the impact of future climate risk relies heavily upon the availability of quality data, as well as on the evolution of climate risk modelling expertise. As this matures, we plan to expand our approach to additional markets.

Management

We are focusing on embedding climate risk into retail credit risk management processes, prioritising the largest residential mortgage portfolios.

We continue to update our risk management framework to reflect lessons learnt.

Aggregation and reporting

We manage and monitor the integration of climate risk across Wealth and Personal Banking through the Risk Management Meeting.

We have also developed and are implementing metrics to support active risk management, which will be tracked and monitored through relevant credit risk meetings.

A representative from Retail Credit Risk attends the Group Climate Risk Oversight Forum to ensure this risk type is considered.

How we are starting to measure climate risk

We are starting to measure climate risk with the most material market, which is the UK, where the primary risk facing properties is flooding.

Using a risk methodology that considers a combination of the likelihood and severity of flood hazard affecting individual properties, we estimate that on a total volume basis, and at present day levels, 3.5% of the UK retail banking mortgage portfolio is at high risk of flooding, and 0.3% is at a very high risk. This is based on 94% coverage of our mortgage portfolio and is reliant on flood data provided by Ambiental Risk Analytics, flood risk experts and suppliers of flood models to more than 50% of the UK insurance industry.

This data will enable monitoring and reporting of properties at risk of flooding, which will support activities to educate impacted customers and protect the Group from incurring losses as a result of climate events.

Our transition risk efforts in the UK have focused on obtaining current and potential energy efficiency ratings for individual properties, sourced from property EPC data.

The UK Government has a stated ambition to improve the EPC ratings of housing stock as set out in its Clean Growth Strategy.  We are working towards improving the proportion of properties on our book with an EPC rating of C or above and on improving the EPC data coverage.

We have approximately 53% of properties in our portfolio with a valid EPC certificate (i.e. dated within the last 10 years) and 35.7% of these are rated A to C.

For further details and metrics relating to physical and transition risk to our UK mortgage portfolio, see our ESG Data Pack at www.hsbc.com/esg.

Reputational risk

Identification and assessment

We implement sustainability risk policies, including the Equator Principles, as part of our broader reputational risk framework. We focus on sensitive sectors that may have a high adverse impact on people or the environment, and in which we have a significant number of customers. A key area of focus is high-carbon sectors, which include oil and gas, power generation, mining, agricultural commodities and forestry. During 2021 we published our thermal coal phase-out policy.

Management

As the primary point of contact for our customers, our relationship managers are responsible for checking that our customers meet policies aimed at reducing carbon impacts. Our global network of more than 75 sustainability risk managers provides local policy support and expertise to relationship managers. A central Sustainability Risk team provides a higher level of guidance and is responsible for the oversight of policy compliance and implementation over wholesale banking activities. During 2021, we introduced a refreshed assurance framework, which takes a risk-based approach focusing on higher risks.

For further details on our sustainability risk policies, see our ESG review on page 62.

Aggregation and reporting

Our Sustainability Risk Oversight Forum provides a Group-wide forum for senior members of our Global Risk and Compliance team and global businesses. It also oversees the development and implementation of sustainability risk policies. Cases involving complex sustainability risk issues related to customers, transactions or third parties are managed through the reputational risk and client selection governance process. We report annually on our implementation of the Equator Principles and the corporate loans, project-related bridge loans and advisory mandates completed under the principles. With the introduction of Equator Principles IV, a training programme was delivered to raise the awareness of the changes and obligations therein.

For the latest report, see: www.hsbc.com/who-we-are/our-climate-strategy/sustainability-risk/equator-principles.

A representative from Reputational risk attends the Group Climate Risk Forum to ensure consideration of this risk type.

Regulatory compliance risk

Identification and assessment

Compliance, as a sub-function within Group Risk and Compliance, continues to prioritise the identification and assessment of compliance risks that may arise from climate risk. Although not an exhaustive list, key regulatory compliance risks under consideration include those related to product management, mis-selling, marketing, conflicts of interest and regulatory change.

An area of particular focus is the risk of greenwashing. We regard greenwashing as the act of knowingly or unknowingly misleading stakeholders regarding our climate ambition, the climate impact/benefits of a product or service or regarding the climate commitments of our customers. For the Compliance function, product-based greenwashing is a key area of focus. When considering product-based greenwashing, we seek to:

• effectively and consistently consider climate risk factors in the development and ongoing governance of new, changed or withdrawn products and services through the enhancement of existing risk management frameworks utilised within the Group's operating entities and lines of business, enabling climate risks to be identified and assessed in a timely manner;

• ensure that climate-related products and services offered to customers are appropriately designed and that related sales practices and marketing materials are clear, fair and not misleading; and

• develop climate-related products and services consistent with the evolving expectations of the Group's regulators and other relevant authorities.

Management

We continue to develop our compliance policies and underlying measurement capability to enhance the management of climate risks in line with our climate ambition and risk appetite. As such, we have integrated and are continuing to enhance climate risk considerations within our product and customer life-cycle policies.  Our policies set the minimum standards that are required to manage the risk of breaches of our regulatory duty to customers, including those related to climate risk, ensuring fair customer outcomes are achieved.

The Compliance sub-function placed significant focus in 2021 on supporting and improving the capability of Compliance colleagues through climate-specific training, communications and guidance materials to ensure the robust identification, assessment and management of climate risks.

Aggregation and reporting

The Compliance sub-function continues to operate an ESG and Climate Risk Working Group. This group tracks and monitors the integration and embedding of Climate risk within the management of regulatory compliance risks and controls more generally, and monitors ongoing regulatory and legislative changes across the sustainability and climate risk agenda.

We have also developed and implemented climate risk metrics and indicators aligned to wider regulatory compliance risks.

The Compliance sub-function is also represented at the Group's Climate Risk Oversight Forum to ensure this risk type is considered.

Resilience risk

Identification and assessment

Our assessment of climate risk identified building unavailability, workplace safety, information technology and cybersecurity risk, transaction processing risk, and third-party risk as the key risks facing our operational resilience.

In 2021 we repeated and extended our scenario stress testing. We will continue to work with our partners to identify and assess emerging climate risks.

Management

In 2021, we reviewed existing policies, processes and controls, which were then revised as required. This work will continue in subsequent years.

Identification of new tooling, both internally and through collaboration with business partners, for the management of climate risk is ongoing with new tooling being introduced as appropriate.

Our stress test results will continue to inform our approach to climate risk management.

Aggregation and reporting

Our exposure to climate risk will continue to be aggregated and reported to the Group Climate Risk Forum and other relevant formal governance forums.

Our material banking risks

The material risk types associated with our banking and insurance manufacturing operations are described in the following tables:

Description of risks - banking operations
Credit risk (see page 137)
Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract.	Credit risk arises principally from direct lending, trade finance and leasing business, but also from other products such as guarantees and derivatives.	Credit risk is: • measured as the amount that could be lost if a customer or counterparty fails to make repayments; • monitored using various internal risk management measures and within limits approved by individuals within a framework of delegated authorities; and • managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance for risk managers.
Treasury risk (see page 189)
Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including the risk of adverse impact on earnings or capital due to structural foreign exchange exposures and changes in market interest rates, together with pension and insurance risk.	Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions, or the external environment	Treasury risk is: • measured through risk appetite and more granular limits, set to provide an early warning of increasing risk, minimum ratios of relevant regulatory metrics, and metrics to monitor the key risk drivers impacting treasury resources; • monitored and projected against appetites and by using operating plans based on strategic objectives together with stress and scenario testing; and • managed through control of resources in conjunction with risk profiles, strategic objectives and cash flows.
Market risk (see page 203)
Market risk is the risk of an adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads.	Exposure to market risk is separated into two portfolios: trading portfolios and non-trading portfolios. Market risk exposures arising from our insurance operations are discussed on page 185.	Market risk is: • measured using sensitivities, value at risk and stress testing, giving a detailed picture of potential gains and losses for a range of market movements and scenarios, as well as tail risks over specified time horizons; • monitored using value at risk, stress testing and other measures; and • managed using risk limits approved by the RMM and the risk management meeting in various global businesses.

Description of risks - banking operations (continued)
Resilience risk (see page 207)
Resilience risk is the risk that we are unable to provide critical services to our customers, affiliates and counterparties as a result of sustained and significant operational disruption.	Resilience risk arises from failures or inadequacies in processes, people, systems or external events.	Resilience risk is: • measured using a range of metrics with defined maximum acceptable impact tolerances, and against our agreed risk appetite; • monitored through oversight of enterprise processes, risks, controls and strategic change programmes; and • managed by continual monitoring and thematic reviews.
Regulatory compliance risk (see page 208)
Regulatory compliance risk is the risk associated with breaching our duty to clients and other counterparties, inappropriate market conduct and breaching related financial services regulatory standards.	Regulatory compliance risk arises from the failure to observe relevant laws, codes, rules and regulations and can manifest itself in poor market or customer outcomes and lead to fines, penalties and reputational damage to our business.	Regulatory compliance risk is: • measured by reference to risk appetite, identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our regulatory compliance teams; • monitored against the first line of defence risk and control assessments, the results of the monitoring and control assurance activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and • managed by establishing and communicating appropriate policies and procedures, training employees in them and monitoring activity to help ensure their observance. Proactive risk control and/or remediation work is undertaken where required.
Financial crime risk (see page 208)
Financial crime risk is the risk of knowingly or unknowingly helping parties to commit or to further potentially illegal activity through HSBC, including money laundering, fraud, bribery and corruption, tax evasion, sanctions breaches, and terrorist and proliferation financing.	Financial crime risk arises from day-to-day banking operations involving customers, third parties and employees.	Financial crime risk is: • measured by reference to risk appetite, identified metrics, incident assessments, regulatory feedback and the judgement of, and assessment by, our compliance teams; • monitored against the first line of defence risk and control assessments, the results of the monitoring and control assurance activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and • managed by establishing and communicating appropriate policies and procedures, training employees in them and monitoring activity to help ensure their observance. Proactive risk control and/or remediation work is undertaken where required.
Model risk (see page 209)
Model risk is the risk of inappropriate or incorrect business decisions arising from the use of models that have been inadequately designed, implemented or used or that model does not perform in line with expectations and predictions.	Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models.	Model risk is: • measured by reference to model performance tracking and the output of detailed technical reviews, with key metrics including model review statuses and findings;  • monitored against model risk appetite statements, insight from the independent review function, feedback from internal and external audits, and regulatory reviews; and • managed by creating and communicating appropriate policies, procedures and guidance, training colleagues in their application, and supervising their adoption to ensure operational effectiveness.

Our insurance manufacturing subsidiaries are regulated separately from our banking operations. Risks in our insurance entities are managed using methodologies and processes that are subject to Group oversight. Our insurance operations are also subject to many of the same risks as our banking operations, and these are covered by the Group's risk management processes. However, there are specific risks inherent to the insurance operations as noted below.

Description of risks - insurance manufacturing operations
Financial risk (see page 214)
For insurance entities, financial risk includes the risk of not being able  to effectively match liabilities arising under insurance contracts with appropriate investments and that the expected sharing of financial performance with policyholders under certain contracts is not possible.	Exposure to financial risk arises from: • market risk affecting the fair values of financial assets or their future cash flows; • credit risk; and • liquidity risk of entities being unable to make payments to policyholders as they fall due.	Financial risk is: • measured (i) for credit risk, in terms of economic capital and the amount that could be lost if a counterparty fails to make repayments; (ii) for market risk, in terms of economic capital, internal metrics and fluctuations in key financial variables; and (iii) for liquidity risk, in terms of internal metrics including stressed operational cash flow projections; • monitored through a framework of approved limits and delegated authorities; and • managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance. This includes using product design, asset liability matching and bonus rates.
Insurance risk (see page 216)
Insurance risk is the risk that, over time, the cost of insurance policies written, including claims and benefits, may exceed the total amount of premiums and investment income received.	The cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, as well as lapse and surrender rates.	Insurance risk is: • measured in terms of life insurance liabilities and economic capital allocated to insurance underwriting risk; • monitored through a framework of approved limits and delegated authorities; and • managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance. This includes using product design, underwriting, reinsurance and claims-handling procedures.

Credit risk
	Page
Overview	137
Credit risk management	137
Credit risk in 2021	139
Summary of credit risk	140
Stage 2 decomposition as at December 2021	143
Credit exposure	143
Measurement uncertainty and sensitivity analysis of ECL estimates	144
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees	154
Credit quality	155
Customer relief programmes	159
Wholesale lending	162
Personal lending	176
Supplementary information	183
HSBC Holdings	188

Overview

Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. Credit risk arises principally from direct lending, trade finance and leasing business, but also from other products such as guarantees and credit derivatives.

Credit risk management

Key developments in 2021

There were no material changes to the policies and practices for the management of credit risk in 2021. We continued to apply the requirements of IFRS 9 'Financial Instruments' within the Credit Risk sub-function.

Due to the Covid-19 pandemic and its continued effects on the global economy we provided short-term support to customers through market-specific measures under the current credit policy framework. We have also implemented the guidance provided by regulators on managing the credit portfolio as required throughout the course of the customer relief life cycle.

The extent of our support depends on the degree of country-specific government support measures, restrictions, associated policy responses, and the effects of new Covid-19 variants.

The majority of the customer relief programmes that we provided during the Covid-19 pandemic ended by 31 December 2021 and will not be reassessed under the revised definition of default. For further details of market-specific measures to support our personal and business customers, see page 159.

In the second half of 2021, market concerns regarding China's commercial real estate sector emerged. At 31 December 2021 we had no direct exposures to developers in the 'red' category under the Chinese government's 'three red lines' framework used to govern the real estate sector. We continue to monitor the situation closely, including potential indirect impacts that may arise, and seek to take mitigating actions as required under our existing policy framework.

During 2021, we adopted the EBA 'Guidelines on the application of definition of default' for our wholesale portfolios. This did not have a material impact on our wholesale portfolios. For our retail portfolios, these guidelines will be adopted in 2022 and this is not expected to have a material impact.

Governance and structure

We have established Group-wide credit risk management and related IFRS 9 processes. We continue to assess the impact of economic developments in key markets on specific customers, customer segments or portfolios. As credit conditions change, we take mitigating actions, including the revision of risk appetites or limits and tenors, as appropriate. In addition, we continue to evaluate the terms under which we provide credit facilities within the context of individual customer requirements, the quality of the relationship, local regulatory requirements, market practices and our local market position.
Credit Risk sub-function

(Audited)

Credit approval authorities are delegated by the Board to the Group Chief Executive together with the authority to sub-delegate them. The Credit Risk sub-function in Global Risk and Compliance is responsible for the key policies and processes for managing credit risk, which include formulating Group credit policies and risk rating frameworks, guiding the Group's appetite for credit risk exposures, undertaking independent reviews and objective assessment of credit risk, and monitoring performance and management of portfolios.

The principal objectives of our credit risk management are:

• to maintain across HSBC a strong culture of responsible lending, and robust risk policies and control frameworks;

• to both partner and challenge our businesses in defining, implementing and continually re-evaluating our risk appetite under actual and scenario conditions; and

• to ensure there is independent, expert scrutiny of credit risks, their costs and their mitigation.

Key risk management processes

IFRS 9 'Financial Instruments' process

The IFRS 9 process comprises three main areas: modelling and data; implementation; and governance.

Modelling and data

We have established IFRS 9 modelling and data processes in various geographies, which are subject to internal model risk governance including independent review of significant model developments.

Implementation

A centralised impairment engine performs the expected credit losses calculation using data, which is subject to a number of validation checks and enhancements, from a variety of client, finance and risk systems. Where possible, these checks and processes are performed in a globally consistent and centralised manner.

Governance

Regional management review forums are established in key sites and regions in order to review and approve the impairment results. Regional management review forums have representatives from Credit Risk and Finance. The key site and regional approvals are reported up to the global business impairment committee for final approval of the Group's ECL for the period. Required members of the committee are the global heads of Wholesale Credit, Market Risk, and Wealth and Personal Banking Risk, as well as the relevant global business Chief Financial Officer and the Global Financial Controller.

Concentration of exposure

(Audited)

Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic characteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas or industry sectors so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. We use a number of controls and measures to minimise undue concentration of exposure in our portfolios across industries, countries and global businesses. These include portfolio and counterparty limits, approval and review controls, and stress testing.

Credit quality of financial instruments

(Audited)

Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the Group to support the calculation of our minimum credit regulatory capital requirement. The five credit quality classifications encompass a range of granular internal credit rating grades assigned to wholesale and retail customers, and the external ratings attributed by external agencies to debt securities.

For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications based upon the mapping of related customer risk rating ('CRR') to external credit rating.

Wholesale lending

The CRR 10-grade scale summarises a more granular underlying 23-grade scale of obligor probability of default ('PD'). All corporate customers are rated using the 10- or 23-grade scale, depending on the degree of sophistication of the Basel approach adopted for the exposure.

Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by the average of issuer-weighted historical default rates. This mapping between internal and external ratings is indicative and may vary over time.

Retail lending

Retail lending credit quality is based on a 12-month point-in-time probability-weighted PD.

Credit quality classification
	Sovereign debt securities and bills	Other debt securities and bills	Wholesale lending and derivatives		Retail lending
	External credit rating	External credit rating	Internal credit rating	12-month Basel probability of default %	Internal credit rating	12 month probability- weighted PD %
Quality classification1,2
Strong	BBB and above	A- and above	CRR 1 to CRR 2	0-0.169	Band 1 and 2	0.000-0.500
Good	BBB- to BB	BBB+ to BBB-	CRR 3	0.170-0.740	Band 3	0.501-1.500
Satisfactory	BB- to B and unrated	BB+ to B and unrated	CRR 4 to CRR 5	0.741-4.914	Band 4 and 5	1.501-20.000
Sub-standard	B- to C	B- to C	CRR 6 to CRR 8	4.915-99.999	Band 6	20.001-99.999
Credit impaired	Default	Default	CRR 9 to CRR 10	100	Band 7	100

1  Customer risk rating ('CRR').

2  12-month point-in-time probability-weighted probability of default ('PD').

Quality classification definitions • 'Strong' exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of expected loss. • 'Good' exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. • 'Satisfactory' exposures require closer monitoring and demonstrate an average-to-fair capacity to meet financial commitments, with moderate default risk. • 'Sub-standard' exposures require varying degrees of special attention and default risk is of greater concern. • 'Credit-impaired' exposures have been assessed as described on Note 1.2(i) on the financial statements.

Renegotiated loans and forbearance

(Audited)

'Forbearance' describes concessions made on the contractual terms of a loan in response to an obligor's financial difficulties.

A loan is classed as 'renegotiated' when we modify the contractual payment terms on concessionary terms because we have significant concerns about the borrowers' ability to meet contractual payments when due. Non-payment-related concessions (e.g. covenant waivers), while potential indicators of impairment, do not trigger identification as renegotiated loans under our existing disclosures.

Loans that have been identified as renegotiated retain this designation until maturity or derecognition under our existing disclosures.

For details of our policy on derecognised renegotiated loans, see Note 1.2(i) on the financial statements.

Credit quality of renegotiated loans

On execution of a renegotiation, the loan will also be classified as credit impaired if it is not already so classified. In wholesale lending, all facilities with a customer, including loans that have not been modified, are considered credit impaired following the identification of a renegotiated loan under our existing disclosures.

Wholesale renegotiated loans are classified as credit impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period, and there are no other indicators of impairment. Personal renegotiated loans generally remain credit impaired until repayment, write-off or derecognition.

Renegotiated loans and recognition of expected credit losses

(Audited)

For retail lending, unsecured renegotiated loans are generally segmented from other parts of the loan portfolio. Renegotiated expected credit loss assessments reflect the higher rates of losses typically encountered with renegotiated loans. For wholesale lending, renegotiated loans are typically assessed individually. Credit risk ratings are intrinsic to the impairment assessments. The individual impairment assessment takes into account the higher risk of the future non-payment inherent in renegotiated loans.

Customer relief programmes and renegotiated loans

In response to the Covid-19 pandemic, governments and regulators around the world encouraged a range of customer relief programmes including payment deferrals. In determining whether a customer is experiencing financial difficulty for the purposes of identifying renegotiated loans a payment deferral requested under such schemes, or an extension thereof, is not automatically determined to be evidence of financial difficulty and would therefore not automatically trigger identification as renegotiated loans. Rather, information provided by payment deferrals is considered in the context of other reasonable and supportable information. The IFRS 9 treatment of customer relief programmes is explained on page 159.

Impairment assessment

(Audited)

For details of our impairment policies on loans and advances and financial investments, see Note 1.2(i) on the financial statements.

Write-off of loans and advances

(Audited)

For details of our policy on the write-off of loans and advances, see Note 1.2(i) on the financial statements.

Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due. The standard period runs until the end of the month in which the account becomes 180 days contractually delinquent. However, in exceptional circumstances to achieve a fair customer outcome, and in line with regulatory expectations, they may be extended further.

For secured facilities, write-off should occur upon repossession of collateral, receipt of proceeds via settlement, or determination that recovery of the collateral will not be pursued.

Any secured assets maintained on the balance sheet beyond
60 months of consecutive delinquency-driven default require additional monitoring and review to assess the prospect of recovery.

There are exceptions in a few countries and territories where local regulation or legislation constrains earlier write-off, or where the realisation of collateral for secured real estate lending takes more time. Write-off, either partially or in full, may be earlier when there is no reasonable expectation of further recovery, for example, in the event of a bankruptcy or equivalent legal proceedings. Collection procedures may continue after write-off.

Credit risk in 2021

At 31 December 2021, gross loans and advances to customers and banks of $1,140bn increased by $6.3bn, compared with 31 December 2020. This included adverse foreign exchange movements of $17.0bn and a $2.4bn decrease due to domestic mass market retail banking in the US being reclassified to assets held for sale.

Excluding foreign exchange movements, the growth was driven by a $24.0bn increase in personal loans and advances to customers and a $3.0bn increase in loans and advances to banks. Wholesale loans and advances to customers decreased by $3.7bn.

The increase in personal loans and advances to customers was driven by mortgage growth of $22.8bn, mainly in the UK (up $10.1bn), Hong Kong (up $6.6bn), Canada (up $3.4bn) and Australia (up $2.1bn). Other personal lending increased by $1.2bn, mainly from unsecured personal lending in Hong Kong (up $1.0bn) and Latin America (up $0.7bn), as well as guaranteed loans in respect of residential property in France (up $0.8bn). These were offset by a decrease in credit cards mainly in the US (down $0.9bn).

At 31 December 2021, the allowance for ECL of $12.2bn decreased by $3.5bn compared with 31 December 2020, including favourable foreign exchange movements of $0.4bn. The $12.2bn allowance comprised $11.6bn in respect of assets held at amortised cost, $0.4bn in respect of loan commitments and financial guarantees, and $0.1bn in respect of debt instruments measured at fair value through other comprehensive income ('FVOCI').

During the first half of 2021, the Group experienced a release in allowances for ECL, reflecting an improvement of the economic outlook. This trend continued during the second half of the year following better than expected levels of credit performance and lower levels of stage 3 charges. However, in the later part of the

year the trend slowed down due to the emergence of the new Omicron variant and the recent developments in China's commercial real estate sector.

Excluding foreign exchange movements, the allowance for ECL in relation to loans and advances to customers decreased by $2.7bn from 31 December 2020. This was attributable to:

• a $1.2bn decrease in wholesale loans and advances to customers, of which $1.0bn was driven by stages 1 and 2; and

• a $1.5bn decrease in personal loans and advances to customers, of which $1.3bn was driven by stages 1 and 2.

During the first six months of the year, the Group experienced significant migrations from stage 2 to stage 1, reflecting an improvement of the economic outlook. This trend continued during the second half of 2021 as forecasts underpinning forward economic guidance stabilised.

Stage 3 balances at 31 December 2021 remained broadly stable compared with 31 December 2020.

The ECL release for 2021 was $0.9bn, inclusive of recoveries. This release comprised $0.6bn in respect of wholesale lending, of which the stage 3 and purchased or originated credit impaired ('POCI') charge was $0.5bn, and $0.3bn in respect of personal lending, of which the stage 3 charge was $0.4bn. Uncertainty remains as countries recover from the pandemic at different speeds, government support measures unwind and the emergence of new strains of the virus continue to test the efficacy of vaccination programmes.

During 2021, we continued to provide Covid-19-related support to customers under the current policy framework. For further details of market-specific measures to support our personal and business customers, see page 159.

Income statement movements are analysed further on page 92.

While credit risk arises across most of our balance sheet, ECL have typically been recognised on loans and advances to customers and banks, in addition to securitisation exposures and other structured products. As a result, our disclosures focus primarily on these two areas. For further details of:

• maximum exposure to credit risk, see page 144;

• measurement uncertainty and sensitivity analysis of ECL estimates, see page 144;

• reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees, see page 152;

• credit quality, see page 155;

• customer relief programmes, see page 159;

• total wholesale lending for loans and advances to banks and customers by stage distribution, see page 163;

• wholesale lending collateral, see page 169;

• total personal lending for loans and advances to customers at amortised cost by stage distribution, see page 177; and

• personal lending collateral, see page 181.

•

Summary of credit risk

The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in IFRS 9 are applied and the associated allowance for ECL.

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied
(Audited)
	31 Dec 2021		At 31 Dec 2020
	Gross carrying/nominal amount	Allowance for ECL1	Gross carrying/nominal amount	Allowance for ECL1
	$m	$m	$m	$m
Loans and advances to customers at amortised cost	1,057,231	(11,417)	1,052,477	(14,490)
-  personal	478,337	(3,103)	460,809	(4,731)
-  corporate and commercial	513,539	(8,204)	527,088	(9,494)
-  non-bank financial institutions	65,355	(110)	64,580	(265)
Loans and advances to banks at amortised cost	83,153	(17)	81,658	(42)
Other financial assets measured at amortised cost	880,351	(193)	772,408	(175)
-  cash and balances at central banks	403,022	(4)	304,486	(5)
-  items in the course of collection from other banks	4,136	-	4,094	-
-  Hong Kong Government certificates of indebtedness	42,578	-	40,420	-
-  reverse repurchase agreements - non-trading	241,648	-	230,628	-
-  financial investments	97,364	(62)	88,719	(80)
-  prepayments, accrued income and other assets2	91,603	(127)	104,061	(90)
Total gross carrying amount on-balance sheet	2,020,735	(11,627)	1,906,543	(14,707)
Loans and other credit-related commitments	627,637	(379)	659,783	(734)
-  personal	239,685	(39)	236,170	(40)
-  corporate and commercial	283,625	(325)	299,802	(650)
-  financial	104,327	(15)	123,811	(44)
Financial guarantees	27,795	(62)	18,384	(125)
-  personal	1,130	-	900	(1)
-  corporate and commercial	22,355	(58)	12,946	(114)
-  financial	4,310	(4)	4,538	(10)
Total nominal amount off-balance sheet3	655,432	(441)	678,167	(859)
	2,676,167	(12,068)	2,584,710	(15,566)
	Fair value	Memorandum allowance for ECL4	Fair value	Memorandum allowance for ECL4
	$m	$m	$m	$m
Debt instruments measured at fair value through other comprehensive income ('FVOCI')	347,203	(96)	399,717	(141)

1  The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.

2  Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets', as presented within the consolidated balance sheet on page 310, includes both financial and non-financial assets. The 31 December 2021 balances include $2,424m gross carrying amounts and $39m allowances for ECL related to assets held for sale due to the exit of domestic mass market retail banking in the US.

3  Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

4  Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is recognised in 'Change in expected credit losses and other credit impairment charges' in the income statement.

The following table provides an overview of the Group's credit risk by stage and industry, and the associated ECL coverage. The financial assets recorded in each stage have the following characteristics:

• Stage 1: These financial assets are unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL is recognised.

• Stage 2: A significant increase in credit risk has been experienced on these financial assets since initial recognition for which a lifetime ECL is recognised.

•
Stage 3: There is objective evidence of impairment and the financial assets are therefore considered to be in default or otherwise credit impaired on which a lifetime ECL is recognised.

• POCI: Financial assets that are purchased or originated at a deep discount are seen to reflect the incurred credit losses on which a lifetime ECL is recognised.

•

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2021
(Audited)
	Gross carrying/nominal amount1					Allowance for ECL					ECL coverage %
	Stage 1	Stage 2	Stage 3	POCI2	Total	Stage 1	Stage 2	Stage 3	POCI2	Total	Stage 1	Stage 2	Stage 3	POCI2	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	%	%	%	%	%
Loans and advances to customers at amortised cost	918,936	119,224	18,797	274	1,057,231	(1,367)	(3,119)	(6,867)	(64)	(11,417)	0.1	2.6	36.5	23.4	1.1
-  personal	456,956	16,439	4,942	-	478,337	(658)	(1,219)	(1,226)	-	(3,103)	0.1	7.4	24.8	-	0.6
-  corporate and commercial	400,894	98,911	13,460	274	513,539	(665)	(1,874)	(5,601)	(64)	(8,204)	0.2	1.9	41.6	23.4	1.6
-  non-bank financial institutions	61,086	3,874	395	-	65,355	(44)	(26)	(40)	-	(110)	0.1	0.7	10.1	-	0.2
Loans and advances to banks at amortised cost	81,636	1,517	-	-	83,153	(14)	(3)	-	-	(17)	-	0.2	-	-	-
Other financial assets measured at amortised cost	875,016	4,988	304	43	880,351	(91)	(54)	(42)	(6)	(193)	-	1.1	13.8	14.0	-
Loan and other credit-related commitments	594,473	32,389	775	-	627,637	(165)	(174)	(40)	-	(379)	-	0.5	5.2	-	0.1
-  personal	237,770	1,747	168	-	239,685	(37)	(2)	-	-	(39)	-	0.1	-	-	-
-  corporate and commercial	254,750	28,269	606	-	283,625	(120)	(165)	(40)	-	(325)	-	0.6	6.6	-	0.1
-  financial	101,953	2,373	1	-	104,327	(8)	(7)	-	-	(15)	-	0.3	-	-	-
Financial guarantees	24,932	2,638	225	-	27,795	(11)	(30)	(21)	-	(62)	-	1.1	9.3	-	0.2
-  personal	1,114	15	1	-	1,130	-	-	-	-	-	-	-	-	-	-
-  corporate and commercial	20,025	2,107	223	-	22,355	(10)	(28)	(20)	-	(58)	-	1.3	9.0	-	0.3
-  financial	3,793	516	1	-	4,310	(1)	(2)	(1)	-	(4)	-	0.4	100.0	-	0.1
At 31 Dec 2021	2,494,993	160,756	20,101	317	2,676,167	(1,648)	(3,380)	(6,970)	(70)	(12,068)	0.1	2.1	34.7	22.1	0.5

1  Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

2  Purchased or originated credit-impaired ('POCI').

Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days past due ('DPD') and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of stage 2

financial assets by those less than 30 days and greater than 30 DPD and therefore presents those financial assets classified as stage 2 due to ageing (30 DPD) and those identified at an earlier stage (less than 30 DPD).

Stage 2 days past due analysis at 31 December 2021
(Audited)
	Gross carrying amount				Allowance for ECL				ECL coverage %
	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2
	$m	$m	$m	$m	$m	$m	$m	$m	%	%	%	%
Loans and advances to customers at amortised cost	119,224	115,350	2,193	1,681	(3,119)	(2,732)	(194)	(193)	2.6	2.4	8.8	11.5
-  personal	16,439	14,124	1,387	928	(1,219)	(884)	(160)	(175)	7.4	6.3	11.5	18.9
-  corporate and commercial	98,911	97,388	806	717	(1,874)	(1,822)	(34)	(18)	1.9	1.9	4.2	2.5
-  non-bank financial institutions	3,874	3,838	-	36	(26)	(26)	-	-	0.7	0.7	-	-
Loans and advances to banks at amortised cost	1,517	1,517	-	-	(3)	(3)	-	-	0.2	0.2	-	-
Other financial assets measured at amortised cost	4,988	4,935	22	31	(54)	(47)	(4)	(3)	1.1	1.0	18.2	9.7

1  Days past due ('DPD').

2  The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2020 (continued)
(Audited)
	Gross carrying/nominal amount1					Allowance for ECL					ECL coverage %
	Stage 1	Stage 2	Stage 3	POCI2	Total	Stage 1	Stage 2	Stage 3	POCI2	Total	Stage 1	Stage 2	Stage 3	POCI2	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	%	%	%	%	%
Loans and advances to customers at amortised cost	869,920	163,185	19,095	277	1,052,477	(1,974)	(4,965)	(7,439)	(112)	(14,490)	0.2	3.0	39.0	40.4	1.4
-  personal	430,134	25,064	5,611	-	460,809	(827)	(2,402)	(1,502)	-	(4,731)	0.2	9.6	26.8	-	1.0
-  corporate and commercial	387,563	126,287	12,961	277	527,088	(1,101)	(2,444)	(5,837)	(112)	(9,494)	0.3	1.9	45.0	40.4	1.8
-  non-bank financial institutions	52,223	11,834	523	-	64,580	(46)	(119)	(100)	-	(265)	0.1	1.0	19.1	-	0.4
Loans and advances to banks at amortised cost	79,654	2,004	-	-	81,658	(33)	(9)	-	-	(42)	-	0.4	-	-	0.1
Other financial assets measured at amortised cost	768,216	3,975	177	40	772,408	(80)	(44)	(42)	(9)	(175)	-	1.1	23.7	22.5	-
Loan and other credit-related commitments	604,485	54,217	1,080	1	659,783	(290)	(365)	(78)	(1)	(734)	-	0.7	7.2	100.0	0.1
-  personal	234,337	1,681	152	-	236,170	(39)	(1)	-	-	(40)	-	0.1	-	-	-
-  corporate and commercial	253,062	45,851	888	1	299,802	(236)	(338)	(75)	(1)	(650)	0.1	0.7	8.4	100.0	0.2
-  financial	117,086	6,685	40	-	123,811	(15)	(26)	(3)	-	(44)	-	0.4	7.5	-	-
Financial guarantees	14,090	4,024	269	1	18,384	(37)	(62)	(26)	-	(125)	0.3	1.5	9.7	-	0.7
-  personal	872	26	2	-	900	-	(1)	-	-	(1)	-	3.8	-	-	0.1
-  corporate and commercial	9,536	3,157	252	1	12,946	(35)	(54)	(25)	-	(114)	0.4	1.7	9.9	-	0.9
-  financial	3,682	841	15	-	4,538	(2)	(7)	(1)	-	(10)	0.1	0.8	6.7	-	0.2
At 31 Dec 2020	2,336,365	227,405	20,621	319	2,584,710	(2,414)	(5,445)	(7,585)	(122)	(15,566)	0.1	2.4	36.8	38.2	0.6

1  Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

2  Purchased or originated credit-impaired ('POCI').

Stage 2 days past due analysis at 31 December 2020
(Audited)
	Gross carrying amount				Allowance for ECL				ECL coverage %
	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2
	$m	$m	$m	$m	$m	$m	$m	$m	%	%	%	%
Loans and advances to customers at amortised cost	163,185	159,367	2,052	1,766	(4,965)	(4,358)	(275)	(332)	3.0	2.7	13.4	18.8
-  personal	25,064	22,250	1,554	1,260	(2,402)	(1,895)	(227)	(280)	9.6	8.5	14.6	22.2
-  corporate and commercial	126,287	125,301	489	497	(2,444)	(2,344)	(48)	(52)	1.9	1.9	9.8	10.5
-  non-bank financial institutions	11,834	11,816	9	9	(119)	(119)	-	-	1.0	1.0	-	-
Loans and advances to banks at amortised cost	2,004	2,004	-	-	(9)	(9)	-	-	0.4	0.4	-	-
Other financial assets measured at amortised cost	3,975	3,963	3	9	(44)	(44)	-	-	1.1	1.1	-	-

1  Days past due ('DPD').

2  The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted. 

Stage 2 decomposition at 31 December 2021

The following disclosure presents the stage 2 decomposition of gross carrying amount and allowances for ECL for loans and advances to customers.

The table below discloses the reasons why an exposure moved into stage 2 originally, and is therefore presented as a significant increase in credit risk since origination.

The quantitative classification shows when the relevant reporting date PD measure exceeds defined quantitative thresholds for retail and wholesale exposures, as set out in Note 1.2 'Summary of significant accounting policies', on page 324.

The qualitative classification primarily accounts for CRR deterioration, watch and worry and retail management judgemental adjustments.

For further details on our approach to the assessment of significant increase in credit risk, see 'Summary of significant accounting policies' on page 324.

Loans and advances to customers1
	Gross carrying amount				Allowance for ECL				ECL coverage  Total
	Personal	Corporate and commercial	Non-bank financial institutions	Total	Personal	Corporate and commercial	Non-bank financial institutions	Total
	$m	$m	$m	$m	$m	$m	$m	$m	%
Quantitative	9,907	68,000	3,041	80,948	(1,076)	(1,347)	(19)	(2,442)	3.0
Qualitative	6,329	30,326	818	37,473	(134)	(520)	(7)	(661)	1.8
30 DPD backstop2	203	585	15	803	(9)	(7)	-	(16)	2.0
Total stage 2	16,439	98,911	3,874	119,224	(1,219)	(1,874)	(26)	(3,119)	2.6

1  Where balances satisfy more than one of the above three criteria for determining a significant increase in credit risk, the corresponding gross exposure and ECL have been assigned in order of categories presented.

2  Days past due ('DPD').

Credit exposure

Maximum exposure to credit risk

(Audited)

This section provides information on balance sheet items and their offsets as well as loan and other credit-related commitments.

Commentary on consolidated balance sheet movements in 2021 is provided on page 96.

The offset on derivatives remains in line with the movements in maximum exposure amounts.

'Maximum exposure to credit risk' table The following table presents our maximum exposure before taking account of any collateral held or other credit enhancements (unless such enhancements meet accounting offsetting requirements). The table excludes financial instruments whose carrying amount best represents the net exposure to credit risk, and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount and is net of the allowance for ECL. For financial guarantees and other guarantees granted, it is the maximum amount that we would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments, it is generally the full amount of the committed facilities. The offset in the table relates to amounts where there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes. No offset has been applied to off-balance sheet collateral. In the case of derivatives, the offset column also includes collateral received in cash and other financial assets.

Other credit risk mitigants

While not disclosed as an offset in the following 'Maximum exposure to credit risk' table, other arrangements are in place that reduce our maximum exposure to credit risk. These include a charge over collateral on borrowers' specific assets, such as residential properties, collateral held in the form of financial instruments that are not held on the balance sheet and short positions in securities. In addition, for financial assets held as part of linked insurance/investment contracts the risk is predominantly borne by the policyholder. See page 322 and Note 30 on the financial statements for further details of collateral in respect of certain loans and advances and derivatives.

Collateral available to mitigate credit risk is disclosed in the 'Collateral' section on page 169.

Maximum exposure to credit risk
(Audited)
	2021			2020
	Maximum exposure	Offset	Net	Maximum exposure	Offset	Net
	$m	$m	$m	$m	$m	$m
Loans and advances to customers held at amortised cost	1,045,814	(22,838)	1,022,976	1,037,987	(27,221)	1,010,766
-  personal	475,234	(4,461)	470,773	456,078	(4,287)	451,791
-  corporate and commercial	505,335	(16,824)	488,511	517,594	(21,102)	496,492
-  non-bank financial institutions	65,245	(1,553)	63,692	64,315	(1,832)	62,483
Loans and advances to banks at amortised cost	83,136	-	83,136	81,616	-	81,616
Other financial assets held at amortised cost	882,708	(12,231)	870,477	774,116	(14,668)	759,448
-  cash and balances at central banks	403,018	-	403,018	304,481	-	304,481
-  items in the course of collection from other banks	4,136	-	4,136	4,094	-	4,094
-  Hong Kong Government certificates of indebtedness	42,578	-	42,578	40,420	-	40,420
-  reverse repurchase agreements - non-trading	241,648	(12,231)	229,417	230,628	(14,668)	215,960
-  financial investments	97,302	-	97,302	88,639	-	88,639
-  prepayments, accrued income and other assets	94,026	-	94,026	105,854	-	105,854
Derivatives	196,882	(188,284)	8,598	307,726	(293,240)	14,486
Total on-balance sheet exposure to credit risk	2,208,540	(223,353)	1,985,187	2,201,445	(335,129)	1,866,316
Total off-balance sheet	928,183	-	928,183	940,185	-	940,185
-  financial and other guarantees	113,088	-	113,088	96,147	-	96,147
-  loan and other credit-related commitments	815,095	-	815,095	844,038	-	844,038
At 31 Dec	3,136,723	(223,353)	2,913,370	3,141,630	(335,129)	2,806,501

Concentration of exposure

We have a number of global businesses with a broad range of products. We operate in a number of geographical markets with the majority of our exposures in Asia and Europe.

For an analysis of:

• financial investments, see Note 17 on the financial statements;

• trading assets, see Note 11 on the financial statements;

• derivatives, see page 176 and Note 16 on the financial statements; and

• loans and advances by industry sector and by the location of the principal operations of the lending subsidiary (or, in the case of the operations of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, HSBC Bank Middle East Limited and HSBC Bank USA, by the location of the lending branch), see page 162 for wholesale lending and page 176 for personal lending.

Credit deterioration of financial instruments

(Audited)

A summary of our current policies and practices regarding the identification, treatment and measurement of stage 1, stage 2, stage 3 (credit impaired) and POCI financial instruments can be found in Note 1.2 on the financial statements.

Measurement uncertainty and sensitivity analysis of ECL estimates

(Audited)

Despite a broad recovery in economic conditions during 2021, ECL estimates continued to be subject to a high degree of uncertainty, and management judgements and estimates continued to reflect a degree of caution, both in the selection of economic scenarios and their weightings, and through management judgemental adjustments. Releases of provisions were made progressively as economic conditions recovered and by 31 December 2021 the majority of the 2020 uplift in ECL provisions had been reversed. By the end of 2021, we retained $0.6bn (15%) of the $3.9bn uplift in stage 1 and stage 2 ECL provisions on loans made during 2020.

The recognition and measurement of ECL involves the use of significant judgement and estimation. We form multiple economic scenarios based on economic forecasts, apply these assumptions to credit risk models to estimate future credit losses, and probability-weight the results to determine an unbiased ECL estimate. Management judgemental adjustments are used to address late-breaking events, data and model limitations, model deficiencies and expert credit judgements. 

Methodology

Four economic scenarios are used to capture the current economic environment and to articulate management's view of the range of potential outcomes. Scenarios produced to calculate ECL are aligned to HSBC's top and emerging risks.

In the second quarter of 2020, to ensure that the severe risks associated with the pandemic were appropriately captured, management added a fourth, more severe, scenario to use in the measurement of ECL. Starting in the fourth quarter of 2021, HSBC's methodology has been adjusted so that the use of four scenarios, of which two are Downside scenarios, is the standard approach to ECL calculation.

Three of the scenarios are drawn from consensus forecasts and distributional estimates. The Central scenario is deemed the 'most likely' scenario, and usually attracts the largest probability weighting, while the outer scenarios represent the tails of the distribution, which are less likely to occur. The Central scenario is created using the average of a panel of external forecasters. Consensus Upside and Downside scenarios are created with reference to distributions for select markets that capture forecasters' views of the entire range of outcomes. In the later years of the scenarios, projections revert to long-term consensus trend expectations. In the consensus outer scenarios, reversion to trend expectations is done mechanically with reference to historically observed quarterly changes in the values of macroeconomic variables.

The fourth scenario, Downside 2, is designed to represent management's view of severe downside risks. It is a globally consistent narrative-driven scenario that explores more extreme economic outcomes than those captured by the consensus scenarios. In this scenario, variables do not, by design, revert to long-term trend expectations. They may instead explore alternative states of equilibrium, where economic activity moves permanently away from past trends.

The consensus Downside and the consensus Upside scenarios are each constructed to be consistent with a 10% probability. The Downside 2 is constructed with a 5% probability. The Central scenario is assigned the remaining 75%. This weighting scheme is deemed appropriate for the unbiased estimation of ECL in most circumstances. However, management may depart from this probability-based scenario weighting approach when the economic outlook is determined to be particularly uncertain and risks are elevated.

In light of ongoing risks, related primarily to the Covid-19 pandemic, management deviated from this probability weighting in most markets in the fourth quarter of 2021.

Description of economic scenarios

The economic assumptions presented in this section have been formed by HSBC with reference to external forecasts specifically for the purpose of calculating ECL.

The global economy experienced a recovery in 2021, following an unprecedented contraction in 2020. Restrictions to mobility and travel eased across our key markets, aided by the successful roll-out of vaccination programmes. The emergence of new variants that potentially reduce the efficacy of vaccines remains a risk.

Economic forecasts remain subject to a high degree of uncertainty. Risks to the economic outlook are dominated by the progression of the pandemic, vaccine roll-out and the public policy response. Geopolitical risks also remain significant and include continued differences between the US and other countries with China over a range of economic and strategic defence issues. Continued uncertainty over the long-term economic relationship between the UK and EU also present downside risks.

The scenarios used to calculate ECL in the Annual Report and Accounts 2021 are described below.

The consensus Central scenario

HSBC's Central scenario features a continued recovery in economic growth in 2022 as activity and employment gradually return to the levels reached prior to the outbreak of Covid-19.

Our Central scenario assumes that the stringent restrictions on activity, imposed across several countries and territories in 2020 and 2021 are not repeated. The new viral strain that emerged late in 2021, Omicron, has only a limited impact on the recovery, according to this scenario. Consumer spending and business investment, supported by elevated levels of private sector savings, are expected to drive the economic recovery as fiscal and monetary policy support recedes.

Regional differences in the speed of economic recovery in the Central scenario reflect differences over the progression of the pandemic, roll-out of vaccination programmes, national level restrictions imposed and scale of support measures. Global GDP is expected to grow by 4.2% in 2022 in the Central scenario and the average rate of global GDP growth is 3.1% over the five-year

forecast period. This exceeds the average growth rate over the five-year period prior to the onset of the pandemic.

The key features of our Central scenario are:

• Economic activity in our top eight markets continues to recover. GDP grows at a moderate rate and exceeds pre-pandemic levels across all our key markets in 2022.

• Unemployment declines to levels only slightly higher than existed pre-pandemic, with the exception of France where the downward trend in unemployment, related to structural changes to the labour market, resumes.

• Covid-19-related fiscal spending recedes in 2022 as fewer restrictions on activity allow fiscal support to be withdrawn. Deficits remain high in several countries as they embark on multi-year investment programmes to support recovery, productivity growth and climate transition.

• Inflation across many of our key markets remains elevated through 2022. Supply-driven price pressures persist through the first half of 2022 before gradually easing. In subsequent years, inflation quickly converges back towards central bank target rates.

• Policy interest rates in key markets rise gradually over our projection period, in line with economic recovery.

• The West Texas Intermediate oil price is forecast to average $62 per barrel over the projection period.

In the longer term, growth reverts back towards similar rates that existed prior to the pandemic, suggesting that the damage to long-term economic prospects is expected to be minimal.

The Central scenario was first created with forecasts available in November, and subsequently updated in December. Probability weights assigned to the Central scenario vary from 60% to 80% and reflect relative differences in uncertainty across markets.

The following table describes key macroeconomic variables and the probabilities assigned in the consensus Central scenario.

Central scenario 2022-2026
	UK	US	Hong Kong	Mainland China	Canada	France	UAE	Mexico
	%	%	%	%	%	%	%	%
GDP growth rate
2022: Annual average growth rate	5.0	4.0	3.1	5.3	4.1	3.9	4.4	2.9
2023: Annual average growth rate	2.1	2.4	2.9	5.4	2.8	2.1	3.4	2.3
2024: Annual average growth rate	1.9	2.1	2.6	5.1	2.0	1.6	3.0	2.2
5-year average	2.5	2.5	2.7	5.1	2.5	2.1	3.2	2.3
Unemployment rate
2022: Annual average rate	4.5	4.2	4.1	3.8	6.3	8.0	3.1	4.0
2023: Annual average rate	4.3	3.8	3.6	3.7	5.9	7.7	3.0	3.9
2024: Annual average rate	4.2	3.8	3.5	3.8	5.8	7.6	2.9	3.8
5-year average	4.3	3.8	3.6	3.8	5.9	7.7	3.0	3.8
House price growth
2022: Annual average growth rate	5.5	10.3	3.4	0.3	6.4	4.9	4.9	5.8
2023: Annual average growth rate	3.3	5.4	2.4	4.7	2.8	4.6	-	5.0
2024: Annual average growth rate	3.3	3.7	2.0	4.9	2.1	4.0	2.1	4.4
5-year average	3.5	5.4	2.6	3.5	3.3	3.9	2.7	4.7
Short-term interest rate
2022: Annual average rate	1.0	0.5	0.5	3.1	1.1	(0.5)	1.1	7.2
2023: Annual average rate	1.3	1.1	1.1	3.2	2.0	(0.3)	1.7	8.1
2024: Annual average rate	1.2	1.5	1.6	3.4	2.2	(0.1)	2.2	8.0
5-year average	1.2	1.3	1.4	3.4	1.9	(0.2)	2.0	7.9
Probability	60	75	70	80	75	60	70	65

The graphs comparing the respective Central scenarios in the fourth quarters of 2020 and 2021 reveal the extent of economic dislocation that occurred in 2020 and compare current economic expectations with those held a year ago.

GDP growth: Comparison

UK

Note: Real GDP shown as year-on-year percentage change.

Hong Kong

Note: Real GDP shown as year-on-year percentage change.

US

Note: Real GDP shown as year-on-year percentage change.

Mainland China

Note: Real GDP shown as year-on-year percentage change.

The consensus Upside scenario

Compared with the Central scenario, the consensus Upside scenario features a faster recovery in economic activity during the first two years, before converging to long-run trend expectations.

The scenario is consistent with a number of key upside risk themes. These include the orderly and rapid global abatement of

Covid-19 via successful containment and ongoing vaccine efficacy; de-escalation of tensions between the US and China; continued fiscal and monetary support; and smooth relations between the UK and the EU.

The following table describes key macroeconomic variables and the probabilities assigned in the consensus Upside scenario.

Consensus Upside scenario best outcome
	UK		US		Hong Kong		Mainland China		Canada		France		UAE		Mexico
	%		%		%		%		%		%		%		%
GDP growth rate	9.9	(1Q22)	7.3	(3Q22)	10.3	(4Q22)	11.8	(4Q22)	9.1	(3Q22)	7.0	(2Q22)	10.8	(1Q22)	7.6	(3Q22)
Unemployment rate	3.0	(4Q23)	2.7	(2Q23)	2.7	(4Q23)	3.5	(1Q23)	5.0	(2Q23)	6.6	(4Q23)	2.3	(4Q23)	3.3	(3Q22)
House price growth	7.4	(2Q23)	14.8	(1Q22)	11.9	(4Q22)	8.2	(4Q22)	16.0	(4Q22)	6.8	(2Q22)	14.4	(2Q22)	9.6	(1Q23)
Short-term interest rate	0.7	(1Q22)	0.4	(1Q22)	0.6	(1Q22)	3.2	(1Q22)	0.9	(1Q22)	(0.5)	(1Q22)	0.9	(1Q22)	8.7	(1Q22)
Probability	10		5		5		5		10		10		5		5

Note: Extreme point in the consensus Upside is 'best outcome' in the scenario, for example the highest GDP growth and the lowest unemployment rate, in the first two years of the scenario.

Downside scenarios

The progress of the pandemic and the ongoing public policy response continue to be a key sources of risk. Downside scenarios assume that new strains of the virus result in an acceleration in infection rates and increased pressure on public health services, necessitating restrictions on activity. The reimposition of such restrictions could be assumed to have a damaging effect on consumer and business confidence.

Government fiscal programmes in advanced economies in 2020 and 2021 were supported by accommodative actions taken by central banks. These measures have provided households and firms with significant support. An inability or unwillingness to

continue with such support or the untimely withdrawal of support present a downside risk to growth.

While Covid-19 and related risks dominate the economic outlook, geopolitical risks also present a threat. These risks include:

• continued differences between the US and other countries with China, which could affect sentiment and restrict global economic activity;

• the re-emergence of social unrest in Hong Kong; and

• potential disagreements between the UK and the EU, which may hinder the ability to reach a more comprehensive agreement on trade and services, despite the Trade and Cooperation Agreement averting a disorderly UK departure.

The consensus Downside scenario

In the consensus Downside scenario, economic recovery is weaker compared with the Central scenario as key global risks, including the Covid-19 pandemic, escalate. Compared with the Central scenario, GDP growth is expected to be lower, unemployment rates rise moderately and asset and commodity

prices fall, before gradually recovering towards their long-run trend expectations.

The following table describes key macroeconomic variables and the probabilities assigned in the consensus Downside scenario.

Consensus Downside scenario worst outcome
	UK		US		Hong Kong		Mainland China		Canada		France		UAE		Mexico
	%		%		%		%		%		%		%		%
GDP growth rate	(0.5)	(3Q23)	0.0	(4Q22)	(1.0)	(4Q22)	2.3	(4Q22)	(0.5)	(4Q22)	0.5	(4Q23)	(2.0)	(4Q22)	(0.7)	(4Q22)
Unemployment rate	5.6	(4Q22)	5.6	(3Q22)	5.6	(2Q22)	4.0	(2Q22)	7.3	(3Q22)	9.1	(3Q22)	4.3	(3Q22)	4.8	(3Q22)
House price growth	(4.2)	(1Q23)	3.0	(4Q23)	(7.9)	(4Q22)	(3.7)	(2Q22)	(2.3)	(4Q22)	2.0	(4Q22)	(6.6)	(1Q23)	2.5	(1Q23)
Short-term interest rate	0.2	(4Q23)	0.3	(1Q22)	0.4	(1Q22)	2.9	(1Q22)	0.5	(3Q23)	(0.5)	(1Q22)	0.6	(4Q23)	4.6	(1Q22)
Probability	15		10		20		10		10		15		20		20

Note: Extreme point in the consensus Downside is 'worst outcome' in the scenario, for example lowest GDP growth and the highest unemployment rate, in the first two years of the scenario.

Downside 2 scenario

The Downside 2 scenario features a deep global recession. In this scenario, new Covid-19 variants emerge that cause infections to rise sharply in 2022, resulting in setbacks to vaccination programmes and the rapid imposition of restrictions on mobility

and travel across some countries. The scenario also assumes governments and central banks are unable to significantly increase fiscal and monetary support, which results in abrupt corrections in labour and asset markets.

The following table describes key macroeconomic variables and the probabilities assigned in the Downside 2 scenario.

Downside 2 scenario worst outcome
	UK		US		Hong Kong		Mainland China		Canada		France		UAE		Mexico
	%		%		%		%		%		%		%		%
GDP growth rate	(4.6)	(4Q22)	(4.6)	(4Q22)	(8.2)	(4Q22)	(4.8)	(4Q22)	(13.9)	(4Q22)	(4.6)	(4Q22)	(12.5)	(4Q22)	(8.5)	(4Q22)
Unemployment rate	7.5	(2Q23)	10.6	(4Q23)	6.1	(4Q22)	5.4	(4Q23)	11.5	(2Q23)	10.0	(4Q23)	4.7	(2Q22)	5.9	(2Q23)
House price growth	(14.2)	(2Q23)	(6.2)	(4Q22)	(17.7)	(4Q22)	(24.8)	(4Q22)	(23.8)	(1Q23)	(6.0)	(2Q23)	(16.2)	(4Q22)	1.0	(2Q23)
Short-term interest rate	1.6	(2Q22)	1.3	(2Q22)	1.3	(2Q22)	4.0	(2Q22)	0.5	(3Q23)	0.4	(2Q22)	1.5	(2Q22)	9.6	(2Q22)
Probability	15		10		5		5		5		15		5		10

Note: Extreme point in the Downside 2 is 'worst outcome' in the scenario, for example lowest GDP growth and the highest unemployment rate, in the first two years of the scenario.

Scenario weighting

In reviewing the economic conjuncture, the level of uncertainty and risk, management has considered both global and country-specific factors. This has led management to assign scenario probabilities that are tailored to its view of uncertainty in individual markets.

To inform its view, management has considered the progression of the virus in individual countries, the speed of vaccine roll-outs, the degree of current and expected future government support and connectivity with other countries. Management has also been guided by the policy response and economic performance through the pandemic, as well as the evidence that economies have adapted as the virus has progressed.

A key consideration in the fourth quarter was the emergence of the new variant, Omicron. The virulence and severity of the new strain, in addition to the continued efficacy of vaccines against it, was unknown when the variant first emerged. Management therefore determined that uncertainty attached to forecasts had increased and sought to reflect this in scenario weightings.

China's significant capacity to extend policy support to the economy and manage through Covid-19-related disruptions, led management to conclude that the outlook for mainland China was the least uncertain of all our key markets. The Central scenario was given an 80% probability while a total of 15% has been assigned to the two Downside scenarios.

In Hong Kong, the combination of recurrent outbreaks and the other risks outlined above led management to assign a 25% weight to the two Downside scenarios.

The UK and France faced the greatest economic uncertainties of our key markets. The emergence of Omicron exacerbated the rise in case rates and hospitalisations in both countries, necessitating the imposition of new restrictions. These increase uncertainties around economic growth and employment. Accordingly, the Central scenario was assigned a 60% weight in both countries. The two Downside scenarios were given a combined probability weighting of 30% for both the UK and France.

For the US, Canada and Mexico, connectivity across the three North American economies has been considered. For the US and Mexico, management similarly sought to reflect the increase in uncertainty by raising the probability weighting of the Downside 2 scenario. The two Downside scenarios combined have been given weights of between 20% and 30%. For Canada, the probability attached to the Downside 2 scenario was reduced. This follows from an adjustment to the methodology used for this scenario, which increased its overall severity. The change aligned the methodology to the global approach and weighting adjustments reflect the greater implied severity. In the UAE, the impact of the oil price on the economy and the ability of non-oil sectors to contribute to economic recovery have influenced the view of uncertainty. The Central scenario has been assigned between 65% and 75% weight for these four markets and, with risks perceived as being weighted to the downside, the two Downside scenarios have been given weights of between 15% and 30%.

The following graphs show the historical and forecasted GDP growth rate for the various economic scenarios in our four largest markets.

US

UK

Hong Kong

Mainland China

Critical accounting estimates and judgements

The calculation of ECL under IFRS 9 involves significant judgements, assumptions and estimates. Despite a general recovery in economic conditions during 2021, the level of estimation uncertainty and judgement has remained high during 2021 as a result of the ongoing economic effects of the Covid-19 pandemic and other sources of economic instability, including significant judgements relating to:

• the selection and weighting of economic scenarios, given rapidly changing economic conditions in an unprecedented manner, uncertainty as to the effect of government and central bank support measures designed to alleviate adverse economic impacts, and a wider distribution of economic forecasts than before the pandemic. The key judgements are the length of time over which the economic effects of the pandemic will occur, and the speed and shape of recovery. The main factors include the effectiveness of pandemic containment measures, the pace of roll-out and effectiveness of vaccines, and the emergence of new variants of the virus, plus a range of geopolitical uncertainties, which together represent a high degree of estimation uncertainty, particularly in assessing Downside scenarios;

• estimating the economic effects of those scenarios on ECL, where there is no observable historical trend that can be reflected in the models that will accurately represent the effects of the economic changes of the severity and speed brought about by the Covid-19 pandemic and the recovery from those conditions. Modelled assumptions and linkages between economic factors and credit losses may underestimate or overestimate ECL in these conditions, and there is significant uncertainty in the estimation of parameters such as collateral values and loss severity; and

• the identification of customers experiencing significant increases in credit risk and credit impairment, particularly where those customers have accepted payment deferrals and other reliefs designed to address short-term liquidity issues given muted default experience to date. The use of segmentation techniques for indicators of significant increases in credit risk involves significant estimation uncertainty.

How economic scenarios are reflected in ECL calculations

Models are used to reflect economic scenarios on ECL estimates. As described above, modelled assumptions and linkages based on historical information could not alone produce relevant information under the conditions experienced in 2021, and management judgemental adjustments were still required to support modelled outcomes. 

We have developed globally consistent methodologies for the application of forward economic guidance into the calculation of ECL for wholesale and retail credit risk. These standard approaches are described below, followed by the management judgemental adjustments made, including those to reflect the circumstances experienced in 2021. 

For our wholesale portfolios, a global methodology is used for the estimation of the term structure of probability of default ('PD') and loss given default ('LGD'). For PDs, we consider the correlation of forward economic guidance to default rates for a particular industry in a country. For LGD calculations, we consider the correlation of forward economic guidance to collateral values and realisation rates for a particular country and industry. PDs and LGDs are estimated for the entire term structure of each instrument.

For impaired loans, LGD estimates take into account independent recovery valuations provided by external consultants where available or internal forecasts corresponding to anticipated economic conditions and individual company conditions. In estimating the ECL on impaired loans that are individually considered not to be significant, we incorporate forward economic guidance proportionate to the probability-weighted outcome and the Central scenario outcome for non-stage 3 populations.

For our retail portfolios, the impact of economic scenarios on PD is modelled at a portfolio level. Historical relationships between observed default rates and macroeconomic variables are integrated into IFRS 9 ECL estimates by using economic response models. The impact of these scenarios on PD is modelled over a period equal to the remaining maturity of the underlying asset or assets. The impact on LGD is modelled for mortgage portfolios by forecasting future loan-to-value ('LTV') profiles for the remaining maturity of the asset by using national level forecasts of the house price index and applying the corresponding LGD expectation.

These models are based largely on historical observations and correlations with default rates. Management judgemental adjustments are described below.

Management judgemental adjustments

In the context of IFRS 9, management judgemental adjustments are short-term increases or decreases to the ECL at either a customer, segment or portfolio level to account for late-breaking events, model and data limitations and deficiencies, and expert credit judgement applied following management review and challenge.

At 31 December 2021, management judgements were applied to reflect credit risk dynamics not captured by our models. The drivers of the management judgemental adjustments reflect the changing economic outlook and evolving risks across our geographies.

Where the macroeconomic and portfolio risk outlook continues to improve, supported by low levels of observed defaults, adjustments initially taken to reflect increased risk expectations have been retired or reduced.

However, other adjustments have increased where modelled outcomes are overly sensitive and not aligned to observed changes in the risk of the underlying portfolios during the pandemic, or where sector-specific risks are not adequately captured.

The effects of management judgemental adjustments are considered for balances and ECL when determining whether or not a significant increase in credit risk has occurred and are attributed or allocated to a stage as appropriate. This is in accordance with the internal adjustments framework.

Management judgemental adjustments are reviewed under the governance process for IFRS 9 (as detailed in the section 'Credit risk management' on page 137). Review and challenge focuses on the rationale and quantum of the adjustments with a further review carried out by the second line of defence where significant. For some management judgemental adjustments, internal frameworks establish the conditions under which these adjustments should no longer be required and as such are considered as part of the governance process. This internal governance process allows management judgemental adjustments to be reviewed regularly and, where possible, to reduce the reliance on these through model recalibration or redevelopment, as appropriate.

Management judgemental adjustments made in estimating the scenario-weighted reported ECL at 31 December 2021 are set out in the following table. The table includes adjustments in relation to data and model limitations, including those driven by late-breaking events and sector-specific risks and as a result of the regular process of model development and implementation.

Management judgemental adjustments to ECL at 31 December 20211
	Retail	Wholesale	Total
	$bn	$bn	$bn
Low-risk counterparties (banks, sovereigns and government entities)		(0.1)	(0.1)
Corporate lending adjustments		1.3	1.3
Retail lending probability of default adjustments			-
Retail model default timing adjustments			-
Macroeconomic-related adjustments			-
Pandemic-related economic recovery adjustments	0.2		0.2
Other retail lending adjustments	0.3		0.3
Total	0.5	1.2	1.7

.

Management judgemental adjustments to ECL at 31 December 20201
	Retail	Wholesale	Total
	$bn	$bn	$bn
Low-risk counterparties (banks, sovereigns and government entities)		(0.7)	(0.7)
Corporate lending adjustments		0.5	0.5
Retail lending probability of default adjustments	(0.8)		(0.8)
Retail model default timing adjustment	1.9		1.9
Macroeconomic-related adjustments	0.1		0.1
Pandemic-related economic recovery adjustments			-
Other retail lending adjustments	0.3		0.3
Total	1.5	(0.2)	1.3

1  Management judgemental adjustments presented in the table reflect increases or (decreases) to ECL, respectively.

Management judgemental adjustments at 31 December 2021 were an increase to ECL of $1.2bn for the wholesale portfolio and an increase to ECL of $0.5bn for the retail portfolio.

During 2021, management judgemental adjustments reflected an evolving macroeconomic outlook and the relationship of the modelled ECL to this outlook and to late-breaking and sector-specific risks.

At 31 December 2021, wholesale management judgemental adjustments were an ECL increase of $1.2bn (31 December 2020: $0.2bn decrease).

• Adjustments relating to low credit-risk exposures decreased ECL by $0.1bn at 31 December 2021 (31 December 2020: $0.7bn decrease). These were mainly to highly rated banks, sovereigns and US government-sponsored entities, where modelled credit factors did not fully reflect the underlying fundamentals of these entities or the effect of government support and economic programmes in the Covid-19 environment. The decrease in adjustment impact relative to 31 December 2020 was mostly driven by increased alignment of modelled outcomes to management expectations following changes in systems and data.

• Adjustments to corporate exposures increased ECL by $1.3bn at 31 December 2021 (31 December 2020: $0.5bn increase). These principally reflected the outcome of management judgements for high-risk and vulnerable sectors in some of our key markets, supported by credit experts' input, portfolio risk metrics, quantitative analyses and benchmarks. Considerations include risk of individual exposures under different macroeconomic scenarios and comparison of key risk metrics to pre-pandemic levels, resulting in either releases or increases to ECL in each geography. The increase in adjustment impact relative to 31 December 2020 was mostly driven by management judgements as a result of the effect of further improvement of macroeconomic scenarios on modelled outcomes and increased dislocation of modelled outcomes to management expectations for high-risk sectors and due to late-breaking events not fully reflected in the underlying data. The highest increase was observed in the real estate sector, including an adjustment to reflect the uncertainty of the higher risk Chinese commercial real estate offshore exposures, booked in Hong Kong, on account of tightening liquidity and increased refinancing risks resulting in the downgrade of even some previously highly rated borrowers.

At 31 December 2021, retail management judgemental adjustments were an ECL increase of $0.5bn (31 December 2020: $1.5bn increase).

• Pandemic-related economic recovery adjustments increased ECL by $0.2bn (31 December 2020: $0) to adjust for the effects of the volatile pace of recovery from the pandemic. This is where in management's judgement, supported by quantitative analyses of portfolio and economic metrics, modelled outcomes are overly sensitive given the limited observed deterioration in the underlying portfolio during the pandemic.

• Other retail lending adjustments increased ECL by $0.3bn
(31 December 2020: $0.3bn increase). These were primarily to address areas such as model recalibration and redevelopment, customer relief and data limitations.

Economic scenarios sensitivity analysis of ECL estimates

Management considered the sensitivity of the ECL outcome against the economic forecasts as part of the ECL governance process by recalculating the ECL under each scenario described above for selected portfolios, applying a 100% weighting to each scenario in turn. The weighting is reflected in both the determination of a significant increase in credit risk and the

measurement of the resulting ECL.

The ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and lower limits of possible ECL outcomes. The impact of defaults that might occur in the future under different economic scenarios is captured by recalculating ECL for loans at the balance sheet date.

There is a particularly high degree of estimation uncertainty in numbers representing more severe risk scenarios when assigned a 100% weighting.

For wholesale credit risk exposures, the sensitivity analysis excludes ECL and financial instruments related to defaulted (stage 3) obligors. It is generally impracticable to separate the effect of macroeconomic factors in individual assessments of obligors in default. The measurement of stage 3 ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios, and loans to defaulted obligors are a small portion of the overall wholesale lending exposure, even if representing the majority of the allowance for ECL. Therefore, the sensitivity analysis to macroeconomic scenarios does not capture the residual estimation risk arising from wholesale stage 3 exposures.

For retail credit risk exposures, the sensitivity analysis includes ECL for loans and advances to customers related to defaulted obligors. This is because the retail ECL for secured mortgage portfolios including loans in all stages is sensitive to macroeconomic variables.

Wholesale and retail sensitivity

The wholesale and retail sensitivity analysis is stated inclusive of management judgemental adjustments, as appropriate to each scenario. The results tables exclude portfolios held by the insurance business and small portfolios, and as such cannot be directly compared to personal and wholesale lending presented in other credit risk tables. Additionally, in both the wholesale and retail analysis, the comparative period results for Downside 2 scenarios are also not directly comparable with the current period, because they reflect different risk profiles relative to the consensus scenarios for the period end.

Wholesale analysis

IFRS 9 ECL sensitivity to future economic conditions1, 2, 3
	Gross carrying amount2	Reported ECL	Consensus Central scenario ECL	Consensus Upside scenario ECL	Consensus Downside scenario ECL	Downside 2 scenario ECL
By geography at 31 Dec 2021	$m	$m	$m	$m	$m	$m
UK	483,273	920	727	590	944	1,985
US	227,817	227	204	155	317	391
Hong Kong	434,608	767	652	476	984	1,869
Mainland China	120,627	149	113	36	216	806
Canada	85,117	151	98	61	150	1,121
Mexico	23,054	118	80	61	123	358
UAE	44,767	158	122	73	214	711
France	163,845	133	121	106	162	187

By geography at 31 Dec 2020
UK	430,555	2,077	1,514	1,026	2,271	3,869
US	201,263	369	314	219	472	723
Hong Kong	452,983	474	388	211	672	1,363
Mainland China	118,163	116	93	28	252	1,158
Canada	85,720	183	140	82	253	528
Mexico	25,920	246	222	177	285	437
UAE	44,777	250	241	190	330	536
France	164,899	117	109	97	131	238

1  ECL sensitivity includes off-balance sheet financial instruments that are subject to significant measurement uncertainty.

2  Includes low credit-risk financial instruments such as debt instruments at FVOCI, which have high carrying amounts but low ECL under all the above scenarios.

3  Excludes defaulted obligors. For a detailed breakdown of performing and non-performing wholesale portfolio exposures, see page 162.

At 31 December 2021, the most significant level of ECL sensitivity was observed in Hong Kong, the UK and Canada. Real estate was the sector with higher sensitivity to a severe scenario, namely in Hong Kong and Canada. In the case of Hong Kong, the higher ECL sensitivity was mainly driven by increased uncertainty due to tightening liquidity and increased refinancing risks resulting in the

downgrade of even some previously highly rated borrowers. In the case of Canada, the higher ECL sensitivity was mainly driven by the adoption of a new Downside 2 scenario, which resulted in increased modelled ECL for this scenario relative to 31 December 2020.

Retail analysis

IFRS 9 ECL sensitivity to future economic conditions1
	Gross carrying amount	Reported ECL	Consensus Central scenario ECL	Consensus Upside scenario ECL	Consensus Downside scenario ECL	Downside 2 scenario ECL
ECL of loans and advances to customers at 31 December 2021	$m	$m	$m	$m	$m	$m
UK
Mortgages	155,084	191	182	175	197	231
Credit cards	8,084	439	381	330	456	987
Other	7,902	369	298	254	388	830
Mexico
Mortgages	4,972	123	116	106	130	164
Credit cards	1,167	141	134	122	150	176
Other	2,935	366	360	350	374	401
Hong Kong
Mortgages	96,697	-	-	-	-	-
Credit cards	7,644	218	206	154	231	359
Other	5,628	109	101	88	128	180
UAE
Mortgages	1,982	45	44	42	46	57
Credit cards	429	43	41	29	54	82
Other	615	19	18	13	21	25
France
Mortgages	23,159	63	62	62	63	64
Other	1,602	61	61	60	61	63
US
Mortgages	15,379	28	27	26	29	41
Credit cards	446	80	76	70	83	118
Canada
Mortgages	26,097	28	27	26	29	48
Credit cards	279	9	9	9	10	13
Other	1,598	19	18	17	19	27

IFRS 9 ECL sensitivity to future economic conditions1
	Gross carrying amount	Reported ECL	Central scenario  ECL	Upside scenario  ECL	Downside scenario ECL	Additional  Downside scenario
ECL of loans and advances to customers at 31 December 2020	$m	$m	$m	$m	$m	$m
UK
Mortgages	146,478	197	182	172	205	221
Credit cards	7,869	857	774	589	904	1,084
Other	9,164	897	795	471	1,022	1,165
Mexico
Mortgages	3,896	111	101	79	136	167
Credit cards	1,113	260	255	243	269	290
Other	2,549	436	428	411	451	491
Hong Kong
Mortgages	89,943	-	-	-	-	-
Credit cards	7,422	266	259	247	277	405
Other	6,020	112	105	102	115	130
UAE
Mortgages	1,889	66	63	53	73	78
Credit cards	426	92	81	62	107	126
Other	683	38	37	33	41	46
France
Mortgages	24,565	68	68	68	69	70
Other	1,725	88	87	85	88	91
US
Mortgages	15,399	41	39	38	41	53
Credit cards	570	86	84	81	88	119
Canada
Mortgages	22,454	31	30	29	31	36
Credit cards	260	9	9	8	9	9
Other	1,775	22	21	20	24	28

1  ECL sensitivities exclude portfolios utilising less complex modelling approaches.

At 31 December 2021, the most significant level of ECL sensitivity was observed in the UK, Mexico and Hong Kong. Mortgages reflected the lowest level of ECL sensitivity across most markets as collateral values remained resilient. Hong Kong mortgages had low levels of reported ECL due to the credit quality of the portfolio, and so presented sensitivity was negligible. Credit cards and other unsecured lending are more sensitive to economic forecasts, which improved during 2021.

Group ECL sensitivity results

The ECL impact of the scenarios and management judgemental adjustments are highly sensitive to movements in economic forecasts. Based upon the sensitivity tables presented above, if the Group ECL balance was estimated solely on the basis of the Central scenario, Downside scenario or the Downside 2 scenario at 31 December 2021, it would increase/(decrease) as presented in the below table.

	Retail1	Wholesale1
Total Group ECL at 31 December 2021	$bn	$bn
Reported ECL	3.0	3.1
Scenarios
100% Consensus Central scenario	(0.2)	(0.6)
100% Consensus Upside scenario	(0.5)	(1.2)
100% Consensus Downside scenario	0.2	0.6
100% Downside 2 scenario	2.0	5.5

	Retail1	Wholesale
Total Group ECL at 31 December 2020	$bn	$bn
Reported ECL	4.5	4.5
Scenarios
100% Consensus Central scenario	(0.3)	(0.9)
100% Consensus Upside scenario	(1.0)	(2.0)
100% Consensus Downside scenario	0.3	1.0
100% Downside 2 scenario	1.3	5.9

1  On the same basis as retail and wholesale sensitivity analysis.

For both retail and wholesale portfolios, the reported ECL decreased since 31 December 2020. The relative sensitivity of the Group total consensus Central scenario remained relatively stable, while the Group total consensus Upside and consensus Downside sensitivities both reduced since 31 December 2020. The Group total Downside 2 scenario continues to present the highest level of sensitivity. The Group results are reflective of the improvement in economic expectations, inclusive of the continuing pandemic-related and sector-specific uncertainty.

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees

The following disclosure provides a reconciliation by stage of the Group's gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees. Movements are calculated on a quarterly basis and therefore fully capture stage movements between quarters. If movements were calculated on a year-to-date basis they would only reflect the opening and closing position of the financial instrument.

The transfers of financial instruments represents the impact of stage transfers upon the gross carrying/nominal amount and associated allowance for ECL.

The net remeasurement of ECL arising from stage transfers represents the increase or decrease due to these transfers, for example, moving from a 12-month (stage 1) to a lifetime (stage 2) ECL measurement basis. Net remeasurement excludes the underlying customer risk rating ('CRR')/probability of default ('PD') movements of the financial instruments transferring stage. This is captured, along with other credit quality movements in the 'changes in risk parameters - credit quality' line item.

Changes in 'New financial assets originated or purchased', 'assets derecognised (including final repayments)' and 'changes to risk parameters - further lending/repayment' represent the impact from volume movements within the Group's lending portfolio.

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		POCI		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2021	1,506,451	(2,331)	223,432	(5,403)	20,424	(7,544)	279	(113)	1,750,586	(15,391)
Transfers of financial instruments:	21,107	(1,792)	(27,863)	2,601	6,756	(809)	-	-	-	-
-  transfers from stage 1 to stage 2	(159,633)	527	159,633	(527)	-	-	-	-	-	-
-  transfers from stage 2 to stage 1	182,432	(2,279)	(182,432)	2,279	-	-	-	-	-	-
-  transfers to stage 3	(2,345)	24	(6,478)	1,010	8,823	(1,034)	-	-	-	-
-  transfers from stage 3	653	(64)	1,414	(161)	(2,067)	225	-	-	-	-
Net remeasurement of ECL arising from transfer of stage	-	1,225	-	(596)	-	(34)	-	-	-	595
New financial assets originated or purchased	444,070	(553)	-	-	-	-	124	-	444,194	(553)
Assets derecognised (including final repayments)	(304,158)	174	(31,393)	489	(2,750)	458	(10)	6	(338,311)	1,127
Changes to risk parameters - further lending/repayment	(61,742)	547	(3,634)	498	(1,268)	576	(108)	12	(66,752)	1,633
Changes to risk parameters - credit quality	-	1,111	-	(1,012)	-	(2,354)	-	28	-	(2,227)
Changes to models used for ECL calculation	-	(17)	-	(33)	-	1	-	-	-	(49)
Assets written off	-	-	-	-	(2,610)	2,605	(7)	7	(2,617)	2,612
Credit-related modifications that resulted in derecognition	-	-	-	-	(125)	-	-	-	(125)	-
Foreign exchange	(25,231)	26	(2,918)	45	(479)	157	(4)	1	(28,632)	229
Others1	(2,915)	53	(1,882)	85	(151)	16	-	(5)	(4,948)	149
At 31 Dec 2021	1,577,582	(1,557)	155,742	(3,326)	19,797	(6,928)	274	(64)	1,753,395	(11,875)
ECL income statement change for the period		2,487		(654)		(1,353)		46		526
Recoveries										409
Others										(111)
Total ECL income statement change for the period										824

1  Total includes $3.0bn of gross carrying loans and advances to customers, which were classified to assets held for sale and a corresponding allowance for ECL of $123m, reflecting our exit of the domestic mass market retail banking in the US.

	At 31 Dec 2021		12 months ended 31 Dec 2021
	Gross carrying/nominal amount	Allowance for ECL	ECL charge
	$m	$m	$m
As above	1,753,395	(11,875)	824
Other financial assets measured at amortised cost	880,351	(193)	(19)
Non-trading reverse purchase agreement commitments	42,421	-	-
Performance and other guarantees not considered for IFRS 9	-	-	75
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement	2,676,167	(12,068)	880
Debt instruments measured at FVOCI	347,203	(96)	48
Total allowance for ECL/total income statement ECL change for the period	n/a	(12,164)	928

As shown in the previous table, the allowance for ECL for loans and advances to customers and banks and relevant loan commitments and financial guarantees decreased $3,516m during the period from $15,391m at 31 December 2020 to $11,875m at 31 December 2021.

This decrease was primarily driven by:

• $2,612m of assets written off;

• $2,207m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further lending/repayment;

• $595m relating to the net remeasurement impact of stage transfers; and

• foreign exchange and other movements of $378m.

These were partly offset by:

• $2,227m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages; and

• $49m of changes to models used for ECL calculation.

The ECL release for the period of $526m presented in the previous table consisted of $2,207m relating to underlying net book volume movement and $595m relating to the net remeasurement impact of stage transfers. This was partly offset by $2,227m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages and $49m in changes to models used for ECL calculation.

Summary views of the movement in wholesale and personal lending are presented on pages 165 and 179.

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired				Total
	Stage 1		Stage 2		Stage 3		POCI
	Gross exposure	Allowance/ provision for ECL	Gross exposure	Allowance/ provision for ECL	Gross exposure	Allowance/ provision for ECL	Gross exposure	Allowance/ provision for ECL	Gross exposure	Allowance/ provision for ECL
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2020	1,561,613	(1,464)	105,551	(2,441)	14,335	(5,121)	345	(99)	1,681,844	(9,125)
Transfers of financial instruments:	(129,236)	(1,122)	116,783	1,951	12,453	(829)	-	-	-	-
-  transfers from stage 1 to stage 2	(298,725)	947	298,725	(947)	-	-	-	-	-	-
-  transfers from stage 2 to stage 1	172,894	(2,073)	(172,894)	2,073	-	-	-	-	-	-
-  transfers to stage 3	(3,942)	30	(10,320)	986	14,262	(1,016)	-	-	-	-
-  transfers from stage 3	537	(26)	1,272	(161)	(1,809)	187	-	-	-	-
Net remeasurement of ECL arising from transfer of stage	-	907	-	(1,158)	-	(750)	-	-	-	(1,001)
New financial assets originated or purchased	437,836	(653)	-	-	-	-	25	(1)	437,861	(654)
Assets derecognised (including final repayments)	(313,347)	160	(37,409)	464	(3,430)	485	(23)	2	(354,209)	1,111
Changes to risk parameters - further lending/repayment	(83,147)	157	29,092	85	(597)	248	(50)	(2)	(54,702)	488
Changes to risk parameters - credit quality	-	(408)	-	(4,374)	-	(4,378)	-	(39)	-	(9,199)
Changes to models used for ECL calculation	-	134	-	294	-	5	-	-	-	433
Assets written off	-	-	-	-	(2,946)	2,944	(30)	30	(2,976)	2,974
Credit-related modifications that resulted in derecognition	-	-	-	-	(23)	7	-	-	(23)	7
Foreign exchange	32,808	(47)	9,123	(223)	633	(163)	4	(3)	42,568	(436)
Others	(76)	5	292	(1)	(1)	8	8	(1)	223	11
At 31 Dec 2020	1,506,451	(2,331)	223,432	(5,403)	20,424	(7,544)	279	(113)	1,750,586	(15,391)
ECL income statement change for the period		297		(4,689)		(4,390)		(40)		(8,822)
Recoveries										326
Others										(84)
Total ECL income statement change for the period										(8,580)

	At 31 Dec 2020		12 months ended 31 Dec 2020
	Gross carrying/nominal amount	Allowance for ECL	ECL charge
	$m	$m	$m
As above	1,750,586	(15,391)	(8,580)
Other financial assets measured at amortised cost	772,408	(175)	(95)
Non-trading reverse purchase agreement commitments	61,716	-	-
Performance and other guarantees not considered for IFRS 9	-	-	(94)
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/ Summary consolidated income statement	2,584,710	(15,566)	(8,769)
Debt instruments measured at FVOCI	399,717	(141)	(48)
Total allowance for ECL/total income statement ECL change for the period	n/a	(15,707)	(8,817)

Credit quality

Credit quality of financial instruments

(Audited)

We assess the credit quality of all financial instruments that are subject to credit risk. The credit quality of financial instruments is a point-in-time assessment of PD, whereas stages 1 and 2 are determined based on relative deterioration of credit quality since initial recognition. Accordingly, for non-credit-impaired financial

instruments, there is no direct relationship between the credit quality assessment and stages 1 and 2, although typically the lower credit quality bands exhibit a higher proportion in stage 2.

The five credit quality classifications each encompass a range of granular internal credit rating grades assigned to wholesale and personal lending businesses and the external ratings attributed by external agencies to debt securities, as shown in the table on page 138.

Distribution of financial instruments by credit quality at 31 December 2021
(Audited)
	Gross carrying/notional amount						Allowance for ECL/other credit provisions	Net
	Strong	Good	Satisfactory	Sub-standard	Credit impaired	Total
	$m	$m	$m	$m	$m	$m	$m	$m
In-scope for IFRS 9
Loans and advances to customers held at amortised cost	544,695	230,326	233,739	29,404	19,067	1,057,231	(11,417)	1,045,814
-  personal	388,903	52,080	30,492	1,920	4,942	478,337	(3,103)	475,234
-  corporate and commercial	124,819	158,938	188,858	27,194	13,730	513,539	(8,204)	505,335
-  non-bank financial institutions	30,973	19,308	14,389	290	395	65,355	(110)	65,245
Loans and advances to banks held at amortised cost	72,978	4,037	5,020	1,118	-	83,153	(17)	83,136
Cash and balances at central banks	400,176	1,675	1,171	-	-	403,022	(4)	403,018
Items in the course of collection from other banks	4,122	10	4	-	-	4,136	-	4,136
Hong Kong Government certificates of indebtedness	42,578	-	-	-	-	42,578	-	42,578
Reverse repurchase agreements - non-trading	175,576	46,412	18,881	779	-	241,648	-	241,648
Financial investments	84,477	11,442	1,401	1	43	97,364	(62)	97,302
Prepayments, accrued income and other assets	67,097	12,109	11,685	408	304	91,603	(127)	91,476
-  endorsements and acceptances	1,742	5,240	4,038	199	26	11,245	(17)	11,228
-  accrued income and other	65,355	6,869	7,647	209	278	80,358	(110)	80,248
Debt instruments measured at fair value through other comprehensive income1	320,161	12,298	11,677	1,087	46	345,269	(96)	345,173
Out-of-scope for IFRS 9
Trading assets	101,879	16,254	20,283	678	134	139,228	-	139,228
Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss	6,438	723	4,455	150	-	11,766	-	11,766
Derivatives	146,748	42,717	6,691	719	7	196,882	-	196,882
Total gross carrying amount on balance sheet	1,966,925	378,003	315,007	34,344	19,601	2,713,880	(11,723)	2,702,157
Percentage of total credit quality	72.5%	13.9%	11.6%	1.3%	0.7%	100%
Loan and other credit-related commitments	389,865	136,297	92,558	8,142	775	627,637	(379)	627,258
Financial guarantees	16,511	4,902	5,166	991	225	27,795	(62)	27,733
In-scope: Irrevocable loan commitments and financial guarantees	406,376	141,199	97,724	9,133	1,000	655,432	(441)	654,991
Loan and other credit-related commitments	62,701	65,031	56,446	3,327	332	187,837	-	187,837
Performance and other	31,510	32,193	19,265	2,027	539	85,534	(179)	85,355
Out-of-scope: Revocable loan commitments and non-financial guarantees	94,211	97,224	75,711	5,354	871	273,371	(179)	273,192

1  For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.

Distribution of financial instruments by credit quality at 31 December 2020 (continued)
(Audited)
	Gross carrying/notional amount						Allowance for ECL/other credit provisions	Net
	Strong	Good	Satisfactory	Sub- standard	Credit impaired	Total
	$m	$m	$m	$m	$m	$m	$m	$m
In-scope for IFRS 9
Loans and advances to customers held at amortised cost	506,231	233,320	256,584	36,970	19,372	1,052,477	(14,490)	1,037,987
-  personal	357,821	53,892	38,520	4,965	5,611	460,809	(4,731)	456,078
-  corporate and commercial	120,971	158,601	203,560	30,718	13,238	527,088	(9,494)	517,594
-  non-bank financial institutions	27,439	20,827	14,504	1,287	523	64,580	(265)	64,315
Loans and advances to banks held at amortised cost	71,318	5,496	3,568	1,276	-	81,658	(42)	81,616
Cash and balances at central banks	302,028	1,388	1,070	-	-	304,486	(5)	304,481
Items in the course of collection from other banks	4,079	9	6	-	-	4,094	-	4,094
Hong Kong Government certificates of indebtedness	40,420	-	-	-	-	40,420	-	40,420
Reverse repurchase agreements - non-trading	177,457	40,461	12,398	312	-	230,628	-	230,628
Financial investments	77,361	9,781	1,537	1	39	88,719	(80)	88,639
Prepayments, accrued income and other assets	81,886	10,129	11,570	298	178	104,061	(90)	103,971
-  endorsements and acceptances	1,458	4,355	4,245	229	20	10,307	(30)	10,277
-  accrued income and other	80,428	5,774	7,325	69	158	93,754	(60)	93,694
Debt instruments measured at fair value through other comprehensive income1	367,685	12,678	10,409	825	306	391,903	(141)	391,762
Out-of-scope for IFRS 9
Trading assets	117,972	14,694	20,809	829	43	154,347	-	154,347
Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss	6,440	2,378	1,827	109	-	10,754	-	10,754
Derivatives	243,005	54,581	8,709	1,359	72	307,726	-	307,726
Total gross carrying amount on balance sheet	1,995,882	384,915	328,487	41,979	20,010	2,771,273	(14,848)	2,756,425
Percentage of total credit quality	72.0%	13.9%	11.9%	1.5%	0.7%	100%
Loan and other credit-related commitments	400,911	157,339	90,784	9,668	1,081	659,783	(734)	659,049
Financial guarantees	6,356	5,194	5,317	1,247	270	18,384	(125)	18,259
In-scope: Irrevocable loan commitments and financial guarantees	407,267	162,533	96,101	10,915	1,351	678,167	(859)	677,308
Loan and other credit-related commitments	59,392	62,664	59,666	2,837	430	184,989	-	184,989
Performance and other guarantees	26,082	27,909	21,256	2,112	755	78,114	(226)	77,888
Out-of-scope: Revocable loan commitments and non-financial guarantees	85,474	90,573	80,922	4,949	1,185	263,103	(226)	262,877

1  For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.

Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation
(Audited)
	Gross carrying/notional amount						Allowance  for ECL	Net
	Strong	Good	Satisfactory	Sub- standard	Credit impaired	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Loans and advances to customers at amortised cost	544,695	230,326	233,739	29,404	19,067	1,057,231	(11,417)	1,045,814
-  stage 1	537,642	206,645	169,809	4,840	-	918,936	(1,367)	917,569
-  stage 2	7,053	23,681	63,930	24,560	-	119,224	(3,119)	116,105
-  stage 3	-	-	-	-	18,797	18,797	(6,867)	11,930
-  POCI	-	-	-	4	270	274	(64)	210
Loans and advances to banks at amortised cost	72,978	4,037	5,020	1,118	-	83,153	(17)	83,136
-  stage 1	72,903	3,935	4,788	10	-	81,636	(14)	81,622
-  stage 2	75	102	232	1,108	-	1,517	(3)	1,514
-  stage 3	-	-	-	-	-	-	-	-
-  POCI	-	-	-	-	-	-	-	-
Other financial assets measured at amortised cost	774,026	71,648	33,142	1,188	347	880,351	(193)	880,158
-  stage 1	773,427	70,508	30,997	84	-	875,016	(91)	874,925
-  stage 2	599	1,140	2,145	1,104	-	4,988	(54)	4,934
-  stage 3	-	-	-	-	304	304	(42)	262
-  POCI	-	-	-	-	43	43	(6)	37
Loan and other credit-related commitments	389,865	136,297	92,558	8,142	775	627,637	(379)	627,258
-  stage 1	387,434	129,455	76,043	1,541	-	594,473	(165)	594,308
-  stage 2	2,431	6,842	16,515	6,601	-	32,389	(174)	32,215
-  stage 3	-	-	-	-	775	775	(40)	735
-  POCI	-	-	-	-	-	-	-	-
Financial guarantees	16,511	4,902	5,166	991	225	27,795	(62)	27,733
-  stage 1	16,351	4,469	3,929	183	-	24,932	(11)	24,921
-  stage 2	160	433	1,237	808	-	2,638	(30)	2,608
-  stage 3	-	-	-	-	225	225	(21)	204
-  POCI	-	-	-	-	-	-	-	-
At 31 Dec 2021	1,798,075	447,210	369,625	40,843	20,414	2,676,167	(12,068)	2,664,099
Debt instruments at FVOCI1
-  stage 1	319,557	12,196	11,354	-	-	343,107	(67)	343,040
-  stage 2	604	102	323	1,087	-	2,116	(22)	2,094
-  stage 3	-	-	-	-	-	-	-	-
-  POCI	-	-	-	-	46	46	(7)	39
At 31 Dec 2021	320,161	12,298	11,677	1,087	46	345,269	(96)	345,173

1  For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.

Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation (continued)
(Audited)
	Gross carrying/notional amount
	Strong	Good	Satisfactory	Sub-standard	Credit impaired	Total	Allowance for ECL	Net
	$m	$m	$m	$m	$m	$m	$m	$m
Loans and advances to customers at amortised cost	506,231	233,320	256,584	36,970	19,372	1,052,477	(14,490)	1,037,987
-  stage 1	499,836	199,138	165,507	5,439	-	869,920	(1,974)	867,946
-  stage 2	6,395	34,182	91,077	31,531	-	163,185	(4,965)	158,220
-  stage 3	-	-	-	-	19,095	19,095	(7,439)	11,656
-  POCI	-	-	-	-	277	277	(112)	165
Loans and advances to banks at amortised cost	71,318	5,496	3,568	1,276	-	81,658	(42)	81,616
-  stage 1	71,126	5,098	3,357	73	-	79,654	(33)	79,621
-  stage 2	192	398	211	1,203	-	2,004	(9)	1,995
-  stage 3	-	-	-	-	-	-	-	-
-  POCI	-	-	-	-	-	-	-	-
Other financial assets measured at amortised cost	683,231	61,768	26,581	611	217	772,408	(175)	772,233
-  stage 1	682,412	61,218	24,532	54	-	768,216	(80)	768,136
-  stage 2	819	550	2,049	557	-	3,975	(44)	3,931
-  stage 3	-	-	-	-	177	177	(42)	135
-  POCI	-	-	-	-	40	40	(9)	31
Loan and other credit-related commitments	400,911	157,339	90,784	9,668	1,081	659,783	(734)	659,049
-  stage 1	396,028	143,600	63,592	1,265	-	604,485	(290)	604,195
-  stage 2	4,883	13,739	27,192	8,403	-	54,217	(365)	53,852
-  stage 3	-	-	-	-	1,080	1,080	(78)	1,002
-  POCI	-	-	-	-	1	1	(1)	-
Financial guarantees	6,356	5,194	5,317	1,247	270	18,384	(125)	18,259
-  stage 1	6,286	4,431	3,163	210	-	14,090	(37)	14,053
-  stage 2	70	763	2,154	1,037	-	4,024	(62)	3,962
-  stage 3	-	-	-	-	269	269	(26)	243
-  POCI	-	-	-	-	1	1	-	1
At 31 Dec 2020	1,668,047	463,117	382,834	49,772	20,940	2,584,710	(15,566)	2,569,144
Debt instruments at FVOCI1
-  stage 1	367,542	12,585	10,066	-	-	390,193	(88)	390,105
-  stage 2	143	93	343	825	-	1,404	(20)	1,384
-  stage 3	-	-	-	-	257	257	(23)	234
-  POCI	-	-	-	-	49	49	(10)	39
At 31 Dec 2020	367,685	12,678	10,409	825	306	391,903	(141)	391,762

1  For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.

Credit-impaired loans

(Audited)

We determine that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily whether:

• contractual payments of either principal or interest are past due for more than 90 days;

• there are other indications that the borrower is unlikely to pay, such as when a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition; and

• the loan is otherwise considered to be in default. If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit impaired.

Renegotiated loans and forbearance

The following table shows the gross carrying amounts of the Group's holdings of renegotiated loans and advances to customers by industry sector and by stages. Mandatory and general offer loan modifications that are not borrower-specific, for example market-wide customer relief programmes, have not been classified as renegotiated loans. For details on customer relief schemes, see page 159.

A summary of our current policies and practices for renegotiated loans and forbearance is set out in 'Credit risk management' on page 137.

Renegotiated loans and advances to customers at amortised cost by stage allocation
	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m
Gross carrying amount
Personal	-	-	2,256	-	2,256
-  first lien residential mortgages	-	-	1,547	-	1,547
-  other personal lending	-	-	709	-	709
Wholesale	366	559	4,505	253	5,683
-  corporate and commercial	355	550	4,491	253	5,649
-  non-bank financial institutions	11	9	14	-	34
At 31 Dec 2021	366	559	6,761	253	7,939
Allowance for ECL
Personal	-	-	(400)	-	(400)
-  first lien residential mortgages	-	-	(178)	-	(178)
-  other personal lending	-	-	(222)	-	(222)
Wholesale	(7)	(24)	(1,282)	(52)	(1,365)
-  corporate and commercial	(7)	(24)	(1,274)	(52)	(1,357)
-  non-bank financial institutions	-	-	(8)	-	(8)
At 31 Dec 2021	(7)	(24)	(1,682)	(52)	(1,765)

Gross carrying amount
Personal	-	-	2,429	-	2,429
-  first lien residential mortgages	-	-	1,692	-	1,692
-  other personal lending	-	-	737	-	737
Wholesale	328	989	3,929	239	5,485
-  corporate and commercial	324	972	3,903	239	5,438
-  non-bank financial institutions	4	17	26	-	47
At 31 Dec 2020	328	989	6,358	239	7,914
Allowance for ECL
Personal	-	-	(452)	-	(452)
-  first lien residential mortgages	-	-	(152)	-	(152)
-  other personal lending	-	-	(300)	-	(300)
Wholesale	(10)	(36)	(1,276)	(86)	(1,408)
-  corporate and commercial	(10)	(36)	(1,263)	(86)	(1,395)
-  non-bank financial institutions	-	-	(13)	-	(13)
At 31 Dec 2020	(10)	(36)	(1,728)	(86)	(1,860)

Renegotiated loans and advances to customers by geographical region
							Of which:
	Europe	Asia	MENA	North America	Latin America	Total	UK	Hong Kong
	$m	$m	$m	$m	$m	$m	$m	$m
At 31 Dec 2021	4,119	1,322	954	1,064	480	7,939	3,469	528
At 31 Dec 2020	4,274	745	1,279	1,349	267	7,914	3,483	220

Customer relief programmes

In response to the Covid-19 pandemic, governments and regulators around the world introduced a number of support measures for both personal and wholesale customers in market-wide schemes. The following table presents the number of personal accounts/wholesale customers and the associated drawn loan values of customers under these schemes and HSBC-specific measures for major markets at 31 December 2021. When schemes expire, accounts and customers and their associated drawn balances are no longer reported under relief regardless of their repayment status. In relation to personal lending, the majority of relief measures, including payment holidays, relate to existing lending, while in wholesale lending the relief measures comprise payment holidays, refinancing of existing facilities and new lending under government-backed schemes.

At 31 December 2021, the gross carrying value of loans to personal customers under relief was $1.7bn (31 December 2020: $5.5bn). This comprised $1.0bn in relation to mortgages (31 December 2020: $4.7bn) and $0.7bn in relation to other personal lending (31 December 2020: $0.9bn). The decrease in personal customer relief during the year was driven by customers exiting relief measures. The gross carrying value of loans to wholesale customers under relief was $26.3bn (31 December 2020: $35.3bn). We continue to monitor the recoverability of loans granted under customer relief programmes, including loans to a small number of customers that were subsequently found to be ineligible for such relief. The ongoing performance of such loans remains an area of uncertainty at 31 December 2021.

Personal lending
Extant at 31 December 2021		UK	Hong Kong	US	Other major markets1,2	Total
Market-wide schemes
Number of accounts granted mortgage customer relief	000s	-	-	-	8	8
Drawn loan value of accounts granted mortgage customer relief	$m	-	-	-	657	657
Number of accounts granted other personal lending customer relief	000s	-	-	-	34	34
Drawn loan value of accounts granted other personal lending customer relief	$m	-	-	-	613	613
HSBC-specific measures
Number of accounts granted mortgage customer relief	000s	-	-	1	-	1
Drawn loan value of accounts granted mortgage customer relief	$m	-	57	336	3	396
Number of accounts granted other personal lending customer relief	000s	-	-	-	1	1
Drawn loan value of accounts granted other personal lending customer relief	$m	-	34	18	10	62
Total personal lending to major markets under market-wide schemes and HSBC-specific measures
Number of accounts granted mortgage customer relief	000s	-	-	1	8	9
Drawn loan value of accounts granted mortgage customer relief	$m	-	57	336	660	1,053
Number of accounts granted other personal lending customer relief	000s	-	-	-	35	35
Drawn loan value of accounts granted other personal lending customer relief	$m	-	34	18	623	675
Market-wide schemes and HSBC-specific measures - mortgage relief as a proportion of total mortgages	%	-	0.1	2.0	0.8	0.3
Market-wide schemes and HSBC-specific measures - other personal lending relief as a proportion of total other personal lending loans and advances	%	-	0.1	2.3	1.2	0.7
Wholesale lending
Extant at 31 December 2021		UK	Hong Kong	US	Other major markets1	Total
Market-wide schemes
Number of customers under market-wide measures	000s	227	1	1	5	234
Drawn loan value of customers under market-wide schemes	$m	12,468	2,907	262	4,501	20,138
HSBC-specific schemes
Number of customers under HSBC-specific measures	000s	-	5	-	-	5
Drawn loan value of customers under HSBC-specific measures	$m	82	4,611	42	1,420	6,155
Total wholesale lending to major markets under market-wide schemes and HSBC-specific measures
Number of customers	000s	227	6	1	5	239
Drawn loan value	$m	12,550	7,518	304	5,921	26,293
Market-wide schemes and HSBC-specific measures as a proportion of total wholesale lending loans and advances	%	9.9	4.1	0.9	2.9	4.8

Personal lending (continued)
Extant at 31 December 2020		UK	Hong Kong	US	Other major markets1,2,3	Total
Market-wide schemes
Number of accounts granted mortgage customer relief	000s	6	-	-	5	11
Drawn loan value of accounts granted mortgage customer relief	$m	1,412	-	-	908	2,320
Number of accounts granted other personal lending customer relief	000s	15	-	-	28	43
Drawn loan value of accounts granted other personal lending customer relief	$m	140	-	-	386	526
HSBC-specific measures
Number of accounts granted mortgage customer relief	000s	-	3	2	3	8
Drawn loan value of accounts granted mortgage customer relief	$m	7	1,124	864	360	2,355
Number of accounts granted other personal lending customer relief	000s	-	1	6	18	25
Drawn loan value of accounts granted other personal lending customer relief	$m	-	75	67	182	324
Total personal lending to major markets under market-wide schemes and HSBC-specific measures
Number of accounts granted mortgage customer relief	000s	6	3	2	8	19
Drawn loan value of accounts granted mortgage customer relief	$m	1,419	1,124	864	1,268	4,675
Number of accounts granted other personal lending customer relief	000s	15	1	6	46	68
Drawn loan value of accounts granted other personal lending customer relief	$m	140	75	67	568	850
Market-wide schemes and HSBC-specific measures - mortgage relief as a proportion of total mortgages	%	0.9	1.2	4.7	1.6	1.4
Market-wide schemes and HSBC-specific measures - other personal lending relief as a proportion of total other personal lending loans and advances	%	0.7	0.2	3.1	1.1	0.8

Wholesale lending (continued)
Extant at 31 December 2020		UK	Hong Kong	US	Other major markets1	Total
Market-wide schemes
Number of customers under market-wide measures	000s	226	3	3	5	237
Drawn loan value of customers under market-wide schemes	$m	13,517	10,622	1,043	6,017	31,199
HSBC-specific schemes
Number of customers under HSBC-specific measures	000s	-	-	-	-	-
Drawn loan value of customers under HSBC-specific measures	$m	349	-	924	2,869	4,142
Total wholesale lending to major markets under market-wide schemes and HSBC-specific measures
Number of customers	000s	226	3	3	5	237
Drawn loan value	$m	13,866	10,622	1,967	8,886	35,341
Market-wide schemes and HSBC-specific measures as a proportion of total wholesale lending loans and advances	%	9.6	5.9	5.2	4.6	6.4

1  Other major markets include Australia, Canada, mainland China, Egypt, France, Germany, India, Indonesia, Malaysia, Mexico, Singapore, Switzerland, Taiwan and UAE.

2  In Malaysia, personal lending customers are granted an automatic moratorium programme for all eligible retail customers. As a result of further loosening of eligibility criteria and scope of relief measures, the country is now the major contributor to the figures reported under 'Other major markets'. At 31 December 2021, the number of accounts under relief was 39,000 (31 December 2020: 26,000) with an associated drawn balance of $1,151m (31 December 2020: $452m).

3  In Mexico, at 31 December 2020, there were 16,000 personal lending accounts under customer relief with an associated drawn balance of $233m.  

The initial granting of customer relief does not automatically trigger a migration to stage 2 or 3. However, information provided by payment deferrals is considered in the context of other reasonable and supportable information. This forms part of the overall assessment for whether there has been a significant increase in credit risk and credit impairment to identify loans for which lifetime ECL is appropriate. An extension in payment deferral does not automatically result in a migration to stage 2 or stage 3. The key accounting and credit risk judgement to ascertain whether a significant increase in credit risk has occurred is whether the economic effects of the Covid-19 pandemic on the customer are likely to be temporary over the lifetime of the loan, and whether they indicate that a concession is being made in respect of financial difficulty that would be consistent with stage 3.

Market-wide schemes

The following narrative provides further details on the major government and regulatory schemes offered in the UK, Hong Kong and the US.

UK personal lending

Mortgages

Customer relief granted on UK mortgages primarily consisted of payment holidays or partial payment deferrals.

Relief was offered for an initial period of three months and could be extended for a further three months in certain circumstances. No payment was required from the customer during this period (though with a partial payment deferral the customer had expressed a desire to make a contribution) and interest continued to be charged as usual. The customer's arrears status was not worsened from utilisation of these schemes. All UK personal lending schemes expired during 2021.

Other personal lending payment holidays

Customer relief was granted for an initial period of three months and could be extended for a further three months. The maximum relief value was up to the due payment amount during the period. All UK personal lending schemes expired during 2021.

UK wholesale lending  

The primary relief granted under government schemes consisted of the Bounce Back Loan Scheme, Coronavirus Business Interruption Loan Scheme and Coronavirus Large Business Interruption Loan Scheme. Since their initial launch, the application deadline for these schemes was extended to 31 March 2021. The key features of these schemes were as follows:

• The Bounce Back Loan Scheme provided small and medium-sized enterprises ('SME') with loans of up to £50,000 for a maximum period of six years. Interest was charged at 2.5% and the government paid the fees and interest for the first 12 months. No capital repayment was required by the customer for the first 12 months of the scheme. A government guarantee of 100% was provided under the scheme. Before their first payment was due customers could extend the term of the loan to 10 years, move to interest-only repayments for a period of six months (customers could use this option up to three times) and/or pause repayments for a period of six months (customers could use this option once).

• The Coronavirus Business Interruption Loan Scheme provided SMEs that had a turnover of less than £45m with loans of up to £5m for a maximum period of six years. Interest was charged between 3.49% and 3.99% above the UK base rate and no capital repayment was required by the customer for the first 12 months of the scheme. A government guarantee of up to 80% was provided under the scheme.

• The Coronavirus Large Business Interruption Loan Scheme provided medium and large-sized enterprises that had a turnover in excess of £45m with loans of up to £200m. The interest rate and tenor of the loan were negotiated on commercial terms. A government guarantee of 80% was provided under the scheme.

Until 31 December 2021, the Recovery Loan Scheme, launched on 6 April 2021, provided businesses of any size financial support to recover from the Covid-19 pandemic with loans of £25,001 to £10m subject to eligibility and viability assessments. A government guarantee of 80% was provided under the scheme.

For term loans and asset finance, businesses could borrow for three months up to six years and for overdrafts and invoice finance, three months up to three years. The scheme was extended until 30 June 2022, with the following changes coming into force from 1 January 2022: the scheme remains open to small and medium-sized enterprises and the maximum amount of finance available is £2m per business. A government guarantee of 70% is provided on such loans.

Hong Kong wholesale lending

Pre-approved Principal Payment Holiday Scheme for Corporate Customers

The above scheme enabled eligible customers to apply for a payment holiday of six months (or 90 days for trade finance) with no change to the existing interest rate charge. On 2 September 2020, the Hong Kong Monetary Authority ('HKMA') announced that this scheme had been extended for a further six months to April 2021 and on 4 March 2021, it was extended for a further six months (or 90 days for trade finance) to October 2021.

Given the persistence of the Covid-19 pandemic around the world and the severity of the ensuing impact on the global and local economy, HKMA - together with the Banking Sector SME Lending Coordination Mechanism - announced on 21 September 2021 that the Pre-approved Principal Payment Holiday Scheme would be extended for another six months until April 2022. HKMA and the coordination mechanism agreed that all principal payments of loans falling due between November 2021 and April 2022 by eligible corporate customers would be deferred by another six months except for repayments of trade loans, which would be deferred by 90 days.

US wholesale lending  

Paycheck Protection Program

The CARES Act created the Paycheck Protection Program ('PPP') loan guarantee programme to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP were fully guaranteed by the Small Business Administration, whose guarantee was backed by the full faith and credit of the US. PPP-covered loans also afforded customers forgiveness up to the principal amount of the PPP-covered loan, plus accrued interest, if the loan proceeds were used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria were satisfied. The Small Business Administration would reimburse PPP lenders for any amount of a PPP-covered loan that was forgiven, and PPP lenders would not be liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Lenders received pre-determined fees for processing and servicing PPP loans. The schemes have now been closed.

HSBC-specific measures

UK wholesale lending

HSBC offered capital repayment holidays to CMB customers. Relief was offered on a preferred term of six months. However, some were granted for three months with the option of an extension. Interest continued to be paid as usual. Schemes have now been closed for application.

Hong Kong personal lending

Mortgages

Customer relief granted on Hong Kong mortgages consisted of deferred principal repayment of up to 12 months. This relief programme was available to existing HSBC mortgage loan customers who had a good repayment record during the six months prior to application. Schemes have now been closed for application.

Hong Kong wholesale lending

On 20 May 2021, the Group announced a new SME financing scheme in Hong Kong, with HK$40bn reserved to support SME customers as the economy started to recover. The scheme has now been closed for application.

US total personal lending

Customer relief granted on US mortgages and other personal lending consisted of deferrals of up to 12 months and up to nine months respectively. Schemes have now been closed for application.

Wholesale lending

This section provides further details on the regions, countries, territories and products comprising wholesale loans and advances to customers and banks. Product granularity is also provided by stage with geographical data presented for loans and advances to customers, banks, other credit commitments, financial guarantees and similar contracts. Additionally, this section provides a reconciliation of the opening 1 January 2021 to 31 December 2021 closing gross carrying/nominal amounts and the associated allowance for ECL.

At 31 December 2021, wholesale lending for loans and advances to banks and customers of $662bn decreased by $11.3bn since 31 December 2020. This included adverse foreign exchange movements of $10.6bn. Excluding foreign exchange movements, the total wholesale lending decrease was driven by a $5.2bn decline in corporate and commercial balances. This was partly offset by a $3bn increase in loans and advances to banks and a $1.5bn increase in balances from non-bank financial institutions.

The primary driver of the decline in corporate and commercial balances was $11.2bn in Europe, notably $12.4bn in the UK and $1bn in Germany, partly offset by growth of $4.6bn in France.

In MENA and North America, balances declined $1.4bn and $0.9bn respectively, while they grew in Asia by $8.0bn, notably $4.3bn in mainland China, $1.6bn in Hong Kong and $1.1bn in India.

Loan commitments and financial guarantees declined $26.5bn since 31 December 2020 to $415bn at 31 December 2021, including a $19.3bn decrease related to unsettled reverse repurchase agreements. This also included adverse foreign exchange movements of $12.7bn.

The allowance for ECL attributable to wholesale loans and advances to banks and customers decreased $1.5bn to $8.3bn at 31 December 2021 from $9.8bn at 31 December 2020. This included favourable foreign exchange movements of $0.2bn.

Excluding foreign exchange movements, the total decrease in the wholesale ECL allowance for loans and advances to customers and banks was driven by a $1.1bn decline in corporate and commercial allowances. The primary driver of this decrease in corporate and commercial allowance for ECL was $1.1bn in Europe, notably $1.1bn in the UK. Additionally, there were decreases of $0.2bn, $0.2bn and $0.1bn in MENA, North America and Latin America, respectively. There was an increase of $0.6bn in Asia, notably $0.4bn in Hong Kong.

The allowance for ECL attributable to loan commitments and financial guarantees of $0.4bn at 31 December 2021 decreased from $0.8bn at 31 December 2020.

Total wholesale lending for loans and advances to banks and customers by stage distribution
	Gross carrying amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Corporate and commercial	400,894	98,911	13,460	274	513,539	(665)	(1,874)	(5,601)	(64)	(8,204)
-  agriculture, forestry and fishing	6,510	1,026	362	1	7,899	(10)	(23)	(104)	(1)	(138)
-  mining and quarrying	7,167	2,055	447	16	9,685	(17)	(39)	(159)	(12)	(227)
-  manufacturing	75,193	16,443	2,019	88	93,743	(110)	(176)	(931)	(31)	(1,248)
-  electricity, gas, steam and air-conditioning supply	15,255	1,285	78	-	16,618	(16)	(21)	(31)	-	(68)
-  water supply, sewerage, waste management and remediation	3,376	468	51	-	3,895	(5)	(4)	(20)	-	(29)
-  construction	9,506	3,605	842	1	13,954	(24)	(44)	(439)	(1)	(508)
-  wholesale and retail trade, repair of motor vehicles and motorcycles	79,137	12,802	3,003	2	94,944	(71)	(99)	(1,936)	(1)	(2,107)
-  transportation and storage	21,199	7,726	658	9	29,592	(56)	(116)	(191)	-	(363)
-  accommodation and food	8,080	14,096	1,199	1	23,376	(67)	(245)	(110)	(1)	(423)
-  publishing, audiovisual and broadcasting	16,417	1,804	222	28	18,471	(37)	(47)	(94)	(6)	(184)
-  real estate	93,633	25,154	2,375	98	121,260	(132)	(737)	(775)	-	(1,644)
-  professional, scientific and technical activities	16,160	2,888	637	-	19,685	(26)	(40)	(172)	-	(238)
-  administrative and support services	23,186	4,740	719	30	28,675	(40)	(84)	(296)	(11)	(431)
-  public administration and defence, compulsory social security	938	333	-	-	1,271	(5)	(3)	-	-	(8)
-  education	1,455	273	65	-	1,793	(4)	(15)	(18)	-	(37)
-  health and care	3,743	928	183	-	4,854	(11)	(24)	(37)	-	(72)
-  arts, entertainment and recreation	1,620	826	152	-	2,598	(6)	(44)	(42)	-	(92)
-  other services	10,123	1,726	448	-	12,297	(26)	(101)	(246)	-	(373)
-  activities of households	860	117	-	-	977	-	-	-	-	-
-  extra-territorial organisations and bodies activities	2	-	-	-	2	-	-	-	-	-
-  government	7,010	602	-	-	7,612	(2)	(2)	-	-	(4)
-  asset-backed securities	324	14	-	-	338	-	(10)	-	-	(10)
Non-bank financial institutions	61,086	3,874	395	-	65,355	(44)	(26)	(40)	-	(110)
Loans and advances to banks	81,636	1,517	-	-	83,153	(14)	(3)	-	-	(17)
At 31 Dec 2021	543,616	104,302	13,855	274	662,047	(723)	(1,903)	(5,641)	(64)	(8,331)
By geography
Europe	154,575	31,871	6,741	30	193,217	(356)	(654)	(1,806)	(9)	(2,825)
-  of which: UK	101,029	24,461	5,126	28	130,644	(306)	(518)	(1,060)	(6)	(1,890)
Asia	297,423	53,993	3,997	199	355,612	(182)	(830)	(2,299)	(43)	(3,354)
-  of which: Hong Kong	165,437	30,305	1,990	159	197,891	(85)	(650)	(836)	(21)	(1,592)
MENA	26,135	5,295	1,682	22	33,134	(62)	(108)	(1,028)	(11)	(1,209)
North America	53,513	10,397	652	-	64,562	(57)	(215)	(169)	-	(441)
Latin America	11,970	2,746	783	23	15,522	(66)	(96)	(339)	(1)	(502)
At 31 Dec 2021	543,616	104,302	13,855	274	662,047	(723)	(1,903)	(5,641)	(64)	(8,331)

Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1
	Nominal amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Corporate and commercial	274,775	30,376	829	-	305,980	(130)	(193)	(60)	-	(383)
Financial	105,746	2,889	2	-	108,637	(9)	(9)	(1)	-	(19)
At 31 Dec 2021	380,521	33,265	831	-	414,617	(139)	(202)	(61)	-	(402)
By geography
Europe	189,770	15,585	673	-	206,028	(67)	(76)	(47)	-	(190)
-  of which: UK	68,136	8,430	389	-	76,955	(55)	(49)	(28)	-	(132)
Asia	72,179	5,229	20	-	77,428	(35)	(40)	(5)	-	(80)
-  of which: Hong Kong	31,314	1,517	10	-	32,841	(11)	(17)	(2)	-	(30)
MENA	6,335	1,017	19	-	7,371	(10)	(18)	(3)	-	(31)
North America	109,851	11,350	91	-	121,292	(24)	(66)	(1)	-	(91)
Latin America	2,386	84	28	-	2,498	(3)	(2)	(5)	-	(10)
At 31 Dec 2021	380,521	33,265	831	-	414,617	(139)	(202)	(61)	-	(402)

1  Included in loans and other credit-related commitments and financial guarantees is $42bn relating to unsettled reverse repurchase agreements, which once drawn are classified as 'Reverse repurchase agreements - non-trading'.

Total wholesale lending for loans and advances to banks and customers by stage distribution
	Gross carrying amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Corporate and commercial	387,563	126,287	12,961	277	527,088	(1,101)	(2,444)	(5,837)	(112)	(9,494)
-  agriculture, forestry and fishing	6,087	1,026	331	1	7,445	(12)	(45)	(149)	(1)	(207)
-  mining and quarrying	7,429	3,705	797	16	11,947	(33)	(112)	(209)	(11)	(365)
-  manufacturing	68,179	23,564	2,076	87	93,906	(201)	(442)	(905)	(40)	(1,588)
-  electricity, gas, steam and air-conditioning supply	14,240	1,907	53	-	16,200	(25)	(40)	(8)	-	(73)
-  water supply, sewerage, waste management and remediation	2,874	253	47	-	3,174	(8)	(7)	(22)	-	(37)
-  construction	9,368	4,455	773	4	14,600	(42)	(118)	(426)	(4)	(590)
-  wholesale and retail trade, repair of motor vehicles and motorcycles	65,937	21,518	3,196	12	90,663	(174)	(326)	(2,029)	(3)	(2,532)
-  transportation and storage	19,510	9,143	769	11	29,433	(90)	(163)	(240)	-	(493)
-  accommodation and food	10,616	14,918	536	1	26,071	(76)	(285)	(129)	(1)	(491)
-  publishing, audiovisual and broadcasting	17,019	2,796	131	33	19,979	(45)	(85)	(39)	(20)	(189)
-  real estate	102,933	22,186	1,907	1	127,027	(169)	(260)	(738)	-	(1,167)
-  professional, scientific and technical activities	17,162	6,379	498	33	24,072	(56)	(149)	(185)	(8)	(398)
-  administrative and support services	17,085	8,361	907	70	26,423	(66)	(153)	(291)	(24)	(534)
-  public administration and defence, compulsory social security	1,530	475	3	-	2,008	(2)	(11)	(1)	-	(14)
-  education	1,402	691	29	-	2,122	(12)	(20)	(9)	-	(41)
-  health and care	4,049	1,192	261	8	5,510	(21)	(45)	(120)	-	(186)
-  arts, entertainment and recreation	1,631	1,570	236	-	3,437	(9)	(62)	(87)	-	(158)
-  other services	11,380	1,320	410	-	13,110	(54)	(105)	(249)	-	(408)
-  activities of households	660	142	-	-	802	-	(1)	-	-	(1)
-  extra-territorial organisations and bodies activities	10	-	-	-	10	-	-	-	-	-
-  government	7,866	671	1	-	8,538	(6)	(2)	(1)	-	(9)
-  asset-backed securities	596	15	-	-	611	-	(13)	-	-	(13)
Non-bank financial institutions	52,223	11,834	523	-	64,580	(46)	(119)	(100)	-	(265)
Loans and advances to banks	79,654	2,004	-	-	81,658	(33)	(9)	-	-	(42)
At 31 Dec 2020	519,440	140,125	13,484	277	673,326	(1,180)	(2,572)	(5,937)	(112)	(9,801)
By geography
Europe	156,474	51,708	6,531	109	214,822	(589)	(1,400)	(2,097)	(51)	(4,137)
-  of which: UK	104,534	40,454	4,712	53	149,753	(536)	(1,234)	(1,320)	(33)	(3,123)
Asia	279,985	58,159	3,443	106	341,693	(337)	(383)	(2,040)	(43)	(2,803)
-  of which: Hong Kong	156,817	39,257	1,637	45	197,756	(162)	(260)	(751)	(23)	(1,196)
MENA	24,753	7,893	1,952	30	34,628	(91)	(216)	(1,205)	(12)	(1,524)
North America	46,852	18,220	913	-	65,985	(77)	(302)	(281)	-	(660)
Latin America	11,376	4,145	645	32	16,198	(86)	(271)	(314)	(6)	(677)
At 31 Dec 2020	519,440	140,125	13,484	277	673,326	(1,180)	(2,572)	(5,937)	(112)	(9,801)

Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1
	Nominal amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Corporate and commercial	262,598	49,008	1,140	2	312,748	(271)	(392)	(100)	(1)	(764)
Financial	120,768	7,526	55	-	128,349	(17)	(33)	(4)	-	(54)
At 31 Dec 2020	383,366	56,534	1,195	2	441,097	(288)	(425)	(104)	(1)	(818)
By geography
Europe	210,141	28,705	851	2	239,699	(152)	(208)	(83)	(1)	(444)
-  of which: UK	81,153	17,048	480	1	98,682	(138)	(176)	(72)	(1)	(387)
Asia	63,586	6,311	20	-	69,917	(73)	(43)	(6)	-	(122)
-  of which: Hong Kong	26,502	3,639	4	-	30,145	(24)	(22)	(1)	-	(47)
MENA	4,975	1,609	85	-	6,669	(14)	(44)	(2)	-	(60)
North America	102,399	19,360	198	-	121,957	(39)	(124)	(7)	-	(170)
Latin America	2,265	549	41	-	2,855	(10)	(6)	(6)	-	(22)
At 31 Dec 2020	383,366	56,534	1,195	2	441,097	(288)	(425)	(104)	(1)	(818)

1  Included in loans and other credit-related commitments and financial guarantees is $62bn relating to unsettled reverse repurchase agreements, which once drawn are classified as 'Reverse repurchase agreements - non-trading'.

Wholesale lending - reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		POCI		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2021	841,105	(1,465)	196,662	(2,998)	14,662	(6,041)	279	(113)	1,052,708	(10,617)
Transfers of financial instruments	19,285	(638)	(23,361)	888	4,076	(250)	-	-	-	-
Net remeasurement of ECL arising from transfer of stage	-	400	-	(233)	-	(27)	-	-	-	140
Net new and further lending/ repayments	38,224	20	(32,150)	454	(2,501)	764	6	18	3,579	1,256
Change in risk parameters - credit quality	-	793	-	(234)	-	(1,347)	-	28	-	(760)
Changes to models used for ECL calculation	-	(15)	-	(33)	-	-	-	-	-	(48)
Assets written off	-	-	-	-	(1,085)	1,085	(7)	7	(1,092)	1,092
Credit-related modifications that resulted in derecognition	-	-	-	-	(125)	-	-	-	(125)	-
Foreign exchange and other	(16,872)	43	(3,610)	51	(341)	114	(4)	(4)	(20,827)	204
At 31 Dec 2021	881,742	(862)	137,541	(2,105)	14,686	(5,702)	274	(64)	1,034,243	(8,733)
ECL income statement change for the period		1,198		(46)		(610)		46		588
Recoveries										54
Others										(102)
Total ECL income statement change for the period										540

As shown in the above table, the allowance for ECL for loans and advances to customers and banks and relevant loan commitments and financial guarantees decreased $1,884m during the period from $10,617m at 31 December 2020 to $8,733m at 31 December 2021.

This decrease was primarily driven by:

• $1,256m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further lending/repayments;

• $1,092m of assets written off;

• $140m relating to the net remeasurement impact of stage transfers; and

• foreign exchange and other movements of $204m.

These were partly offset by:

• $760m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages; and

• $48m of changes to models used for ECL calculation.

The ECL release for the period of $588m presented in the previous table consisted of $1,256m relating to underlying net book volume movement and $140m relating to the net remeasurement impact of stage transfers. This was partly offset by $760m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages and $48m in changes to models used for ECL calculation.

The net transfer of gross carrying/nominal amounts to stage 1 of $19,285m reflects the overall improvement in the economic outlook as the effects of the Covid-19 outbreak subsided. It was primarily driven by $14,393m in Europe, $8,871m in North America, $3,674m in Middle East and North Africa, and was partly offset by a net transfer out of stage 1 of $8,285m in Asia mainly driven by an increase in Downside scenario weighting for China, reflecting management's concern for potential deterioration on forward looking credit quality.

Wholesale lending - reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		POCI		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2020	925,652	(867)	88,169	(1,103)	9,289	(3,906)	345	(99)	1,023,455	(5,975)
Transfers of financial instruments	(113,217)	(493)	103,413	770	9,804	(277)	-	-	-	-
Net remeasurement of ECL arising from transfer of stage	-	476	-	(603)	-	(742)	-	-	-	(869)
Net new and further lending/repayments	10,451	(437)	(2,910)	141	(3,350)	583	(48)	(1)	4,143	286
Changes to risk parameters - credit quality	-	(261)	-	(2,349)	-	(3,120)	-	(39)	-	(5,769)
Changes to models used for ECL calculation	-	137	-	303	-	-	-	-	-	440
Assets written off	-	-	-	-	(1,537)	1,537	(30)	30	(1,567)	1,567
Credit-related modifications that resulted in derecognition	-	-	-	-	(23)	7	-	-	(23)	7
Foreign exchange and other	18,219	(20)	7,990	(157)	479	(123)	12	(4)	26,700	(304)
At 31 Dec 2020	841,105	(1,465)	196,662	(2,998)	14,662	(6,041)	279	(113)	1,052,708	(10,617)
ECL income statement change for the period		(85)		(2,508)		(3,279)		(40)		(5,912)
Recoveries										46
Others										(59)
Total ECL income statement change for the period										(5,925)

Wholesale lending - distribution of financial instruments to which the impairment requirements of IFRS 9 are applied by credit quality
	Gross carrying/nominal amount						Allowance for ECL	Net
	Strong	Good	Satisfactory	Sub- standard	Credit impaired	Total
	$m	$m	$m	$m	$m	$m	$m	$m
By geography
Europe	48,758	49,254	74,240	14,196	6,769	193,217	(2,825)	190,392
-  of which: UK	30,390	37,212	48,694	9,192	5,156	130,644	(1,890)	128,754
Asia	155,072	95,626	96,046	4,670	4,198	355,612	(3,354)	352,258
-  of which: Hong Kong	74,440	54,703	63,301	3,297	2,150	197,891	(1,592)	196,299
MENA	12,264	7,004	10,321	1,844	1,701	33,134	(1,209)	31,925
North America	11,683	24,663	22,022	5,543	651	64,562	(441)	64,121
Latin America	993	5,736	5,638	2,349	806	15,522	(502)	15,020
At 31 Dec 2021	228,770	182,283	208,267	28,602	14,125	662,047	(8,331)	653,716
Percentage of total credit quality	34.6  %	27.5  %	31.5  %	4.3  %	2.1  %	100.0  %

By geography
Europe	53,373	55,436	81,049	18,327	6,637	214,822	(4,137)	210,685
-  of which: UK	35,050	42,476	55,106	12,357	4,764	149,753	(3,123)	146,630
Asia	141,811	93,350	98,488	4,493	3,551	341,693	(2,803)	338,890
-  of which: Hong Kong	72,088	52,601	68,826	2,558	1,683	197,756	(1,196)	196,560
MENA	12,398	7,810	10,990	1,448	1,982	34,628	(1,524)	33,104
North America	11,157	22,973	24,978	5,964	913	65,985	(660)	65,325
Latin America	989	5,355	6,127	3,049	678	16,198	(677)	15,521
At 31 Dec 2020	219,728	184,924	221,632	33,281	13,761	673,326	(9,801)	663,525
Percentage of total credit quality	32.6  %	27.5  %	32.9  %	4.9  %	2.0  %	100.0  %

Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the Group to support calculation of our minimum credit regulatory capital requirement. The credit quality classifications can be found on page 138.

Wholesale lending - credit risk profile by obligor grade for loans and advances at amortised cost
		Gross carrying amount					Allowance for ECL
	Basel one-year PD range	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total	ECL coverage	Mapped external rating
	%	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	%
Corporate and commercial		400,894	98,911	13,460	274	513,539	(665)	(1,874)	(5,601)	(64)	(8,204)	1.6
-  CRR 1	0.000 to 0.053	40,583	599	-	-	41,182	(7)	(1)	-	-	(8)	-	AA- and above
-  CRR 2	0.054 to 0.169	78,794	4,843	-	-	83,637	(26)	(43)	-	-	(69)	0.1	A+ to A-
-  CRR 3	0.170 to 0.740	139,739	19,199	-	-	158,938	(165)	(145)	-	-	(310)	0.2	BBB+ to BBB-
-  CRR 4	0.741 to 1.927	91,268	23,365	-	-	114,633	(218)	(258)	-	-	(476)	0.4	BB+ to BB-
-  CRR 5	1.928 to 4.914	45,850	28,375	-	-	74,225	(185)	(424)	-	-	(609)	0.8	BB- to B
-  CRR 6	4.915 to 8.860	3,280	11,197	-	-	14,477	(22)	(242)	-	-	(264)	1.8	B-
-  CRR 7	8.861 to 15.000	1,101	4,406	-	-	5,507	(24)	(167)	-	-	(191)	3.5	CCC+
-  CRR 8	15.001 to 99.999	279	6,927	-	4	7,210	(18)	(594)	-	-	(612)	8.5	CCC to C
-  CRR 9/10	100.000	-	-	13,460	270	13,730	-	-	(5,601)	(64)	(5,665)	41.3	D
Non-bank financial institutions		61,086	3,874	395	-	65,355	(44)	(26)	(40)	-	(110)	0.2
-  CRR 1	0.000 to 0.053	14,370	122	-	-	14,492	(2)	(1)	-	-	(3)	-	AA- and above
-  CRR 2	0.054 to 0.169	16,438	43	-	-	16,481	(5)	-	-	-	(5)	-	A+ to A-
-  CRR 3	0.170 to 0.740	18,282	1,026	-	-	19,308	(11)	(4)	-	-	(15)	0.1	BBB+ to BBB-
-  CRR 4	0.741 to 1.927	6,835	1,204	-	-	8,039	(15)	(11)	-	-	(26)	0.3	BB+ to BB-
-  CRR 5	1.928 to 4.914	5,053	1,297	-	-	6,350	(11)	(4)	-	-	(15)	0.2	BB- to B
-  CRR 6	4.915 to 8.860	102	98	-	-	200	-	(5)	-	-	(5)	2.5	B-
-  CRR 7	8.861 to 15.000	5	25	-	-	30	-	(1)	-	-	(1)	3.3	CCC+
-  CRR 8	15.001 to 99.999	1	59	-	-	60	-	-	-	-	-	-	CCC to C
-  CRR 9/10	100.000	-	-	395	-	395	-	-	(40)	-	(40)	10.1	D
Banks		81,636	1,517	-	-	83,153	(14)	(3)	-	-	(17)	-
-  CRR 1	0.000 to 0.053	61,275	10	-	-	61,285	(4)	-	-	-	(4)	-	AA- and above
-  CRR 2	0.054 to 0.169	11,628	65	-	-	11,693	(3)	-	-	-	(3)	-	A+ to A-
-  CRR 3	0.170 to 0.740	3,935	102	-	-	4,037	(2)	-	-	-	(2)	-	BBB+ to BBB-
-  CRR 4	0.741 to 1.927	4,232	180	-	-	4,412	(5)	-	-	-	(5)	0.1	BB+ to BB-
-  CRR 5	1.928 to 4.914	556	52	-	-	608	-	(1)	-	-	(1)	0.2	BB- to B
-  CRR 6	4.915 to 8.860	9	541	-	-	550	-	-	-	-	-	-	B-
-  CRR 7	8.861 to 15.000	1	564	-	-	565	-	-	-	-	-	-	CCC+
-  CRR 8	15.001 to 99.999	-	3	-	-	3	-	(2)	-	-	(2)	66.7	CCC to C
-  CRR 9/10	100.000	-	-	-	-	-	-	-	-	-	-	-	D
At 31 Dec 2021		543,616	104,302	13,855	274	662,047	(723)	(1,903)	(5,641)	(64)	(8,331)	1.3

Corporate and commercial		387,563	126,287	12,961	277	527,088	(1,101)	(2,444)	(5,837)	(112)	(9,494)	1.8
- CRR 1	0.000 to 0.053	36,047	486	-	-	36,533	(8)	(5)	-	-	(13)	-	AA- and above
- CRR 2	0.054 to 0.169	81,298	3,140	-	-	84,438	(42)	(36)	-	-	(78)	0.1	A+ to A-
- CRR 3	0.170 to 0.740	131,540	27,061	-	-	158,601	(262)	(197)	-	-	(459)	0.3	BBB+ to BBB-
- CRR 4	0.741 to 1.927	91,385	35,376	-	-	126,761	(390)	(375)	-	-	(765)	0.6	BB+ to BB-
- CRR 5	1.928 to 4.914	42,214	34,585	-	-	76,799	(330)	(686)	-	-	(1,016)	1.3	BB- to B
- CRR 6	4.915 to 8.860	3,523	14,560	-	-	18,083	(35)	(476)	-	-	(511)	2.8	B-
- CRR 7	8.861 to 15.000	1,111	7,241	-	-	8,352	(21)	(322)	-	-	(343)	4.1	CCC+
- CRR 8	15.001 to 99.999	445	3,838	-	-	4,283	(13)	(347)	-	-	(360)	8.4	CCC to C
- CRR 9/10	100.000	-	-	12,961	277	13,238	-	-	(5,837)	(112)	(5,949)	44.9	D
Non-bank financial institutions		52,223	11,834	523	-	64,580	(46)	(119)	(100)	-	(265)	0.4
- CRR 1	0.000 to 0.053	12,234	28	-	-	12,262	(3)	-	-	-	(3)	-	AA- and above
- CRR 2	0.054 to 0.169	15,128	49	-	-	15,177	(5)	(1)	-	-	(6)	-	A+ to A-
- CRR 3	0.170 to 0.740	16,741	4,086	-	-	20,827	(12)	(9)	-	-	(21)	0.1	BBB+ to BBB-
- CRR 4	0.741 to 1.927	4,931	3,917	-	-	8,848	(15)	(27)	-	-	(42)	0.5	BB+ to BB-
- CRR 5	1.928 to 4.914	2,859	2,797	-	-	5,656	(10)	(34)	-	-	(44)	0.8	BB- to B
- CRR 6	4.915 to 8.860	103	505	-	-	608	(1)	(22)	-	-	(23)	3.8	B-
- CRR 7	8.861 to 15.000	87	329	-	-	416	-	(9)	-	-	(9)	2.2	CCC+
- CRR 8	15.001 to 99.999	140	123	-	-	263	-	(17)	-	-	(17)	6.5	CCC to C
- CRR 9/10	100.000	-	-	523	-	523	-	-	(100)	-	(100)	19.1	D
Banks		79,654	2,004	-	-	81,658	(33)	(9)	-	-	(42)	0.1
- CRR 1	0.000 to 0.053	62,291	46	-	-	62,337	(10)	-	-	-	(10)	-	AA- and above
- CRR 2	0.054 to 0.169	8,835	146	-	-	8,981	(7)	-	-	-	(7)	0.1	A+ to A-
- CRR 3	0.170 to 0.740	5,098	398	-	-	5,496	(5)	(2)	-	-	(7)	0.1	BBB+ to BBB-
- CRR 4	0.741 to 1.927	2,558	168	-	-	2,726	(4)	(4)	-	-	(8)	0.3	BB+ to BB-
- CRR 5	1.928 to 4.914	799	43	-	-	842	(1)	(1)	-	-	(2)	0.2	BB- to B
- CRR 6	4.915 to 8.860	71	20	-	-	91	(6)	-	-	-	(6)	6.6	B-
- CRR 7	8.861 to 15.000	2	1	-	-	3	-	-	-	-	-	-	CCC+
- CRR 8	15.001 to 99.999	-	1,182	-	-	1,182	-	(2)	-	-	(2)	0.2	CCC to C
- CRR 9/10	100.000	-	-	-	-	-	-	-	-	-	-	-	D
At 31 Dec 2020		519,440	140,125	13,484	277	673,326	(1,180)	(2,572)	(5,937)	(112)	(9,801)	1.5

 

END

 

 

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