Annual Financial Report - Part 4

RNS Number : 0663Q

HSBC Holdings PLC

23 February 2021

 

Risk
	Page
Our approach to risk	107
Our risk appetite	107
Risk management	107
Key developments in 2020	109
Top and emerging risks	110
Externally driven	110
Internally driven	115
Areas of special interest	118
Risks related to Covid-19	118
UK withdrawal from the European Union	119
Our material banking risks	120
Credit risk	121
Treasury risk	180
Market risk	198
Resilience risk	203
Regulatory compliance risk	203
Financial crime risk	204
Model risk	205
Insurance manufacturing operations risk	206

Operational resilience in a pandemic

We upheld our operational resilience during the Covid-19 outbreak during a period of increased demand on our teams and systems, with approximately 1.6 million of our WPB customers granted payment relief options across more than 30 markets.

We supplemented our existing approach to risk management with additional tools and practices helping to mitigate and manage risks. Initiatives included mortgage assistance, payment holidays, and the waiving of certain fees and charges.

As we helped our customers during these challenging times, we continued to prioritise effective and robust credit risk management. We also increased our focus on the quality and timeliness of the data used to inform management decisions, so we were able to manage the varying level of risk actively throughout the year.

For further details of our customer relief programmes, see page 142.

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, 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 a conservative risk appetite and strong risk management capability.

• We aim to deliver sustainable 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.

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 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. The exercise carried out in 2019 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 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 109.

We are focused on the implementation of our business strategy, as part of which we are carrying out a major change programme. It is critical that we ensure that as we implement changes, we use active risk management to manage the execution risks.

We will also perform periodic risk assessments, including against strategies, to help ensure retention of key personnel for our continued safe operation.

We use a comprehensive risk management framework across the organisation and across all risk types, underpinned by our culture and values. This outlines the key principles, policies and practices that we employ in managing material risks, both financial and non-financial.

The framework fosters continual monitoring, promotes risk awareness and encourages sound operational and strategic decision making. It also ensures a consistent approach to identifying, assessing, managing and reporting the risks we accept and incur in our activities.

Our risk management framework

The following diagram and descriptions summarise key aspects of the risk management framework, including governance and structure, our risk management tools and our culture, which together help align employee behaviour with our 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 209).
		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 109 and 118).
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 function helps ensure the necessary balance in risk/return decisions (see page 109).
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 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 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.

The management of regulatory compliance risk and financial crime risk resides with the Group Chief Compliance Officer. Oversight is maintained by the Group Chief Risk Officer, in line with their enterprise risk oversight responsibilities, through the RMM.

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 RMM. This structure is summarised in the following table.

Governance structure for the management of risk
Risk Management Meeting	Group Chief Risk Officer Group Chief Legal Officer Group Chief Executive Group Chief Financial Officer All other Group Executive Committee members	• Supporting the Group Chief Risk 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 Officer Chief risk officers of HSBC's global businesses and regions Heads of Global Risk sub-functions	• Supporting the Group Chief Risk Officer in providing strategic direction for the Global Risk function, setting priorities and providing oversight • Overseeing a consistent approach to accountability for, and mitigation of, risk 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 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 213.

Our responsibilities

All our people are responsible for identifying and managing risk within the scope of their roles as part of the three lines of defence model.

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 that our risk management approach and processes are designed and operating effectively.

Global Risk function

Our Global Risk function, headed by the Group Chief Risk Officer, 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 is made up of sub-functions covering all risks to our business. Global Risk forms part of the second line of defence. It 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.

Non-financial risk is the risk to achieving our strategy or objectives as a result of failed internal processes, people and systems, or from external events. Sound non-financial risk management is central to achieving good outcomes for our customers. 

During 2020, we 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.

The Bank of England ('BoE') annual cyclical scenario stress test in 2020 was cancelled and the publication of the results of the 2019 biennial exploratory scenario on liquidity was postponed due to the Covid-19 outbreak.

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 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 help 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 2020

We actively managed the risks resulting from the Covid-19 outbreak and its impacts on our customers and operations during 2020, as well as other key risks described in this section.

In addition, we enhanced our risk management in the following areas:

• In January 2020, we simplified our approach and articulation of risk management through the combination of our enterprise risk management framework and our operational risk management framework.

• The global model risk policy and associated standards were revised to improve how we manage model risk and meet enhanced external expectations.

• We continued to focus on simplifying our approach to non-financial risk management. We are implementing more effective oversight and better end-to-end identification and management of non-financial risks.

• We established the Treasury Risk Management function. This function is a dedicated second line of defence, providing independent oversight of treasury activities across capital risk, liquidity and funding risk, structural foreign exchange risk and interest rate risk in the banking book, together with pension risk. 

• We continued to support the business and our customers throughout the global pandemic, while continuing our focus on managing financial crime risk. We continued to invest in both advanced analytics and artificial intelligence, which remain key components of our next generation of tools to fight financial crime.

• We combined our Operational Risk and Resilience Risk teams to form a new Operational and Resilience Risk sub-function. This sub-function provides robust non-financial risk first line of defence oversight and risk steward oversight of the management of risk by the Group's businesses, functions, legal entities and critical business services. The sub-function helps to ensure that the first line of defence is focused firmly on priority tasks. By bringing the two teams together, we expect to benefit from improved stewardship, better risk management capabilities and better outcomes for our customers.

• We established a dedicated Climate Risk Oversight Forum to shape and oversee our approach to climate risk. We have also established a climate risk programme to drive the delivery of our enhanced climate risk management approach.

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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, updating our top and emerging risks as necessary.

We define a 'top risk' as a thematic issue that may form and crystallise within one year, and which has the potential to materially affect the Group's financial results, reputation or business model. It may arise across any combination of risk types, regions or global businesses. The impact may be well understood by senior management and some mitigating actions may already be in place.

An 'emerging risk' is a thematic issue with large unknown components that may form and crystallise beyond a one-year time horizon. If it were to materialise, it could have a material effect on our long-term strategy, profitability and/or reputation. Existing mitigation plans are likely to be minimal, reflecting the uncertain nature of these risks at this stage. Some high-level analysis and/or stress testing may have been carried out to assess the potential impact.

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 can manifest themselves in divergent regulatory standards and compliance regimes, presenting long-term strategic challenges for multinational businesses.

The Covid-19 outbreak dominated the political and economic landscape through much of 2020. The twin shocks of a public health emergency and the resultant economic fallout were felt around the world, hitting both advanced and emerging markets. The closure of borders threatened medical and food supplies for many markets, leading to countries and territories focusing efforts on building resilient supply chains closer to home. The Covid-19 outbreak and corresponding vaccine roll-out will likely dominate the political and economic agenda for most of 2021.

Tensions could increase as countries compete for access to the array of vaccines either under development, approved or pending approval, while the potential differences of protection offered by vaccines, and the speed and scale with which they can be manufactured and distributed may further add to tensions.

The Covid-19 outbreak also heightened existing US-China tensions. Tensions span a wide range of issues, including trade, finance, military, technology and human rights. The Covid-19 outbreak has accelerated US and Chinese efforts to reduce mutual dependence in strategic industries such as sensitive technology, pharmaceuticals and precursor chemicals.

A range of tensions in US-China relations could have potential ramifications for the Group and its customers. These tensions could include divisions over Hong Kong, US funding of and trading with strategic Chinese industries and claims of human rights violations. Some of these tensions have manifested themselves through actions taken by the governments of the US and China in 2020 and early 2021. These tensions may affect the Group through the impact of sanctions, including the impact of sanctions on customers, and could result in regulatory, reputational and market risks for the Group.

The US has imposed a range of sanctions and trade restrictions on Chinese persons and companies, focusing on entities the US believes are involved in human rights violations, information technology and communications equipment and services, and military activities, among others. In response, China has announced a number of sanctions and trade restrictions that target or provide authority to target foreign officials and companies, including those in the US. Certain measures are of particular relevance.

The US Hong Kong Autonomy Act provides 'secondary sanctions' authority that allows for the imposition of US sanctions against non-US financial institutions found to be engaged in significant transactions with certain Chinese individuals and entities subject to US sanctions as a result of a US determination that these individuals or entities engaged in activities undermining Hong Kong's autonomy. The US has also imposed restrictions on US persons' ability to engage in transactions in or relating to publicly traded securities of a number of prominent Chinese companies. China has subsequently adopted regulations providing a framework for specific prohibitions against compliance with, and private rights of action for damages resulting from, measures that the government determines have an unjustified extraterritorial application that impairs Chinese sovereignty. 

No penalties have yet been imposed against financial institutions under any of these measures, and their scope and application remain uncertain. These and any future measures that may be taken by the US and China may affect the Group, its customers, and the markets in which we operate.

It remains unclear the extent to which the new US administration will affect the current geopolitical tensions, following the inauguration of President Biden on 20 January 2021. However, long-term differences between the two nations will likely remain, which could affect sentiment and restrict global economic activity. We continue to monitor the situation.

While UK-China relations have historically been shaped by strong trade and investment, there are also emerging challenges. Following China's implementation of the Hong Kong national security law, the UK offered residency rights and a path to citizenship to eligible British National (Overseas) passport holders in Hong Kong. In addition, both the UK and Hong Kong governments have suspended their extradition treaties with each other.

As geopolitical tensions rise, the 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 reputational and political risks for the Group. We maintain an open dialogue with our regulators on the impact of legal and regulatory obligations on HSBC's business and customers.

China's expanding data privacy and cybersecurity laws could pose potential challenges to intra-group data sharing, especially within the Greater Bay Area. China's draft Personal Information Protection Law and Data Security Law, if passed in their current forms, could increase financial institutions' compliance burdens in respect of cross-border transfers of personal information. In Hong Kong, there is also an increasing focus by regulators on the use of data and artificial intelligence. Use of personal data through digital platforms for initiatives in the Greater Bay Area may need to take into account these evolving data privacy and cybersecurity obligations.

Emerging and frontier markets have suffered particularly heavily from the Covid-19 outbreak, in light of healthcare shortcomings, widespread labour informality, exposure to commodities production and often weak policy frameworks and buffers. Multilateral institutions have mobilised support for the weaker frontier markets, with the World Bank and G-20 marshalling efforts to implement a standstill on debt to public sector institutions. The International Monetary Fund has also, to date, made approximately $106bn in emergency funds available to over 80 countries. However, negotiations on debt to the private sector will likely prove more difficult, and may result in sovereign debt restructuring and defaults for several countries. Most developed markets are expected to recover from the crisis, as macroeconomic policies remain highly accommodative. However, permanent business closures and job losses in some sectors will likely prevent several developed markets from achieving pre-crisis growth rates or activity levels in the near term. These countries and territories should be able to shoulder the higher public deficits and debts necessary to offset private sector weaknesses, given the continuing low cost of servicing public debt. However, some continental European countries entered the Covid-19 crisis on a weak economic and fiscal footing and suffered high healthcare and economic costs. Although substantial joint EU monetary and fiscal measures should help support recoveries and keep debt servicing costs down at least through 2021, there are concerns that permanently higher debt burdens will eventually lead to investors questioning their sustainability. Renewed government restrictions in response to new waves of infections will put further pressure on these economies.

Central banks have reduced interest rates in most financial markets due to the adverse impact on the path for economic recovery from the Covid-19 outbreak, which has in turn increased the likelihood of negative interest rates. This raises a number of risks and concerns, such as the readiness of our systems and processes to accommodate zero or negative rates, the resulting impacts on customers, and the financial implications given the significant impact that prolonged low interest rates have had, and may continue to have, on our net interest income. For some products, we have floored deposit rates at zero or made decisions not to charge negative rates. This, alongside loans repriced at lower rates, will result in our commercial margins being compressed, which is expected to be reflected in our profitability. The pricing of this risk will need to be carefully considered. These factors may challenge the long-term profitability of the banking sector, including HSBC, and will be considered as part of the Group's transformation programme.

A Trade and Cooperation Agreement between the EU and the UK was agreed on 24 December 2020 and ratified by the UK on 30 December 2020. This avoids the imposition of tariffs and quotas on UK-EU goods trade, and thus a more material setback to the expected gradual recovery of the UK and EU economies from recessions caused by the Covid-19 outbreak. However, the new trading relationship features non-tariff barriers, and leaves several aspects of the broader relationship, including financial services trade, for further negotiation. While it is too early to assess the full economic impact, the UK's exit from the EU may lead to an increase in market volatility and economic risk, particularly in the UK, which could adversely impact our profitability and prospects for growth in this market. For further details on our approach to the UK's withdrawal from the EU, see 'Areas of special interest' on page 116.

The contraction in the global economy during 2020 has had varying effects on our customers, with many of them experiencing financial difficulties. This has resulted in an increase in expected credit losses ('ECL') and risk-weighted assets ('RWAs'). For further details on customer relief programmes, see page 142. For further details on RWAs, see page 174.

Mitigating actions

• We closely monitor economic developments in key markets and sectors and undertake scenario analysis. This helps enable 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 undertake regular reviews of 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 continually monitor the geopolitical outlook, in particular in countries where we have material exposures and/or a significant physical presence. We have also established dedicated forums to monitor geopolitical developments.

• We continue to carry out contingency planning following the UK's withdrawal from the EU and we are assessing the potential impact on our portfolios, operations and staff. This includes the possibility of disputes arising from differing interpretations of the Trade and Cooperation Agreement and other aspects of the bilateral relationship.

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

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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 low-carbon 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 borrowers 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.

Climate risks increased over 2020, primarily as a result of the pace and volume of policy and regulatory changes. These impacted the Group both directly and indirectly through our customers.

Mitigating actions

• A dedicated Climate Risk Oversight Forum is responsible for shaping and overseeing our approach to climate risk to provide support in managing the Group climate-related risks that are outside of our risk appetite. We have also established a climate risk programme to drive the delivery of our plans relating to the enhancement of our risk management approach.

• The Group's risk appetite statement has been enhanced with quantitative metrics to articulate the risks from climate change and embed climate risk into our risk management framework. We established a transition risk framework to gain a better understanding of our exposure to the highest transition risk sectors.

• We implement sustainability risk policies as part of our reputational risk framework. We focus our policies on sensitive sectors that may have a high adverse impact on people or on the environment and in which we have a significant number of customers. These include sectors with potentially high-carbon impacts.

• We have conducted a climate stress test pilot to inform the development of our approach to climate risk management. This pilot also aims to help us prepare and build the necessary capabilities to execute the Bank of England's climate biennial exploratory scenario in 2021.

• We continue to engage with our customers, investors and regulators proactively when compiling and disclosing the information needed to manage climate risk. We also engage with initiatives actively, 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 information, see our TCFD report on page 20.

Ibor transition

Interbank offered rates ('Ibors') are used to set interest rates on hundreds of trillions of US dollars of different types of financial transactions and are used extensively for valuation purposes, risk measurement and performance benchmarking.

The UK's Financial Conduct Authority ('FCA') announced 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. In addition, the 2016 EU Benchmark Regulation, which aims to ensure the accuracy, robustness and integrity of interest rate benchmarks, has resulted in other regulatory bodies reassessing their national benchmarks. As a result, industry-led national working groups are actively discussing the mechanisms for an orderly transition of five Libor currencies, four Asia-Pacific benchmarks that reference US dollar Libor, the Euro Overnight Index Average ('Eonia'), the Singapore interbank offered rate ('Sibor'), and the Turkish Lira interbank offered rate ('TRLibor') to their chosen replacement rates.

The transition process away from Ibors, including the transition of legacy contracts that reference Ibors, exposes HSBC to material execution risks, and increases some financial and non-financial risks.

As our Ibor transition programme progresses into the execution phase, resilience and operational risks are heightened. This is due to an expected increase in the number of new near risk-free rate ('RFR') products being rolled out, compressed timelines for the transition of legacy Ibor contracts and the extensive systems and process changes required to facilitate both new products and the transition. This is being exacerbated by the current interest rate environment where low Libor rates, in comparison with replacement RFRs, could affect decisions to transition contracts early, further compressing transition timelines. Regulatory compliance, legal and conduct risks may also increase as a result of both the continued sale of products referencing Ibors, and the sale of new products referencing RFRs, principally due to the lack of established market conventions across the different RFR products, and the compressed timelines for transition. 

Financial risks resulting from the discontinuation of Ibors and the development of market liquidity in RFRs will also affect HSBC throughout transition. The differences in Ibor and RFR interest rates will create a basis risk that we need to actively manage through appropriate financial hedging. Basis risk in the trading book and in the banking book may arise out of the asymmetric adoption of RFRs across assets and liabilities and across currencies and products. In addition, this may limit the ability to hedge effectively.

The continued orderly transition from Ibors continues to be the programme's key objective through 2021 and can be broadly grouped into two workstreams: the development of alternative rate and RFR product capabilities and the transition of legacy Ibor contracts.

Development of alternative rate and RFR product capabilities

All of our global businesses have actively developed and implemented system and operational capabilities for alternative rates, such as base or prime rates and RFR products during 2020. Several key RFR product transactions were undertaken within the wholesale, Wealth and Personal Banking and Markets and Securities Services business areas. The offering of RFR products is expected to be expanded, with further releases for products referencing the Sterling Overnight Index Average ('Sonia') and the Secured Overnight Financing Rate ('SOFR') set for the first half of 2021, in addition to products linked to other RFRs set to be released throughout 2021.

These developments and the reduced suitability of Ibor products have enabled HSBC to cease selling certain Ibor-linked products. Notably, the origination of US adjustable rate mortgages linked to Libor has ceased, and Libor-linked loan products have been demised for Business Banking and mid-market enterprise segments in certain countries, where suitable alternatives are available.

While Ibor sales do continue for a number of product lines, Ibor exposures that have post-2021 maturities are reducing, aided by market compression of Ibor trades, and undertaking new transactions in alternative rate and replacement RFR products, as market liquidity builds.

Transition legacy contracts

In addition to offering alternative rate and replacement RFR products, the development of new product capabilities will also help facilitate the transition of legacy Ibor and Eonia products. HSBC has begun to engage clients to determine their ability to transition in line with the readiness of alternative rate and replacement RFR products. The Covid-19 outbreak and the interest-rate environment may have affected clients' abilities to transition early, and has resulted in compressed timelines for the transition of legacy Ibor contracts. However, for some US dollar Libor legacy contracts, this timing risk may be mitigated in part by the recent announcement by the Libor benchmark administrator, ICE Benchmark Administration Limited ('IBA'), to consult on extending the publication of overnight and one, three, six and 12 month US dollar Libor settings to 30 June 2023. Despite the proposed extension, regulatory and industry guidance has been clear that market participants should cease writing new US dollar Libor contracts as soon as is practicable, and in any event by the end of 2021 for the majority of products. While the extended deadline will result in additional US dollar Libor transactions maturing before cessation, not all of them will, so it is possible that other proposed solutions, including legislative relief, will still be needed.

The Group continues to have Ibor and Eonia derivatives, loan and bond exposures maturing beyond 2021.

For the derivatives exposures, HSBC's main trading entities have adhered to the adoption of the International Swaps and Derivatives Association ('ISDA') protocol as a fallback provision, which came into effect in January 2021, and the successful changes made by clearing houses to discount derivatives using the euro short-term rate ('€STR') and SOFR, to reduce the risk of a disorderly transition of the derivatives market.

For HSBC's loan book, our global businesses have developed commercial strategies that include active client engagement and communication, providing detailed information on RFR products to determine our clients' abilities to transition to a suitable alternative rate or replacement RFR product, before Ibor cessation.

With respect to HSBC's legacy bond issuances referencing Ibors that may be subject to demise, we continue to assess the terms of those bond issuances and a variety of transition options, with a view to implementing, through 2021 and beyond, transition plans that we expect to be value neutral and in line with market practice. The timing of that implementation will depend on a variety of factors, including the expected timing for the demise of the relevant Ibor rate. The success of these transition plans will, to a certain extent, also depend on the participation and engagement of third-party market participants.  In addition, bond issuances that reference Ibors by certain issuing entities in the Group also reduced during 2020, with such entities opting to issue bonds that reference RFRs such as Sonia and SOFR. For those bonds where HSBC is the paying agent, there remains dependence on engagement of third-party market participants in the transition process of their issued debt.

Mitigating actions

• Our global Ibor transition programme continues to assist in progressing towards an orderly transition to alternative benchmarks and replacement RFRs for our business and our clients, which is overseen by the Group Chief Risk Officer.

• We have widened the scope of the global Ibor transition programme to include additional interest rate benchmarks, where plans are in place to demise those benchmarks in the near future.

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

• We have dedicated teams in place to support the development of and transition to alternative rate and replacement RFR products.

• We are implementing IT and operational changes to enable a longer transition window.

• We met the third quarter of 2020 regulatory endorsed milestones for implementing changes to contractual documentation and the clearing house-led transition to RFR discounting for derivatives.

• We actively compressed derivative contracts and are targeting regulatory endorsed and industry-agreed milestones for the cessation of new issuance of Libor transactions maturing post-2021. These include the first quarter 2021 for sterling Libor and the second quarter 2021 for US dollar Libor. This led to a reduction in the Group's Ibor portfolio of financial instruments.

• We are undertaking reviews of existing Ibor hedge accounting strategies and have implemented policy and entity tools in respect of regulatory reliefs. 

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

• We continue to engage with regulatory and industry bodies actively to mitigate risks relating to hedge accounting changes, multiple RFR market conventions, and so-called 'tough legacy' contracts that have no appropriate replacements or no likelihood of renegotiation to transition.  This includes providing feedback and responses on recent IBA and FCA consultations.

•

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.

These amendments applied from 1 January 2021 with early adoption permitted. HSBC adopted the amendments from
1 January 2020.

	Financial instruments yet to transition to alternative benchmarks, by main benchmark
	USD Libor		GBP Libor		JPY Libor		Others1
At 31 Dec 2020	$m		$m		$m		$m
Non-derivative financial assets2	94,148		46,587		371		10,763
Non-derivative financial liabilities2	33,602		7,183		1,548		549
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, MIFOR, THBFIX, PHIREF, TRLibor 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 after 31 December 2021, the date by which Libor is expected to cease; and

• are recognised on HSBC's consolidated balance sheet.

The administrator of Libor, IBA, has announced a proposal to extend the publication date of most US dollar Libor tenors until
30 June 2023. Publication of one-week and two-month tenors will cease after 31 December 2021. This proposal, if endorsed, would reduce the amounts presented in the above table as some financial instruments included will reach their contractual maturity date prior to 30 June 2023.

Financial crime risk environment

Financial institutions remain under considerable regulatory scrutiny regarding their ability to prevent and detect financial crime. Financial crime threats continue to evolve, often in tandem with increased geopolitical developments and tensions, posing challenges for financial institutions to keep abreast of developments and manage conflicting laws. In particular, during 2020, the escalating US-China tensions had significant impacts on sanctions and export control legal and regulatory regimes.

The global economic slowdown as a result of the Covid-19 outbreak, and the resulting rapid deployment of government relief measures to support individuals and businesses, have increased the risk of fraud. Developments around virtual currencies, stablecoins and central bank digital currencies have continued, with the industry's financial crime risk assessment and management frameworks in their early stages. The evolving regulatory environment presents an execution challenge. We continue to face increasing challenges presented by national data privacy requirements in a global organisation, which may affect our ability to manage financial crime risks effectively. There has also been an increase in media and public scrutiny on how financial crime is managed within financial institutions.

Mitigating actions

• We continue to enhance our financial crime risk management capabilities. We are investing in next generation capabilities to fight financial crime through the application of advanced analytics and artificial intelligence. We continue to monitor geopolitical developments closely and the impacts on our financial crime controls.

• We are strengthening and investing in our fraud controls, to introduce next generation anti-fraud capabilities to protect both our customers and the Group.

• We have developed procedures and controls to manage the risks associated with direct and indirect exposure to virtual currencies. We continue to monitor external developments. We continue to educate our staff on emerging digital products and associated risks.

• We continue to monitor external developments on stablecoins and central bank digital currencies, engaging with central banks and regulators on financial crime risk management.

• We continue to 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 continue to take steps designed to ensure that the reforms we have put in place are both effective and sustainable over the long term.

• We continue to 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.

•

Regulatory compliance risk environment including conduct

Financial service providers continue to face numerous regulatory and supervisory requirements, particularly in the areas of capital and liquidity management, conduct of business, financial crime, internal control frameworks, the use of models and the integrity of financial services delivery. The competitive landscape in which the Group operates may be significantly altered by future regulatory changes and government intervention. Regulatory changes, including those driven by geopolitical issues, such as US-China tensions and those resulting from the UK's exit from the EU, may affect the activities of the Group as a whole, or of some or all of its principal subsidiaries. For further details, see page 110.

Mitigating actions

• We engage, wherever possible, with governments and regulators in the countries and territories in which we operate, to help ensure that new requirements are considered properly and can be implemented effectively. In particular, we were proactive with the global policy changes issued in response to the Covid-19 outbreak to help our customers and contribute to an economic recovery.

• We have had regular meetings with all relevant authorities to discuss strategic contingency plans, including those arising from geopolitical issues.

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Cyber threat and unauthorised access to systems

Together with other organisations, we continue to operate in an increasingly hostile cyber threat environment, which requires ongoing investment in business and technical controls to defend against these threats.

Key threats include unauthorised access to online customer accounts, advanced malware attacks, attacks on our third-party suppliers and security vulnerabilities being exploited.

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 quarterly 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 several industry bodies and working groups to share information about tactics employed by cyber-crime groups and to collaborate in fighting, detecting and preventing cyber-attacks on financial organisations.

•

Internally driven

Data management

We use a large number of systems and applications to support key business processes and operations. To manage the risk of error, HSBC employs data controls at the point of capture, transfer and consumption. Along with other organisations, we also need to meet external/regulatory obligations such as the General Data Protection Regulation ('GDPR') and Basel III.

Mitigating actions

• We are improving data quality across a large number of systems globally. Our data management, aggregation and oversight continues to strengthen and enhance the effectiveness of internal systems and processes. We are implementing data controls for end-to-end critical processes to improve our data capture at the point of entry and throughout the data lifecycle.

• Through our global data management framework we are expanding and enhancing our data governance processes to help monitor the quality of critical customer, product, reference and transaction data proactively and resolve associated data issues in a timely manner.

• We continue to modernise our data and analytics infrastructure through investments in advanced capabilities in Cloud, visualisation, machine learning and artificial intelligence platforms.

• We help protect customer data via our global data privacy framework programme, which establishes data privacy practices, design principles and guidelines that help enable us to demonstrate compliance with data privacy laws and regulations in the jurisdictions in which we operate.

• To help our employees keep abreast of data privacy laws and regulations we hold data privacy awareness training, highlighting our commitment to protect personal data for our customers, employees and other stakeholders.

•

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 including GDP, unemployment rates and housing prices.

Prior to the Covid-19 outbreak a key area of focus was improving and enhancing our model risk governance, and this activity continued throughout 2020. We prioritised the redevelopment of internal ratings-based ('IRB') and internal models 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.

Mitigating actions

• We enhanced the monitoring and review 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.

• We appointed model risk stewards for each of the global businesses and functions to support, oversee and guide the global businesses and functions on model risk management. The risk stewards will provide close monitoring of changes in model behaviour, working closely with business and function model owners and sponsors.

• We worked with the model owners of IRB models and traded risk models to increase our engagement on management of model risk with key regulators including the Prudential Regulation Authority ('PRA').

• We updated the model risk policy and introduced model risk standards to enable a more risk-based approach to model risk management.

• We refreshed the model risk controls through the risk control assessment process. Employees who work in the first line of defence are expected to complete testing using the new enhanced controls in order to assess and understand model risk across the global businesses and key geographies.

• We upgraded the Group model inventory system to provide more granular measurement and management of model risk for multiple applications of a single model.

• We are redeveloping our IRB and IMM models for counterparty credit and our internal models approach ('IMA') for traded risk models. These will be submitted for PRA approval over the next two years.

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Risks arising from the receipt of services from third parties

We use third parties for the provision of a range of services, in common with other financial service providers. Risks arising from the use of third-party service providers may be less transparent and therefore more challenging to manage or influence. It is critical that we ensure we have appropriate risk management policies, processes and practices. These should include adequate control over the selection, governance and oversight of third parties, particularly for key processes and controls that could affect operational resilience. Any deficiency in our management of risks arising from the use of third parties could affect our ability to meet strategic, regulatory or customer expectations.

Mitigating actions

• We continue to embed our delivery model in the first line of defence led by a global third-party management team, which works closely with our global businesses, global functions and regions. We have deployed processes, controls and technology to assess third-party service providers against key criteria and associated control monitoring, testing and assurance. This includes requesting third-party service providers to attest to HSBC's ethical code of conduct during onboarding.

• A dedicated oversight forum in the second line of defence monitors the embedding of policy requirements and performance against risk appetite.

• We delivered a major programme involving our global businesses, global functions and regions to help ensure that we are compliant with our third-party risk policy.

• We reviewed our external supplier engagements to ensure that they meet our third-party risk quality standards including remediation where necessary.

• We implemented a new process for risk assessing our internal group service providers and ensuring that services we provide to other parts of our business also meet defined standards.

•

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. The ability to continue to attract, develop and retain competent individuals in an employment market impacted by the Covid-19 outbreak is challenging particularly due to organisational restructuring. Changed working arrangements, local Covid-19 restrictions and health concerns during the pandemic also impact 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 outbreak. 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 launched the Future Skills curriculum through HSBC University to help 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.

• We have robust plans in place, driven by senior management, to mitigate the effects of external factors that may impact our employment practices. Political and regulatory challenges are closely monitored to minimise the impact on the attraction and retention of talent and key performers. 

•

IT systems infrastructure and resilience

We are committed to investing in the reliability and resilience of our IT systems and critical services. We do so to protect our customers and ensure they are not impacted by disruption to services.

Mitigating actions

• We continue to invest in transforming how software solutions are developed, delivered and maintained, with a particular focus on providing high-quality, stable and secure services. We concentrate on improving system resilience and service continuity testing. We have enhanced the security features of our software development life cycle and improved our testing processes and tools.

• We upgraded many of our IT systems, simplified our service provision and replaced older IT infrastructure and applications. These enhancements led to continued global improvements in service availability during 2020 for both our customers and employees.

•

Change execution risk

In February 2020, we announced our plans to restructure our business, reallocate freed-up capital into higher-growth and higher-return businesses and markets, and to simplify our organisation and reduce costs. Our success in delivering our strategic priorities and continuing to address regulatory change and other top and emerging risks is dependent on the effective and safe delivery of change across the Group.

Mitigating actions

• We have established a global transformation programme to deliver the commitments made in February 2020. The programme is overseen by members of the Group Executive Committee. Related execution risks across the initiatives, including their sequencing and prioritisation, are being monitored and managed. Many of the initiatives impact our staff and require continued investment in technology.

• We continue to work to strengthen our change management practices to deliver sustainable change. These include increased adoption across the Group of Agile ways of working to deliver change.

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Areas of special interest

During 2020, 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 outbreak and the UK withdrawal from the EU.

Risks related to Covid-19

The Covid-19 outbreak and its effect on the global economy have impacted our customers and our performance, and the future effects of the outbreak remain uncertain. The outbreak necessitated governments to respond at unprecedented levels to protect public health, local economies and livelihoods. It has affected regions at different times and to varying degrees as it has developed. The varying government support measures and restrictions in response have added challenges, given the rapid pace of change and significant operational demands. The speed at which countries and territories will be able to unwind the government support measures and restrictions and return to pre-Covid-19 economic levels will vary based on the levels of infection, local governmental decisions and access to and ability to roll out vaccines. There remains a risk of subsequent waves of infection, as evidenced by the recently emerged more transmissible variants of the virus. Renewed outbreaks emphasise the ongoing threat of Covid-19 even in countries that have recorded lower than average cases so far.

Government restrictions imposed around the world to limit the spread of Covid-19 resulted in a sharp contraction in global economic activity during 2020. At the same time governments also took steps designed to soften the extent of the damage to investment, trade and labour markets. Our Central scenario used to calculate impairment assumes that economic activity will gradually recover over the course of 2021. In this scenario, recovery will be supported by a successful roll-out of vaccination programmes across our key markets, which, coupled with effective non-pharmacological measures to contain the virus, will lead to a decline in infections over the course of the year. Governments and central banks are expected to continue to work together across many of our key markets to ensure that households and firms receive an appropriate level of financial support until restrictions on economic activity and mobility can be materially eased. Such support is intended to ensure that labour and housing markets do not experience abrupt, negative corrections. It is also intended to limit the extent of long-term structural damage to economies. 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' on page 127.

There is a material risk of a renewed drop in economic activity. The economic fallout from the Covid-19 outbreak risks increasing inequality across markets that have already suffered from social unrest. This will leave the burden on governments and central banks to maintain or increase fiscal and monetary stimulus. After financial markets suffered a sharp fall in the early phases of the spread of Covid-19, they rebounded but still remain volatile. Depending on the long-term impact on global economic growth, financial asset prices may suffer a further sharp fall.

Governments and central banks in major economies have deployed extensive measures to support their local populations. Measures implemented by governments have included income support to households and funding support to businesses. Central bank measures have included cuts to policy rates, support to funding markets and asset purchases. These measures are being extended in countries where further waves of the Covid-19 outbreak are prompting renewed government restrictions. Central banks are expected to maintain record-low interest rates for a considerable period of time and the debt burden of governments is expected to rise significantly.

We initiated market-specific measures to support our personal and business customers through these challenging times. These included mortgage assistance, payment holidays, the waiving of certain fees and charges, and liquidity relief for businesses facing market uncertainty and supply chain disruption. We are also working closely with governments, and supporting national schemes that focus on the parts of the economy most impacted by Covid-19. In the UK, this included providing access to the various government support schemes from the beginning. In Hong Kong, we provided prompt liquidity relief to businesses facing market uncertainty and supply chain pressures. For further details of our customer relief programmes, see page 142.

Central bank and government actions and support measures taken in response to the Covid-19 outbreak, and our responses to those, have created, and may in the future create restrictions in relation to capital. This has limited and may in the future limit management's flexibility in managing the business and taking action in relation to capital distribution and capital allocation. For example, in response to a written request from the PRA, we cancelled the fourth interim dividend for 2019 of $0.21 per ordinary share. We also announced that we would make no quarterly or interim dividend payments or accruals in respect of ordinary shares until the end of 2020. Following this, in December 2020 the PRA announced a temporary approach to shareholder distributions for 2020 in which it set out a framework for board decisions on dividends. After considering the requirements of the temporary approach, the Board announced an interim dividend for 2020 of $0.15 per ordinary share.

The rapid introduction and varying nature of the government support schemes, as well as customer expectations, has led to risks as the Group implements large-scale changes in a short period of time. This has 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 government support schemes are unwound. Central bank and government actions and support measures, and our responses to those, have also led to increased litigation risk, including lawsuits that have been and may continue to be brought in connection with our cancellation of the fourth interim dividend for 2019.

At 31 December 2020, our CET1 ratio was 15.9%, compared with 14.7% at 31 December 2019, and our liquidity coverage ratio ('LCR') was 139%. Our capital, funding and liquidity position is expected to help us to continue supporting our customers throughout the Covid-19 outbreak.

In many of our markets the Covid-19 outbreak has led to a worsening of economic conditions and increased uncertainty, which has been reflected in higher ECL reserves. Furthermore, credit losses may increase due to exposure to vulnerable sectors of the economy such as retail, hospitality and commercial real estate. The impact of the pandemic on the long-term prospects of businesses in these sectors is 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.

The significant changes in economic and market drivers, customer behaviours and government actions caused by Covid-19 have materially impacted the performance of financial models. ECL model performance has been significantly impacted, which has increased reliance on management judgement in determining the appropriate level of ECL estimates. The reliability of ECL models under these circumstances has also been impacted by the unprecedented response from governments to provide a variety of economic stimulus packages to support livelihoods and businesses. Historical observations on which the models were built do not reflect these unprecedented support measures. We continue to monitor credit performance against the level of government support and customer relief programmes.

In order to address some model limitations and performance issues, we redeveloped some of the key models used to calculate ECL estimates. These models have been independently validated by the Model Risk Management team and assessed as having the ability to deliver reliable credit loss estimates. While this reduced the reliance on management judgement for determining ECL estimates, the current uncertain economic outlook, coupled with the expected end to government support schemes, resulted in judgemental post-model adjustments still being required. The Model Risk Management team is reviewing IFRS 9 model performance at the country and Group level on a quarterly basis to assess whether or not the models in place can deliver reliable outputs.

These assessments provide the credit teams with a view of model reliability. The redevelopment of IFRS 9 models will continue as the economic consequences of the Covid-19 outbreak become clearer over time, economic conditions normalise and actual credit losses occur.

As a result of the Covid-19 outbreak, business continuity responses were implemented and the majority of service level agreements have been maintained. We have not experienced any major impacts to the supply chain from our third-party service providers due to the pandemic. The risk of damage or theft to our physical assets or criminal injury to our employees remains unchanged and no significant incidents have impacted our buildings or staff.

There remain significant uncertainties in assessing the duration of the Covid-19 outbreak and its impact. The actions taken by various governments and central banks, in particular in the UK, mainland China, Hong Kong and the US, provide an indication of the potential severity of the downturn and post-recovery environment, which from a commercial, regulatory and risk perspective could be significantly different to past crises and persist for a prolonged period. A continued prolonged period of significantly reduced economic activity as a result of the impact of the outbreak could have a materially adverse effect on our financial condition, results of operations, prospects, liquidity, capital position and credit ratings. We continue to monitor the situation closely, and given the novel or prolonged nature of the outbreak, additional mitigating actions may be required.

UK withdrawal from the European Union

The UK left the EU on 31 January 2020 and entered a transition period until 31 December 2020. A Trade and Cooperation Agreement between the EU and the UK was agreed on
24 December 2020 and ratified by the UK on 30 December 2020. It includes a joint declaration of cooperation, and in the coming months both parties are expected to enter discussions with the aim of agreeing a Memorandum of Understanding establishing the framework for this cooperation. As expected, the financial passporting arrangement expired at the end of the transition period, and therefore financial institutions in the UK including HSBC Bank plc and HSBC UK lost their EU regulatory permissions to continue servicing clients in the European Economic Area ('EEA') from 1 January 2021. The Trade and Cooperation Agreement mainly focused on goods and services but also covered a wide range of other areas, including competition, state aid, tax, fisheries, transport, data and security. However, it included limited elements on financial services, and, as a result, did not change HSBC's planning in relation to the UK's withdrawal from the EU.

Our programme to manage the impact of the UK withdrawal from the EU has now been largely completed. It was based on the assumption of a scenario whereby the UK exits the transition period without the financial passporting or regulatory equivalence framework that supports cross-border business.

Equivalence decisions are an established feature of EU law, which allow the authorities in the UK and EU to rely on the other's regime for specific regulatory purposes only. While the UK and the EU have made a number of equivalence decisions, these decisions do not give UK firms full access to EU clients and counterparties.

Our programme focused on four main components: legal entity restructuring; product offering; customer migrations; and employees. However, there remain risks, many of them linked to the absence of some equivalence decisions between the EU and the UK.

We have carried out detailed reviews of our credit portfolios to determine those sectors and customers most vulnerable to the UK's exit from the EU and will continue to monitor any implications for our clients in adhering to the new requirements under the Trade and Cooperation Agreement.

Legal entity restructuring

Our branches in seven EEA countries (Belgium, the Netherlands, Luxembourg, Spain, Italy, Ireland and Czech Republic) relied on financial passporting out of the UK. We had worked on the assumption that this passporting would no longer be possible following the UK's withdrawal from the EU and therefore transferred our branch business to newly established branches of HSBC Continental Europe, our primary banking entity authorised in the EU. This was completed in the first quarter of 2019.

Product offering  

To accommodate customer migrations and new business after the UK's departure from the EU, we expanded our product offering in a wide range of areas such as in our Markets and Securities Services franchise as well as in our Global Trade Business. We also enhanced our cash management solutions in France, the Netherlands and Ireland. We also opened a new branch in Stockholm to service our customers in the Nordic region.

Customer migrations

The UK's withdrawal from the EU has had an impact on our clients' operating models, including their working capital requirements, investment decisions and financial markets infrastructure access. Our priority is to provide continuity of service, and while our intention was to minimise the level of change for our customers, we were required to migrate some EEA-incorporated clients from the UK to HSBC Continental Europe or another EEA entity. We have now migrated almost all clients who we expect can no longer be serviced out of the UK. The majority of remaining customers are covered by national regimes that allow continuity of financial services on a temporary or permanent basis between the UK and their respective jurisdictions. We are working in close collaboration with our customers with the aim of managing their transition in 2021, where required.

Employees

The migration of EEA-incorporated clients required us to strengthen our local teams in the EU, and France in particular. We have now completed the transfer of roles from London to Paris to support our post-UK withdrawal from the EU operating model.

Looking beyond the transfer of roles to the EU, we are also providing support to our employees who are UK citizens resident in EEA countries, and employees who are citizens of an EU member state resident in the UK, for example on settlement applications.

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 119)
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 169)
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, and including the financial risks arising from historical and current provision of pensions and other post-employment benefits to staff and their dependants.	Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions, or pension plan fiduciary decisions. It also arises from the external environment, including changes to market parameters such as interest rates or foreign exchange rates, together with updates to the regulatory requirements.	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 182)
Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices, will reduce our income or the value of our portfolios.	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.
Resilience risk (see page 186)
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 186)
Regulatory compliance risk is the risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice, which as a consequence incur fines and penalties and suffer damage to our business.	Regulatory compliance risk arises from the risks associated with breaching our duty to our customers and inappropriate market conduct, as well as breaching regulatory licensing, permission and rules.	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 187)
Financial crime risk is the risk of knowingly or unknowingly helping parties to commit or to further 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. Exceptional circumstances that impact day-to-day operations may additionally increase financial crime risk.	Financial crime 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.
Description of risks - banking operations
Model risk (see page 188)
Model risk is the potential for adverse consequences from business decisions informed by models, which can be exacerbated by errors in methodology, design or the way they are used.	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 192)
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 194)
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	121
Credit risk management	121
Credit risk in 2020	124
Summary of credit risk	123
Credit exposure	128
Measurement uncertainty and sensitivity analysis of ECL estimates	130
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees	141
Credit quality	144
Customer relief programmes	148
Wholesale lending	150
Personal lending	166
Supplementary information	174
HSBC Holdings	180

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 2020

There were no material changes to the policies and practices for the management of credit risk in 2020. We continued to apply the requirements of IFRS 9 'Financial Instruments' within the Credit Risk sub-function.

Due to the unique market conditions observed during the Covid-19 outbreak, we expanded operational practices to provide short-term support to customers under the current credit policy framework.

The outbreak necessitated governments to respond at unprecedented levels to protect public health, local economies and livelihoods. It has affected regions at different times and varying degrees as it has developed. The varying government support measures in response have added challenges, given the rapid pace of change and significant operational demands. The speed at which countries and territories will be able to unwind the government measures and return to pre-Covid-19 economic levels will vary based on the levels of infection, local political decisions and access to and ability to roll out vaccine.

As we helped our customers during these challenging times, we continued to prioritise effective and robust credit risk management. We performed a number of reviews on segments of our loan portfolio that were likely to be impacted by the economic slowdown. A number of internal stress tests were conducted under different scenarios in order to assess the potential impact of the Covid-19 outbreak on expected credit losses. We reviewed and implemented the guidance provided by regulators on how to manage the credit portfolio, how to identify the effects of the various payment moratoria, and the appropriate classification of forborne/renegotiated loans under the various schemes. We also increased our focus on the quality and timeliness of the data used to inform management decisions, so we were able to manage the varying level of risk actively throughout the year.

The Covid-19 outbreak and its effect on the global economy have impacted our customers and our performance during this year, and the future effects of the outbreak remain uncertain.

For further details of market-specific measures to support our personal and business customers, see page 142.

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 action, 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 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 global business chief financial officers and the Group Chief Accounting Officer.

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 lending businesses, 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
	Footnotes	External credit rating	External credit rating	Internal credit rating	12-month Basel probability of default %	Internal credit rating	12 month probability- weighted PD %
Quality classification	1, 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.

Loans that have been identified as renegotiated retain this designation until maturity or derecognition.

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.

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 outbreak, 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 142.

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, 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. In the event of bankruptcy or analogous proceedings, write-off may occur earlier than the maximum periods stated above. Collection procedures may continue after write-off.

Credit risk in 2020

At 31 December 2020, gross loans and advances to customers and banks of $1,134bn increased by $19.4bn, compared with
31 December 2019. This included favourable foreign exchange movements of $26.4bn. Excluding foreign exchange movements, the decline was driven by a $33.2bn decrease in wholesale loans and advances to customers. This was partly offset by a $15bn increase in personal loans and advances and a $11.2bn increase in loans and advances to banks.

At 31 December 2020, the allowance for ECL of $15.7bn increased by $6.3bn compared with 31 December 2019, including adverse foreign exchange movements of $0.1bn. It increased by $1.2bn compared with 30 June 2020. The $15.7bn allowance comprised $14.7bn in respect of assets held at amortised cost, $0.9bn 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 2020, the Group experienced a significant increase in allowances for ECL, which subsequently stabilised during the second half of 2020. Excluding foreign exchange movements, the allowance for ECL in relation to loans and advances to customers increased by $5.7bn from
31 December 2019. This was attributable to:

• a $4.1bn increase in wholesale loans and advances to customers, of which $2.0bn was driven by stages 1 and 2; and

• a $1.6bn increase 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 1 to stage 2, reflecting a worsening of the economic outlook. This trend slowed during the second half of 2020 as forward economic guidance remained broadly stable in comparison with 30 June 2020, with some regions experiencing transfers from stage 2 to stage 1.

At 31 December 2020, stage 3 gross loans and advances to customers and banks of $19.1bn increased by $5.7bn compared with 31 December 2019. This included favourable foreign exchange movements of $0.2bn. Stage 3 gross loans and advances to customers and banks at 31 December 2020 increased from $17.1bn at 30 June 2020, while benefiting from releases from historical default cases. As the Covid-19 pandemic continues, there may be volatility in future stage 3 balances, in particular due to the expiration of the measures implemented by governments, regulators and banks to support customers.

The ECL charge for 2020 was $8.8bn, inclusive of recoveries, which comprised $6.0bn in respect of wholesale lending, of which stage 3 and purchased or originated credit impaired ('POCI') was $3.4bn; $2.7bn in respect of personal lending, of which stage 3 was $0.8bn; and $0.1bn in respect of other financial assets measured at amortised cost and debt instruments measured at FVOCI.

The ECL charge for the six months ended 30 June 2020 was $6.9bn, which comprised $4.6bn in respect of wholesale lending, of which stage 3 and POCI was $2.2bn; $2.0bn in respect of personal lending, of which stage 3 was $0.5bn; and $0.2bn in respect of other financial assets measured at amortised cost and debt instruments measured at FVOCI.

Income statement movements are analysed further on page 79.

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 126;

• measurement uncertainty and sensitivity analysis of ECL estimates, see page 127;

• 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 135;

• credit quality, see page 138;

• customer relief programmes, see page 142;

• total wholesale lending for loans and advances to banks and customers by stage distribution, see page 145;

• wholesale lending collateral, see page 150;

• total personal lending for loans and advances to customers at amortised cost by stage distribution, see page 159; and

• personal lending collateral, see page 162.

•

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 2020				At 31 Dec 2019
		Gross carrying/nominal amount		Allowance for ECL1		Gross carrying/nominal amount		Allowance for ECL1
	Footnotes	$m		$m		$m		$m
Loans and advances to customers at amortised cost		1,052,477		(14,490)		1,045,475		(8,732)
-  personal		460,809		(4,731)		434,271		(3,134)
-  corporate and commercial		527,088		(9,494)		540,499		(5,438)
-  non-bank financial institutions		64,580		(265)		70,705		(160)
Loans and advances to banks at amortised cost		81,658		(42)		69,219		(16)
Other financial assets measured at amortised cost		772,408		(175)		615,179		(118)
-  cash and balances at central banks		304,486		(5)		154,101		(2)
-  items in the course of collection from other banks		4,094		-		4,956		-
-  Hong Kong Government certificates of indebtedness		40,420		-		38,380		-
-  reverse repurchase agreements - non-trading		230,628		-		240,862		-
-  financial investments		88,719		(80)		85,788		(53)
-  prepayments, accrued income and other assets	2	104,061		(90)		91,092		(63)
Total gross carrying amount on-balance sheet		1,906,543		(14,707)		1,729,873		(8,866)
Loans and other credit-related commitments		659,783		(734)		600,029		(329)
-  personal		236,170		(40)		223,314		(15)
-  corporate and commercial		299,802		(650)		278,524		(307)
-  non-bank financial institutions		123,811		(44)		98,191		(7)
Financial guarantees		18,384		(125)		20,214		(48)
-  personal		900		(1)		804		(1)
-  corporate and commercial		12,946		(114)		14,804		(44)
-  non-bank financial institutions		4,538		(10)		4,606		(3)
Total nominal amount off-balance sheet	3	678,167		(859)		620,243		(377)
		2,584,710		(15,566)		2,350,116		(9,243)
		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')		399,717		(141)		355,664		(166)

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 280, includes both financial and non-financial assets.

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 2020
(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').

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 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.

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2019 (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	951,583		80,182		13,378		332		1,045,475		(1,297)		(2,284)		(5,052)		(99)		(8,732)		0.1		2.8		37.8		29.8		0.8
-  personal	413,669		15,751		4,851		-		434,271		(583)		(1,336)		(1,215)		-		(3,134)		0.1		8.5		25.0		-		0.7
-  corporate and commercial	472,253		59,599		8,315		332		540,499		(672)		(920)		(3,747)		(99)		(5,438)		0.1		1.5		45.1		29.8		1.0
-  non-bank financial institutions	65,661		4,832		212		-		70,705		(42)		(28)		(90)		-		(160)		0.1		0.6		42.5		-		0.2
Loans and advances to banks at amortised cost	67,769		1,450		-		-		69,219		(14)		(2)		-		-		(16)		-		0.1		-		-		-
Other financial assets measured at amortised cost	613,200		1,827		151		1		615,179		(38)		(38)		(42)		-		(118)		-		2.1		27.8		-		-
Loan and other credit-related commitments	577,631		21,618		771		9		600,029		(137)		(133)		(59)		-		(329)		-		0.6		7.7		-		0.1
-  personal	221,490		1,630		194		-		223,314		(13)		(2)		-		-		(15)		-		0.1		-		-		-
-  corporate and commercial	259,138		18,804		573		9		278,524		(118)		(130)		(59)		-		(307)		-		0.7		10.3		-		0.1
-  financial	97,003		1,184		4		-		98,191		(6)		(1)		-		-		(7)		-		0.1		-		-		-
Financial guarantees	17,684		2,340		186		4		20,214		(16)		(22)		(10)		-		(48)		0.1		0.9		5.4		-		0.2
-  personal	802		1		1		-		804		(1)		-		-		-		(1)		0.1		-		-		-		0.1
-  corporate and commercial	12,540		2,076		184		4		14,804		(14)		(21)		(9)		-		(44)		0.1		1.0		4.9		-		0.3
-  financial	4,342		263		1		-		4,606		(1)		(1)		(1)		-		(3)		-		0.4		100.0		-		0.1
At 31 Dec 2019	2,227,867		107,417		14,486		346		2,350,116		(1,502)		(2,479)		(5,163)		(99)		(9,243)		0.1		2.3		35.6		28.6		0.4

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 2019
(Audited)
	Gross carrying amount								Allowance for ECL								ECL coverage %
	Stage 2		Up-to-date		1 to 29 DPD1		30 and > DPD1		Stage 2		Up-to-date		1 to 29 DPD1		30 and > DPD1		Stage 2		Up-to-date		1 to 29 DPD1		30 and > DPD1
	$m		$m		$m		$m		$m		$m		$m		$m		%		%		%		%
Loans and advances to customers at amortised cost	80,182		76,035		2,471		1,676		(2,284)		(1,829)		(208)		(247)		2.8		2.4		8.4		14.7
-  personal	15,751		12,658		1,804		1,289		(1,336)		(941)		(178)		(217)		8.5		7.4		9.9		16.8
-  corporate and commercial	59,599		58,557		657		385		(920)		(860)		(30)		(30)		1.5		1.5		4.6		7.8
-  non-bank financial institutions	4,832		4,820		10		2		(28)		(28)		-		-		0.6		0.6		-		-
Loans and advances to banks at amortised cost	1,450		1,450		-		-		(2)		(2)		-		-		0.1		0.1		-		-
Other financial assets measured at amortised cost	1,827		1,783		14		30		(38)		(38)		-		-		2.1		2.1		-		-

1  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 2020 is provided on page 83.

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 293 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 150.

Maximum exposure to credit risk
(Audited)
	2020						2019
	Maximum exposure		Offset		Net		Maximum exposure		Offset		Net
	$m		$m		$m		$m		$m		$m
Loans and advances to customers held at amortised cost	1,037,987		(27,221)		1,010,766		1,036,743		(28,524)		1,008,219
-  personal	456,078		(4,287)		451,791		431,137		(4,640)		426,497
-  corporate and commercial	517,594		(21,102)		496,492		535,061		(21,745)		513,316
-  non-bank financial institutions	64,315		(1,832)		62,483		70,545		(2,139)		68,406
Loans and advances to banks at amortised cost	81,616		-		81,616		69,203		-		69,203
Other financial assets held at amortised cost	774,116		(14,668)		759,448		616,648		(28,826)		587,822
-  cash and balances at central banks	304,481		-		304,481		154,099		-		154,099
-  items in the course of collection from other banks	4,094		-		4,094		4,956		-		4,956
-  Hong Kong Government certificates of indebtedness	40,420		-		40,420		38,380		-		38,380
-  reverse repurchase agreements - non-trading	230,628		(14,668)		215,960		240,862		(28,826)		212,036
-  financial investments	88,639		-		88,639		85,735		-		85,735
-  prepayments, accrued income and other assets	105,854		-		105,854		92,616		-		92,616
Derivatives	307,726		(293,240)		14,486		242,995		(232,908)		10,087
Total on-balance sheet exposure to credit risk	2,201,445		(335,129)		1,866,316		1,965,589		(290,258)		1,675,331
Total off-balance sheet	940,185		-		940,185		893,246		-		893,246
-  financial and other guarantees	96,147		-		96,147		95,967		-		95,967
-  loan and other credit-related commitments	844,038		-		844,038		797,279		-		797,279
At 31 Dec	3,141,630		(335,129)		2,806,501		2,858,835		(290,258)		2,568,577

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 16 on the financial statements;

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

• derivatives, see page 158 and Note 15 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, HSBC Bank plc, HSBC Bank Middle East Limited and HSBC Bank USA, by the location of the lending branch), see page 144 for wholesale lending and page 158 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)

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 have been used to capture the exceptional nature of 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. Three of these 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, while consensus Upside and Downside scenarios are created with reference to distributions for select markets that capture forecasters' views of the entire range of outcomes. Management has chosen to use an additional scenario to represent its view of severe downside risks. The use of an additional scenario is in line with HSBC's forward economic guidance methodology and has been regularly used over the course of 2020. Management may include additional scenarios if it feels that the consensus scenarios do not adequately capture the top and emerging risks. Unlike the consensus scenarios, these additional scenarios are driven by narrative assumptions, could be country-specific and may result in shocks that drive economic activity permanently away from trend.

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 world economy experienced a deep economic shock in 2020. As Covid-19 spread globally, governments in many of our markets sought to limit the human impact by imposing significant restrictions on mobility, in turn driving the deep falls in activity that were observed in the first half of the year. Restrictions were eased as cases declined in response to the initial measures, which supported an initial rebound in economic activity by the third quarter of 2020. This increase in mobility unfortunately led to renewed transmission of the virus in several countries, placing healthcare systems under significant burden, leading governments to reimpose restrictions on mobility and causing economic activity to decline once more.

Economic forecasts are subject to a high degree of uncertainty in the current environment. Limitations of forecasts and economic models require a greater reliance on management judgement in addressing both the error inherent in economic forecasts and in assessing associated ECL outcomes. The scenarios used to calculate ECL in the Annual Report and Accounts 2020 are described below.

The consensus Central scenario

HSBC's Central scenario features an improvement in economic growth in 2021 as activity and employment gradually return to the levels experienced prior to the outbreak of Covid-19.

Despite the sharp contraction in activity, government support in advanced economies played a crucial role in averting significant financial distress. At the same time, central banks in our key markets implemented a variety of measures, which included lowering their main policy interest rates, implementing emergency support measures for funding markets, and either restarting or increasing quantitative easing programmes in order to support economies and the financial system. Across our key markets, governments and central banks are expected to continue to work together to ensure that households and firms receive an appropriate level of financial support until restrictions on economic activity and mobility can be materially eased. Such support intends to ensure that labour and housing markets do not experience abrupt, negative corrections and also intends to limit the extent of long-term structural damage to economies.

Our Central scenario incorporates expectations that governments and public health authorities in our key markets will implement large vaccination programmes, first by inoculating critical groups and then increasing coverage to include the wider population. The deployment of mass vaccination programmes marks a significant step forward in combating the virus and will ease the burden on healthcare systems. We expect vaccination programmes across our key markets to contribute positively to recovery prospects and our Central scenario assumes a steady increase in the proportion of the population inoculated against Covid-19 over the course of 2021.

Differences across markets in the speed and scale of economic recovery in the Central scenario reflect timing differences in the progression of the Covid-19 outbreak, national level differences in restrictions imposed, the coverage achieved by vaccination programmes and the scale of support measures.

The key features of our Central scenario are:

• Economic activity across our top eight markets will recover in 2021, supported by a successful roll-out of vaccination programmes. We expect vaccination programmes, coupled with effective non-pharmacological measures to contain the virus including 'track and trace' systems and restrictions to mobility, to lead to a significant decline in infections across our key markets by the end of 2021.

• Where government support programmes are available, they will continue to provide support to labour markets and households in 2021. We expect a gradual reversion of the unemployment rate to pre-crisis levels over the course of the projection period as a result of economic recovery and due to the orderly withdrawal of government support.

• Inflation will converge towards central bank targets in our key markets.

• In advanced economies, government support in 2020 led to large deficits and a significant increase in public debt. This support is expected to continue as needed and deficits are expected to reduce gradually over the projection period. Sovereign debt levels will remain high and our Central scenario does not assume fiscal austerity.

• Policy interest rates in key markets will remain at current levels for an extended period and will increase very modestly towards the end of our projection period. Central banks will continue to provide assistance through their asset purchase programmes as needed.

• The West Texas Intermediate oil price is forecast to average $43 per barrel over the projection period.

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

Central scenario 2021-2025
	UK		US		Hong Kong		Mainland China		Canada		France		UAE		Mexico
	%		%		%		%		%		%		%		%
GDP growth rate
2020: Annual average growth rate	(11.0)		(4.1)		(6.4)		2.0		(6.1)		(9.7)		(6.3)		(9.7)
2021: Annual average growth rate	4.9		3.8		4.3		7.8		5.0		5.9		3.0		3.7
2022: Annual average growth rate	3.1		2.9		2.9		5.3		3.1		2.9		3.6		2.5
2023: Annual average growth rate	2.4		2.4		2.6		5.2		2.4		2.2		3.9		2.4
5-year average	2.8		2.7		2.9		5.6		2.9		2.9		3.4		2.6
Unemployment rate
2020: Annual average rate	4.6		8.3		5.8		3.9		9.6		7.9		3.1		5.4
2021: Annual average rate	6.9		6.7		5.0		4.1		7.9		10.0		2.7		5.3
2022: Annual average rate	5.8		5.8		3.9		4.2		6.8		9.1		2.6		4.7
2023: Annual average rate	5.4		4.9		3.8		4.1		6.5		8.8		2.7		4.5
5-year average	5.6		5.3		4.0		4.0		6.8		9.0		2.7		4.6
House price growth
2020: Annual average growth rate	2.3		6.0		(0.8)		2.3		5.7		4.4		(11.6)		5.5
2021: Annual average growth rate	(2.1)		4.0		(2.2)		4.7		2.1		(0.5)		(9.8)		3.4
2022: Annual average growth rate	0.9		4.3		2.4		5.7		2.0		4.1		(1.3)		5.0
2023: Annual average growth rate	3.0		4.0		5.2		5.0		3.1		4.1		2.6		4.6
5-year average	1.9		4.0		2.3		4.7		2.7		2.8		-		4.2
Short-term interest rate
2020: Annual average rate	0.3		0.7		1.2		3.2		0.8		(0.4)		1.0		5.7
2021: Annual average rate	0.1		0.3		1.0		2.9		0.5		(0.5)		0.8		4.5
2022: Annual average rate	0.1		0.3		1.1		3.0		0.6		(0.5)		0.8		4.7
2023: Annual average rate	0.1		0.4		1.2		3.1		0.8		(0.5)		0.9		5.2
5-year average	0.2		0.5		1.3		3.1		0.8		(0.5)		1.0		5.2
Probability	40		65		70		80		70		40		65		65

The graphs comparing the respective Central scenarios in the fourth quarters of 2019 and 2020 reveal the extent of economic dislocation that occurred in 2020 and the impact this has had on central projections made at the end of 2019.

The emergent nature of the Covid-19 outbreak at the end of 2019 meant that, consistent with other banks, HSBC's Central scenario did not, on a forward-looking basis, consider the impact of the virus. Our Central scenario at the 2019 year-end projected moderate growth over a five-year horizon, with strong prospects for employment and a gradual increase in policy interest rates by central banks in the major economies of Europe and North America. The onset of the virus led to a fundamental reassessment of our Central forecast and the distribution of risks over the course of 2020. Our Central scenario at the end of 2020, as described above, is based on assumptions that are considerably different.

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

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 prompt deployment of a vaccine; de-escalation of tensions between the US and China; de-escalation of political tensions in Hong Kong; continued support from fiscal and monetary policy and smooth relations between the UK and the EU, which enables the two parties to swiftly reach a comprehensive agreement on trade and services.

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

19.9 (2Q21)

11.8 (2Q21)

13.8 (4Q21)

20.5 (1Q21)

15.8 (2Q21)

19.5 (2Q21)

13.8 (4Q21)

16.8 (2Q21)

Unemployment rate

3.7 (4Q22)

3.9 (4Q22)

3.0 (3Q22)

3.9 (4Q21)

5.3 (3Q22)

7.9 (4Q22)

2.2 (4Q21)

3.6 (3Q22)

House price growth

6.9 (4Q22)

6.4 (1Q22)

4.9 (1Q22)

12.2 (1Q22)

5.2 (1Q21)

5.7 (2Q22)

18.5 (1Q22)

8.2 (3Q22)

Short-term interest rate

0.1 (2Q22)

0.4 (1Q21)

1.1 (1Q21)

3.0 (1Q21)

0.6 (1Q21)

(0.4) (1Q21)

0.9 (1Q21)

5.0 (1Q21)

Probability consensus Upside

5

5

5

10

10

5

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 year 2021 is expected to be a period of economic recovery, but the progression and management of the pandemic presents a key risk to global growth. A new and more contagious strain of the virus increased the transmission rate in the UK and resulted in stringent restrictions to mobility towards the end of 2020. This viral strain observed in the UK, together with aggressive strains observed in other countries including South Africa and Brazil, introduce the risk that transmission may increase significantly within the national borders of a number of countries in 2021 and also raise concerns around the efficacy of vaccines as the virus mutates. Some countries may keep significant restrictions to mobility in place for an extended period of time and at least until critical segments of the population can be inoculated. Further risks to international travel also arise.

A number of vaccines have been developed and approved for use at a rapid pace and plans to inoculate significant proportions of national populations in 2021 across many of our key markets are a clear positive for economic recovery. While we expect vaccination programmes to be successful, governments and healthcare authorities face country-specific challenges that could affect the speed and spread of vaccinations. These challenges include the logistics of inoculating a significant proportion of national populations within a limited timeframe and the public acceptance of vaccines. On a global level, supply challenges could affect the pace of roll-out and the efficacy of vaccines is yet to be determined.

Government support programmes in advanced economies in 2020 were supported by accommodative actions taken by central banks. These measures by governments and central banks 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 long-term differences between the US and China, which could affect sentiment and restrict global economic activity.

• The Covid-19 outbreak reduced the incidence of protests in Hong Kong. Despite the passage of the national security law in 2020, such unrest has the potential to return as the virus abates and restrictions to mobility ease.

• The Trade and Cooperation Agreement between the UK and EU averted a disorderly UK departure from the EU, but the risk of future disagreements remains, which may hinder the ability to reach a more comprehensive agreement on trade and services.

The consensus Downside scenario

In the consensus Downside scenario, economic recovery is considerably weaker compared with the Central scenario. GDP growth remains weak, unemployment rates stay elevated and asset and commodity prices fall before gradually recovering towards their long-run trends.

The scenario is consistent with the key downside risks articulated above. Further outbreaks of Covid-19, coupled with delays in vaccination programmes, lead to longer-lasting restrictions on economic activity in this scenario. Other global risks also increase and drive increased risk-aversion in asset markets.

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

(7.6) (1Q21)

(3.4) (1Q21)

(2.1) (3Q21)

(1.3) (4Q21)

(3.6) (1Q21)

(3.0) (1Q21)

(7.3) (1Q21)

(8.0) (1Q21)

Unemployment rate

9.4 (4Q21)

8.2 (2Q21)

6.4 (1Q21)

4.3 (3Q22)

9.2 (1Q21)

11.2 (1Q21)

3.0 (1Q21)

6.2 (3Q21)

House price growth

(10.8) (4Q21)

0.1 (3Q21)

(6.8) (3Q21)

0.3 (4Q21)

(1.3) (1Q22)

(3.3) (2Q21)

(19.2) (2Q21)

1.0 (4Q21)

Short-term interest rate

0.1 (1Q21)

0.3 (1Q22)

1.1 (4Q22)

2.8 (1Q21)

0.5 (1Q21)

(0.5) (1Q21)

0.8 (1Q22)

3.8 (1Q21)

Probability consensus Downside

40

25

20

8

10

40

25

25

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.

Additional Downside scenario

An additional Downside scenario that features a global recession has been created to reflect management's view of severe risks. In this scenario, infections rise in 2021 and setbacks to vaccine programmes imply that successful roll-out of vaccines only occurs towards the end of 2021 and it takes until the end of 2022 for the

pandemic to come to an end. The scenario also assumes governments and central banks are unable to significantly increase fiscal and monetary programmes, which results in abrupt corrections in labour and asset markets.

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

Additional Downside scenario worst outcome

UK

US

Hong Kong

Mainland China

Canada

France

UAE

Mexico

%

%

%

%

%

%

%

%

GDP growth rate

(10.1) (1Q21)

(4.2) (1Q21)

(8.3) (4Q21)

(9.5) (4Q21)

(5.0) (1Q21)

(6.7) (1Q21)

(12.2) (1Q21)

(10.9) (1Q21)

Unemployment rate

9.8 (3Q21)

11.4 (4Q22)

6.7 (3Q21)

6.1 (3Q22)

11.3 (1Q21)

12.3 (1Q21)

3.9 (1Q21)

6.9 (4Q21)

House price growth

(14.5) (4Q21)

(9.3) (3Q21)

(21.0) (4Q21)

(19.4) (4Q21)

(10.4) (4Q21)

(7.1) (3Q21)

(22.9) (2Q21)

(2.7) (4Q21)

Short-term interest rate

0.8 (2Q21)

1.1 (1Q21)

1.3 (1Q21)

4.0 (2Q21)

0.4 (1Q21)

0.2 (2Q21)

0.5 (3Q21)

6.7 (2Q21)

Probability additional  Downside

15

5

5

2

10

15

5

5

Note: Extreme point in the additional 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.

In considering economic uncertainty and assigning probabilities to scenarios, management has considered both global and country-specific factors. This has led management to assigning scenario probabilities that are tailored to its view of uncertainty in individual markets.

To inform its view, management has considered trends in the progression of the virus in individual countries, the expected reach and efficacy of vaccine roll-outs over the course of 2021, the size and effectiveness of future government support schemes and the connectivity with other countries. Management has also been guided by the actual response to the Covid-19 outbreak and by the economic experience across countries in 2020. China's visible success at containing the virus and its repeated rapid response to localised outbreaks, coupled with government support programmes and clear signs of economic recovery, have led management to conclude that the economic outlook for mainland China is the least volatile out of all our top markets. The Central scenario for mainland China has an 80% probability while a total of 10% has been assigned to the two Downside scenarios. In Hong Kong, the combination of recurrent outbreaks, a lack of details around the roll-out of a vaccination programme and the other risks outlined above, have led management to assign 25% weight to the two Downside scenarios.

The UK and France face the greatest economic uncertainty in our key markets. In the UK, the discovery of a more infectious strain of the virus and subsequent national restrictions on activity imposed before the end of 2020 have resulted in considerable uncertainty in the economic outlook. In France, the increases in cases and hospitalisations towards the end of 2020, the difficulties experienced with the launch of a national vaccination programme and the wide range of measures taken to restrict activity similarly affect the economic outlook. Given these considerations, the Central and the consensus Downside scenario for the UK and France have each been assigned 40% probability. This reflects management's view that, as a result of elevated uncertainty in these two markets, the Central scenario cannot be viewed as the single most likely outcome. The additional Downside scenario has been assigned 15% probability to reflect the view that the balance of risks is weighted to the downside.

Uncertainty related to the continued impact of the pandemic and the ability of governments to control its spread via restrictions and vaccinations over the course of 2021 also play a prominent role in assigning scenario weights to our other markets. In addition, for the US, Canada and Mexico, connectivity across the three North American economies has been considered. 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 70% weight for these four markets and, with risks perceived as being weighted to the downside, the two Downside scenarios have been given weights between 20% 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. The level of estimation uncertainty and judgement has increased during 2020 as a result of the economic effects of the Covid-19 outbreak, 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, 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 very 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 outbreak. 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 unprecedented conditions experienced in 2020, and it was necessary to place greater emphasis on judgemental adjustments to modelled outcomes than in previous years. 

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 2020. 

For wholesale, 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 retail, 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 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. In the Annual Report and Accounts 2019, these were 'Post-model adjustments'.

The most severe projections at 31 December 2020 of macroeconomic variables are outside the historical observations on which IFRS 9 models have been built and calibrated to operate. Moreover, the complexities of country-specific governmental support programmes, the impacts on customer behaviours and the unpredictable pathways of the pandemic have never been modelled. Consequently, HSBC's IFRS 9 models, in some cases, generate outputs that appear overly sensitive when compared with other economic and credit metrics. Governmental support programmes and customer payment reliefs have dislocated the correlation between economic conditions and defaults on which models are based. Management judgemental adjustments are required to help ensure that an appropriate amount of ECL impairment is recognised.

We have internal governance in place to regularly monitor management judgemental adjustments and, where possible, to reduce the reliance on these through model recalibration or redevelopment, as appropriate. During 2020 the composition of modelled ECL and management judgemental adjustments changed significantly, reflecting the path of the pandemic, containment efforts and government support measures, and this is expected to continue to be the case until economic conditions improve. Wider-ranging model changes will take time to develop and need observable loss data on which models can be developed. Models will be revisited over time once the longer-term impacts of Covid-19 are observed. Therefore, we anticipate significant management judgemental adjustments for the foreseeable future.

Management judgemental adjustments made in estimating the reported ECL at 31 December 2020 are set out in the following table. The table includes adjustments in relation to data and model limitations resulting from the pandemic, and as a result of the regular process of model development and implementation. It shows the adjustments applicable to the scenario-weighted ECL numbers. Adjustments in relation to Downside scenarios are more significant, as results are subject to greater uncertainty.

Management judgemental adjustments to ECL1
	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 PD adjustments	(0.8)				(0.8)
Retail model default suppression adjustment	1.9		-		1.9
Other retail lending adjustments	0.4		-		0.4
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 2019 were an increase to ECL of $75m for the wholesale portfolio and $131m for the retail portfolio. This excludes adjustments for alternative scenarios.

During 2020, management judgemental adjustments reflected the volatile economic conditions associated with the Covid-19 pandemic. The composition of modelled ECL and management judgemental adjustments changed significantly over 2020 as certain economic measures, such as GDP growth rate, passed the expected low point in a number of key markets and returned towards those reflected in modelled relationships, subject to continued uncertainty in the recovery paths of different economies. 

At 31 December 2020, wholesale management judgemental adjustments were an ECL reduction of $0.2bn (31 December 2019: $0.1bn increase). These wholesale adjustments were lower than those made in the second and third quarters of 2020 following an improvement in macroeconomic assumptions, with models operating closer to their calibration range and following recalibration for stressed conditions.

The adjustments relating to low-credit-risk exposures are 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.

Adjustments to corporate exposures principally reflect the outcome of management judgements for high-risk and vulnerable sectors in some of our key markets, supported by credit experts' input, quantitative analyses and benchmarks. Considerations include potential default suppression in some sectors due to government intervention and late-breaking idiosyncratic developments.

In the fourth quarter of 2020, retail management judgemental adjustments led to an ECL increase of $1.5bn, primarily from additional ECL of $1.9bn to reflect adjustments to the timing of default, which has been delayed by government support and customer relief measures. This was partly offset by adjustments to retail lending PD outputs, to reduce ECL of $0.8bn for unintuitive model responses, primarily where economic forecasts were beyond the bounds of the model development period. Other retail lending adjustments of $0.4bn led to an increase in ECL from areas such as customer relief and data limitations.

The retail model default suppression adjustment was applied as defaults remain temporarily suppressed due to government support and customer relief programmes, which have supported stabilised portfolio performance. Retail models are reliant on the assumption that as macroeconomic conditions deteriorate, defaults will crystallise. This adjustment aligns the increase in default due to changes in economic conditions to the period of time when defaults are expected to be observed. The retail model default suppression adjustment will be monitored and updated prospectively to ensure appropriate alignment with expected performance taking into consideration the levels and timing of government support and customer relief programmes.

Retail lending PD adjustments are primarily related to an adjustment made in relation to the UK. The downside unemployment forecasts were outside the historical bounds on which the model was developed resulting in unintuitive levels of PD. This adjustment reduced the sensitivity of PD to better align with the historical correlation between changes in levels of unemployment and defaults.

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 in stages 1 and 2 at the balance sheet date. The population of stage 3 loans (in default) at the balance sheet date is unchanged in these sensitivity calculations. Stage 3 ECL would only be sensitive to changes in forecasts of future economic conditions if the LGD of a particular portfolio was sensitive to these changes.

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

For wholesale credit risk exposures, the sensitivity analysis excludes ECL and financial instruments related to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios. Therefore, it is impracticable to separate the effect of macroeconomic factors in individual assessments. 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 additional/ alternative Downside 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 conditions
	Gross carrying amount2		Reported ECL		Central scenario ECL		Upside scenario ECL		Downside scenario ECL		Additional Downside scenario ECL
ECL of loans and advances to customers at 31 December 20201	$m		$m		$m		$m		$m		$m
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

IFRS 9 ECL sensitivity to future economic conditions3
	Gross carrying  amount2	Reported ECL	Central scenario ECL	Upside scenario ECL	Downside scenario ECL	Alternative scenarios ECL4
ECL of loans and advances to customers at 31 December 20191	$m	$m	$m	$m	$m	$m
UK	346,035	725	536	480	635	1,050-2,100
US	203,610	148	149	132	161
Hong Kong	418,102	328	243	241	244	550-700
Mainland China	104,004	124	118	95	106	150
Canada	74,620	80	79	63	108
Mexico	32,632	69	68	48	99
UAE	42,304	97	97	89	108
France	124,618	55	53	50	79

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  ECL sensitivities for 2019 exclude portfolios utilising less complex modelling approaches and management judgemental adjustments only included in reported ECL.

4  The UK alternative Downside ('AD') scenario 1 had an ECL impact of $1bn with AD2 and AD3 scenarios with ECL impacts of $1.9bn and $2.1bn respectively. The Hong Kong AD1 and AD2 scenarios had an impact of $0.55bn and $0.7bn respectively.

At 31 December 2020, the most significant level of ECL sensitivity was observed in the UK, Hong Kong and mainland China. This higher sensitivity is largely driven by significant exposure in these regions and more severe impacts of the Downside scenarios relative to the Central and probability-weighted scenarios. For mainland China, the additional Downside scenario weighting of 2% reflects a scenario that is considered highly unlikely and is significantly more adverse compared with the Central scenario, resulting in a higher ECL estimate relative to the reported and Central scenarios.

Retail analysis

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 20202	$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

IFRS 9 ECL sensitivity to future economic conditions1 (continued)
	Gross carrying amount		Reported ECL	Central scenario ECL	Upside scenario ECL	Downside scenario ECL	Alternative scenarios ECL
ECL of loans and advances to customers at 31 December 20192	$m		$m	$m	$m	$m	$m
UK
Mortgages	130,079		123	33	28	38	50-80
Credit cards	9,359		431	421	376	506	670-930
Other	10,137		382	318	282	374	490-700
Mexico
Mortgages	3,385		32	31	24	41
Credit cards	1,295		211	211	190	231
Other	3,001		341	340	312	380
Hong Kong
Mortgages	86,448		0	0	0	0	0
Credit cards	7,795		243	201	191	201	400
Other	7,446		105	95	90	104	130
UAE
Mortgages	1,983		92	92	83	91
Credit cards	513		54	54	49	72
Other	895		28	28	26	31
France
Mortgages	21,374		60	60	59	60
Other	1,643		73	73	73	74
US
Mortgages	14,732		22	22	21	24
Credit cards	738		68	68	62	74
Canada
Mortgages	19,843		15	14	13	16
Credit cards	270		7	7	7	7
Other	2,231		17	17	16	18

1  ECL sensitivities exclude portfolios utilising less complex modelling approaches.

2  ECL sensitivity includes only on-balance sheet financial instruments to which IFRS 9 impairment requirements are applied.

At 31 December 2020, 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 remain 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 have deteriorated in 2020 due to the Covid-19 pandemic.

Group ECL sensitivity results

The ECL impact of the scenarios and management judgemental adjustments are highly sensitive to movements in economic forecasts, including the efficacy of government support measures. Based upon the sensitivity tables presented above, if the Group ECL balance (excluding wholesale stage 3, which is assessed individually) was estimated solely on the basis of the Central scenario, Downside scenario or the additional Downside scenario at 31 December 2020, it would increase/(decrease) as presented in the below table.

	Retail1		Wholesale1
Total Group ECL 2020	$bn		$bn
Reported ECL	4.5		4.5
Scenarios
100% consensus Central scenario	(0.3)		(0.9)
100% consensus Downside scenario	0.3		1.0
100% additional Downside scenario	1.3		5.9

	Retail1		Wholesale
Total Group ECL 2019	$bn		$bn
Reported ECL	2.9		2.0
Scenarios
100% consensus Central scenario	(0.2)		(0.3)
100% consensus Downside scenario	0.1		-
100% alternative Downside scenario	n/a		n/a

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

There still remains a significant degree of uncertainty in relation to the UK economic outlook. If a 100% weight were applied to the consensus Downside and additional Downside scenario for the UK, respectively, it would result in an increase in ECL of $0.2bn and $1.8bn in wholesale and $0.2bn and $0.5bn in retail.

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 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)

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 increased $6,266m during the period from $9,125m at 31 December 2019 to $15,391m at 31 December 2020.

This increase was primarily driven by:

• $9,199m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages;

• $1,001m relating to the net remeasurement impact of stage transfers; and

• foreign exchange and other movements of $425m.

These were partly offset by:

• $2,974m of assets written off;

• $945m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further lending/repayment;

• $433m of changes to models used for ECL calculation; and

• $7m of credit-related modifications that resulted in derecognitions.

The ECL charge for the period of $8,822m presented in the previous table consisted of $9,199m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stage and $1,001m relating to the net remeasurement impact of stage transfers. This was partly offset by $945m relating to underlying net book volume movement and $433m in changes to models used for ECL calculation.

Summary views of the movement in wholesale and personal lending are presented on pages 147 and 160.

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 2019	1,502,976		(1,449)		95,104		(2,278)		14,232		(5,135)		334		(194)		1,612,646		(9,056)
Transfers of financial instruments:	(36,244)		(543)		31,063		1,134		5,181		(591)		-		-		-		-
-  transfers from stage 1 to stage 2	(108,434)		487		108,434		(487)		-		-		-		-		-		-
-  transfers from stage 2 to stage 1	73,086		(1,044)		(73,086)		1,044		-		-		-		-		-		-
-  transfers to stage 3	(1,284)		59		(5,022)		665		6,306		(724)		-		-		-		-
-  transfers from stage 3	388		(45)		737		(88)		(1,125)		133		-		-		-		-
Net remeasurement of ECL arising from transfer of stage	-		669		-		(676)		-		(114)		-		-		-		(121)
New financial assets originated or purchased	504,064		(534)		-		-		-		-		135		(21)		504,199		(555)
Assets derecognised (including final repayments)	(352,961)		112		(19,909)		553		(2,712)		656		(26)		8		(375,608)		1,329
Changes to risk parameters - further lending/repayment	(72,239)		291		(2,560)		67		402		(6)		28		12		(74,369)		364
Changes to risk parameters - credit quality	-		2		-		(1,208)		-		(2,704)		-		(51)		-		(3,961)
Changes to models used for ECL calculation	-		(6)		-		4		-		14		-		-		-		12
Assets written off	-		-		-		-		(2,657)		2,657		(140)		140		(2,797)		2,797
Credit-related modifications that resulted in derecognition	-		-		-		-		(268)		125		-		-		(268)		125
Foreign exchange	16,838		(9)		1,201		(40)		160		(31)		1		1		18,200		(79)
Others	(821)		3		652		3		(3)		8		13		6		(159)		20
At 31 Dec 2019	1,561,613		(1,464)		105,551		(2,441)		14,335		(5,121)		345		(99)		1,681,844		(9,125)
ECL income statement change for the period			534				(1,260)				(2,154)				(52)				(2,932)
Recoveries																			361
Others																			(20)
Total ECL income statement change for the period																			(2,591)

	At 31 Dec 2019				12 months ended 31 Dec 2019
	Gross carrying/nominal amount		Allowance for ECL		ECL charge
	$m		$m		$m
As above	1,681,844		(9,125)		(2,591)
Other financial assets measured at amortised cost	615,179		(118)		(26)
Non-trading reverse purchase agreement commitments	53,093		-		-
Performance and other guarantees not considered for IFRS 9	-		-		(34)
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/ Summary consolidated income statement	2,350,116		(9,243)		(2,651)
Debt instruments measured at FVOCI	355,664		(166)		(105)
Total allowance for ECL/total income statement ECL change for the period	n/a		(9,409)		(2,756)

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 121.

Distribution of financial instruments by credit quality at 31 December 2020
(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 by credit quality at 31 December 2019 (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	524,889		258,402		228,485		20,007		13,692		1,045,475		(8,732)		1,036,743
-  personal	354,461		45,037		27,636		2,286		4,851		434,271		(3,134)		431,137
-  corporate and commercial	138,126		190,470		186,383		16,891		8,629		540,499		(5,438)		535,061
-  non-bank financial institutions	32,302		22,895		14,466		830		212		70,705		(160)		70,545
Loans and advances to banks held at amortised cost	60,636		5,329		1,859		1,395		-		69,219		(16)		69,203
Cash and balances at central banks	151,788		1,398		915		-		-		154,101		(2)		154,099
Items in the course of collection from other banks	4,935		18		3		-		-		4,956		-		4,956
Hong Kong Government certificates of indebtedness	38,380		-		-		-		-		38,380		-		38,380
Reverse repurchase agreements - non-trading	193,157		37,947		9,621		137		-		240,862		-		240,862
Financial investments	78,318		6,503		906		61		-		85,788		(53)		85,735
Prepayments, accrued income and other assets	70,675		8,638		11,321		306		152		91,092		(63)		91,029
-  endorsements and acceptances	1,133		4,651		4,196		230		4		10,214		(16)		10,198
-  accrued income and other	69,542		3,987		7,125		76		148		80,878		(47)		80,831
Debt instruments measured at fair value through other comprehensive income1	333,158		10,966		7,222		544		1		351,891		(166)		351,725
Out-of-scope for IFRS 9
Trading assets	135,059		15,240		22,964		2,181		-		175,444		-		175,444
Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss	4,655		1,391		5,584		139		-		11,769		-		11,769
Derivatives	187,636		42,642		11,894		821		2		242,995		-		242,995
Total gross carrying amount on balance sheet	1,783,286		388,474		300,774		25,591		13,847		2,511,972		(9,032)		2,502,940
Percentage of total credit quality	70.9%		15.5%		12.0%		1.0%		0.6%		100%
Loan and other credit-related commitments	369,424		146,988		77,499		5,338		780		600,029		(329)		599,700
Financial guarantees	7,441		6,033		5,539		1,011		190		20,214		(48)		20,166
In-scope: Irrevocable loan commitments and financial guarantees	376,865		153,021		83,038		6,349		970		620,243		(377)		619,866
Loan and other credit-related commitments	66,148		69,890		58,754		2,605		182		197,579		-		197,579
Performance and other guarantees	30,099		23,335		20,062		2,057		380		75,933		(132)		75,801
Out-of-scope: Revocable loan commitments and non-financial guarantees	96,247		93,225		78,816		4,662		562		273,512		(132)		273,380

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
	Footnotes	$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 FVOCI	1
-  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.

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
	Footnotes	$m		$m		$m		$m		$m		$m		$m		$m
Loans and advances to customers at amortised cost		524,889		258,402		228,485		20,007		13,692		1,045,475		(8,732)		1,036,743
-  stage 1		523,092		242,631		181,056		4,804		-		951,583		(1,297)		950,286
-  stage 2		1,797		15,771		47,429		15,185		-		80,182		(2,284)		77,898
-  stage 3		-		-		-		-		13,378		13,378		(5,052)		8,326
-  POCI		-		-		-		18		314		332		(99)		233
Loans and advances to banks at amortised cost		60,636		5,329		1,859		1,395		-		69,219		(16)		69,203
-  stage 1		60,548		5,312		1,797		112		-		67,769		(14)		67,755
-  stage 2		88		17		62		1,283		-		1,450		(2)		1,448
-  stage 3		-		-		-		-		-		-		-		-
-  POCI		-		-		-		-		-		-		-		-
Other financial assets measured at amortised cost		537,253		54,505		22,766		503		152		615,179		(118)		615,061
-  stage 1		536,942		54,058		21,921		279		-		613,200		(38)		613,162
-  stage 2		311		447		845		224		-		1,827		(38)		1,789
-  stage 3		-		-		-		-		151		151		(42)		109
-  POCI		-		-		-		-		1		1		-		1
Loan and other credit-related commitments		369,424		146,988		77,499		5,338		780		600,029		(329)		599,700
-  stage 1		368,711		141,322		66,283		1,315		-		577,631		(137)		577,494
-  stage 2		713		5,666		11,216		4,023		-		21,618		(133)		21,485
-  stage 3		-		-		-		-		771		771		(59)		712
-  POCI		-		-		-		-		9		9		-		9
Financial guarantees		7,441		6,033		5,539		1,011		190		20,214		(48)		20,166
-  stage 1		7,400		5,746		4,200		338		-		17,684		(16)		17,668
-  stage 2		41		287		1,339		673		-		2,340		(22)		2,318
-  stage 3		-		-		-		-		186		186		(10)		176
-  POCI		-		-		-		-		4		4		-		4
At 31 Dec 2019		1,499,643		471,257		336,148		28,254		14,814		2,350,116		(9,243)		2,340,873
Debt instruments at FVOCI	1
-  stage 1		333,072		10,941		6,902		-		-		350,915		(39)		350,876
-  stage 2		86		25		320		544		-		975		(127)		848
-  stage 3		-		-		-		-		-		-		-		-
-  POCI		-		-		-		-		1		1		-		1
At 31 Dec 2019		333,158		10,966		7,222		544		1		351,891		(166)		351,725

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 142.

A summary of our current policies and practices for renegotiated loans and forbearance is set out in 'Credit risk management' on page 119.

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	-		-		2,429		-		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)

Gross carrying amount
Personal	-		-		2,207		-		2,207
-  first lien residential mortgages	-		-		1,558		-		1,558
-  other personal lending	-		-		649		-		649
Wholesale	1,168		1,179		3,353		310		6,010
-  corporate and commercial	1,168		1,179		3,290		310		5,947
-  non-bank financial institutions	-		-		63		-		63
At 31 Dec 2019	1,168		1,179		5,560		310		8,217
Allowance for ECL
Personal	-		-		(397)		-		(397)
-  first lien residential mortgages	-		-		(181)		-		(181)
-  other personal lending	-		-		(216)		-		(216)
Wholesale	(13)		(55)		(1,349)		(86)		(1,503)
-  corporate and commercial	(13)		(55)		(1,316)		(86)		(1,470)
-  non-bank financial institutions	-		-		(33)		-		(33)
At 31 Dec 2019	(13)		(55)		(1,746)		(86)		(1,900)

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 2020	4,274		745		1,279		1,349		267		7,914		3,483		220
At 31 Dec 2019	4,182		838		1,805		1,185		207		8,217		3,438		277

Customer relief programmes

In response to the Covid-19 outbreak, governments and regulators around the world have 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 2020. 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 2020, the gross carrying value of loans to personal customers under relief was $5.5bn (30 June 2020: $26.3bn). This comprised $4.7bn in relation to mortgages (30 June 2020: $21.1bn) and $0.9bn in relation to other personal lending (30 June 2020: $5.2bn). The decrease in personal customer relief during the second half of the year was driven by customers exiting relief measures. The gross carrying value of loans to wholesale customers under relief was $35.3bn (30 June 2020: $51.8bn). 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 2020.

Personal lending
Extant at 31 December 2020		UK		Hong Kong		US		Other major markets1,2,3		Total
Market-wide schemes
Number of accounts in mortgage customer relief	000s	6		-		-		5		11
Drawn loan value of accounts in mortgage customer relief	$m	1,412		-		-		908		2,320
Number of accounts in other personal lending customer relief	000s	15		-		-		28		43
Drawn loan value of accounts in other personal lending customer relief	$m	140		-		-		386		526
HSBC-specific measures
Number of accounts in mortgage customer relief	000s	-		3		2		3		8
Drawn loan value of accounts in mortgage customer relief	$m	7		1,124		864		360		2,355
Number of accounts in other personal lending customer relief	000s	-		1		6		18		25
Drawn loan value of accounts in 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 in mortgage customer relief	000s	6		3		2		8		19
Drawn loan value of accounts in mortgage customer relief	$m	1,419		1,124		864		1,268		4,675
Number of accounts in other personal lending customer relief	000s	15		1		6		46		68
Drawn loan value of accounts in 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
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. At 31 December 2020, the number of accounts under this moratorium was 26,000 with an associated drawn balance of $452m.

3  In Mexico, 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 outbreak 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 consists of payment holidays or partial payment deferrals.

Relief is offered for an initial period of three months and may be extended for a further three months in certain circumstances. No payment is required from the customer during this period (though with a partial payment deferral the customer has expressed a desire to make a contribution) and interest continues to be charged as usual. The customer's arrears status is not worsened from utilisation of these schemes.

Other personal lending payment holidays

Customer relief is granted for an initial period of three months and may be extended for a further three months. The maximum relief value is up to the due payment amount during the period.

UK wholesale lending  

The primary relief granted under government schemes consists 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 has been extended until 31 March 2021. The key features of these schemes are as follows:

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

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

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

Hong Kong wholesale lending

Pre-approved Principal Payment Holiday Scheme for Corporate Customers

The above scheme enables 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 announced that this scheme has been extended for a further six months to April 2021.

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 are fully guaranteed by the Small Business Administration, whose guarantee is backed by the full faith and credit of the US. PPP-covered loans also afford customers forgiveness up to the principal amount of the PPP-covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The Small Business Administration will reimburse PPP lenders for any amount of a PPP-covered loan that is forgiven, and PPP lenders will not be liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Lenders receive pre-determined fees for processing and servicing PPP loans.

HSBC-specific measures

UK wholesale lending

HSBC is offering capital repayment holidays to CMB customers. Relief is offered on a preferred term of six months. However, some are granted for three months with the option of an extension. Interest continues to be paid as usual.

Hong Kong personal lending

Mortgages

Customer relief granted on Hong Kong mortgages consists of deferred principal repayment of up to 12 months. This relief programme is available to existing HSBC mortgage loan customers who have a good repayment record during the past six months.

US total personal lending

Customer relief granted on US mortgages and other personal lending consists of deferrals of up to 12 months and up to nine months respectively.

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 2020 to 31 December 2020 closing gross carrying/nominal amounts and the associated allowance for ECL.

At 31 December 2020, wholesale lending for loans and advances to banks and customers of $673bn decreased by $7.1bn since 31 December 2019. This included favourable foreign exchange movements of $14.9bn. Excluding foreign exchange movements, the total wholesale lending decrease was driven by a $25.3bn decline in corporate and commercial balances and a $8bn decline in balances from non-bank financial institutions. This was partly offset by a $11.2bn increase in loans and advances to banks.

The primary driver of the decline in corporate and commercial balances was $14.5bn in Asia, notably $7.1 bn in Hong Kong, $2.8bn in Australia and $1.5bn in Singapore. Balances in Europe declined $4.3bn, notably $2.4bn in Germany and $2bn in the UK, partly offset by growth of $1.8bn in France.

In North America and Latin America, balances declined $6.8bn and $1.3bn respectively, while they grew in MENA by $1.6bn.

Loan commitments and financial guarantees grew $45bn since 31 December 2019 to $441bn at 31 December 2020, including a $8.6bn increase related to unsettled reverse repurchase agreements. This also included favourable foreign exchange movements of $15.4bn.

The allowance for ECL attributable to wholesale loans and advances to banks and customers increased $4.2bn to $9.8bn at 31 December 2020 from $5.6bn at 31 December 2019. This included adverse foreign exchange movements of $0.1bn.

Excluding foreign exchange movements, the total increase in the wholesale ECL allowance for loans and advances to customers and banks was driven by a $4bn rise in corporate and commercial balances. The primary driver of this increase in corporate and commercial allowance for ECL was $1.5bn in Europe, notably $1.3bn in the UK. There was an increase of $1.3bn in Asia, notably $0.7bn in Singapore and $0.4bn in Hong Kong. Additionally, there were increases of $0.5bn, $0.4bn and $0.4bn in MENA, North America and Latin America, respectively.

The allowance for ECL attributable to loan commitments and financial guarantees of $0.8bn at 31 December 2020 increased from $0.4bn at 31 December 2019.

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'.

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	472,253		59,599		8,315		332		540,499		(672)		(920)		(3,747)		(99)		(5,438)
-  agriculture, forestry and fishing	5,416		1,000		278		2		6,696		(13)		(29)		(139)		(1)		(182)
-  mining and quarrying	9,923		4,189		311		12		14,435		(22)		(70)		(122)		(12)		(226)
-  manufacturing	88,138		14,525		1,581		136		104,380		(143)		(211)		(806)		(50)		(1,210)
-  electricity, gas, steam and air-conditioning supply	13,479		1,386		175		-		15,040		(14)		(41)		(25)		-		(80)
-  water supply, sewerage, waste management and remediation	2,963		508		30		-		3,501		(6)		(4)		(18)		-		(28)
-  construction	10,520		3,883		852		32		15,287		(16)		(49)		(467)		(32)		(564)
-  wholesale and retail trade, repair of motor vehicles and motorcycles	83,151		9,897		1,625		8		94,681		(111)		(137)		(934)		(2)		(1,184)
-  transportation and storage	22,604		2,359		588		29		25,580		(42)		(37)		(158)		-		(237)
-  accommodation and food	20,109		4,284		262		1		24,656		(37)		(46)		(62)		(1)		(146)
-  publishing, audiovisual and broadcasting	18,103		1,706		141		21		19,971		(30)		(23)		(33)		(1)		(87)
-  real estate	122,972		6,450		1,329		1		130,752		(108)		(97)		(475)		-		(680)
-  professional, scientific and technical activities	21,085		2,687		350		-		24,122		(31)		(33)		(145)		-		(209)
-  administrative and support services	21,370		3,817		438		89		25,714		(33)		(58)		(179)		-		(270)
-  public administration and defence, compulsory social security	1,889		488		-		-		2,377		(1)		(7)		-		-		(8)
-  education	1,700		184		16		-		1,900		(7)		(5)		(6)		-		(18)
-  health and care	3,543		811		111		-		4,465		(9)		(20)		(28)		-		(57)
-  arts, entertainment and recreation	2,537		257		30		-		2,824		(6)		(8)		(11)		-		(25)
-  other services	13,143		941		191		1		14,276		(35)		(31)		(133)		-		(199)
-  activities of households	725		66		-		-		791		-		-		-		-		-
-  extra-territorial organisations and bodies activities	2		-		-		-		2		-		-		-		-		-
-  government	8,159		147		7		-		8,313		(6)		(2)		(6)		-		(14)
-  asset-backed securities	722		14		-		-		736		(2)		(12)		-		-		(14)
Non-bank financial institutions	65,661		4,832		212		-		70,705		(42)		(28)		(90)		-		(160)
Loans and advances to banks	67,769		1,450		-		-		69,219		(14)		(2)		-		-		(16)
At 31 Dec 2019	605,683		65,881		8,527		332		680,423		(728)		(950)		(3,837)		(99)		(5,614)
By geography
Europe	190,528		20,276		4,671		129		215,604		(318)		(458)		(1,578)		(45)		(2,399)
-  of which: UK	131,007		16,253		3,343		79		150,682		(252)		(385)		(989)		(32)		(1,658)
Asia	308,305		32,287		1,419		148		342,159		(228)		(253)		(986)		(38)		(1,505)
-  of which: Hong Kong	182,501		23,735		673		48		206,957		(118)		(172)		(475)		(28)		(793)
MENA	25,470		3,314		1,686		18		30,488		(55)		(85)		(946)		(12)		(1,098)
North America	64,501		7,495		458		-		72,454		(45)		(96)		(141)		-		(282)
Latin America	16,879		2,509		293		37		19,718		(82)		(58)		(186)		(4)		(330)
At 31 Dec 2019	605,683		65,881		8,527		332		680,423		(728)		(950)		(3,837)		(99)		(5,614)

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	271,678		20,880		757		13		293,328		(132)		(151)		(68)		-		(351)
Financial	101,345		1,447		5		-		102,797		(7)		(2)		(1)		-		(10)
At 31 Dec 2019	373,023		22,327		762		13		396,125		(139)		(153)		(69)		-		(361)
By geography
Europe	190,604		7,852		645		13		199,114		(60)		(43)		(56)		-		(159)
-  of which: UK	76,013		4,193		494		9		80,709		(48)		(32)		(31)		-		(111)
Asia	60,759		3,762		8		-		64,529		(43)		(33)		(4)		-		(80)
-  of which: Hong Kong	27,047		2,114		5		-		29,166		(14)		(23)		(2)		-		(39)
MENA	5,690		621		31		-		6,342		(12)		(13)		(4)		-		(29)
North America	112,812		9,933		77		-		122,822		(22)		(62)		(5)		-		(89)
Latin America	3,158		159		1		-		3,318		(2)		(2)		-		-		(4)
At 31 Dec 2019	373,023		22,327		762		13		396,125		(139)		(153)		(69)		-		(361)

1  Included in loans and other credit-related commitments and financial guarantees is $53bn 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 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
Change in 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)

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 increased $4,642m during the period from $5,975m at 31 December 2019 to $10,617m at 31 December 2020.

This increase was primarily driven by:

• $5,769m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages;

• $869m relating to the net remeasurement impact of stage transfers; and

• foreign exchange and other movements of $304m.

These were partly offset by:

• $1,567m of assets written off;

• $440m of changes to models used for ECL calculation;

• $286m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further lending/repayments; and

• $7m of credit-related modifications that resulted in derecognition.

The ECL charge for the period of $5,912m presented in the above table consisted of $5,769m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stage and $869m relating to the net remeasurement impact of stage transfers. These charges were partly offset by $440m in changes to models used for ECL calculation and $286m relating to underlying net book volume movements.

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 2019	922,192		(902)		78,266		(1,012)		9,239		(3,987)		334		(194)		1,010,031		(6,095)
Transfers of financial instruments	(31,493)		(169)		28,418		276		3,075		(107)		-		-		-		-
Net remeasurement of ECL arising from transfer of stage	-		223		-		(268)		-		(38)		-		-		-		(83)
Net new and further lending/repayments	27,918		(134)		(20,121)		167		(1,552)		369		137		(1)		6,382		401
Changes to risk parameters - credit quality	-		102		-		(193)		-		(1,514)		-		(51)		-		(1,656)
Changes to models used for ECL calculation	-		-		-		(56)		-		-		-		-		-		(56)
Assets written off	-		-		-		-		(1,312)		1,312		(140)		140		(1,452)		1,452
Credit-related modifications that resulted in derecognition	-		-		-		-		(268)		125		-		-		(268)		125
Foreign exchange and other	7,035		13		1,606		(17)		107		(66)		14		7		8,762		(63)
At 31 Dec 2019	925,652		(867)		88,169		(1,103)		9,289		(3,906)		345		(99)		1,023,455		(5,975)
ECL income statement change for the period			191				(350)				(1,183)				(52)				(1,394)
Recoveries																			47
Others																			(24)
Total ECL income statement change for the period																			(1,371)

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	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%

By geography
Europe	57,340	69,427		74,143		9,895		4,799		215,604		(2,399)		213,205
-  of which: UK	35,838	53,046		51,355		7,023		3,420		150,682		(1,658)		149,024
Asia	145,450	106,313		86,685		2,158		1,553		342,159		(1,505)		340,654
-  of which: Hong Kong	82,053	67,541		55,379		1,263		721		206,957		(793)		206,164
MENA	12,036	6,003		9,307		1,439		1,703		30,488		(1,098)		29,390
North America	12,319	31,496		24,860		3,320		459		72,454		(282)		72,172
Latin America	3,919	5,455		7,713		2,304		327		19,718		(330)		19,388
At 31 Dec 2019	231,064	218,694		202,708		19,116		8,841		680,423		(5,614)		674,809
Percentage of total credit quality	34.0%	32.1%		29.8%		2.8%		1.3%		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 121.

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			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

Corporate and commercial			472,253		59,599		8,315		332		540,499		(672)		(920)		(3,747)		(99)		(5,438)		1.0
- CRR 1	0.000 to 0.053		44,234		18		-		-		44,252		(7)		-		-		-		(7)		-		AA- and above
- CRR 2	0.054 to 0.169		92,861		1,013		-		-		93,874		(20)		(10)		-		-		(30)		-		A+ to A-
- CRR 3	0.170 to 0.740		178,662		11,808		-		-		190,470		(164)		(91)		-		-		(255)		0.1		BBB+ to BBB-
- CRR 4	0.741 to 1.927		105,708		17,829		-		-		123,537		(244)		(151)		-		-		(395)		0.3		BB+ to BB-
- CRR 5	1.928 to 4.914		46,423		16,423		-		-		62,846		(190)		(218)		-		-		(408)		0.6		BB- to B
- CRR 6	4.915 to 8.860		3,323		7,592		-		15		10,930		(33)		(141)		-		-		(174)		1.6		B-
- CRR 7	8.861 to 15.000		795		3,067		-		3		3,865		(11)		(172)		-		-		(183)		4.7		CCC+
- CRR 8	15.001 to 99.999		247		1,849		-		-		2,096		(3)		(137)		-		-		(140)		6.7		CCC to C
- CRR 9/10	100.000		-		-		8,315		314		8,629		-		-		(3,747)		(99)		(3,846)		44.6		D
Non-bank financial institutions			65,661		4,832		212		-		70,705		(42)		(28)		(90)		-		(160)		0.2
- CRR 1	0.000 to 0.053		16,616		-		-		-		16,616		(1)		-		-		-		(1)		-		AA- and above
- CRR 2	0.054 to 0.169		15,630		56		-		-		15,686		(4)		-		-		-		(4)		-		A+ to A-
- CRR 3	0.170 to 0.740		21,562		1,333		-		-		22,895		(12)		(4)		-		-		(16)		0.1		BBB+ to BBB-
- CRR 4	0.741 to 1.927		7,535		1,169		-		-		8,704		(12)		(7)		-		-		(19)		0.2		BB+ to BB-
- CRR 5	1.928 to 4.914		4,024		1,738		-		-		5,762		(12)		(11)		-		-		(23)		0.4		BB- to B
- CRR 6	4.915 to 8.860		280		517		-		-		797		(1)		(4)		-		-		(5)		0.6		B-
- CRR 7	8.861 to 15.000		12		7		-		-		19		-		-		-		-		-		-		CCC+
- CRR 8	15.001 to 99.999		2		12		-		-		14		-		(2)		-		-		(2)		14.3		CCC to C
- CRR 9/10	100.000		-		-		212		-		212		-		-		(90)		-		(90)		42.5		D
Banks			67,769		1,450		-		-		69,219		(14)		(2)		-		-		(16)		-
- CRR 1	0.000 to 0.053		49,858		21		-		-		49,879		(2)		-		-		-		(2)		-		AA- and above
- CRR 2	0.054 to 0.169		10,689		68		-		-		10,757		(7)		-		-		-		(7)		0.1		A+ to A-
- CRR 3	0.170 to 0.740		5,312		17		-		-		5,329		(2)		-		-		-		(2)		-		BBB+ to BBB-
- CRR 4	0.741 to 1.927		1,725		31		-		-		1,756		(1)		(1)		-		-		(2)		0.1		BB+ to BB-
- CRR 5	1.928 to 4.914		71		32		-		-		103		-		-		-		-		-		-		BB- to B
- CRR 6	4.915 to 8.860		113		2		-		-		115		(2)		-		-		-		(2)		1.7		B-
- CRR 7	8.861 to 15.000		1		1		-		-		2		-		-		-		-		-		-		CCC+
- CRR 8	15.001 to 99.999		-		1,278		-		-		1,278		-		(1)		-		-		(1)		0.1		CCC to C
- CRR 9/10	100.000		-		-		-		-		-		-		-		-		-		-		-		D
At 31 Dec 2019			605,683		65,881		8,527		332		680,423		(728)		(950)		(3,837)		(99)		(5,614)		0.8

Commercial real estate

Commercial real estate lending includes the financing of corporate, institutional and high net worth customers who are investing primarily in income-producing assets and, to a lesser extent, in their construction and development. The portfolio is globally diversified with larger concentrations in Hong Kong, the UK and the US.

Our global exposure is centred largely on cities with economic, political or cultural significance. In more developed markets, our exposure mainly comprises the financing of investment assets, the

redevelopment of existing stock and the augmentation of both commercial and residential markets to support economic and population growth. In less-developed commercial real estate markets, our exposures comprise lending for development assets on relatively short tenors with a particular focus on supporting larger, better capitalised developers involved in residential construction or assets supporting economic expansion.

Commercial real estate lending declined $5bn, including favourable foreign exchange movements of $2.4bn, mainly in Hong Kong and, to a lesser extent, within the UK.

Commercial real estate lending
													Of which:
	Europe		Asia		MENA		North  America		Latin America		Total		UK		Hong Kong
	$m		$m		$m		$m		$m		$m		$m		$m
Gross loans and advances
Stage 1	22,639		63,276		1,147		7,373		1,269		95,704		16,207		48,735
Stage 2	5,549		11,686		436		4,093		381		22,145		4,299		9,105
Stage 3	1,114		37		250		42		240		1,683		966		18
POCI	1		-		-		-		-		1		-		-
At 31 Dec 2020	29,303		74,999		1,833		11,508		1,890		119,533		21,472		57,858
-  of which: renegotiated loans	751		3		201		-		-		955		744		-
Allowance for ECL	(650)		(117)		(190)		(64)		(120)		(1,141)		(575)		(65)

Gross loans and advances
Stage 1	25,017		76,832		1,507		10,938		1,653		115,947		17,953		60,632
Stage 2	3,988		2,673		18		508		41		7,228		2,953		1,696
Stage 3	1,115		21		208		33		27		1,404		948		17
POCI	1		-		-		-		-		1		-		-
At 31 Dec 2019	30,121		79,526		1,733		11,479		1,721		124,580		21,854		62,345
-  of which: renegotiated loans	788		-		195		-		-		983		782		-
Allowance for ECL	(372)		(78)		(170)		(17)		(7)		(644)		(305)		(40)

Refinance risk in commercial real estate

Commercial real estate lending tends to require the repayment of a significant proportion of the principal at maturity. Typically, a customer will arrange repayment through the acquisition of a new loan to settle the existing debt. Refinance risk is the risk that a customer, being unable to repay the debt on maturity, fails to refinance it at commercial rates. We monitor our commercial real estate portfolio closely, assessing indicators for signs of potential issues with refinancing.

Commercial real estate gross loans and advances maturity analysis
													Of which:
	Europe		Asia		MENA		North America		Latin America		Total		UK		Hong Kong
	$m		$m		$m		$m		$m		$m		$m		$m
On demand, overdrafts or revolving
< 1 year	13,728		25,075		750		5,793		263		45,609		12,131		19,998
1-2 years	6,373		18,396		119		3,112		434		28,434		4,991		13,237
2-5 years	6,241		27,699		668		2,288		927		37,823		3,135		21,694
> 5 years	2,961		3,829		296		315		266		7,667		1,215		2,929
At 31 Dec 2020	29,303		74,999		1,833		11,508		1,890		119,533		21,472		57,858

On demand, overdrafts or revolving
< 1 year	13,808		21,625		816		5,905		135		42,289		11,775		16,937
1-2 years	6,197		17,638		142		1,548		107		25,632		5,274		13,776
2-5 years	7,797		35,557		509		3,511		1,332		48,706		4,347		27,860
> 5 years	2,319		4,706		266		515		147		7,953		458		3,772
At 31 Dec 2019	30,121		79,526		1,733		11,479		1,721		124,580		21,854		62,345

Collateral and other credit enhancements

(Audited)

Although collateral can be an important mitigant of credit risk, it is the Group's practice to lend on the basis of the customer's ability to meet their obligations out of cash flow resources rather than placing primary reliance on collateral and other credit risk enhancements. Depending on the customer's standing and the type of product, facilities may be provided without any collateral or other credit enhancements. For other lending, a charge over collateral is obtained and considered in determining the credit decision and pricing. In the event of default, the Group may utilise the collateral as a source of repayment.

Depending on its form, collateral can have a significant financial effect in mitigating our exposure to credit risk. Where there is sufficient collateral, an expected credit loss is not recognised. This is the case for reverse repurchase agreements and for certain loans and advances to customers where the loan to value ('LTV') is very low.

Mitigants may include a charge on borrowers' specific assets, such as real estate or financial instruments. Other credit risk mitigants include short positions in securities and financial assets held as part of linked insurance/investment contracts where the risk is predominantly borne by the policyholder. Additionally, risk may be managed by employing other types of collateral and credit risk enhancements, such as second charges, other liens and unsupported guarantees. Guarantees are normally taken from corporates and export credit agencies. Corporates would normally provide guarantees as part of a parent/subsidiary relationship and span a number of credit grades. The export credit agencies will normally be investment grade.

Certain credit mitigants are used strategically in portfolio management activities. While single name concentrations arise in portfolios managed by Global Banking and Corporate Banking, it is only in Global Banking that their size requires the use of portfolio level credit mitigants. Across Global Banking, risk limits and utilisations, maturity profiles and risk quality are monitored and managed proactively. This process is key to the setting of risk appetite for these larger, more complex, geographically distributed customer groups. While the principal form of risk management continues to be at the point of exposure origination, through the lending decision-making process, Global Banking also utilises loan sales and credit default swap ('CDS') hedges to manage concentrations and reduce risk. These transactions are the responsibility of a dedicated Global Banking portfolio management team. Hedging activity is carried out within agreed credit parameters, and is subject to market risk limits and a robust governance structure. Where applicable, CDSs are entered into directly with a central clearing house counterparty. Otherwise, the Group's exposure to CDS protection providers is diversified among mainly banking counterparties with strong credit ratings.

CDS mitigants are held at portfolio level and are not included in the expected loss calculations. CDS mitigants are not reported in the following tables.

Collateral on loans and advances

Collateral held is analysed separately for commercial real estate and for other corporate, commercial and financial (non-bank) lending. The following tables include off-balance sheet loan commitments, primarily undrawn credit lines.

The collateral measured in the following tables consists of fixed first charges on real estate, and charges over cash and marketable financial instruments. The values in the tables represent the expected market value on an open market basis. No adjustment has been made to the collateral for any expected costs of recovery. Marketable securities are measured at their fair value.

Other types of collateral such as unsupported guarantees and floating charges over the assets of a customer's business are not measured in the following tables. While such mitigants have value, often providing rights in insolvency, their assignable value is not sufficiently certain and they are therefore assigned no value for disclosure purposes.

The LTV ratios presented are calculated by directly associating loans and advances with the collateral that individually and uniquely supports each facility. When collateral assets are shared by multiple loans and advances, whether specifically or, more generally, by way of an all monies charge, the collateral value is pro-rated across the loans and advances protected by the collateral.

For credit-impaired loans, the collateral values cannot be directly compared with impairment allowances recognised. The LTV figures use open market values with no adjustments. Impairment allowances are calculated on a different basis, by considering other cash flows and adjusting collateral values for costs of realising collateral as explained further on page 294.

Commercial real estate loans and advances

The value of commercial real estate collateral is determined by using a combination of external and internal valuations and physical inspections. For CRR 1-7, local valuation policies determine the frequency of review on the basis of local market conditions because of the complexity of valuing collateral for commercial real estate. For CRR 8-10, almost all collateral would have been revalued within the last three years.

In Hong Kong, market practice is typically for lending to major property companies to be either secured by guarantees or unsecured. In Europe, facilities of a working capital nature are generally not secured by a first fixed charge, and are therefore disclosed as not collateralised.

Wholesale lending - commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories (by stage)
(Audited)
					Of which:
	Total				UK				Hong Kong
	Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage
	$m		%		$m		%		$m		%
Stage 1
Not collateralised	55,376		0.1		7,205		0.6		29,422		-
Fully collateralised	71,915		0.2		14,053		0.2		33,386		-
LTV ratio:
-  less than 50%	36,408		0.1		4,665		0.3		22,361		-
-  51% to 75%	26,081		0.2		7,031		0.2		9,091		-
-  76% to 90%	5,098		0.3		1,932		0.2		1,093		-
-  91% to 100%	4,328		0.3		425		0.5		841		-
Partially collateralised (A):	5,477		0.2		1,463		0.1		769		-
-  collateral value on A	3,486				912				594
Total	132,768		0.1		22,721		0.4		63,577		-
Stage 2
Not collateralised	8,710		1.3		3,337		2.2		1,084		0.1
Fully collateralised	18,383		1.0		2,534		1.6		8,719		0.5
LTV ratio:
-  less than 50%	8,544		0.8		1,132		1.5		5,359		0.4
-  51% to 75%	8,097		1.1		1,020		2.0		2,955		0.8
-  76% to 90%	849		1.1		350		0.9		319		0.3
-  91% to 100%	893		1.0		32		3.1		86		-
Partially collateralised (B):	1,260		1.0		713		0.8		196		1.0
-  collateral value on B	517				246				147
Total	28,353		1.1		6,584		1.8		9,999		0.5
Stage 3
Not collateralised	1,038		45.3		635		50.7		-		-
Fully collateralised	583		11.5		348		9.5		20		5.0
LTV ratio:
-  less than 50%	177		13.6		56		5.4		11		-
-  51% to 75%	161		15.5		128		12.5		3		-
-  76% to 90%	149		6.7		139		5.8		-		-
-  91% to 100%	96		8.3		25		24.0		6		16.7
Partially collateralised (C):	474		45.6		195		27.7		-		-
-  collateral value on C	331				120				-
Total	2,095		35.9		1,178		34.7		20		5.0
POCI
Not collateralised	-		-		-		-		-		-
Fully collateralised	1		-		-		-		-		-
LTV ratio:
-  less than 50%	1		-		-		-		-		-
-  51% to 75%	-		-		-		-		-		-
-  76% to 90%	-		-		-		-		-		-
-  91% to 100%	-		-		-		-		-		-
Partially collateralised (D):	-		-		-		-		-		-
-  collateral value on D	-				-				-
Total	1		-		-		-		-		-
At 31 Dec 2020	163,217		0.8		30,483		2.0		73,596		0.1

Wholesale lending - commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories (by stage) (continued)
(Audited)
					Of which:
	Total				UK				Hong Kong
	Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage
	$m		%		$m		%		$m		%
Stage 1
Not collateralised	61,820		0.1		7,266		0.1		32,478		-
Fully collateralised	89,319		0.1		18,535		-		41,798		-
LTV ratio:
-  less than 50%	46,318		0.1		7,018		0.1		28,776		-
-  51% to 75%	32,583		0.1		9,349		-		10,815		0.1
-  76% to 90%	5,018		0.1		1,649		0.1		1,436		0.1
-  91% to 100%	5,400		0.2		519		-		771		-
Partially collateralised (A):	6,563		0.2		682		-		1,627		0.1
-  collateral value on A	3,602				535				1,142
Total	157,702		0.1		26,483		0.1		75,903		-
Stage 2
Not collateralised	3,040		1.2		1,857		1.2		440		0.2
Fully collateralised	5,184		1.1		1,419		1.2		1,501		0.6
LTV ratio:
-  less than 50%	2,167		1.1		615		1.8		955		0.3
-  51% to 75%	1,986		0.9		712		0.6		497		1.0
-  76% to 90%	333		2.1		16		6.3		29		-
-  91% to 100%	698		1.1		76		1.3		20		-
Partially collateralised (B):	500		0.6		296		0.3		42		-
-  collateral value on B	203				56				25
Total	8,724		1.1		3,572		1.1		1,983		0.5
Stage 3
Not collateralised	315		57.8		66		92.4		-		-
Fully collateralised	557		14.9		404		12.9		17		11.8
LTV ratio:
-  less than 50%	87		16.1		42		7.1		6		16.7
-  51% to 75%	90		7.8		69		4.3		10		-
-  76% to 90%	89		15.7		72		4.2		-		-
-  91% to 100%	291		16.5		221		19.5		1		-
Partially collateralised (C):	773		41.5		507		27.8		-		-
-  collateral value on C	380				166				-
Total	1,645		35.6		977		26.0		17		11.8
POCI
Not collateralised	-		-		-		-		-		-
Fully collateralised	1		-		-		-		-		-
LTV ratio:
-  less than 50%	1		-		-		-		-		-
-  51% to 75%	-		-		-		-		-		-
-  76% to 90%	-		-		-		-		-		-
-  91% to 100%	-		-		-		-		-		-
Partially collateralised (D):	-		-		-		-		-		-
-  collateral value on D	-				-				-
Total	1		-		-		-		-		-
At 31 Dec 2019	168,072		0.5		31,032		1.0		77,903		0.1

Wholesale lending - commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories
(Audited)
					Of which:
	Total				UK				Hong Kong
	Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage
	$m		%		$m		%		$m		%
Rated CRR/PD1 to 7
Not collateralised	64,046		0.3		10,527		1.1		30,506		-
Fully collateralised	89,664		0.3		16,483		0.4		41,861		0.1
Partially collateralised (A):	6,728		0.4		2,174		0.3		965		0.2
-  collateral value on A	3,994				1,157				741
Total	160,438		0.3		29,184		0.6		73,332		-
Rated CRR/PD8
Not collateralised	40		22.5		15		6.7		-		-
Fully collateralised	634		8.2		104		12.5		244		12.7
LTV ratio:
-  less than 50%	282		7.1		15		6.7		102		11.8
-  51% to 75%	321		9.0		75		13.3		138		13.0
-  76% to 90%	14		21.4		5		20.0		4		25.0
-  91% to 100%	17		-		9		-		-		-
Partially collateralised (B):	9		11.1		2		50.0		-		-
-  collateral value on B	9				1				-
Total	683		9.1		121		12.4		244		12.7
Rated CRR/PD9 to 10
Not collateralised	1,038		45.3		635		50.7		-		-
Fully collateralised	584		11.5		348		9.5		20		5.0
LTV ratio:
-  less than 50%	178		13.5		56		5.4		11		-
-  51% to 75%	161		15.5		128		12.5		3		-
-  76% to 90%	149		6.7		139		5.8		-		-
-  91% to 100%	96		8.3		25		24.0		6		16.7
Partially collateralised (C):	474		45.6		195		27.7		-		-
-  collateral value on C	331				120				-
Total	2,096		35.9		1,178		34.7		20		5.0
At 31 Dec 2020	163,217		0.8		30,483		2.0		73,596		0.1

Rated CRR/PD1 to 7
Not collateralised	64,850		0.1		9,119		0.3		32,918		-
Fully collateralised	94,299		0.1		19,833		0.1		43,299		0.1
Partially collateralised (A):	7,052		0.2		971		0.1		1,669		0.1
-  collateral value on A	3,796				586				1,167
Total	166,201		0.1		29,923		0.1		77,886		-
Rated CRR/PD8
Not collateralised	10		50.0		4		100.0		-		-
Fully collateralised	204		4.9		121		5.0		-		-
LTV ratio:
-  less than 50%	47		8.5		27		14.8		-		-
-  51% to 75%	120		3.3		68		1.5		-		-
-  76% to 90%	25		4.0		15		6.7		-		-
-  91% to 100%	12		8.3		11		-		-		-
Partially collateralised (B):	11		-		7		-		-		-
-  collateral value on B	9				5				-
Total	225		6.7		132		7.6		-		-
Rated CRR/PD9 to 10
Not collateralised	315		57.8		66		92.4		-		-
Fully collateralised	557		14.9		404		12.9		17		11.8
LTV ratio:
-  less than 50%	87		16.1		42		7.1		6		16.7
-  51% to 75%	90		7.8		69		4.3		10		-
-  76% to 90%	89		15.7		72		4.2		-		-
-  91% to 100%	291		16.5		221		19.5		1		100.0
Partially collateralised (C):	774		41.6		507		27.8		-		-
-  collateral value on C	380				166				-
Total	1,646		35.7		977		26.0		17		11.8
At 31 Dec 2019	168,072		0.5		31,032		1.0		77,903		0.1

Other corporate, commercial and financial (non-bank) loans and advances

Other corporate, commercial and financial (non-bank) loans are analysed separately in the following table, which focuses on the countries/territories containing the majority of our loans and advances balances. For financing activities in other corporate and commercial lending, collateral value is not strongly correlated to principal repayment performance.

Collateral values are generally refreshed when an obligor's general credit performance deteriorates and we have to assess the likely performance of secondary sources of repayment should it prove necessary to rely on them.

Accordingly, the following table reports values only for customers with CRR 8-10, recognising that these loans and advances generally have valuations that are comparatively recent.

Wholesale lending - other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories (by stage)
(Audited)
					Of which:
	Total				UK				Hong Kong
	Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage
	$m		%		$m		%		$m		%
Stage 1
Not collateralised	617,592		0.2		122,554		0.4		95,061		0.1
Fully collateralised	110,528		0.2		28,232		0.3		40,207		0.1
LTV ratio:
-  less than 50%	37,991		0.1		7,367		0.3		14,744		0.1
-  51% to 75%	36,696		0.2		11,891		0.3		13,961		0.2
-  76% to 90%	13,542		0.2		2,624		0.4		6,522		0.1
-  91% to 100%	22,299		0.1		6,350		0.1		4,980		0.1
Partially collateralised (A):	52,892		0.2		6,826		0.5		19,163		0.1
-  collateral value on A	25,903				3,524				9,208
Total	781,012		0.2		157,612		0.4		154,431		0.1
Stage 2
Not collateralised	118,959		1.6		37,430		2.6		19,466		0.4
Fully collateralised	37,753		1.3		9,316		2.1		15,044		0.8
LTV ratio:
-  less than 50%	11,992		1.3		2,498		1.5		3,920		0.7
-  51% to 75%	16,982		1.6		5,715		2.2		6,657		1.0
-  76% to 90%	3,727		1.2		502		3.2		2,150		0.7
-  91% to 100%	5,052		0.9		601		2.0		2,317		0.3
Partially collateralised (B):	16,829		1.5		3,984		2.7		3,849		0.9
-  collateral value on B	9,425				1,714				2,104
Total	173,541		1.5		50,730		2.5		38,359		0.6
Stage 3
Not collateralised	7,852		50.0		2,793		28.5		865		66.0
Fully collateralised	1,939		17.3		585		7.9		342		6.4
LTV ratio:
-  less than 50%	637		24.0		151		8.6		83		6.0
-  51% to 75%	526		19.0		182		12.6		128		4.7
-  76% to 90%	294		9.2		211		1.9		49		14.3
-  91% to 100%	482		11.6		41		14.6		82		4.9
Partially collateralised (C):	2,847		35.5		553		23.1		592		26.4
-  collateral value on C	1,619				337				322
Total	12,638		41.7		3,931		24.7		1,799		41.6
POCI
Not collateralised	211		39.8		54		63.0		1		-
Fully collateralised	63		41.3		-		-		45		51.1
LTV ratio:
-  less than 50%	6		50.0		-		-		-		-
-  51% to 75%	11		9.1		-		-		11		9.1
-  76% to 90%	34		64.7		-		-		34		64.7
-  91% to 100%	12		-		-		-		-		-
Partially collateralised (D):	4		75.0		-		-		-		-
-  collateral value on D	4				-				-
Total	278		40.6		54		63.0		46		50.0
At 31 Dec 2020	967,469		1.0		212,327		1.3		194,635		0.6

Wholesale lending - other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories (by stage) (continued)
(Audited)
					Of which:
	Total				UK				Hong Kong
	Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage
	$m		%		$m		%		$m		%
Stage 1
Not collateralised	680,079		0.1		132,197		0.2		116,536		-
Fully collateralised	128,290		0.1		40,172		0.1		32,818		0.1
LTV ratio:
-  less than 50%	48,012		0.1		13,831		0.1		11,009		0.1
-  51% to 75%	37,891		0.1		11,903		0.2		12,783		0.1
-  76% to 90%	13,072		0.1		3,399		0.2		4,697		0.1
-  91% to 100%	29,315		-		11,039		-		4,329		0.1
Partially collateralised (A):	52,890		0.1		8,122		0.1		20,162		0.1
-  collateral value on A	25,824				3,809				9,616
Total	861,259		0.1		180,491		0.2		169,516		-
Stage 2
Not collateralised	61,540		1.2		13,318		2.2		13,308		0.7
Fully collateralised	21,126		0.8		3,139		1.8		12,934		0.6
LTV ratio:
-  less than 50%	7,081		0.9		1,208		2.0		3,845		0.6
-  51% to 75%	8,482		0.9		1,111		1.8		5,580		0.7
-  76% to 90%	2,684		0.9		282		2.1		1,646		0.5
-  91% to 100%	2,879		0.6		538		1.3		1,863		0.2
Partially collateralised (B):	8,463		0.8		1,516		1.4		3,768		0.4
-  collateral value on B	3,669				370				1,801
Total	91,129		1.1		17,973		2.1		30,010		0.6
Stage 3
Not collateralised	4,768		49.2		1,899		33.0		504		83.5
Fully collateralised	1,479		22.4		494		12.6		86		12.8
LTV ratio:
-  less than 50%	335		35.2		103		17.5		9		33.3
-  51% to 75%	352		24.4		198		8.6		21		4.8
-  76% to 90%	373		23.6		101		20.8		40		7.5
-  91% to 100%	419		9.1		92		7.6		16		25.0
Partially collateralised (C):	1,367		44.8		369		20.1		87		48.3
-  collateral value on C	693				192				34
Total	7,614		43.2		2,762		27.6		677		70.0
POCI
Not collateralised	223		32.7		32		96.9		7		-
Fully collateralised	28		3.6		-		-		10		-
LTV ratio:
-  less than 50%	2		50.0		-		-		-		-
-  51% to 75%	26		-		-		-		10		-
-  76% to 90%	-		-		-		-		-		-
-  91% to 100%	-		-		-		-		-		-
Partially collateralised (D):	97		33.0		57		1.8		31		90.3
-  collateral value on D	57				19				30
Total	348		30.5		89		36.0		48		58.3
At 31 Dec 2019	960,350		0.5		201,315		0.7		200,251		0.4

Wholesale lending - other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories
(Audited)
					Of which:
	Total				UK				Hong Kong
	Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage		Gross carrying/nominal amount		ECL coverage
	$m		%		$m		%		$m		%
Rated CRR/PD8
Not collateralised	3,787		7.1		924		8.7		103		25.2
Fully collateralised	1,107		5.2		171		9.4		15		-
LTV ratio:
-  less than 50%	269		4.1		29		10.3		1		-
-  51% to 75%	480		6.3		87		6.9		-		-
-  76% to 90%	140		5.0		13		23.1		14		-
-  91% to 100%	218		4.1		42		9.5		-		-
Partially collateralised (A):	493		8.1		174		9.2		27		3.7
-  collateral value on A	352				83				13
Total	5,387		6.8		1,269		8.7		145		18.6
Rated CRR/PD9 to 10
Not collateralised	8,062		49.7		2,847		29.1		865		66.0
Fully collateralised	2,003		18.1		585		7.9		388		11.6
LTV ratio:
-  less than 50%	644		24.2		151		8.6		84		6.0
-  51% to 75%	538		18.8		182		12.6		139		5.0
-  76% to 90%	327		15.0		211		1.9		83		34.9
-  91% to 100%	494		11.3		41		14.6		82		4.9
Partially collateralised (B):	2,851		35.6		553		23.1		592		26.4
-  collateral value on B	1,623				337				322
Total	12,916		41.7		3,985		25.2		1,845		41.8
At 31 Dec 2020	18,303		31.4		5,254		21.2		1,990		40.2

Rated CRR/PD8
Not collateralised	2,499		5.8		285		13.0		10		70.0
Fully collateralised	694		3.3		382		2.6		-		-
LTV ratio:
-  less than 50%	246		2.8		120		1.7		-		-
-  51% to 75%	189		4.2		93		3.2		-		-
-  76% to 90%	97		2.1		42		2.4		-		-
-  91% to 100%	162		3.7		127		3.9		-		-
Partially collateralised (A):	279		4.7		53		5.7		73		2.7
-  collateral value on A	152				34				6
Total	3,472		5.2		720		6.9		83		12.0
Rated CRR/PD9 to 10
Not collateralised	4,991		48.5		1,930		34.1		510		82.5
Fully collateralised	1,507		22.0		494		12.6		96		11.5
LTV ratio:
-  less than 50%	338		35.2		103		17.5		10		-
-  51% to 75%	377		22.8		198		8.6		30		3.3
-  76% to 90%	373		23.6		101		20.8		40		7.5
-  91% to 100%	419		9.1		92		7.6		16		-
Partially collateralised (B):	1,464		44.0		427		17.6		119		58.8
-  collateral value on B	750				211				64
Total	7,962		42.7		2,851		27.9		725		69.2
At 31 Dec 2019	11,434		31.3		3,571		23.7		808		63.4

Other credit risk exposures

In addition to collateralised lending, other credit enhancements are employed and methods used to mitigate credit risk arising from financial assets. These are summarised below:

• Some securities issued by governments, banks and other financial institutions benefit from additional credit enhancements provided by government guarantees that cover the assets.

• Debt securities issued by banks and financial institutions include asset-backed securities ('ABSs') and similar instruments, which are supported by underlying pools of financial assets. Credit risk associated with ABSs is reduced through the purchase of credit default swap ('CDS') protection.

• Trading loans and advances mainly pledged against cash collateral are posted to satisfy margin requirements. There is limited credit risk on cash collateral posted since in the event of default of the counterparty this would be set off against the related liability. Reverse repos and stock borrowing are by their nature collateralised.

Collateral accepted as security that the Group is permitted to sell or repledge under these arrangements is described on page 330 of the financial statements.

• The Group's maximum exposure to credit risk includes financial guarantees and similar contracts granted, as well as loan and other credit-related commitments. Depending on the terms of the arrangement, we may use additional credit mitigation if a guarantee is called upon or a loan commitment is drawn and subsequently defaults.

For further information on these arrangements, see Note 32 on the financial statements.

Derivatives

We participate in transactions exposing us to counterparty credit risk. Counterparty credit risk is the risk of financial loss if the counterparty to a transaction defaults before satisfactorily settling it. It arises principally from over-the-counter ('OTC') derivatives and securities financing transactions and is calculated in both the trading and non-trading books. Transactions vary in value by reference to a market factor such as an interest rate, exchange rate or asset price.

The counterparty risk from derivative transactions is taken into account when reporting the fair value of derivative positions. The adjustment to the fair value is known as the credit valuation adjustment ('CVA').

For an analysis of CVAs, see Note 12 on the financial statements.

The following table reflects by risk type the fair values and gross notional contract amounts of derivatives cleared through an exchange, central counterparty or non-central counterparty.

Notional contract amounts and fair values of derivatives
	2020						2019
	Notional		Fair value				Notional		Fair value
	amount		Assets		Liabilities		amount		Assets		Liabilities
	$m		$m		$m		$m		$m		$m
Total OTC derivatives	22,749,280		372,373		368,010		26,244,531		282,778		279,101
-  total OTC derivatives cleared by central counterparties	9,898,260		74,054		75,253		12,563,343		45,140		46,351
-  total OTC derivatives not cleared by central counterparties	12,851,020		298,319		292,757		13,681,188		237,638		232,750
Total exchange traded derivatives	1,332,438		4,456		4,094		1,583,590		1,956		2,135
Gross	24,081,718		376,829		372,104		27,828,121		284,734		281,236
Offset			(69,103)		(69,103)				(41,739)		(41,739)
At 31 Dec			307,726		303,001				242,995		239,497

The purposes for which HSBC uses derivatives are described in Note 15 on the financial statements.

The International Swaps and Derivatives Association ('ISDA') master agreement is our preferred agreement for documenting derivatives activity. It is common, and our preferred practice, for the parties involved in a derivative transaction to execute a credit support annex ('CSA') in conjunction with the ISDA master agreement. Under a CSA, collateral is passed between the parties to mitigate the counterparty risk inherent in outstanding positions. The majority of our CSAs are with financial institutional clients.

We manage the counterparty exposure on our OTC derivative contracts by using collateral agreements with counterparties and netting agreements. Currently, we do not actively manage our general OTC derivative counterparty exposure in the credit markets, although we may manage individual exposures in certain circumstances.

We place strict policy restrictions on collateral types and as a consequence the types of collateral received and pledged are, by value, highly liquid and of a strong quality, being predominantly cash.

Where a collateral type is required to be approved outside the collateral policy, approval is required from a committee of senior representatives from Markets, Legal and Risk.

See page 352 and Note 30 on the financial statements for details regarding legally enforceable right of offset in the event of counterparty default and collateral received in respect of derivatives.

 

END

 

 

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