Annual Financial Report - Part 5

RNS Number : 0668Q

HSBC Holdings PLC

23 February 2021

Personal lending

This section presents further disclosures related to personal lending. It provides details of the regions, countries and products that are driving the change observed in personal loans and advances to customers, with the impact of foreign exchange separately identified. Additionally, Hong Kong and UK mortgage book LTV data is provided.

This section also provides a reconciliation of the opening 1 January 2020 to 31 December 2020 closing gross carrying/nominal amounts and associated allowance for ECL.

Further product granularity is also provided by stage, with geographical data presented for loans and advances to customers, loan and other credit-related commitments and financial guarantees.

At 31 December 2020, total personal lending for loans and advances to customers of $461bn increased by $26.5bn compared with 31 December 2019. This increase included favourable foreign exchange movements of $11.5bn. Excluding foreign exchange movements, there was growth of $15.1bn, primarily driven by $10.1bn in Europe and $3.4bn in Asia. The allowance for ECL attributable to personal lending, excluding off-balance sheet loan commitments and guarantees, and foreign exchange movements, increased $1.6bn to $4.7bn at 31 December 2020.

Excluding foreign exchange movements, total personal lending was primarily driven by mortgage growth, which grew by $21.5bn. Mortgages grew $12.3bn in the UK; $6.4bn in Asia, notably $4.7bn in Hong Kong and $1.6bn in Australia; and $1.8bn in Canada. The allowance for ECL, excluding foreign exchange, attributable to mortgages of $0.8bn increased $0.2bn compared with
31 December 2019.

The quality of both our Hong Kong and UK mortgage books remained high, with low levels of impairment allowances. The average LTV ratio on new mortgage lending in Hong Kong was 61%, compared with an estimated 45% for the overall mortgage portfolio. The average LTV ratio on new lending in the UK was 70%, compared with an estimated 51% for the overall mortgage portfolio.

Excluding foreign exchange movements, other personal lending balances at 31 December 2020 declined by $6.5bn compared with 31 December 2019. The decline was attributable to a $3.8bn decline in credit cards and a $2.4bn decline in loans and overdrafts.

The $3.8bn decrease in credit card lending was attributable to declines of $2.1bn in the UK, $0.5bn in Hong Kong and $0.3bn in the US. The $2.4bn decrease in loans and overdrafts was attributable to declines of $1.1bn in Hong Kong, $1.4bn in the UK, $0.5bn in Singapore and $0.3bn in MENA. These declines were partly offset by growth of $1bn in France, primarily in other personal lending guaranteed by Crédit Logement and $0.5bn in Switzerland.

The allowance for ECL, excluding foreign exchange, attributable to other personal lending of $4.0bn increased $1.4bn compared with 31 December 2019. Excluding foreign exchange, the allowance for ECL attributable to credit cards increased by $0.7bn while loans and overdrafts increased by $0.7bn.

Total personal lending for loans and advances to customers at amortised cost by stage distribution
	Gross carrying amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
By portfolio
First lien residential mortgages	336,666	12,233	3,383	352,282	(125)	(188)	(442)	(755)
- of which: interest only (including offset)	29,143	3,074	351	32,568	(9)	(19)	(88)	(116)
- affordability (including US adjustable rate mortgages)	13,265	2,209	606	16,080	(11)	(11)	(5)	(27)
Other personal lending	93,468	12,831	2,228	108,527	(702)	(2,214)	(1,060)	(3,976)
- other	74,174	7,288	1,489	82,951	(305)	(914)	(665)	(1,884)
- credit cards	17,327	5,292	680	23,299	(386)	(1,281)	(380)	(2,047)
- second lien residential mortgages	593	100	51	744	(3)	(9)	(10)	(22)
- motor vehicle finance	1,374	151	8	1,533	(8)	(10)	(5)	(23)
At 31 Dec 2020	430,134	25,064	5,611	460,809	(827)	(2,402)	(1,502)	(4,731)
By geography
Europe	200,120	11,032	2,511	213,663	(247)	(1,271)	(826)	(2,344)
- of which: UK	163,338	9,476	1,721	174,535	(223)	(1,230)	(545)	(1,998)
Asia	178,175	7,969	1,169	187,313	(234)	(446)	(241)	(921)
- of which: Hong Kong	118,252	5,133	206	123,591	(102)	(237)	(48)	(387)
MENA	4,879	403	251	5,533	(54)	(112)	(152)	(318)
North America	40,387	4,613	1,378	46,378	(93)	(200)	(132)	(425)
Latin America	6,573	1,047	302	7,922	(199)	(373)	(151)	(723)
At 31 Dec 2020	430,134	25,064	5,611	460,809	(827)	(2,402)	(1,502)	(4,731)

Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution
	Nominal amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	56,920	719	96	57,735	(22)	(2)	-	(24)
- of which: UK	54,348	435	92	54,875	(21)	(2)	-	(23)
Asia	156,057	790	11	156,858	-	-	-	-
- of which: Hong Kong	118,529	10	10	118,549	-	-	-	-
MENA	2,935	46	8	2,989	(1)	-	-	(1)
North America	15,835	124	38	15,997	(11)	-	-	(11)
Latin America	3,462	28	1	3,491	(5)	-	-	(5)
At 31 Dec 2020	235,209	1,707	154	237,070	(39)	(2)	-	(41)

Total personal lending for loans and advances to customers at amortised cost by stage distribution (continued)
	Gross carrying amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
By portfolio
First lien residential mortgages	312,031	7,077	3,070	322,178	(39)	(68)	(422)	(529)
- of which: interest only (including offset)	31,201	1,602	376	33,179	(6)	(15)	(91)	(112)
- affordability (including US adjustable rate mortgages)	14,222	796	514	15,532	(3)	(3)	(3)	(9)
Other personal lending	101,638	8,674	1,781	112,093	(544)	(1,268)	(793)	(2,605)
- other	77,031	4,575	1,193	82,799	(229)	(451)	(491)	(1,171)
- credit cards	22,285	3,959	524	26,768	(310)	(801)	(284)	(1,395)
- second lien residential mortgages	750	84	55	889	(1)	(6)	(10)	(17)
- motor vehicle finance	1,572	56	9	1,637	(4)	(10)	(8)	(22)
At 31 Dec 2019	413,669	15,751	4,851	434,271	(583)	(1,336)	(1,215)	(3,134)
By geography
Europe	186,561	6,854	2,335	195,750	(112)	(538)	(578)	(1,228)
- of which: UK	153,313	5,455	1,612	160,380	(104)	(513)	(370)	(987)
Asia	173,523	5,855	717	180,095	(223)	(339)	(170)	(732)
- of which: Hong Kong	117,013	2,751	189	119,953	(90)	(220)	(44)	(354)
MENA	5,671	247	299	6,217	(50)	(58)	(189)	(297)
North America	41,148	1,930	1,238	44,316	(56)	(119)	(141)	(316)
Latin America	6,766	865	262	7,893	(142)	(282)	(137)	(561)
At 31 Dec 2019	413,669	15,751	4,851	434,271	(583)	(1,336)	(1,215)	(3,134)

Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution (continued)
	Nominal amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	51,575	604	110	52,289	(10)	(2)	-	(12)
- of which: UK	49,322	493	105	49,920	(8)	(1)	-	(9)
Asia	149,336	682	9	150,027	-	-	-	-
- of which: Hong Kong	115,025	27	3	115,055	-	-	-	-
MENA	3,150	46	53	3,249	-	-	-	-
North America	13,919	256	20	14,195	(1)	-	-	(1)
Latin America	4,312	43	3	4,358	(3)	-	-	(3)
At 31 Dec 2019	222,292	1,631	195	224,118	(14)	(2)	-	(16)

Exposure to UK interest-only mortgage loans

The following information is presented for HSBC branded UK interest-only mortgage loans with balances of $15.0bn. This excludes offset mortgages in the first direct brand and Private Bank mortgages.

At the end of 2020, the average LTV ratio in the portfolio was 41% and 99% of mortgages had an LTV ratio of 75% or less.

Of the interest-only mortgages that expired in 2018, 89% were repaid within 12 months of expiry with a total of 98% being repaid within 24 months of expiry. For interest-only mortgages expiring during 2019, 89% were fully repaid within 12 months of expiry.

The profile of maturing UK interest-only loans is as follows:

UK interest-only mortgage loans
	$m
Expired interest-only mortgage loans	169
Interest-only mortgage loans by maturity
- 2021	356
- 2022	392
- 2023	500
- 2024	407
- 2025-2029	3,317
- Post 2029	9,914
At 31 Dec 2020	15,055

Exposure to offset mortgage in first direct

The offset mortgage in first direct is a flexible way for our customers to take control of their finances. It works by grouping together the customer's mortgage, savings and current accounts

to off-set their credit and debit balances against their mortgage exposure which at the end of 2020 is of $8.6bn with an average LTV ratio of 37%.

Personal lending - reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		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
	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2020	635,961	(597)	17,382	(1,338)	5,046	(1,215)	658,389	(3,150)
Transfers of financial instruments	(16,019)	(629)	13,370	1,181	2,649	(552)	-	-
Net remeasurement of ECL arising from transfer of stage	-	431	-	(555)	-	(8)	-	(132)
Net new and further lending/repayments	30,891	101	(5,407)	408	(677)	150	24,807	659
Change in risk parameters - credit quality	-	(147)	-	(2,025)	-	(1,258)	-	(3,430)
Changes to models used for ECL calculation	-	(3)	-	(9)	-	5	-	(7)
Assets written off	-	-	-	-	(1,409)	1,407	(1,409)	1,407
Foreign exchange and other	14,513	(22)	1,425	(67)	153	(32)	16,091	(121)
At 31 Dec 2020	665,346	(866)	26,770	(2,405)	5,762	(1,503)	697,878	(4,774)
ECL income statement change for the period		382		(2,181)		(1,111)		(2,910)
Recoveries								280
Other								(25)
Total ECL income statement change for the period								(2,655)

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 $1,624m during the period from $3,150m at 31 December 2019 to $4,774m at 31 December 2020.

This increase was primarily driven by:

• $3,430m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages;

• $132m relating to the net remeasurement impact of stage transfers;

• foreign exchange and other movements of $121m; and

• $7m due to changes to models used for ECL calculation.

These were partly offset by:

• $1,407m of assets written off;

• $659m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further lending/repayments.

The ECL charge for the period of $2,910m presented in the above table consisted of $3,430m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages, $132m relating to the

net remeasurement impact of stage transfers and $7m in changes to models used for ECL calculation. This was partly offset by $659m relating to underlying net book volume movements.

Personal lending - reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees (continued)
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		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
	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2019	580,784	(547)	16,838	(1,266)	4,993	(1,148)	602,615	(2,961)
Transfers of financial instruments	(4,751)	(374)	2,645	858	2,106	(484)	-	-
Net remeasurement of ECL arising from transfer of stage	-	446	-	(408)	-	(76)	-	(38)
Net new and further lending/repayments	50,946	3	(2,348)	453	(758)	281	47,840	737
Change in risk parameters - credit quality	-	(100)	-	(1,015)	-	(1,190)	-	(2,305)
Changes to models used for ECL calculation	-	(6)	-	60	-	14	-	68
Assets written off	-	-	-	-	(1,345)	1,345	(1,345)	1,345
Foreign exchange and other	8,982	(19)	247	(20)	50	43	9,279	4
At 31 Dec 2019	635,961	(597)	17,382	(1,338)	5,046	(1,215)	658,389	(3,150)
ECL income statement change for the period		343		(910)		(971)		(1,538)
Recoveries								314
Other								4
Total ECL income statement change for the period								(1,220)

Personal lending - credit risk profile by internal PD band for loans and advances to customers at amortised cost
		Gross carrying amount				Allowance for ECL
	PD range¹	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total	ECL coverage
	%	$m	$m	$m	$m	$m	$m	$m	$m	%
First lien residential mortgages		336,666	12,233	3,383	352,282	(125)	(188)	(442)	(755)	0.2
- Band 1	0.000 to 0.250	284,252	1,283	-	285,535	(36)	(3)	-	(39)	-
- Band 2	0.251 to 0.500	16,259	302	-	16,561	(9)	(3)	-	(12)	0.1
- Band 3	0.501 to 1.500	27,055	1,755	-	28,810	(64)	(8)	-	(72)	0.2
- Band 4	1.501 to 5.000	8,858	5,134	-	13,992	(15)	(32)	-	(47)	0.3
- Band 5	5.001 to 20.000	238	1,806	-	2,044	(1)	(41)	-	(42)	2.1
- Band 6	20.001 to 99.999	4	1,953	-	1,957	-	(101)	-	(101)	5.2
- Band 7	100.000	-	-	3,383	3,383	-	-	(442)	(442)	13.1
Other personal lending		93,468	12,831	2,228	108,527	(702)	(2,214)	(1,060)	(3,976)	3.7
- Band 1	0.000 to 0.250	41,565	589	-	42,154	(96)	(8)	-	(104)	0.2
- Band 2	0.251 to 0.500	13,053	518	-	13,571	(31)	(63)	-	(94)	0.7
- Band 3	0.501 to 1.500	23,802	1,280	-	25,082	(108)	(37)	-	(145)	0.6
- Band 4	1.501 to 5.000	11,787	2,175	-	13,962	(270)	(112)	-	(382)	2.7
- Band 5	5.001 to 20.000	3,234	5,288	-	8,522	(197)	(821)	-	(1,018)	11.9
- Band 6	20.001 to 99.999	27	2,981	-	3,008	-	(1,173)	-	(1,173)	39.0
- Band 7	100.000	-	-	2,228	2,228	-	-	(1,060)	(1,060)	47.6
At 31 Dec 2020		430,134	25,064	5,611	460,809	(827)	(2,402)	(1,502)	(4,731)	1.0

First lien residential mortgages		312,031	7,077	3,070	322,178	(39)	(68)	(422)	(529)	0.2
- Band 1	0.000 to 0.250	268,490	284	-	268,774	(16)	-	-	(16)	-
- Band 2	0.251 to 0.500	22,293	301	-	22,594	(4)	-	-	(4)	-
- Band 3	0.501 to 1.500	17,247	2,313	-	19,560	(13)	(3)	-	(16)	0.1
- Band 4	1.501 to 5.000	3,796	1,970	-	5,766	(5)	(7)	-	(12)	0.2
- Band 5	5.001 to 20.000	198	1,383	-	1,581	(1)	(23)	-	(24)	1.5
- Band 6	20.001 to 99.999	7	826	-	833	-	(35)	-	(35)	4.2
- Band 7	100.000	-	-	3,070	3,070	-	-	(422)	(422)	13.7
Other personal lending		101,638	8,674	1,781	112,093	(544)	(1,268)	(793)	(2,605)	2.3
- Band 1	0.000 to 0.250	46,533	60	-	46,593	(120)	-	-	(120)	0.3
- Band 2	0.251 to 0.500	16,435	65	-	16,500	(38)	(26)	-	(64)	0.4
- Band 3	0.501 to 1.500	25,160	317	-	25,477	(110)	(13)	-	(123)	0.5
- Band 4	1.501 to 5.000	10,951	3,483	-	14,434	(144)	(329)	-	(473)	3.3
- Band 5	5.001 to 20.000	2,421	3,434	-	5,855	(132)	(440)	-	(572)	9.8
- Band 6	20.001 to 99.999	138	1,315	-	1,453	-	(460)	-	(460)	31.7
- Band 7	100.000	-	-	1,781	1,781	-	-	(793)	(793)	44.5
At 31 Dec 2019		413,669	15,751	4,851	434,271	(583)	(1,336)	(1,215)	(3,134)	0.7

1 12-month point in time adjusted for multiple economic scenarios.

Collateral on loans and advances

(Audited)

The following table provides a quantification of the value of fixed charges we hold over specific assets where we have a history of enforcing, and are able to enforce, collateral in satisfying a debt in the event of the borrower failing to meet its contractual obligations, and where the collateral is cash or can be realised by sale in an established market. The collateral valuation excludes any adjustments for obtaining and selling the collateral and, in particular, loans shown as not collateralised or partially collateralised may also benefit from other forms of credit mitigants.

Personal lending - residential mortgage loans 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
Fully collateralised	354,102	-	159,562	-	90,733	-
LTV ratio:
- less than 50%	174,370	-	76,535	-	54,866	-
- 51% to 60%	60,180	-	23,967	-	14,253	-
- 61% to 70%	48,159	-	23,381	-	6,042	-
- 71% to 80%	40,395	0.1	20,846	-	4,288	-
- 81% to 90%	23,339	0.1	12,936	-	6,837	-
- 91% to 100%	7,659	0.1	1,897	0.1	4,447	-
Partially collateralised (A):	973	0.4	289	-	336	-
LTV ratio:
- 101% to 110%	592	0.4	84	-	334	-
- 111% to 120%	101	0.5	45	-	-	-
- greater than 120%	280	0.3	160	-	2	-
- collateral value on A	847		212		328
Total	355,075	-	159,851	-	91,069	-
Stage 2
Fully collateralised	12,252	1.5	4,229	1.4	1,802	-
LTV ratio:
- less than 50%	6,694	1.1	2,442	1.2	1,256	-
- 51% to 60%	2,223	1.1	730	1.3	253	-
- 61% to 70%	1,779	1.6	606	1.3	83	-
- 71% to 80%	987	2.8	244	2.9	111	-
- 81% to 90%	400	4.9	139	3.6	60	-
- 91% to 100%	169	5.7	68	3.3	39	-
Partially collateralised (B):	53	13.6	4	3.3	9	-
LTV ratio:
- 101% to 110%	28	11.9	3	1.5	9	-
- 111% to 120%	9	16.8	-	-	-	-
- greater than 120%	16	14.8	1	8.5	-	-
- collateral value on B	47		4		9
Total	12,305	1.5	4,233	1.4	1,811	-
Stage 3
Fully collateralised	3,083	9.8	1,050	12.3	63	-
LTV ratio:
- less than 50%	1,472	8.0	676	10.9	53	-
- 51% to 60%	505	8.7	144	15.1	6	-
- 61% to 70%	435	9.2	112	12.9	-	-
- 71% to 80%	378	11.5	81	13.7	2	-
- 81% to 90%	195	17.3	28	22.4	2	-
- 91% to 100%	98	24.3	9	17.8	-	-
Partially collateralised (C):	328	42.7	17	22.9	-	-
LTV ratio:
- 101% to 110%	75	30.4	9	16.7	-	-
- 111% to 120%	56	38.8	5	17.6	-	-
- greater than 120%	197	48.5	3	50.3	-	-
- collateral value on C	228		10		1
Total	3,411	13.0	1,067	12.5	63	-
At 31 Dec 2020	370,791	0.2	165,151	0.1	92,943	-

Personal lending - residential mortgage loans 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
Fully collateralised	326,510	-	143,772	-	86,049	-
LTV ratio:
- less than 50%	168,923	-	70,315	-	57,043	-
- 51% to 60%	55,287	-	21,898	-	13,169	-
- 61% to 70%	44,208	-	19,903	-	6,478	-
- 71% to 80%	33,049	-	17,649	-	3,195	-
- 81% to 90%	18,157	-	11,127	-	3,685	-
- 91% to 100%	6,886	-	2,880	-	2,479	-
Partially collateralised (A):	1,384	0.1	326	-	284	-
LTV ratio:
- 101% to 110%	843	0.1	89	-	281	-
- 111% to 120%	195	0.2	48	-	1	-
- greater than 120%	346	0.1	189	-	2	-
- collateral value on A	1,232		232		279
Total	327,894	-	144,098	-	86,333	-
Stage 2
Fully collateralised	7,087	0.9	1,941	1.0	1,116	-
LTV ratio:
- less than 50%	3,781	0.5	1,146	0.7	892	-
- 51% to 60%	923	1.1	233	1.5	95	-
- 61% to 70%	909	1.2	262	1.2	59	-
- 71% to 80%	894	1.1	231	1.0	32	-
- 81% to 90%	425	1.6	36	2.9	25	-
- 91% to 100%	155	4.4	33	1.8	13	-
Partially collateralised (B):	76	7.2	23	1.8	1	-
LTV ratio:
- 101% to 110%	45	5.4	20	1.5	1	-
- 111% to 120%	10	11.1	1	4.8	-	-
- greater than 120%	21	9.0	2	3.0	-	-
- collateral value on B	69		20		1
Total	7,163	1.0	1,964	1.0	1,117	-
Stage 3
Fully collateralised	2,725	9.0	1,177	9.9	44	0.5
LTV ratio:
- less than 50%	1,337	7.1	711	7.8	39	0.5
- 51% to 60%	410	7.0	159	10.0	3	0.2
- 61% to 70%	358	7.9	136	10.6	-	-
- 71% to 80%	309	13.4	100	18.9	1	-
- 81% to 90%	178	13.8	47	12.3	1	-
- 91% to 100%	133	21.8	24	26.3	-	-
Partially collateralised (C):	371	47.6	25	27.3	-	-
LTV ratio:
- 101% to 110%	97	36.4	11	19.1	-	-
- 111% to 120%	62	37.8	6	22.7	-	-
- greater than 120%	212	55.6	8	42.0	-	-
- collateral value on C	305		24		-
Total	3,096	13.7	1,202	10.3	44	0.5
At 31 Dec 2019	338,153	0.2	147,264	0.1	87,494	-

Supplementary information

Wholesale lending - loans and advances to customers at amortised cost by country/territory
	Gross carrying amount				Allowance for ECL
	Corporate and commercial	Of which: real estate¹	Non-bank financial institutions	Total	Corporate and commercial	Of which: real estate¹	Non-bank financial institutions	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	179,104	26,505	22,176	201,280	(3,918)	(632)	(185)	(4,103)
- UK	128,933	18,890	16,165	145,098	(2,958)	(574)	(147)	(3,105)
- France	32,278	5,740	3,557	35,835	(645)	(40)	(26)	(671)
- Germany	8,309	364	1,156	9,465	(125)	-	(3)	(128)
- Switzerland	1,489	576	513	2,002	(14)	-	-	(14)
- other	8,095	935	785	8,880	(176)	(18)	(9)	(185)
Asia	257,942	82,359	31,637	289,579	(2,766)	(162)	(38)	(2,804)
- Hong Kong	162,039	64,216	18,406	180,445	(1,180)	(83)	(15)	(1,195)
- Australia	9,769	1,813	1,348	11,117	(95)	(2)	-	(95)
- India	7,223	1,951	3,075	10,298	(90)	(18)	(4)	(94)
- Indonesia	3,699	81	246	3,945	(229)	(2)	0	(229)
- mainland China	28,443	6,251	7,128	35,571	(187)	(23)	(18)	(205)
- Malaysia	7,228	1,968	123	7,351	(86)	(27)	-	(86)
- Singapore	18,859	4,637	362	19,221	(782)	(2)	-	(782)
- Taiwan	6,115	50	60	6,175	0	-	-	0
- other	14,567	1,392	889	15,456	(117)	(5)	(1)	(118)
Middle East and North Africa (excluding Saudi Arabia)	24,625	1,839	379	25,004	(1,512)	(187)	(9)	(1,521)
- Egypt	2,162	37	13	2,175	(157)	(7)	(3)	(160)
- UAE	13,485	1,690	170	13,655	(1,019)	(176)	(2)	(1,021)
- other	8,978	112	196	9,174	(336)	(4)	(4)	(340)
North America	53,386	14,491	9,292	62,678	(637)	(73)	(23)	(660)
- US	30,425	7,722	7,708	38,133	(367)	(38)	(3)	(370)
- Canada	22,361	6,645	1,440	23,801	(243)	(27)	(9)	(252)
- other	600	124	144	744	(27)	(8)	(11)	(38)
Latin America	12,031	1,833	1,096	13,127	(661)	(113)	(10)	(671)
- Mexico	10,244	1,832	1,083	11,327	(589)	(113)	(10)	(599)
- other	1,787	1	13	1,800	(72)	-	-	(72)
At 31 Dec 2020	527,088	127,027	64,580	591,668	(9,494)	(1,167)	(265)	(9,759)

Europe	175,215	26,587	26,497	201,712	(2,304)	(354)	(81)	(2,385)
- UK	126,760	18,941	18,545	145,305	(1,629)	(303)	(26)	(1,655)
- France	27,885	5,643	4,899	32,784	(423)	(28)	(52)	(475)
- Germany	9,771	390	1,743	11,514	(60)	-	-	(60)
- Switzerland	1,535	554	406	1,941	(1)	-	-	(1)
- other	9,264	1,059	904	10,168	(191)	(23)	(3)	(194)
Asia	267,709	85,556	32,157	299,866	(1,449)	(94)	(52)	(1,501)
- Hong Kong	168,380	67,856	19,776	188,156	(750)	(51)	(40)	(790)
- Australia	11,428	1,993	1,743	13,171	(70)	(3)	-	(70)
- India	6,657	1,565	2,622	9,279	(49)	(3)	(1)	(50)
- Indonesia	4,346	63	353	4,699	(222)	(1)	(2)	(224)
- mainland China	26,594	5,304	5,911	32,505	(198)	(29)	(8)	(206)
- Malaysia	6,914	1,597	230	7,144	(40)	(2)	-	(40)
- Singapore	19,986	5,235	618	20,604	(60)	(2)	-	(60)
- Taiwan	6,384	28	82	6,466	(2)	-	-	(2)
- other	17,020	1,915	822	17,842	(58)	(3)	(1)	(59)
Middle East and North Africa (excluding Saudi Arabia)	23,447	1,816	288	23,735	(1,087)	(181)	(13)	(1,100)
- Egypt	1,889	35	16	1,905	(132)	-	(3)	(135)
- UAE	13,697	1,695	122	13,819	(683)	(179)	(7)	(690)
- other	7,861	86	150	8,011	(272)	(2)	(3)	(275)
North America	59,680	15,128	10,078	69,758	(274)	(43)	(11)	(285)
- US	34,477	8,282	8,975	43,452	(116)	(14)	(2)	(118)
- Canada	24,427	6,556	979	25,406	(136)	(10)	(4)	(140)
- other	776	290	124	900	(22)	(19)	(5)	(27)
Latin America	14,448	1,665	1,685	16,133	(324)	(8)	(3)	(327)
- Mexico	12,352	1,664	1,625	13,977	(221)	(8)	(3)	(224)
- other	2,096	1	60	2,156	(103)	-	-	(103)
At 31 Dec 2019	540,499	130,752	70,705	611,204	(5,438)	(680)	(160)	(5,598)

1 Real estate lending within this disclosure corresponds solely to the industry of the borrower. Commercial real estate on page 150 includes borrowers in multiple industries investing in income-producing assets and to a lesser extent, their construction and development.

Personal lending - loans and advances to customers at amortised cost by country/territory
	Gross carrying amount				Allowance for ECL
	First lien residential mortgages	Other personal	Of which: credit cards	Total	First lien residential mortgages	Other personal	Of which: credit cards	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	162,630	51,033	8,471	213,663	(364)	(1,980)	(859)	(2,344)
- UK	154,839	19,696	8,064	174,535	(236)	(1,762)	(852)	(1,998)
- France¹	3,623	23,982	358	27,605	(43)	(120)	(5)	(163)
- Germany	-	368	-	368	-	-	-	-
- Switzerland	1,195	6,641	-	7,836	-	(79)	-	(79)
- other	2,973	346	49	3,319	(85)	(19)	(2)	(104)
Asia	141,581	45,732	11,186	187,313	(80)	(841)	(563)	(921)
- Hong Kong	91,997	31,594	7,573	123,591	-	(387)	(265)	(387)
- Australia	20,320	602	514	20,922	(12)	(47)	(45)	(59)
- India	933	544	215	1,477	(9)	(45)	(34)	(54)
- Indonesia	71	288	167	359	-	(37)	(26)	(37)
- mainland China	9,679	1,155	644	10,834	(6)	(81)	(73)	(87)
- Malaysia	2,797	2,964	841	5,761	(41)	(102)	(35)	(143)
- Singapore	7,394	6,537	375	13,931	-	(55)	(17)	(55)
- Taiwan	5,407	1,069	277	6,476	-	(15)	(5)	(15)
- other	2,983	979	580	3,962	(12)	(72)	(63)	(84)
Middle East and North Africa (excluding Saudi Arabia)	2,192	3,341	863	5,533	(43)	(275)	(142)	(318)
- Egypt	-	360	89	360	-	(8)	(3)	(8)
- UAE	1,841	1,158	432	2,999	(37)	(163)	(92)	(200)
- other	351	1,823	342	2,174	(6)	(104)	(47)	(110)
North America	41,826	4,552	1,373	46,378	(159)	(266)	(193)	(425)
- US	18,430	2,141	1,091	20,571	(26)	(226)	(182)	(252)
- Canada	22,241	2,230	244	24,471	(36)	(31)	(10)	(67)
- other	1,155	181	38	1,336	(97)	(9)	(1)	(106)
Latin America	4,053	3,869	1,406	7,922	(109)	(614)	(290)	(723)
- Mexico	3,901	3,351	1,119	7,252	(107)	(578)	(268)	(685)
- other	152	518	287	670	(2)	(36)	(22)	(38)
At 31 Dec 2020	352,282	108,527	23,299	460,809	(755)	(3,976)	(2,047)	(4,731)

Europe	145,382	50,368	10,246	195,750	(266)	(962)	(438)	(1,228)
- UK	137,985	22,395	9,816	160,380	(159)	(828)	(434)	(987)
- France¹	3,520	21,120	376	24,640	(39)	(101)	(3)	(140)
- Germany	-	325	-	325	-	-	-	-
- Switzerland	1,183	6,165	-	7,348	(6)	(17)	-	(23)
- other	2,694	363	54	3,057	(62)	(16)	(1)	(78)
Asia	131,864	48,231	12,144	180,095	(42)	(690)	(463)	(732)
- Hong Kong	86,892	33,061	8,043	119,953	(1)	(353)	(242)	(354)
- Australia	16,997	693	603	17,690	(5)	(34)	(33)	(39)
- India	1,047	528	219	1,575	(5)	(21)	(15)	(26)
- Indonesia	67	329	204	396	-	(24)	(18)	(24)
- mainland China	8,966	1,190	656	10,156	(2)	(74)	(68)	(76)
- Malaysia	2,840	3,200	980	6,040	(22)	(73)	(33)	(95)
- Singapore	6,687	7,033	452	13,720	(1)	(60)	(19)	(61)
- Taiwan	5,286	1,004	297	6,290	0	(14)	(4)	(14)
- other	3,082	1,193	690	4,275	(6)	(37)	(31)	(43)
Middle East and North Africa (excluding Saudi Arabia)	2,303	3,914	1,042	6,217	(62)	(235)	(111)	(297)
- Egypt	-	346	88	346	-	(3)	(1)	(3)
- UAE	1,920	1,462	517	3,382	(59)	(121)	(54)	(180)
- other	383	2,106	437	2,489	(3)	(111)	(56)	(114)
North America	39,065	5,251	1,742	44,316	(122)	(194)	(142)	(316)
- US	17,870	2,551	1,424	20,421	(8)	(160)	(134)	(168)
- Canada	19,997	2,495	271	22,492	(21)	(25)	(7)	(46)
- other	1,198	205	47	1,403	(93)	(9)	(1)	(102)
Latin America	3,564	4,329	1,594	7,893	(37)	(524)	(241)	(561)
- Mexico	3,419	3,780	1,308	7,199	(31)	(488)	(224)	(519)
- other	145	549	286	694	(6)	(36)	(17)	(42)
At 31 Dec 2019	322,178	112,093	26,768	434,271	(529)	(2,605)	(1,395)	(3,134)

1 Included in other personal lending at 31 December 2020 is $20,625m (31 December 2019: $17,585m) guaranteed by Crédit Lodgement.

Change in reportable segments

Effective from 30 June 2020, we made the following realignments within our internal reporting:

• We simplified our matrix organisational structure by merging Global Private Banking and Retail Banking and Wealth Management to form Wealth and Personal Banking ('WPB'). As a result, the gross carrying/nominal values and the associated allowance for ECL of Global Private Banking and Retail Banking and Wealth Management have been merged into WPB.

• We reallocated Markets Treasury from Corporate Centre to the global businesses. As a result, Market Treasury's gross carrying/nominal values and the associated allowance for ECL have been transferred from the Corporate Centre into the other global businesses.

Comparative data have been re-presented accordingly. There is no impact upon total gross carrying/nominal values, total allowance for ECL or the staging of financial instruments.

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied - by global business
	Gross carrying/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
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)
- WPB	442,641	25,694	5,753	-	474,088	(854)	(2,458)	(1,590)	-	(4,902)
- CMB	238,517	101,960	10,408	212	351,097	(917)	(2,029)	(4,874)	(96)	(7,916)
- GBM	187,564	35,461	2,934	65	226,024	(203)	(465)	(975)	(16)	(1,659)
- Corporate Centre	1,198	70	-	-	1,268	-	(13)	-	-	(13)
Loans and advances to banks at amortised cost	79,654	2,004	-	-	81,658	(33)	(9)	-	-	(42)
- WPB	16,837	519	-	-	17,356	(2)	(2)	-	-	(4)
- CMB	12,253	222	-	-	12,475	(2)	-	-	-	(2)
- GBM	33,361	1,166	-	-	34,527	(23)	(7)	-	-	(30)
- Corporate Centre	17,203	97	-	-	17,300	(6)	-	-	-	(6)
Other financial assets measured at amortised cost	768,216	3,975	177	40	772,408	(80)	(44)	(42)	(9)	(175)
- WPB	167,053	1,547	50	39	168,689	(41)	(22)	(7)	(9)	(79)
- CMB	111,299	1,716	65	1	113,081	(17)	(19)	(25)	-	(61)
- GBM	391,967	705	56	-	392,728	(22)	(3)	(10)	-	(35)
- Corporate Centre	97,897	7	6	-	97,910	-	-	-	-	-
Total gross carrying amount on-balance sheet at 31 Dec 2020	1,717,790	169,164	19,272	317	1,906,543	(2,087)	(5,018)	(7,481)	(121)	(14,707)
Loans and other credit-related commitments	604,485	54,217	1,080	1	659,783	(290)	(365)	(78)	(1)	(734)
- WPB	232,027	2,591	136	-	234,754	(41)	(2)	-	-	(43)
- CMB	111,800	29,150	779	1	141,730	(157)	(203)	(72)	(1)	(433)
- GBM	260,527	22,476	165	-	283,168	(92)	(160)	(6)	-	(258)
- Corporate Centre	131	-	-	-	131	-	-	-	-	-
Financial guarantees	14,090	4,024	269	1	18,384	(37)	(62)	(26)	-	(125)
- WPB	1,048	23	2	-	1,073	-	-	-	-	-
- CMB	5,556	2,519	146	1	8,222	(19)	(36)	(12)	-	(67)
- GBM	7,482	1,482	121	-	9,085	(17)	(26)	(14)	-	(57)
- Corporate Centre	4	-	-	-	4	(1)	-	-	-	(1)
Total nominal amount off-balance sheet at 31 Dec 2020	618,575	58,241	1,349	2	678,167	(327)	(427)	(104)	(1)	(859)

WPB	159,988	625	154	39	160,806	(27)	(10)	(15)	(8)	(60)
CMB	95,182	313	51	10	95,556	(22)	(3)	(2)	(2)	(29)
GBM	136,909	126	93	-	137,128	(24)	(1)	(3)	-	(28)
Corporate Centre	5,838	389	-	-	6,227	(17)	(6)	(1)	-	(24)
Debt instruments measured at FVOCI at 31 Dec 2020	397,917	1,453	298	49	399,717	(90)	(20)	(21)	(10)	(141)

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied - by global business (continued)¹
	Gross carrying/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
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)
- WPB	424,342	16,797	5,131	-	446,270	(602)	(1,330)	(1,312)	-	(3,244)
- CMB	297,364	46,423	6,649	212	350,648	(520)	(765)	(3,190)	(68)	(4,543)
- GBM	228,770	16,934	1,598	120	247,422	(173)	(177)	(550)	(31)	(931)
- Corporate Centre	1,107	28	-	-	1,135	(2)	(12)	-	-	(14)
Loans and advances to banks at amortised cost	67,769	1,450	-	-	69,219	(14)	(2)	-	-	(16)
- WPB	14,636	393	-	-	15,029	(1)	(1)	-	-	(2)
- CMB	8,842	219	-	-	9,061	(2)	-	-	-	(2)
- GBM	30,391	818	-	-	31,209	(9)	(1)	-	-	(10)
- Corporate Centre	13,900	20	-	-	13,920	(2)	-	-	-	(2)
Other financial assets measured at amortised cost	613,200	1,827	151	1	615,179	(38)	(38)	(42)	-	(118)
- WPB	109,423	548	41	-	110,012	(21)	(30)	(5)	-	(56)
- CMB	64,586	904	51	1	65,542	(10)	(7)	(26)	-	(43)
- GBM	361,541	374	37	-	361,952	(7)	(1)	(11)	-	(19)
- Corporate Centre	77,650	1	22	-	77,673	-	-	-	-	-
Total gross carrying amount on-balance sheet at 31 Dec 2019	1,632,552	83,459	13,529	333	1,729,873	(1,349)	(2,324)	(5,094)	(99)	(8,866)
Loans and other credit-related commitments	577,631	21,618	771	9	600,029	(137)	(133)	(59)	-	(329)
- WPB	213,093	1,945	185	-	215,223	(15)	(1)	-	-	(16)
- CMB	117,703	11,403	558	9	129,673	(69)	(65)	(56)	-	(190)
- GBM	246,805	8,270	28	-	255,103	(53)	(67)	(3)	-	(123)
- Corporate Centre	30	-	-	-	30	-	-	-	-	-
Financial guarantees	17,684	2,340	186	4	20,214	(16)	(22)	(10)	-	(48)
- WPB	972	4	1	-	977	-	-	-	-	-
- CMB	7,446	1,442	105	4	8,997	(9)	(12)	(6)	-	(27)
- GBM	9,263	894	80	-	10,237	(7)	(10)	(4)	-	(21)
- Corporate Centre	3	-	-	-	3	-	-	-	-	-
Total nominal amount off-balance sheet at 31 Dec 2019	595,315	23,958	957	13	620,243	(153)	(155)	(69)	-	(377)

WPB	144,632	378	-	-	145,010	(13)	(81)	-	-	(94)
CMB	85,353	62	-	1	85,416	(5)	(19)	-	-	(24)
GBM	118,571	68	-	-	118,639	(9)	(16)	-	-	(25)
Corporate Centre	6,093	506	-	-	6,599	(12)	(11)	-	-	(23)
Debt instruments measured at FVOCI at 31 Dec 2019	354,649	1,014	-	1	355,664	(39)	(127)	-	-	(166)

1 2019 figures are restated for the change in reportable segments.

Loans and advances to customers and banks metrics
	Gross carrying amount	Of which: stage 3 and POCI	Allowance for ECL	Of which: stage 3 and POCI	Change in ECL	Write-offs	Recoveries
	$m	$m	$m	$m	$m	$m	$m
First lien residential mortgages	352,282	3,383	(755)	(442)	(259)	(92)	35
Other personal lending	108,527	2,228	(3,976)	(1,060)	(2,363)	(1,315)	245
Personal lending	460,809	5,611	(4,731)	(1,502)	(2,622)	(1,407)	280
- agriculture, forestry and fishing	7,445	332	(207)	(150)	(28)	(3)	-
- mining and quarrying	11,947	813	(365)	(220)	(513)	(311)	-
- manufacturing	93,906	2,163	(1,588)	(945)	(652)	(375)	7
- electricity, gas, steam and air-conditioning supply	16,200	53	(73)	(8)	(7)	(14)	-
- water supply, sewerage, waste management and remediation	3,174	47	(37)	(22)	(8)	-	-
- construction	14,600	777	(590)	(430)	(151)	(135)	13
- wholesale and retail trade, repair of motor vehicles and motorcycles	90,663	3,208	(2,532)	(2,032)	(1,560)	(280)	11
- transportation and storage	29,433	780	(493)	(240)	(308)	(62)	1
- accommodation and food	26,071	537	(491)	(130)	(365)	(28)	-
- publishing, audiovisual and broadcasting	19,979	164	(189)	(59)	(94)	(2)	-
- real estate	127,027	1,908	(1,167)	(738)	(424)	(47)	4
- professional, scientific and technical activities	24,072	531	(398)	(193)	(219)	(36)	1
- administrative and support services	26,423	977	(534)	(315)	(298)	(61)	-
- public administration and defence, compulsory social security	2,008	3	(14)	(1)	(5)	-	-
- education	2,122	29	(41)	(9)	(26)	(6)	1
- health and care	5,510	269	(186)	(120)	(127)	(2)	1
- arts, entertainment and recreation	3,437	236	(158)	(87)	(170)	(2)	-
- other services	13,110	410	(408)	(249)	(360)	(168)	4
- activities of households	802	-	(1)	-	-	-	-
- extra-territorial organisations and bodies activities	10	-	-	-	1	-	1
- government	8,538	1	(9)	(1)	2	(5)	-
- asset-backed securities	611	-	(13)	-	1	-	-
Corporate and commercial	527,088	13,238	(9,494)	(5,949)	(5,311)	(1,537)	44
Non-bank financial institutions	64,580	523	(265)	(100)	(146)	(30)	2
Wholesale lending	591,668	13,761	(9,759)	(6,049)	(5,457)	(1,567)	46
Loans and advances to customers	1,052,477	19,372	(14,490)	(7,551)	(8,079)	(2,974)	326
Loans and advances to banks	81,658	-	(42)	-	(23)	-	-
At 31 Dec 2020	1,134,135	19,372	(14,532)	(7,551)	(8,102)	(2,974)	326

First lien residential mortgages	322,178	3,070	(529)	(422)	(107)	(139)	54
Other personal lending	112,093	1,781	(2,605)	(793)	(1,114)	(1,206)	260
Personal lending	434,271	4,851	(3,134)	(1,215)	(1,221)	(1,345)	314
- agriculture, forestry and fishing	6,696	280	(182)	(140)	(15)	(6)	-
- mining and quarrying	14,435	323	(226)	(134)	(31)	(4)	-
- manufacturing	104,380	1,717	(1,210)	(856)	(392)	(332)	8
- electricity, gas, steam and air-conditioning supply	15,040	175	(80)	(25)	14	(54)	2
- water supply, sewerage, waste management and remediation	3,501	30	(28)	(18)	(4)	-	-
- construction	15,287	884	(564)	(499)	(171)	(191)	12
- wholesale and retail trade, repair of motor vehicles and motorcycles	94,681	1,633	(1,184)	(936)	(330)	(389)	13
- transportation and storage	25,580	617	(237)	(158)	(93)	(37)	-
- accommodation and food	24,656	263	(146)	(63)	(49)	(81)	-
- publishing, audiovisual and broadcasting	19,971	162	(87)	(34)	(17)	(31)	-
- real estate	130,752	1,330	(680)	(475)	(34)	(168)	6
- professional, scientific and technical activities	24,122	350	(209)	(145)	(47)	(10)	1
- administrative and support services	25,714	527	(270)	(179)	(80)	(22)	-
- public administration and defence, compulsory social security	2,377	-	(8)	-	-	-	-
- education	1,900	16	(18)	(6)	6	(3)	-
- health and care	4,465	111	(57)	(28)	(6)	(13)	1
- arts, entertainment and recreation	2,824	30	(25)	(11)	3	(4)	-
- other services	14,276	192	(199)	(133)	(79)	(102)	2
- activities of households	791	-	-	-	-	-	-
- extra-territorial organisations and bodies activities	2	-	-	-	2	-	1
- government	8,313	7	(14)	(6)	(8)	-	-
- asset-backed securities	736	-	(14)	-	-	-	-
Corporate and commercial	540,499	8,647	(5,438)	(3,846)	(1,331)	(1,447)	46
Non-bank financial institutions	70,705	212	(160)	(90)	(71)	(5)	1
Wholesale lending	611,204	8,859	(5,598)	(3,936)	(1,402)	(1,452)	47
Loans and advances to customers	1,045,475	13,710	(8,732)	(5,151)	(2,623)	(2,797)	361
Loans and advances to banks	69,219	-	(16)	-	(6)	-	-
At 31 Dec 2019	1,114,694	13,710	(8,748)	(5,151)	(2,629)	(2,797)	361

HSBC Holdings

(Audited)

Risk in HSBC Holdings is overseen by the HSBC Holdings Asset and Liability Management Committee ('Holdings ALCO'). The major risks faced by HSBC Holdings are credit risk, liquidity risk and market risk (in the form of interest rate risk and foreign exchange risk).

Credit risk in HSBC Holdings primarily arises from transactions with Group subsidiaries and its investments in those subsidiaries.

In HSBC Holdings, the maximum exposure to credit risk arises from two components:

• financial instruments on the balance sheet (see page 285); and

• financial guarantees and similar contracts, where the maximum exposure is the maximum that we would have to pay if the guarantees were called upon (see Note 32).

In the case of our derivative balances, we have amounts with a legally enforceable right of offset in the case of counterparty default that are not included in the carrying value. These offsets also include collateral received in cash and other financial assets.

The total offset relating to our derivative balances was $1.7bn at 31 December 2020 (2019: $0.1bn).

The credit quality of loans and advances and financial investments, both of which consist of intra-Group lending and US Treasury bills and bonds, is assessed as 'strong', with 100% of the exposure being neither past due nor impaired (2019: 100%). For further details of credit quality classification, see page 121.

Treasury risk
	Page
Overview	180
Treasury risk management	180
Capital risk in 2020	184
Structural foreign exchange risk in 2020	194
Interest rate risk in the banking book in 2020	194

Overview

Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, together with the financial risks arising from the provision of pensions and other post-employment benefits to staff and their dependants. Treasury risk also includes the risk to our earnings or capital due to structural foreign exchange exposures and changes in market interest rates.

Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions or the external environment.

Approach and policy

(Audited)

Our objective in the management of treasury risk is to maintain appropriate levels of capital, liquidity, funding, foreign exchange and market risk to support our business strategy, and meet our regulatory and stress testing-related requirements.

Our approach to treasury management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim to maintain a strong capital and liquidity base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory requirements at all times.

Our policy is underpinned by our risk management framework, our internal capital adequacy assessment process ('ICAAP') and our internal liquidity adequacy assessment process ('ILAAP'). The risk framework incorporates a number of measures aligned to our assessment of risks for both internal and regulatory purposes. These risks include credit, market, operational, pensions, structural foreign exchange, banking book foreign exchange risk and interest rate risk in the banking book.

The ICAAP and ILAAP provide an assessment of the Group's capital and liquidity adequacy with consideration of HSBC's risk metrics, business model, strategy, performance and planning, risks to capital, and the implications of stress testing to capital.

For further details, refer to our Pillar 3 Disclosures at 31 December 2020.

Treasury risk management

Key developments in 2020

In 2020, 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, banking book foreign exchange risk, and interest rate risk in the banking book, together with pension risk. The approach to treasury risk management is evolving. This will operate across the Group focusing on both adequacy of capital and sufficiency of returns. In 2020, we carried out several initiatives focused on treasury risk:

• We focused on the management of capital and liquidity to ensure we responded to the unprecedented customer and capital demands arising from the Covid-19 outbreak.

• In response to a written request from the PRA, we cancelled the fourth interim dividend for 2019 of $0.21 per ordinary share. Similar requests were also made to other UK incorporated banking groups. 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. In December 2020, the PRA announced a temporary approach to shareholder distributions for 2020. After considering the requirements of the temporary approach, the Board announced an interim dividend for 2020 of $0.15 per ordinary share.

• In our response to the Covid-19 outbreak, we liaised with governments, central banks and regulatory authorities globally, to ensure there was continued support and provision of financial services to the real economy. The Bank of England's Financial Policy Committee announced a reduction of the UK countercyclical buffer rate to 0% effective from March 2020. This change was reflected in the Group's risk appetite statement, and together with other regulatory relief, resulted in a reduction to Group common equity tier 1 ('CET1') and leverage ratio requirements.

• We implemented the acceleration of some of the beneficial elements of the amendments to the Capital Requirements Regulation ('CRR II') that were originally scheduled for June 2021. The relevant changes impacting the fourth quarter of 2020 positions included a resetting of the transitional provisions in relation to recognising IFRS 9 provisions and the application of the revised small and medium-sized enterprises ('SME') supporting factor. It also included changes in the capital treatment of software intangible assets and the netting of the leverage ratio exposure measure of regular-way purchases and sales. Additionally, there were changes that enabled more favourable prudential treatment for investments in infrastructure, beneficial changes to prudent valuation adjustments and exemptions of market risk back-testing exceptions that arose due to the extraordinary market dislocations.

• The Group's CET1 ratio was 15.9% at 31 December 2020 and the leverage ratio was 5.5%. The Group also continues to maintain the appropriate resources required for the risks to which it is exposed, while continuing to support local economies. This has been further informed by additional internal stress tests carried out in response to the Covid-19 outbreak. Capital risk management practices continued to be enhanced across the Group through the Treasury Risk Management function, focusing on both adequacy of capital and sufficiency of returns.

• The Group's liquidity levels were impacted by the drawdown of committed facilities and buy-backs of short-term debt. However, this was offset by increases in deposits, use of central bank facilities where appropriate, and the ability to issue in the short-term markets as they stabilised. As a result of these liability enhancing actions, the Group and all entities had significant surplus liquidity, resulting in heightened liquidity coverage ratios throughout 2020. At 31 December 2020, all of the Group's material operating entities were above regulatory minimum levels of liquidity and funding.

• Declines in interest rates and the flattening of interest rate yield curves combined to put downwards pressure on net interest income ('NII'). Balance sheet composition changed, with a significant build-up of liquidity that was deployed in short-term investments, which were predominantly cash, hold-to-collect-and-sell securities and reverse repos. This factor, together with the lower level of interest rates, increased the sensitivity of NII to future changes in interest rates. In the scenario where interest rates fall significantly from current levels, contractual floors would dampen the effect on the average rate that would be paid on liabilities whereas the asset side of the balance sheet would be more likely to reprice lower, reducing commercial margin.

• During 2020 we worked with the fiduciaries of all our pension plans to ensure robust and timely actions were taken in response to the Covid-19 outbreak, including the smooth transition to remote working for plan providers and dealing appropriately with affected plan members. Our de-risking programmes provided protection against the volatility in financial markets that resulted from the outbreak's economic impact.

For quantitative disclosures on capital ratios, own funds and RWAs, see pages 173 to 174. For quantitative disclosures on liquidity and funding metrics, see pages 176 to 178. For quantitative disclosures on interest rate risk in the banking book, see pages 179 to 180.

Governance and structure

The Global Head of Treasury Risk Management and Global Risk Analytics is the accountable risk steward for all treasury risks, the Group Head of Performance and Reward is the risk owner for pensions and the Group Treasurer is the risk owner for remaining treasury risks.

Capital and liquidity are the responsibility of the Group Executive Committee and directly addressed by the Group Risk Committee ('GRC'). Treasury risks are generally managed through the Holdings Asset and Liability Management Committee ('ALCO') and local ALCOs and overseen by the Risk Management Meeting ('RMM').

The Asset, Liability and Capital Management ('ALCM') function is responsible for managing interest rate risk in the banking book. It maintains the transfer pricing framework and informs the Holdings ALCO of the Group's overall banking book interest rate exposure. Banking book interest rate positions may be transferred to be managed by the Markets Treasury business, previously known as Balance Sheet Management, within the market risk limits approved by the RMM. Effective governance of Markets Treasury is supported by the dual reporting lines it has to the Chief Executive Officer of Global Banking and Markets and to the Group Treasurer, with the Global Risk function acting as a second line of defence.

Pension risk is managed by a network of local and regional pension risk forums. The Global Pensions Oversight Forum provides oversight of all pension plans sponsored by HSBC globally and is co-chaired by the Group Treasurer and the Global Head of Treasury Risk Management and Global Risk Analytics.

Capital, liquidity and funding risk management processes

Assessment and risk appetite

Our capital management policy is underpinned by a capital management framework and our ICAAP. The framework incorporates key capital risk appetites for CET1, total capital, minimum requirements for own funds and eligible liabilities ('MREL'), and double leverage. The ICAAP is an assessment of the Group's capital position, outlining both regulatory and internal capital resources and requirements resulting from HSBC's business model, strategy, risk profile and management, performance and planning, risks to capital, and the implications of stress testing. Our assessment of capital adequacy is driven by an assessment of risks. These risks include credit, market, operational, pensions, insurance, structural foreign exchange and interest rate risk in the banking book. The Group ICAAP supports the determination of the consolidated capital risk appetite and target ratios as well as enables the assessment and determination of capital requirements by regulators. Subsidiaries prepare ICAAPs based on their local regulatory regimes in order to determine their own risk appetites and ratios.

HSBC Holdings is the provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings' own capital issuance and profit retention.

HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investments in subsidiaries, including management of double leverage. Double leverage reflects the extent to which equity investments in operating entities are funded by holding company debt. Where Group capital requirements are less than the aggregate of operating entity capital requirements, double leverage can be used to improve Group capital efficiency provided it is managed appropriately and prudently in accordance with risk appetite. Double leverage is a constraint on managing our capital position, given the complexity of the Group's subsidiary structure and the multiple regulatory regimes under which we operate. As a matter of long-standing policy, the holding company retains a substantial portfolio of high-quality liquid assets ('HQLA'), which at 31 December 2020 was in excess of $14bn. The portfolio of HQLA helps to mitigate holding company cash flow risk arising from double leverage, and underpins the strength of support the holding company can offer its subsidiaries in times of stress. Further mitigation is provided by additional tier 1 ('AT1') securities issued in excess of the regulatory requirements of our subsidiaries.

We maintain a comprehensive liquidity and funding risk management framework ('LFRF'), which aims to enable us to withstand very severe liquidity stresses. The LFRF comprises policies, metrics and controls designed to ensure that Group and entity management have oversight of our liquidity and funding risks in order to manage them appropriately. We manage liquidity and funding risk at an operating entity level to ensure that obligations can be met in the jurisdiction where they fall due, generally without reliance on other parts of the Group. Operating entities are required to meet internal minimum requirements and any applicable regulatory requirements at all times. These requirements are assessed through the ILAAP, which ensures that operating entities have robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of liquidity risk over an appropriate set of time horizons, including intra-day. The ILAAP informs the validation of risk tolerance and the setting of risk appetite. It also assesses the capability to manage liquidity and funding effectively in each major entity. These metrics are set and managed locally but are subject to robust global review and challenge to ensure consistency of approach and application of the LFRF across the Group.

Planning and performance

Capital and risk-weighted asset ('RWA') plans form part of the annual operating plan that is approved by the Board. Capital and RWA forecasts are submitted to the Group Executive Committee on a monthly basis, and capital and RWAs are monitored and managed against the plan. The responsibility for global capital allocation principles rests with the Group Chief Financial Officer supported by the Group Capital Management Meeting. This is a specialist forum addressing capital management, reporting into Holdings ALCO.

Through our internal governance processes, we seek to strengthen discipline over our investment and capital allocation decisions, and to ensure that returns on investment meet management's objectives. Our strategy is to allocate capital to businesses and entities to support growth objectives where returns above internal hurdle levels have been identified and in order to meet their regulatory and economic capital needs. We evaluate and manage business returns by using a return on average tangible equity measure.

Funding and liquidity plans form part of the annual operating plan that is approved by the Board. The critical Board-level appetite measures are the liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR'). An appropriate funding and liquidity profile is managed through a wider set of measures:

• a minimum LCR requirement;

• a minimum NSFR requirement or other appropriate metric;

• a legal entity depositor concentration limit;

• three-month and 12-month cumulative rolling term contractual maturity limits covering deposits from banks, deposits from non-bank financial institutions and securities issued;

• a minimum LCR requirement by currency;

• intra-day liquidity;

• the application of liquidity funds transfer pricing; and

• forward-looking funding assessments.

The LCR and NSFR metrics are to be supplemented by an internal liquidity metric in 2021.

Risks to capital and liquidity

Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs and/or capital position. Downside and Upside scenarios are assessed against our capital management objectives and mitigating actions are assigned as necessary. We closely monitor future regulatory changes and continue to evaluate the impact of these upon our capital requirements. This includes the UK's implementation of amendments to the Capital Requirements Regulation, the Basel III Reforms, and the regulatory impact from the UK's withdrawal from the EU, as well as other regulatory statements including changes to IRB modelling requirements.

We currently estimate that these regulatory changes could potentially increase RWAs, before any mitigating actions, by approximately 5% over 2022-23. We plan to take action to substantially mitigate a significant proportion of the increase.

The Basel III Reforms introduce an output floor that will be introduced in 2023 with a five-year transitional provision. We estimate that there will be an additional RWA impact as a result of the output floor from 2027.

In parallel with regulatory developments in the EU, the UK's PRA is reviewing the requirements for the capitalisation of structural foreign exchange risk to align to a Pillar 1 approach.

There remains a significant degree of uncertainty in the impact of the regulatory changes due to the number of national discretions and the need for further supporting technical standards to be developed. Furthermore, the impact does not take into consideration the possibility of offsets against Pillar 2, which may arise as shortcomings within Pillar 1 are addressed.

We have applied the revised regulatory treatment of software assets that became law in the EU following its publication in December 2020. We are aware that the PRA intends to consult on this change with a view to returning to full deduction. In line with the PRA's guidance, we have therefore excluded the capital benefit of $2.1bn from our decisions about distributions.

Regulatory reporting processes and controls

There is a continued focus on the quality of regulatory reporting by the PRA and other regulators globally. We continue to strengthen our processes and controls, including commissioning independent external reviews of various aspects of regulatory reporting. As a result, there may be impacts on some of our regulatory ratios such as the CET1 and LCR. We continue to keep the PRA and other relevant regulators informed of adverse findings from external reviews and our progress in strengthening the control environment.

Further details can be found in the 'Regulatory developments' section of the Group's Pillar 3 Disclosures at 31 December 2020.

Stress testing and recovery planning

The Group uses stress testing to evaluate the robustness of plans and risk portfolios, and to meet the requirements for stress testing set by supervisors. Stress testing also informs the ICAAP and ILAAP and supports recovery planning in many jurisdictions. It is an important output used to evaluate how much capital and liquidity the Group requires in setting risk appetite for capital and liquidity risk. It is also used to re-evaluate business plans where analysis shows capital, liquidity and/or returns do not meet their target.

In addition to a range of internal stress tests, we are subject to supervisory stress testing in many jurisdictions. These include the programmes of the Bank of England, the US Federal Reserve Board, the European Banking Authority, the European Central Bank and the Hong Kong Monetary Authority, as well as stress tests undertaken in other jurisdictions. The results of regulatory stress testing and our internal stress tests are used when assessing our internal capital requirements through the ICAAP. The outcomes of stress testing exercises carried out by the PRA and other regulators feed into the setting of regulatory minimum ratios and buffers.

The Group and subsidiaries have established recovery plans, which set out potential options management could take in a range of stress scenarios that could result in a breach of our internal capital buffers. This is to help ensure that our capital and liquidity position can be recovered even in an extreme stress event.

During 2020, in light of the Covid-19 outbreak, we carried out additional internal testing on baseline and stressed scenarios. The results of these stress tests were considered in determining capital actions to manage the Group's position.

Additionally, further stress testing was carried out to include scenarios relating to the impact of the UK's withdrawal from the EU and elevated tensions between the US and China.

All entities monitor internal and external triggers that could threaten their capital, liquidity or funding positions. Entities have established recovery plans providing detailed actions that management would consider taking in a stress scenario should their positions deteriorate and threaten to breach risk appetite and regulatory minimum levels.

Details of HSBC's liquidity and funding risk management framework ('LFRF') can be found in the Group's Pillar 3 Disclosures at 31 December 2020.

Measurement of interest rate risk in the banking book processes

Assessment and risk appetite

Interest rate risk in the banking book is the risk of an adverse impact to earnings or capital due to changes in market interest rates. It is generated by our non-traded assets and liabilities, specifically loans, deposits and financial instruments that are not held for trading intent or held in order to hedge positions held with trading intent. Interest rate risk that can be economically hedged may be transferred to the Markets Treasury business. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Markets Treasury cannot economically hedge is not transferred and will remain within the global business where the risks originate.

The ALCM function uses a number of measures to monitor and control interest rate risk in the banking book, including:

• net interest income sensitivity;

• economic value of equity sensitivity; and

• hold-to-collect-and-sell stressed value at risk.

•

Net interest income sensitivity

A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected net interest income ('NII') under varying interest rate scenarios (i.e. simulation modelling), where all other economic variables are held constant. This monitoring is undertaken at an entity level by local ALCOs, where entities forecast both one-year and five-year NII sensitivities across a range of interest rate scenarios.

Projected NII sensitivity figures represent the effect of pro forma movements in projected yield curves based on a static balance sheet size and structure. The exception to this is where the size of the balances or repricing is deemed interest rate sensitive, for example, non-interest-bearing current account migration and fixed-rate loan early prepayment. These sensitivity calculations do not incorporate actions that would be taken by Markets Treasury or in the business that originates the risk to mitigate the effect of interest rate movements.

The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the 'up-shock' scenario. The sensitivity calculations in the 'down-shock' scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable. This is a change from the NII sensitivity methodology applied in the Annual Report and Accounts 2019, where market rates were floored to zero, unless the central bank rate was already negative as in the case of the euro, Swiss franc and Japanese yen.

Economic value of equity sensitivity

Economic value of equity ('EVE') represents the present value of the future banking book cash flows that could be distributed to equity providers under a managed run-off scenario. This equates to the current book value of equity plus the present value of future NII in this scenario. EVE can be used to assess the economic capital required to support interest rate risk in the banking book. An EVE sensitivity represents the expected movement in EVE due to pre-specified interest rate shocks, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivities as a percentage of capital resources.

Hold-to-collect-and-sell stressed value at risk

Hold-to-collect-and-sell stressed value at risk ('VaR') is a quantification of the potential losses to a 99% confidence level of the portfolio of securities held under a held-to-collect-and-sell business model in the Markets Treasury business. The portfolio is accounted for at fair value through other comprehensive income together with the derivatives held in designated hedging relationships with these securities. This is quantified based on the worst losses over a one-year period going back to the beginning of 2007 and the assumed holding period is 60 days.

Hold-to-collect-and-sell stressed VaR uses the same models as those used for trading book capitalisation and covers only the portfolio managed by Markets Treasury under this business model.

Other Group risks

Structural foreign exchange exposures

Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates, the functional currencies of which are currencies other than the US dollar. An entity's functional currency is normally that of the primary economic environment in which the entity operates.

Exchange differences on structural exposures are recognised in other comprehensive income ('OCI'). We use the US dollar as our presentation currency in our consolidated financial statements because the US dollar and currencies linked to it form the major currency bloc in which we transact and fund our business. Therefore, our consolidated balance sheet is affected by exchange differences between the US dollar and all the non-US dollar functional currencies of underlying subsidiaries.

Our structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that our consolidated capital ratios and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange rates. We hedge structural foreign exchange exposures only in limited circumstances.

For further details of our structural foreign exchange exposures, see page 179.

Banking book foreign exchange exposures

Banking book foreign exchange exposures arise from transactions in the banking book generating profit and loss or OCI reserves in a currency other than the reporting currency of the operating entity. Transactional foreign exchange exposure is transferred to Markets and Securities Services or Markets Treasury and managed within limits, with the exception of both exposure generating OCI reserves and limited residual foreign exchange exposure arising from timing differences or for other reasons.

HSBC Holdings risk management

As a financial services holding company, HSBC Holdings has limited market risk activities. Its activities predominantly involve maintaining sufficient capital resources to support the Group's diverse activities; allocating these capital resources across the Group's businesses; earning dividend and interest income on its investments in the businesses; payment of operating expenses; providing dividend payments to its equity shareholders and interest payments to providers of debt capital; and maintaining a supply of short-term liquid assets for deployment under extraordinary circumstances.

The main market risks to which HSBC Holdings is exposed are banking book interest rate risk and foreign currency risk. Exposure to these risks arises from short-term cash balances, funding positions held, loans to subsidiaries, investments in long-term financial assets and financial liabilities including debt capital issued. The objective of HSBC Holdings' market risk management strategy is to manage volatility in capital resources, cash flows and distributable reserves that could be caused by movements in market parameters. Market risk for HSBC Holdings is monitored by Holdings ALCO in accordance with its risk appetite statement.

HSBC Holdings uses interest rate swaps and cross-currency interest rate swaps to manage the interest rate risk and foreign currency risk arising from its long-term debt issues.

During 2020, HSBC Holdings undertook a variety of liability management exercises, including the issuance of fixed-rate eligible liabilities. Group Treasury generally hedged out the fixed-rate interest rate risk on these liabilities in previous years, but as major interest rate markets remained at very low levels during 2020, this was assessed on a case-by-case basis and in some cases the decision was made to retain the fixed-rate risk.

For quantitative disclosures on interest rate risk in the banking book, see pages 179 to 180.

Pension risk management processes

Our global pensions strategy is to move from defined benefit to defined contribution plans, where local law allows and it is considered competitive to do so. In 2020 we reviewed our risk appetite metrics and in 2021 we will continue to enhance and expand these to further assist the internal monitoring of our de-risking programmes.

In defined contribution pension plans, the contributions that HSBC is required to make are known, while the ultimate pension benefit will vary, typically with investment returns achieved by investment choices made by the employee. While the market risk to HSBC of defined contribution plans is low, the Group is still exposed to operational and reputational risk.

In defined benefit pension plans, the level of pension benefit is known. Therefore, the level of contributions required by HSBC will vary due to a number of risks, including:

• investments delivering a return below that required to provide the projected plan benefits;

• the prevailing economic environment leading to corporate failures, thus triggering write-downs in asset values (both equity and debt);

• a change in either interest rates or inflation expectations, causing an increase in the value of plan liabilities; and

• plan members living longer than expected (known as longevity risk).

Pension risk is assessed using an economic capital model that takes into account potential variations in these factors. The impact of these variations on both pension assets and pension liabilities is assessed using a one-in-200-year stress test. Scenario analysis and other stress tests are also used to support pension risk management. To fund the benefits associated with defined benefit plans, sponsoring Group companies, and in some instances employees, make regular contributions in accordance with advice from actuaries and in consultation with the plan's trustees where relevant. These contributions are normally set to ensure that there are sufficient funds to meet the cost of the accruing benefits for the future service of active members. However, higher contributions are required when plan assets are considered insufficient to cover the existing pension liabilities. Contribution rates are typically revised annually or once every three years, depending on the plan.

The defined benefit plans invest contributions in a range of investments designed to limit the risk of assets failing to meet a plan's liabilities. Any changes in expected returns from the investments may also change future contribution requirements. In pursuit of these long-term objectives, an overall target allocation is established between asset classes of the defined benefit plan. In addition, each permitted asset class has its own benchmarks, such as stock-market or property valuation indices or liability characteristics. The benchmarks are reviewed at least once every three to five years and more frequently if required by local legislation or circumstances. The process generally involves an extensive asset and liability review.

In addition, some of the Group's pension plans hold longevity swap contracts. These arrangements provide long-term protection to the relevant plans against costs resulting from pensioners or their dependants living longer than initially expected. The most sizeable plan to do this is the HSBC Bank (UK) Pension Scheme, which holds longevity swaps covering approximately three-quarters of the plan's pensioner liabilities (50% with The Prudential Insurance Company of America and 25% with Swiss Re).

Capital risk in 2020

Capital overview

Capital adequacy metrics
	At
	31 Dec	31 Dec
	2020	2019
Risk-weighted assets ('RWAs') ($bn)
Credit risk	691.9	676.6
Counterparty credit risk	42.8	44.1
Market risk	28.5	29.9
Operational risk	94.3	92.8
Total RWAs	857.5	843.4
Capital on a transitional basis ($bn)
Common equity tier 1 ('CET1') capital	136.1	124.0
Tier 1 capital	160.2	148.4
Total capital	184.4	172.2
Capital ratios on a transitional basis (%)
Common equity tier 1 ratio	15.9	14.7
Tier 1 ratio	18.7	17.6
Total capital ratio	21.5	20.4
Capital on an end point basis ($bn)
Common equity tier 1 ('CET1') capital	136.1	124.0
Tier 1 capital	158.5	144.8
Total capital	173.2	159.3
Capital ratios on an end point basis (%)
Common equity tier 1 ratio	15.9	14.7
Tier 1 ratio	18.5	17.2
Total capital ratio	20.2	18.9
Liquidity coverage ratio ('LCR')
Total high-quality liquid assets ($bn)	677.9	601.4
Total net cash outflow ($bn)	487.3	400.5
LCR ratio (%)	139.1	150.2

Following the end of the transition period following the UK's withdrawal from the EU, any reference to EU regulations and directives (including technical standards) should be read as a reference to the UK's version of such regulation or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, as amended.

Capital figures and ratios in the previous table are calculated in accordance with the revised Capital Requirements Regulation and Directive, as implemented ('CRR II'). The table presents them under the transitional arrangements in CRR II for capital instruments and after their expiry, known as the end point. The end point figures in the table above include the benefit of the regulatory transitional arrangements in CRR II for IFRS 9, which are more fully described below.

Where applicable, they also reflect government relief schemes intended to mitigate the impact of the Covid-19 outbreak.

Regulatory transitional arrangements for IFRS 9 'Financial Instruments'

We have adopted the regulatory transitional arrangements in CRR II for IFRS 9, including paragraph four of article 473a. Our capital and ratios are presented under these arrangements throughout the table above, including in the end point figures. Without their application, our CET1 ratio would be 15.7%.

The IFRS 9 regulatory transitional arrangements allow banks to add back to their capital base a proportion of the impact that
IFRS 9 has upon their loan loss allowances during the first five years of use. The impact is defined as:

• the increase in loan loss allowances on day one of IFRS 9 adoption; and

• any subsequent increase in ECL in the non-credit-impaired book thereafter.

Any add-back must be tax affected and accompanied by a recalculation of exposure and RWAs. The impact is calculated separately for portfolios using the standardised ('STD') and internal ratings-based ('IRB') approaches. For IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses.

The EU's CRR II 'Quick Fix' relief package enacted in June 2020 increased from 70% to 100% the relief that banks may take for loan loss allowances recognised since 1 January 2020 on the
non-credit-impaired book.

In the current period, the add-back to CET1 capital amounted to $1.6bn under the STD approach with a tax impact of $0.4bn. At 31 December 2019, the add-back to the capital base under the STD approach was $1.0bn with a tax impact of $0.2bn.

Own funds

Own funds disclosure
(Audited)
		At
		31 Dec	31 Dec
		2020	2019
Ref*		$m	$m
	Common equity tier 1 ('CET1') capital: instruments and reserves
1	Capital instruments and the related share premium accounts	23,219	22,873
	- ordinary shares	23,219	22,873
2	Retained earnings	128,665	127,188
3	Accumulated other comprehensive income (and other reserves)¹	9,768	1,735
5	Minority interests (amount allowed in consolidated CET1)	4,079	4,865
5a	Independently reviewed interim net profits net of any foreseeable charge or dividend	(252)	(3,381)
6	Common equity tier 1 capital before regulatory adjustments	165,479	153,280
28	Total regulatory adjustments to common equity tier 1	(29,429)	(29,314)
29	Common equity tier 1 capital	136,050	123,966
36	Additional tier 1 capital before regulatory adjustments	24,183	24,453
43	Total regulatory adjustments to additional tier 1 capital	(60)	(60)
44	Additional tier 1 capital	24,123	24,393
45	Tier 1 capital	160,173	148,359
51	Tier 2 capital before regulatory adjustments	25,722	25,192
57	Total regulatory adjustments to tier 2 capital	(1,472)	(1,401)
58	Tier 2 capital	24,250	23,791
59	Total capital	184,423	172,150

* The references identify the lines prescribed in the European Banking Authority ('EBA') template, which are applicable and where there is a value.

1 Following the call and subsequent redemption of HSBC Holdings' non-cumulative preference shares, the remaining share premium that related to such preference shares is now treated as an 'other reserve' and included in CET1.

Throughout 2020, we complied with the PRA's regulatory capital adequacy requirements, including those relating to stress testing. At 31 December 2020, our CET1 ratio increased to 15.9% from 14.7% at 31 December 2019.

CET1 capital increased during the year by $12.1bn, mainly as a result of:

• the cancellation of the fourth interim dividend of $3.4bn for 2019;

• favourable foreign currency translation differences of $3.4bn;

• capital generation of $2.8bn net of dividends relating to other equity instruments;

• a fall of $2.1bn in the deduction for other intangible assets due to changes to the capital treatment of software assets;

• a $1.8bn increase in fair value through other comprehensive income reserve; and

• a $1.8bn fall in the deduction for excess expected loss.

These increases were partly offset by:

• an interim dividend for 2020 of $3.1bn; and

• a $0.8bn fall in allowable non-controlling interest in CET1. This partly reflected the acquisition in May 2020 of additional shares representing 18.66% of the capital of HSBC Trinkaus and Burkhardt from Landesbank Baden-Württemberg, the principal minority shareholder.

We have applied the revised regulatory treatment of software assets, which became a UK requirement in December 2020. Subsequently, the PRA announced its intention to consult on a reversal of this change in due course and recommended firms do not base their distribution decision on any capital increase from applying this requirement. As a result, we have not considered the related capital benefit in our distributions. The impact of the change on our CET1 ratio was 0.2 percentage points.

Our Pillar 2A requirement at 31 December 2020, as per the PRA's Individual Capital Requirement based on a point-in-time assessment, was equivalent to 3.0% of RWAs, of which 1.7% was met by CET1.

Risk-weighted assets

RWAs by global business
	WPB	CMB	GBM	Corporate Centre	Total
	$bn	$bn	$bn	$bn	$bn
Credit risk	135.9	300.0	168.6	87.4	691.9
Counterparty credit risk	0.7	0.2	41.2	0.7	42.8
Market risk	1.6	0.9	22.9	3.1	28.5
Operational risk	34.6	26.6	32.4	0.7	94.3
At 31 Dec 2020	172.8	327.7	265.1	91.9	857.5

RWAs by geographical region
		Europe	Asia	MENA	North America	Latin America	Total
	Footnotes	$bn	$bn	$bn	$bn	$bn	$bn
Credit risk		211.2	307.3	50.2	96.1	27.1	691.9
Counterparty credit risk		23.7	10.7	1.4	5.3	1.7	42.8
Market risk	1	23.5	20.9	2.4	4.7	1.2	28.5
Operational risk		25.9	45.3	6.2	11.7	5.2	94.3
At 31 Dec 2020		284.3	384.2	60.2	117.8	35.2	857.5

1 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

RWA movement by global business by key driver
	Credit risk, counterparty credit risk and operational risk
	WPB	CMB	GBM	Corporate Centre	Market risk	Total RWAs
	$bn	$bn	$bn	$bn	$bn	$bn
RWAs at 1 Jan 2020	161.4	325.1	248.7	78.3	29.9	843.4
Asset size	2.2	(12.3)	(3.1)	2.4	1.1	(9.7)
Asset quality	0.3	14.5	9.3	0.4	-	24.5
Model updates	2.7	0.9	(2.2)	-	(2.0)	(0.6)
Methodology and policy	2.6	(8.6)	(13.9)	6.2	(0.5)	(14.2)
Acquisitions and disposals	-	-	-	1.0	-	1.0
Foreign exchange movements	2.0	7.2	3.4	0.5	-	13.1
Total RWA movement	9.8	1.7	(6.5)	10.5	(1.4)	14.1
RWAs at 31 Dec 2020	171.2	326.8	242.2	88.8	28.5	857.5

RWA movement by geographical region by key driver
	Credit risk, counterparty credit risk and operational risk
	Europe	Asia	MENA	North America	Latin America	Market risk	Total RWAs
	$bn	$bn	$bn	$bn	$bn	$bn	$bn
RWAs at 1 Jan 2020	257.9	345.9	55.5	117.6	36.6	29.9	843.4
Asset size	(9.9)	3.4	1.1	(6.1)	0.7	1.1	(9.7)
Asset quality	7.2	10.9	1.3	4.6	0.5	-	24.5
Model updates	1.7	0.3	-	(0.6)	-	(2.0)	(0.6)
Methodology and policy	(6.8)	(3.0)	(0.2)	(3.2)	(0.5)	(0.5)	(14.2)
Acquisitions and disposals	-	-	1.0	-	-	-	1.0
Foreign exchange movements	10.7	5.8	(0.9)	0.8	(3.3)	-	13.1
Total RWA movement	2.9	17.4	2.3	(4.5)	(2.6)	(1.4)	14.1
RWAs at 31 Dec 2020	260.8	363.3	57.8	113.1	34.0	28.5	857.5

Risk-weighted assets ('RWAs') rose by $14.1bn during the year, including an increase of $13.1bn due to foreign currency translation differences. The $1.0bn increase (excluding foreign currency translation differences) is described in the commentary below. During the period we recognised RWA reductions through our transformation programme of $51.5bn. These are included within the movements described below, primarily under asset size movements and methodology and policy changes.

Asset size

The $9.7bn fall in RWAs due to asset size movements was due to reductions in CMB and GBM, partly offset by increases in Corporate Centre, WPB and market risk.

The $12.3bn decrease in CMB RWAs was primarily due to management initiatives under our transformation programme, most notably in Europe, North America and Asia.

The $3.1bn fall in GBM RWAs was driven by $16.4bn of reductions under the transformation programme, largely in North America, Europe, Asia and Latin America. This was partly offset by lending growth, mostly in Asia and MENA, and mark-to-market movements in counterparty credit risk RWAs.

In Asia, an increase in the value of material holdings and lending growth in the property market drove increases in Corporate Centre and WPB RWAs of $2.4bn and $2.2bn respectively.

Market risk RWAs increased by $1.1bn, largely due to market conditions, partly offset by management initiatives.

Asset quality

Changes in asset quality led to an RWA increase of $24.5bn, mostly in CMB and GBM. This included credit migration of

$29.7bn, largely caused by the Covid-19 outbreak. These downgrades were mostly in Asia, North America and Europe, partly offset by decreases due to portfolio mix changes.

Model updates

The $0.6bn fall in RWAs due to model updates comprised decreases in GBM and market risk, partly offset by increases in WPB and CMB.

The $2.2bn reduction in GBM RWAs was due to corporate model updates in our major regions, most significantly in North America.

Market risk RWAs fell by $2.0bn primarily as a result of changes to the calculation of risks not in VaR, and the implementation of a new model for an options portfolio.

The increases in WPB and CMB credit risk RWAs were mainly due to updates to French, Hong Kong and North American models.

Methodology and policy

The $14.2bn reduction in RWAs due to methodology and policy changes included reductions as a result of risk parameter refinements and regulatory responses to the Covid-19 outbreak, offset by changes in approach to credit risk exposures.

GBM and CMB reduced RWAs by $23.8bn, of which $11.5bn were under the transformation programme. These reductions stem from a variety of actions, including risk parameter refinements, improved collateral linkage, and data enhancement.

Changes under the CRR 'Quick Fix' relief package also reduced CMB and GBM RWAs. Implementation of the revised small and medium-sized enterprise supporting factor led to a $3.4bn fall in RWAs for CMB while the new infrastructure supporting factor caused a $0.5bn fall in GBM. Partly offsetting these reductions, the recent change in the regulatory treatment of software assets caused a $2.3bn increase in Corporate Centre RWAs.

At the start of 2020, we implemented two changes that led to a $6.4bn increase in our wholesale credit risk exposures. Application of the new securitisation framework to the pre-existing book caused RWAs to rise by $3.4bn, mainly in Corporate Centre and GBM. Following the conclusion of discussions with the PRA, we also transferred several UK corporate portfolios onto a Foundation IRB approach, causing a $3bn rise in RWAs in CMB and GBM.

Corporate Centre and WPB RWAs increased by $5bn as a result of updates to exposures in Asia and the French retail business.

The $0.5bn fall in market risk largely comprised reductions from updates to the calculation of stressed VaR and foreign exchange risk, partly offset by increases due to risks not in VaR.

Acquisitions and disposals

The increase in our shareholding of The Saudi British Bank from 29.2% to 31.0% led to $1.0bn additional Corporate Centre RWAs.

Leverage ratio¹

			At
			31 Dec	31 Dec
			2020	2019
Ref*		Footnotes	$bn	$bn
20	Tier 1 capital		158.5	144.8
21	Total leverage ratio exposure		2,897.1	2,726.5
			%	%
22	Leverage ratio		5.5	5.3
EU-23	Choice of transitional arrangements for the definition of the capital measure		Fully phased-in	Fully phased-in
	UK leverage ratio exposure - quarterly average	2	2,555.5	2,535.4
			%	%
	UK leverage ratio - quarterly average	2	6.1	5.8
	UK leverage ratio - quarter end	2	6.2	5.7

* The references identify the lines prescribed in the EBA template.

1 The CRR II regulatory transitional arrangements for IFRS 9 are applied in both leverage ratio calculations.

2 UK leverage ratio denotes the Group's leverage ratio calculated under the PRA's UK leverage framework. This measure excludes qualifying central bank balances and loans under the UK Bounce Back Loan Scheme from the calculation of exposure.

Our leverage ratio calculated in accordance with the Capital Requirements Regulation was 5.5% at 31 December 2020, up from 5.3% at 31 December 2019, due to an increase in tier 1 capital, offset by an increase in exposure primarily due to growth in central bank deposits and financial investments. The change in treatment of software assets benefited our leverage ratio by 0.1 percentage points.

At 31 December 2020, our UK minimum leverage ratio requirement of 3.25% under the PRA's UK leverage framework was supplemented by an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.1%. These additional buffers translated into capital values of $17.9bn and $1.8bn respectively. We exceeded these leverage requirements.

Pillar 3 disclosure requirements

Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 31 December 2020 is published on our website, www.hsbc.com/investors.

Liquidity and funding risk in 2020

Liquidity metrics

At 31 December 2020, all of the Group's material operating entities were above regulatory minimum liquidity and funding levels.

Each entity maintains sufficient unencumbered liquid assets to comply with local and regulatory requirements. The liquidity value of these liquidity assets for each entity is shown in the following table along with the individual LCR levels on a European Commission ('EC') basis. This basis may differ from local LCR measures due to differences in the way non-EU regulators have implemented the Basel III standards.

Each entity maintains sufficient stable funding relative to the required stable funding assessed using the NSFR or other appropriate metrics.

Given our continued focus on the quality of regulatory reporting, liquidity reporting processes are undergoing a detailed review, which may lead to impacts on some of our regulatory ratios, including LCR and NSFR. All entities are above regulatory minimums and are expected to continue to remain above risk appetite.

The Group liquidity and funding position at the end of 2020 is analysed in the following sections.

Operating entities' liquidity
		At 31 December 2020
		LCR	HQLA	Net outflows	NSFR
	Footnotes	%	$bn	$bn	%
HSBC UK Bank plc (ring-fenced bank)	1	198	121	61	164
HSBC Bank plc (non-ring-fenced bank)	2	136	138	102	124
The Hongkong and Shanghai Banking Corporation - Hong Kong branch	3	195	146	75	146
The Hongkong and Shanghai Banking Corporation - Singapore branch	3	162	16	10	135
Hang Seng Bank		212	50	24	151
HSBC Bank China		232	24	10	158
HSBC Bank USA		130	106	82	130
HSBC Continental Europe	4	143	48	34	130
HSBC Middle East - UAE branch		280	11	4	164
HSBC Canada	4	165	30	18	136
HSBC Mexico		198	10	5	139

Operating entities' liquidity (continued)
		At 31 December 2019
		LCR	HQLA	Net outflows	NSFR
	Footnotes	%	$m	$m	%
HSBC UK Bank plc (ring-fenced bank)	1	165	75	45	150
HSBC Bank plc (non-ring-fenced bank)	2	142	103	72	106
The Hongkong and Shanghai Banking Corporation - Hong Kong branch	3	163	109	67	128
The Hongkong and Shanghai Banking Corporation - Singapore branch	3	147	14	10	120
Hang Seng Bank		185	42	23	148
HSBC Bank China		180	21	11	151
HSBC Bank USA		125	73	59	122
HSBC Continental Europe	4	152	44	29	117
HSBC Middle East - UAE branch		202	11	5	159
HSBC Canada	4	124	18	14	124
HSBC Mexico		208	9	4	136

1 HSBC UK Bank plc refers to the HSBC UK liquidity group, which comprises four legal entities: HSBC UK Bank plc (including the Dublin branch), Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the PRA.

2 HSBC Bank plc includes oversea branches and special purpose entities consolidated by HSBC for financial statements purposes.

3 The Hongkong and Shanghai Banking Corporation - Hong Kong branch and The Hongkong and Shanghai Banking Corporation - Singapore branch represent the material activities of The Hongkong and Shanghai Banking Corporation. Each branch is monitored and controlled for liquidity and funding risk purposes as a stand-alone operating entity.

4 HSBC Continental Europe and HSBC Canada represent the consolidated banking operations of the Group in France and Canada, respectively. HSBC Continental Europe and HSBC Canada are each managed as single distinct operating entities for liquidity purposes.

At 31 December 2020, all of the Group's principal operating entities were well above regulatory minimum levels.

The most significant movements in 2020 are explained below:

• HSBC UK Bank plc improved its liquidity ratio to 198%, mainly driven by growth in commercial and retail deposits.

• HSBC Bank plc and HSBC Continental Europe maintained a strong liquidity position, with an increase in HQLA mainly due to deposit growth. However the LCR declined, reflecting a reassessment of potential outflows, particularly with respect to committed facilities.

• The Hongkong and Shanghai Banking Corporation - Hong Kong branch, Hang Seng Bank and HSBC Bank China remained in a strong liquidity position, mainly as result of an increase in customer deposits.

• HSBC Bank USA remained in a strong liquidity position, mainly driven by an increase in deposits and a reduction in illiquid assets.

• HSBC Bank Middle East - UAE branch remained in a strong liquidity position, with a liquidity ratio of 280%.

• HSBC Canada increased its LCR to 165%, mainly driven by increased customer deposits and covered bond issuance.

Liquid assets

At 31 December 2020, the Group had a total of $678bn of highly liquid unencumbered LCR eligible liquid assets (31 December 2019: $601bn) held in a range of asset classes and currencies. Of these, 90% were eligible as level 1 (31 December 2019: 90%).

The following tables reflect the composition of the liquidity pool by asset type and currency at 31 December 2020:

Liquidity pool by asset type
	Liquidity pool	Cash	Level 1¹	Level 2¹
	$bn	$bn	$bn	$bn
Cash and balance at central bank	307	307	-	-
Central and local government bonds	312	-	263	49
Regional government public sector entities	12	-	11	1
International organisation and multilateral developments banks	14	-	14	-
Covered bonds	11	-	3	8
Other	22	-	10	12
Total at 31 Dec 2020	678	307	301	70
Total at 31 Dec 2019	601	158	383	60

1 As defined in EU regulations, level 1 assets means 'assets of extremely high liquidity and credit quality', and level 2 assets means 'assets of high liquidity and credit quality'.

Liquidity pool by currency
	$	£	€	HK$	Other	Total
	$bn	$bn	$bn	$bn	$bn	$bn
Liquidity pool at 31 Dec 2020	218	176	117	74	93	678
Liquidity pool at 31 Dec 2019	179	117	93	47	165	601

Consolidated liquidity metrics

At 31 December 2020, the total HQLA held at entity level amounted to $857bn (31 December 2019: $646bn), an increase of $211bn, reflecting the increases in entity liquidity positions described above. Consistent with prior periods, the application of requirements under the EC Delegated Act resulted in an adjustment of $179bn (31 December 2019: $45bn) to reflect the limitations in the fungibility of entity liquidity around the Group. As a consequence, the Group consolidated LCR was 139% at
31 December 2020 (31 December 2019: 150%). The $179bn of HQLA remains available to cover liquidity risk in the relevant entities.

The methodology used in the Group consolidated LCR in relation to the treatment of part of the Group's HQLA is currently under review. Upon implementation of this revised approach it is anticipated that the Group's consolidated LCR will reduce, although remain within appetite. The liquidity position of the entities is unaffected by this change and remains the key focus.

	At
	31 Dec 2020	30 Jun 2020	31 Dec 2019
	$bn	$bn	$bn
High-quality liquid assets (in entities)	857	784	646
EC Delegated Act adjustment	(179)	(130)	(45)
Group LCR HQLA	678	654	601
Net outflows	487	443	400
Liquidity coverage ratio	139%	148%	150%

Sources of funding

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

The following 'Funding sources' and 'Funding uses' tables provide a view of how our consolidated balance sheet is funded. In practice, all the principal operating entities are required to manage liquidity and funding risk on a stand-alone basis.

The tables analyse our consolidated balance sheet according to the assets that primarily arise from operating activities and the sources of funding primarily supporting these activities. Assets and liabilities that do not arise from operating activities are presented at a net balancing source or deployment of funds.

In 2020, the level of customer accounts continued to exceed the level of loans and advances to customers. The positive funding gap was predominantly deployed in liquid assets.

Funding sources
(Audited)
	2020	2019
	$m	$m
Customer accounts	1,642,780	1,439,115
Deposits by banks	82,080	59,022
Repurchase agreements - non-trading	111,901	140,344
Debt securities in issue	95,492	104,555
Cash collateral, margin and settlement accounts	78,565	71,002
Subordinated liabilities	21,951	24,600
Financial liabilities designated at fair value	157,439	164,466
Liabilities under insurance contracts	107,191	97,439
Trading liabilities	75,266	83,170
- repos	11,728	558
- stock lending	4,597	9,702
- other trading liabilities	58,941	72,910
Total equity	204,995	192,668
Other balance sheet liabilities	406,504	338,771
At 31 Dec	2,984,164	2,715,152

Funding uses
(Audited)
		2020	2019
	Footnotes	$m	$m
Loans and advances to customers		1,037,987	1,036,743
Loans and advances to banks		81,616	69,203
Reverse repurchase agreements - non-trading		230,628	240,862
Prepayments, accrued income and other assets	1	76,859	63,891
- cash collateral, margin and settlement accounts		76,859	63,891
Assets held for sale		299	123
Trading assets		231,990	254,271
- reverse repos		13,990	13,659
- stock borrowing		8,286	7,691
- other trading assets		209,714	232,921
Financial investments		490,693	443,312
Cash and balances with central banks		304,481	154,099
Other balance sheet assets		529,611	452,648
At 31 Dec		2,984,164	2,715,152

1 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.

Wholesale term debt maturity profile

The maturity profile of our wholesale term debt obligations is set out in the following table.

The balances in the table are not directly comparable with those in the consolidated balance sheet because the table presents gross cash flows relating to principal payments and not the balance sheet carrying value, which includes debt securities and subordinated liabilities measured at fair value.

Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities
	Due not more than 1 month	Due over 1 month but not more than 3 months	Due over 3 months but not more than 6 months	Due over 6 months but not more than 9 months	Due over 9 months but not more than 1 year	Due over 1 year but not more than 2 years	Due over 2 years but not more than 5 years	Due over 5 years	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m
Debt securities issued	18,057	16,848	20,314	15,208	7,561	20,768	49,948	59,911	208,615
- unsecured CDs and CP	4,048	8,440	9,977	6,186	2,945	1,474	1,454	1,546	36,070
- unsecured senior MTNs	9,625	3,363	3,915	4,684	2,005	9,295	35,834	49,209	117,930
- unsecured senior structured notes	2,075	1,539	1,451	1,242	1,241	3,702	4,979	6,765	22,994
- secured covered bonds	-	-	28	-	750	2,514	3,917	-	7,209
- secured asset-backed commercial paper	1,094	-	-	-	-	-	-	-	1,094
- secured ABS	19	119	171	45	41	410	1,865	646	3,316
- others	1,196	3,387	4,772	3,051	579	3,373	1,899	1,745	20,002
Subordinated liabilities	618	-	237	-	12	12	6,081	22,941	29,901
- subordinated debt securities	618	-	237	-	12	12	6,081	21,085	28,045
- preferred securities	-	-	-	-	-	-	-	1,856	1,856
At 31 Dec 2020	18,675	16,848	20,551	15,208	7,573	20,780	56,029	82,852	238,516


Debt securities issued	17,728	19,758	15,654	16,284	16,132	35,836	57,387	53,768	232,547
- unsecured CDs and CP	4,913	12,280	11,020	8,745	11,509	1,156	2,095	1,578	53,296
- unsecured senior MTNs	8,198	2,462	695	4,595	1,753	25,121	42,316	38,812	123,952
- unsecured senior structured notes	1,698	1,386	1,711	1,003	923	3,579	6,102	9,596	25,998
- secured covered bonds	-	-	-	-	1,139	749	3,661	1,159	6,708
- secured asset-backed commercial paper	1,933	-	-	-	-	-	-	-	1,933
- secured ABS	-	-	248	161	-	205	911	741	2,266
- others	986	3,630	1,980	1,780	808	5,026	2,302	1,882	18,394
Subordinated liabilities	1,523	-	22	2,000	-	754	2,424	26,809	33,532
- subordinated debt securities	1,500	-	22	2,000	-	754	2,424	24,587	31,287
- preferred securities	23	-	-	-	-	-	-	2,222	2,245
At 31 Dec 2019	19,251	19,758	15,676	18,284	16,132	36,590	59,811	80,577	266,079

Structural foreign exchange risk in 2020

Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates, the functional currencies of which are currencies other than the US dollar. Exchange differences on structural exposures are recognised in 'Other comprehensive income'.

Net structural foreign exchange exposures
		2020	2019
	Footnotes	$m	$m
Currency of structural exposure
Hong Kong dollars		47,623	46,527
Pound sterling	1	35,285	33,383
Chinese renminbi		32,165	28,847
Euros		15,672	14,881
Canadian dollars		5,123	4,416
Indian rupees		4,833	4,375
Mexican pesos		4,139	4,600
Saudi riyals		3,892	4,280
UAE dirhams		3,867	4,105
Malaysian ringgit		2,771	2,695
Singapore dollars		2,473	2,256
Australian dollars		2,357	1,898
Taiwanese dollars		2,036	1,957
Indonesian rupiah		1,726	1,665
Swiss francs		1,444	1,188
Korean won		1,368	1,245
Thai baht		991	910
Egyptian pound		889	875
Others, each less than $700m		6,858	7,029
At 31 Dec		175,512	167,132

1 At 31 December 2020, we had forward foreign exchange contracts of $11.2bn (2019: $10.5bn) in order to manage our sterling structural foreign exchange exposure.

Shareholders' equity would decrease by $2,427m (2019: $2,298m) if euro and sterling foreign currency exchange rates weakened by 5% relative to the US dollar.

Interest rate risk in the banking book in 2020

Net interest income sensitivity

The following tables set out the assessed impact to a hypothetical base case projection of our NII (excluding insurance) under the following scenarios:

• an immediate shock of 25 basis points ('bps') to the current market-implied path of interest rates across all currencies on
1 January 2021 (effects over one year and five years); and

• an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 January 2021 (effects over one year and five years).

The sensitivities shown represent our assessment of the change to a hypothetical base case NII, assuming a static balance sheet and no management actions from the Markets Treasury business. They incorporate the effect of interest rate behaviouralisation, managed rate product pricing assumptions and customer behaviour, including prepayment of mortgages or customer migration from non-interest-bearing to interest-bearing deposit accounts under the specific interest rate scenarios. Market uncertainty and our competitors' behaviours also need to be factored in when analysing these results. The scenarios represent interest rate shocks to the current market implied path of rates.

The NII sensitivity analysis performed in the case of a down-shock does not include floors to the shocked market rates for wholesale assets and liabilities including those denominated in US dollars and sterling. Floors have however been maintained for deposits and loans to customers where this is contractual or where negative rates would not be applied. This is a change from the NII sensitivity approach published in the Annual Report and Accounts 2019, where market rates were floored to zero, unless the central bank rate was already negative, as in the case of the euro, Swiss franc and Japanese yen. This reflects the increased risk of negative market interest rates going forward.

As such, the one-year and five-year NII sensitivities in the down-shock scenarios have increased in December 2020 at Group level when compared with December 2019. This was driven by the change in approach, changes in the forecasted yield curves and changes in balance sheet composition. The NII sensitivities are forecasted for the whole period of one and five years each quarter.

The NII sensitivities shown are indicative and based on simplified scenarios. Immediate interest rate rises of 25bps and 100bps would increase projected NII for the 12 months to 31 December 2021 by $1,647m and $5,348m, respectively. Conversely, falls of 25bps and 100bps would decrease projected NII for the 12 months to 31 December 2021 by $1,508m and $4,854m, respectively.

The sensitivity of NII for 12 months increased by $2,550m in the plus 100bps parallel shock and increased by $(1,542)m in the minus 100bps parallel shock, comparing December 2021 with December 2020.

The increase in the sensitivity of NII for 12 months in the plus 100bps parallel shock was mainly driven by the growth of rate insensitive customer deposits, against an increase in rate sensitive assets due to a general build-up of liquidity throughout the Group, which has been deployed in short-term investments (predominantly cash, held-to-collect-and-sell securities, and reverse repos) as well as shortening of Markets Treasury's positioning in view of the significant drop in interest rates.

The change in NII sensitivity for five years is also driven by the factors above.

The tables do not include Markets Treasury management actions or changes in MSS net trading income that may further limit the impact.

The limitations of this analysis are discussed within the 'Treasury risk management' section on page 169.

NII sensitivity to an instantaneous change in yield curves (12 months)
	Currency
	$	HK$	£	€	Other	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2021 to Dec 2021 (based on balance sheet at 31 December 2020)
+25bps parallel	223	423	555	126	320	1,647
-25bps parallel	(227)	(343)	(548)	(88)	(302)	(1,508)
+100bps parallel	546	1,267	1,811	502	1,222	5,348
-100bps parallel	(565)	(749)	(1,906)	(299)	(1,335)	(4,854)
Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019)
+25bps parallel	59	198	278	116	202	853
-25bps parallel	(91)	(255)	(332)	11	(182)	(849)
+100bps parallel	(16)	504	1,123	441	746	2,798
-100bps parallel	(490)	(1,023)	(1,049)	(23)	(726)	(3,311)

The net interest income sensitivities arising from the scenarios presented in the tables above are not directly comparable. This is due to timing differences relating to interest rate changes and the repricing of assets and liabilities.

NII sensitivity to an instantaneous change in yield curves (5 years)
	Year 1	Year 2	Year 3	Year 4	Year 5	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2021 to Dec 2021 (based on balance sheet at 31 December 2020)
+25bps parallel	1,647	1,866	1,930	2,028	2,100	9,571
-25bps parallel	(1,508)	(1,986)	(2,307)	(2,045)	(2,113)	(9,959)
+100bps parallel	5,348	6,538	7,083	7,444	7,736	34,149
-100bps parallel	(4,854)	(6,174)	(7,087)	(7,660)	(8,323)	(34,098)
Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019)
+25bps parallel	853	1,158	1,348	1,449	1,523	6,331
-25bps parallel	(849)	(1,205)	(1,402)	(1,562)	(1,649)	(6,667)
+100bps parallel	2,798	4,255	4,915	5,155	5,454	22,577
-100bps parallel	(3,311)	(4,621)	(5,289)	(5,766)	(6,164)	(25,151)

Sensitivity of capital and reserves

Hold-to-collect-and-sell stressed VaR is a quantification of the potential losses to a 99% confidence level of the portfolio of securities held under a hold-to-collect-and-and-sell business model in the Markets Treasury business. The portfolio is accounted for at fair value through other comprehensive income together with the derivatives held in designated hedging relationships with these securities. The mark-to-market of this portfolio therefore has an impact on CET1. Stressed VaR is quantified based on the worst losses over a one-year period going back to the beginning of 2007 and the assumed holding period is 60 days. At December 2020, the stressed VaR of the portfolio was $2.94bn (2019: $3.2bn).

Alongside our monitoring of the stressed VaR of this portfolio, we also monitor the sensitivity of reported cash flow hedging reserves to interest rate movements on a yearly basis by assessing the expected reduction in valuation of cash flow hedges due to parallel movements of plus or minus 100bps in all yield curves. Although we allow rates to go negative in this assessment, we apply a floor on the shocks in the minus 100bps scenario set at the lower of either minus 50bps or the central bank deposit rate. These particular exposures form only a part of our overall interest rate exposure.

The following table describes the sensitivity of our cash flow hedge reported reserves to the stipulated movements in yield curves at the year end. The sensitivities are indicative and based on simplified scenarios.

Comparing December 2020 with December 2019, the sensitivity of the cash flow hedging reserve reduced by $37m in the plus 100bps scenario and reduced by $323m in the minus 100bps scenario. The reduction in the minus 100bps scenario was mainly driven by the significant downwards movement in sterling yields during 2020, which meant that the floor at minus 50bps had an impact across the yield curve.

Sensitivity of cash flow hedging reported reserves to interest rate movements
	$m
At 31 Dec 2020
+100 basis point parallel move in all yield curves	(665)
As a percentage of total shareholders' equity	(0.34)%
-100 basis point parallel move in all yield curves	409
As a percentage of total shareholders' equity	0.21%

At 31 Dec 2019
+100 basis point parallel move in all yield curves	(702)
As a percentage of total shareholders' equity	(0.38)%
-100 basis point parallel move in all yield curves	732
As a percentage of total shareholders' equity	0.4%

Third-party assets in Markets Treasury

For our Markets Treasury governance framework, see page 170.

Third-party assets in Markets Treasury increased by 40% compared with 31 December 2019. Commercial surplus went up in 2020 due to an increase in client deposits and lower credit growth. This was partly reflected in the increase of $135bn in 'Cash and balances at central banks'.

The increase of $42bn across 'Loans and advances to banks' and 'Reverse repurchase agreements' was driven by the short-term investment of part of this surplus. The remainder was invested in high-quality liquid assets, contributing to the increase of $39bn in 'Financial Investments'.

Third-party assets in Markets Treasury
	2020	2019
	$m	$m
Cash and balances at central banks	263,656	129,114
Trading assets	392	268
Loans and advances:
- to banks	34,555	24,466
- to customers	1,167	310
Reverse repurchase agreements	61,693	29,868
Financial investments	391,017	351,842
Other	8,724	7,655
At 31 Dec	761,204	543,523

Defined benefit pension plans

Market risk arises within our defined benefit pension plans to the extent that the obligations of the plans are not fully matched by assets with determinable cash flows.

For details of our defined benefit plans, including asset allocation, see Note 5 on the financial statements, and for pension risk management, see page 172.

Additional market risk measures applicable only to the parent company

HSBC Holdings monitors and manages foreign exchange risk and interest rate risk. In order to manage interest rate risk, HSBC Holdings uses the projected sensitivity of its NII to future changes in yield curves and the interest rate repricing gap tables.

During 2020, HSBC Holdings undertook a variety of liability management exercises, replacing approximately $11.5bn of short-term fixed-rate debt and their corresponding hedges with longer term fixed-rate debt of five to 10 years. As major interest rate markets remained at very low levels during 2020, we left this replacement debt unhedged. In addition to these exercises, approximately $4bn of debt matured in 2020 and we issued $2.5bn of new debt. The impact of this can be observed in the 'Repricing gap analysis of HSBC Holdings' table below, where the gap switched from a net liability to a net asset profile in the 'Up to 1 year' bucket, with a concurrent liability gap increase in the '5 to 10 years' bucket. Additionally it can be observed in the NII sensitivity tables, where NII now increases as interest rates rise.

Foreign exchange risk

HSBC Holdings' foreign exchange exposures derive almost entirely from the execution of structural foreign exchange hedges on behalf of the Group as its business-as-usual foreign exchange exposures are managed within tight risk limits. At 31 December 2020, HSBC Holdings had forward foreign exchange contracts of $11.2bn (2019: $10.5bn) to manage the Group's sterling structural foreign exchange exposure.

Sensitivity of net interest income

HSBC Holdings monitors NII sensitivity over a five-year time horizon, reflecting the longer-term perspective on interest rate risk management appropriate to a financial services holding company. These sensitivities assume that any issuance where HSBC Holdings has an option to reimburse at a future call date is called at this date. The table below sets out the effect on HSBC Holdings' future NII over a five-year time horizon of incremental 25bps parallel falls or rises in all yield curves at the beginning of each quarter during the 12 months from 1 January 2021.

The NII sensitivities shown are indicative and based on simplified scenarios. Immediate interest rate rises of 25bps and 100bps would increase projected NII for the 12 months to 31 December 2021 by $23m and $90m, respectively. Conversely, falls of 25bps and 100bps would decrease projected NII for the 12 months to 31 December 2021 by $23m and $96m, respectively.

NII sensitivity to an instantaneous change in yield curves (12 months)
	$	HK$	£	€	Other	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2021 to Dec 2021 (based on balance sheet at 31 December 2020)
+25bps	13	-	8	2	-	23
-25bps	(12)	-	(8)	(3)	-	(23)
+100bps	50	-	33	7	-	90
-100bps	(51)	-	(32)	(13)	-	(96)
Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019)
+25bps	(30)	-	7	2	-	(21)
-25bps	30	-	(7)	-	-	23
+100bps	(120)	-	30	(6)	-	(96)
-100bps	120	-	(21)	-	-	99

NII sensitivity to an instantaneous change in yield curves (5 years)
	Year 1	Year 2	Year 3	Year 4	Year 5	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2021 to Dec 2021 (based on balance sheet at 31 December 2020)
+25bps	23	40	43	39	31	176
-25bps	(23)	(42)	(46)	(41)	(32)	(184)
+100bps	91	159	171	156	126	702
-100bps	(95)	(169)	(189)	(169)	(139)	(761)
Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019)					-
+25bps	(21)	(14)	(13)	(14)	(17)	(79)
-25bps	23	12	8	9	13	65
+100bps	(96)	(64)	(53)	(54)	(72)	(339)
-100bps	99	61	41	38	43	282

The figures represent hypothetical movements in NII based on our projected yield curve scenarios, HSBC Holdings' current interest rate risk profile and assumed changes to that profile during the next five years.

The sensitivities represent our assessment of the change to a hypothetical base case based on a static balance sheet assumption, and do not take into account the effect of actions that could be taken to mitigate this interest rate risk.

Interest rate repricing gap table

The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included within the Group VaR, but is managed on a repricing gap basis. The following 'Repricing gap analysis of HSBC Holdings' table analyses the full-term structure of interest rate mismatches within HSBC Holdings' balance sheet where debt issuances are reflected based on either the next repricing date if floating rate or the maturity/call date (whichever is first) if fixed rate.

Repricing gap analysis of HSBC Holdings
		Total	Up to 1 year	From over 1 to 5 years	From over 5 to 10 years	More than 10 years	Non-interest bearing
	Footnotes	$m	$m	$m	$m	$m	$m
Cash at bank and in hand:
- balances with HSBC undertakings		2,913	2,913	-	-	-	-
Derivatives		4,698	-	-	-	-	4,698
Loans and advances to HSBC undertakings		75,696	25,610	22,190	20,398	2,000	5,498
Financial investments in HSBC undertakings		17,485	15,112	2,771	-	-	(398)
Investments in subsidiaries		156,485	5,381	7,660	1,500	-	141,944
Other assets		1,721	257	-	-	-	1,464
Total assets		258,998	49,273	32,621	21,898	2,000	153,206
Amounts owed to HSBC undertakings		(330)	(330)	-	-	-	-
Financial liabilities designated at fair values		(25,664)	(1,827)	(6,533)	(13,535)	(750)	(3,019)
Derivatives		(3,060)	-	-	-	-	(3,060)
Debt securities in issue		(64,029)	(9,932)	(29,026)	(22,063)	(2,000)	(1,008)
Other liabilities		(5,375)	-	-	-	-	(5,375)
Subordinated liabilities		(17,916)	-	(3,839)	(1,780)	(10,463)	(1,834)
Total equity		(142,624)	(1,464)	(11,439)	(9,198)		(120,523)
Total liabilities and equity		(258,998)	(13,553)	(50,837)	(46,576)	(13,213)	(134,819)
Off-balance sheet items attracting interest rate sensitivity			(20,324)	11,562	2,492	6,200	70
Net interest rate risk gap at 31 Dec 2020			15,396	(6,654)	(22,186)	(5,013)	18,457
Cumulative interest rate gap			15,396	8,742	(13,444)	(18,457)	-

Cash at bank and in hand:
- balances with HSBC undertakings		2,382	2,382	-	-	-	-
Derivatives		2,002	-	-	-	-	2,002
Loans and advances to HSBC undertakings		72,182	19,976	21,084	24,739	2,000	4,383
Financial investments in HSBC undertakings		16,106	13,054	3,006	-	-	46
Investments in subsidiaries		163,948	5,035	5,118	3,924	-	149,871
Other assets		1,095	102	-	-	-	993
Total assets		257,715	40,549	29,208	28,663	2,000	157,295
Amounts owed to HSBC undertakings		(464)	(464)	-	-	-	-
Financial liabilities designated at fair values		(30,303)	-	(14,628)	(14,698)	(750)	(227)
Derivatives		(2,021)	-	-	-	-	(2,021)
Debt securities in issue		(56,844)	(15,446)	(22,336)	(15,154)	(2,000)	(1,908)
Other liabilities		(2,203)	-	-	-	-	(2,203)
Subordinated liabilities		(18,361)	-	(2,000)	(2,543)	(11,284)	(2,534)
Total equity		(147,519)	(2,950)	(10,707)	(9,975)	-	(123,887)
Total liabilities and equity		(257,715)	(18,860)	(49,671)	(42,370)	(14,034)	(132,780)
Off-balance sheet items attracting interest rate sensitivity			(30,363)	16,789	6,796	6,469	309
Net interest rate risk gap at 31 Dec 2019	1		(8,674)	(3,674)	(6,911)	(5,565)	24,824
Cumulative interest rate gap			(8,674)	(12,348)	(19,259)	(24,824)	-

1 Investments in subsidiaries and equity have been allocated based on call dates for any callable bonds. The prior year figures have been amended to reflect this.

Market risk
	Page
Market risk management	198
Market risk in 2020	199
Trading portfolios	200
Non-trading portfolios	201
Market risk balance sheet linkages	203

Overview

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 management

Key developments in 2020

There were no material changes to our policies and practices for the management of market risk in 2020.

Governance and structure

The following diagram summarises the main business areas where trading and non-trading market risks reside, and the market risk measures used to monitor and limit exposures.

	Trading risk	Non-trading risk
	• Foreign exchange and commodities • Interest rates • Credit spreads • Equities	• Interest rates¹ • Credit spreads • Foreign exchange
	GBM	GBM, ALCM, CMB and WPB
	Value at risk \| Sensitivity \| Stress testing	Value at risk \| Sensitivity \| Stress testing

1 The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included in the Group value at risk. The management of this risk is described on page 181.

Where appropriate, we apply similar risk management policies and measurement techniques to both trading and non-trading portfolios. Our objective is to manage and control market risk exposures to optimise return on risk while maintaining a market profile consistent with our established risk appetite.

Market risk is managed and controlled through limits approved by the Group Chief Risk Officer for HSBC Holdings. These limits are allocated across business lines and to the Group's legal entities. The majority of HSBC's total value at risk ('VaR') and almost all trading VaR reside in GBM. Each major operating entity has an independent market risk management and control sub-function, which is responsible for measuring, monitoring and reporting market risk exposures against limits on a daily basis. Each operating entity is required to assess the market risks arising in its business and to transfer them either to its local Markets and Securities Services or Markets Treasury unit for management, or to separate books managed under the supervision of the local ALCO. The Traded Risk function enforces the controls around trading in permissible instruments approved for each site as well as changes that follow completion of the new product approval process. Traded Risk also restricts trading in the more complex derivative products to offices with appropriate levels of product expertise and robust control systems.

Key risk management processes

Monitoring and limiting market risk exposures

Our objective is to manage and control market risk exposures while maintaining a market profile consistent with our risk appetite.

We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, VaR and stress testing.

Sensitivity analysis

Sensitivity analysis measures the impact of individual market factor movements on specific instruments or portfolios, including interest rates, foreign exchange rates and equity prices. We use sensitivity measures to monitor the market risk positions within each risk type. Granular sensitivity limits are set for trading desks with consideration of market liquidity, customer demand and capital constraints, among other factors.

Value at risk

(Audited)

VaR is a technique for estimating potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and calculated for all trading positions regardless of how we capitalise them. In addition, we calculate VaR for non-trading portfolios to have a complete picture of risk. Where we do not calculate VaR explicitly, we use alternative tools as summarised in the 'Stress testing' section below.

Our models are predominantly based on historical simulation that incorporates the following features:

• historical market rates and prices, which are calculated with reference to foreign exchange rates, commodity prices, interest rates, equity prices and the associated volatilities;

• potential market movements that are calculated with reference to data from the past two years; and

• calculations to a 99% confidence level and using a one-day holding period.

The models also incorporate the effect of option features on the underlying exposures. The nature of the VaR models means that an increase in observed market volatility will lead to an increase in VaR without any changes in the underlying positions.

VaR model limitations

Although a valuable guide to risk, VaR is used with awareness of its limitations. For example:

• The use of historical data as a proxy for estimating future market moves may not encompass all potential market events, particularly those that are extreme in nature.

• The use of a one-day holding period for risk management purposes of trading and non-trading books assumes that this short period is sufficient to hedge or liquidate all positions.

• The use of a 99% confidence level by definition does not take into account losses that might occur beyond this level of confidence.

• VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not reflect intra-day exposures.

Risk not in VaR framework

The risks not in VaR ('RNIV') framework captures and capitalises material market risks that are not adequately covered in the VaR model.

Risk factors are reviewed on a regular basis and are either incorporated directly in the VaR models, where possible, or quantified through either the VaR-based RNIV approach or a stress test approach within the RNIV framework. While VaR-based RNIVs are calculated by using historical scenarios, stress-type RNIVs are estimated on the basis of stress scenarios whose severity is calibrated to be in line with the capital adequacy requirements. The outcome of the VaR-based RNIV approach is included in the overall VaR calculation but excluded from the VaR measure used for regulatory back-testing. In addition, the stressed VaR measure also includes risk factors considered in the VaR-based RNIV approach.

Stress-type RNIVs include a deal contingent derivatives capital charge to capture risk for these transactions and a de-peg risk measure to capture risk to pegged and heavily managed currencies.

Stress testing

Stress testing is an important procedure that is integrated into our market risk management framework to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. In such scenarios, losses can be much greater than those predicted by VaR modelling.

Stress testing is implemented at legal entity, regional and overall Group levels. A set of scenarios is used consistently across all regions within the Group. The risk appetite around potential stress losses for the Group is set and monitored against a referral limit.

Market risk reverse stress tests are designed to identify vulnerabilities in our portfolios by looking for scenarios that lead to loss levels considered severe for the relevant portfolio. These scenarios may be quite local or idiosyncratic in nature, and complement the systematic top-down stress testing.

Stress testing and reverse stress testing provide senior management with insights regarding the 'tail risk' beyond VaR, for which our appetite is limited.

Trading portfolios

Trading portfolios comprise positions held for client servicing and market-making, with the intention of short-term resale and/or to hedge risks resulting from such positions.

Back-testing

We routinely validate the accuracy of our VaR models by back-testing the VaR metric against both actual and hypothetical profit and loss. Hypothetical profit and loss excludes non-modelled items such as fees, commissions and revenue of intra-day transactions.

The number of back-testing exceptions is used to gauge how well the models are performing. We consider enhanced internal monitoring of a VaR model if more than five profit exceptions or more than five loss exceptions occur in a 250-day period.

We back-test our VaR at set levels of our Group entity hierarchy.

Market risk in 2020

Global financial conditions worsened rapidly with the onset of the Covid-19 outbreak from mid-February 2020. Market volatility reached extreme levels across most asset classes and equity prices fell sharply. In credit markets, spreads and yields reached multi-year highs. The gold market experienced Covid-19-related disruption in refining and transportation, affecting the relative pricing of gold futures contracts. Oil prices collapsed due to rising oversupply as demand reduced materially from the economic slowdown. Financial markets stabilised from April onwards, as governments in several developed countries announced economic recovery programmes and key central banks intervened to provide liquidity and support asset prices. Global equity markets substantially recovered from their losses in March and credit spreads reverted towards pre-Covid-19 levels. During the second half of 2020 markets remained susceptible to further bouts of volatility triggered by increases in Covid-19 cases and various geopolitical risks. Market sentiment improved after positive vaccine news and the US presidential elections in November 2020, adding momentum to the performance of risky assets.

We managed market risk prudently during 2020. Sensitivity exposures remained within appetite as the business pursued its core market-making activity in support of our customers during the outbreak. We also undertook hedging activities to protect the business from potential future deterioration in credit conditions. Market risk continued to be managed using a complementary set of exposure measures and limits, including stress and scenario analysis.

Trading portfolios

Value at risk of the trading portfolios

Trading VaR was predominantly generated by the

Markets and Securities Services business. The Fixed Income business continued to be the key driver of trading VaR up to the end of 2020, although with a lower contribution than in the first half of the year. Interest rate risks from market-making activities were the main drivers of trading VaR.

Trading VaR at 31 December 2020 was higher than at
31 December 2019. The moderate increase in trading VaR during the year and a spike in the first half of the year were due primarily to higher levels of market volatility reached in March and April 2020, as a result of the economic impact of the Covid-19 outbreak. Trading VaR did not change significantly during the second half of the year and VaR remained in line with the normal range observed in 2019. Overall market risk in the trading book was actively managed during the year.

The daily levels of total trading VaR during 2020 are set out in the graph below.

Daily VaR (trading portfolios), 99% 1 day ($m)

The Group trading VaR for the year is shown in the table below.

Trading VaR, 99% 1 day¹
(Audited)
	Foreign exchange and commodity	Interest rate	Equity	Credit spread	Portfolio diversification²	Total³
	$m	$m	$m	$m	$m	$m
Balance at 31 Dec 2020	13.7	20.3	21.5	24.3	(36.4)	43.4
Average	11.0	26.6	27.3	21.6	(38.3)	48.1
Maximum	25.7	43.5	42.0	44.1		69.3
Minimum	5.6	19.1	13.6	12.6		33.6

Balance at 31 Dec 2019	7.7	28.2	15.7	15.2	(26.4)	40.3
Average	6.9	29.9	16.2	23.7	(29.0)	47.8
Maximum	13.5	36.5	24.9	33.2		59.3
Minimum	4.1	22.9	12.4	11.7		33.3

1 Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.

2 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types - such as interest rate, equity and foreign exchange - together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.

3 The total VaR is non-additive across risk types due to diversification effects.

Back-testing

During 2020, the Group experienced three loss back-testing exceptions against actual profit and losses, with no additional back-testing exceptions in the second half of 2020. The Group also experienced 10 loss back-testing exceptions against hypothetical profit and losses, including one back-testing exception in the second half of the year. The high number of hypothetical back-testing exceptions that occurred from March 2020 was primarily due to the extreme market volatility resulting from the economic impact of the Covid-19 outbreak, which was significantly greater than the volatility used in the model calibration.

In recognition of the exceptional market environment in 2020, the PRA granted an exemption from the higher VaR multiplier for market risk RWA purposes arising from six out of 10 VaR back-testing exceptions that occurred after the onset of the Covid-19 outbreak. These six back-testing exceptions were granted on the basis that they were not the result of inherent model weaknesses but were driven by larger than normal market volatility in the first half of 2020 caused by the Covid-19 outbreak.

The hypothetical profit and loss reflects the profit and loss that would be realised if positions were held constant from the end of one trading day to the end of the next. This measure of profit and loss does not align with how risk is dynamically hedged, and is not therefore indicative of the actual performance of the business.

Accordingly, of the 10 loss back-testing exceptions against hypothetical profit and losses, only two corresponded to actual profit and loss exceptions.

Despite the high number of loss exceptions, performance of the VaR model was in line with expectations when considered in the context of the extraordinary market movements observed in March and April 2020. During this period, market risk continued to be managed using a complementary set of exposure measures and limits, including stress and scenario analysis. This ensured that the business was prudently managed and performed well across the period.

Non-trading portfolios

Non-trading portfolios comprise positions that primarily arise from

the interest rate management of our retail and commercial banking assets and liabilities, financial investments measured at fair value through other comprehensive income, debt instruments measured at amortised cost, and exposures arising from our insurance operations.

Value at risk of the non-trading portfolios

The VaR for non-trading activity at 31 December 2020 was higher than at 31 December 2019. The increase arose primarily from the effect of higher levels of market volatility observed in March and April 2020 due to the economic impact of the Covid-19 outbreak. Although the size of interest rate and credit exposures did not change significantly during the year, increased volatility of yields and spreads led to an increase in VaR and a reduction of the diversification benefit effects across these exposures.

Non-trading VaR includes the interest rate risk in the banking book transferred to and managed by Markets Treasury and the non-trading financial instruments held by Markets Treasury. The management of interest rate risk in the banking book is described further in the 'Net interest income sensitivity' section.

The daily levels of total non-trading VaR over the last year are set out in the graph below.

Daily VaR (non-trading portfolios), 99% 1 day ($m)

The Group non-trading VaR for the year is shown in the table below.

Non-trading VaR, 99% 1 day
(Audited)
	Interest rate	Credit spread	Portfolio diversification¹	Total²
	$m	$m	$m	$m
Balance at 31 Dec 2020	166.6	87.0	(5.7)	247.8
Average	150.2	82.5	(42.0)	190.7
Maximum	196.4	133.4	-	274.6
Minimum	59.0	44.2	-	79.7

Balance at 31 Dec 2019	96.2	62.5	(28.2)	130.5
Average	65.9	44.2	(25.6)	84.5
Maximum	100.1	81.2	0	132.8
Minimum	49.2	26.6	0	60.9

1 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types - such as interest rate, equity and foreign exchange - together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.

2 The total VaR is non-additive across risk types due to diversification effects.

Non-trading VaR excludes equity risk on securities held at fair value, structural foreign exchange risk and interest rate risk on fixed-rate securities issued by HSBC Holdings. HSBC's management of market risks in non-trading books is described further in the Treasury Risk section.

Market risk balance sheet linkages

The following balance sheet lines in the Group's consolidated position are subject to market risk:

Trading assets and liabilities

The Group's trading assets and liabilities are in almost all cases originated by GBM. These assets and liabilities are treated as traded risk for the purposes of market risk management, other than a limited number of exceptions, primarily in Global Banking where the short-term acquisition and disposal of the assets are linked to other non-trading-related activities such as loan origination.

Derivative assets and liabilities

We undertake derivative activity for three primary purposes: to create risk management solutions for clients, to manage the portfolio risks arising from client business, and to manage and hedge our own risks. Most of our derivative exposures arise from sales and trading activities within GBM. The assets and liabilities included in trading VaR give rise to a large proportion of the income included in net income from financial instruments held for trading or managed on a fair value basis. Adjustments to trading income such as valuation adjustments are not measured by the trading VaR model.

For information on the accounting policies applied to financial instruments at fair value, see Note 1 on the financial statements

Resilience risk

Overview

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 management

Key developments in 2020

In line with the increasing expectations from customers, regulators and the Board, and in response to a continually evolving threat landscape that the wider industry faces, we combined Operational Risk and Resilience Risk to form a new Operational and Resilience Risk sub-function. This sub-function provides robust non-financial risk steward oversight of the management of risk by the Group businesses, functions, legal entities and critical business services. It also provides effective and timely independent challenge. We carried out several initiatives during the year:

• We developed regional hubs accountable for core Operational and Resilience Risk activities.

• We implemented teams aligned to businesses and functions, which were focused on emerging risks as well as material products and services.

• We deployed risk management oversight of the most material transformation programmes across the Group.

• We implemented central services including governance, reporting and transformation.

• We created a stand-alone assurance capability that provides independent review and evaluation of end-to-end processes, risks and key controls.

We prioritise our efforts on material risks and areas undergoing strategic growth, aligning our location strategy to this need. We also remotely provide oversight and stewardship, including support of chief risk officers, in territories where we have no physical presence.

Governance and structure

The Operational and Resilience Risk target operating model provides a globally consistent view across resilience risks, strengthening our risk management oversight while operating effectively as part of a simplified non-financial risk structure. We view resilience risk across seven risk types related to: third parties and supply chains; information, technology and cybersecurity; payments and manual processing; physical security; business interruption and contingency risk; building unavailability; and workplace safety.

A principal senior management meeting for operational and resilience risk governance is the Non-Financial Risk Management Board, chaired by the Group Chief Risk Officer, with an escalation path to the Group Risk Management Meeting.

Key risk management processes

Operational resilience is our ability to anticipate, prevent, adapt, respond to, recover and learn from internal or external disruption, protecting customers, the markets we operate in and economic stability. Resilience is determined by assessing whether we are able to continue to provide our most important services, within an agreed level. We accept we will not be able to prevent all disruption but we prioritise investment to continually improve the response and recovery strategies for our most important business services.

Business operations continuity

As a result of the Covid-19 outbreak, we successfully implemented business continuity responses and continue to maintain the majority of service level agreements. We did not experience 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 colleagues remains unchanged and no significant incidents impacted our buildings or people.

Regulatory compliance risk

Overview

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, permissions and rules.

Regulatory compliance risk management

Key developments in 2020

In 2020, we made changes to our wider approach to the governance and structure of the Compliance function and continued to raise standards related to the conduct of our business, as set out below.

Governance and structure

In May, we introduced a new operating model to transform the Compliance function. We created a new Group capability called Group Regulatory Conduct, which was formed from the regulatory compliance and regulatory affairs capabilities, and the monitor liaison office team. The Group Head of Regulatory Conduct continues to report to the Group Chief Compliance Officer. The Group Regulatory Conduct capability works with the newly appointed regional chief compliance officers and their respective teams to help them identify and manage regulatory compliance risks across the Group. They also work together to ensure good conduct outcomes and provide enterprise-wide support on the regulatory agenda.

Key risk management processes

The Group Regulatory Conduct capability is responsible for setting global policies, standards and risk appetite to guide the Group's management of regulatory compliance. It also devises clear frameworks and support processes to protect against regulatory compliance risks. The capability provides oversight, review and challenge to the regional chief compliance officers and their teams to help them identify, assess and mitigate regulatory compliance risks, where required. The Group's regulatory compliance risk policies are regularly reviewed. Global policies and procedures require the prompt identification and escalation of any actual or potential regulatory breach. Relevant reportable events are escalated to the Group RMM and the GRC, as appropriate.

Conduct of business

In 2020, we continued to promote and encourage good conduct through our people's behaviour and decision making to deliver fair outcomes for our customers, and to maintain financial market integrity. During 2020:

• We continued to champion a strong conduct and customer-focused culture. We implemented a number of measures throughout the Covid-19 outbreak to support our customers in financial difficulties. We also maintained service and supported colleagues in unprecedented conditions.

• We continued our focus on culture and behaviours, adapting our controls and risk management processes to reflect significant levels of remote working throughout the year.

• We continued to invest significant resources to improve our compliance systems and controls relating to our activities in Global Markets and to ensure market integrity. These included enhancements to: pricing and disclosure, order management and trade execution; trade; voice and audio surveillance; front office supervision; and the enforcement and discipline framework for employee misconduct.

• We continued to emphasise - and worked to create - an environment in which employees are encouraged and feel safe to speak up. We placed a particular focus on the importance of well-being during the pandemic through regular top-down communications, virtual town halls, videos and podcasts.

• We continued to embed conduct within our business line processes. We also considered and sought to mitigate the conduct impacts of the Group's strategic transformation programme and other key business change programmes, including those relating to the UK's departure from the EU and the Ibor transition.

• We delivered our sixth annual global mandatory training course on conduct to reinforce the importance of conduct for all colleagues.

• We are refreshing our approach to conduct arrangements across the Group with a view to ensuring that the arrangements remain appropriate for the nature of our business.

The Board continues to maintain oversight of conduct matters through the GRC.

Further details can be found under the 'Our conduct' section of www.hsbc.com/our-approach/risk-and-responsibility.

Financial crime risk

Overview

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.

Financial crime risk management

Key developments in 2020

In 2020, we continued to strengthen our fight against financial crime and to enhance our financial crime risk management capability. Amid the challenges posed by the Covid-19 outbreak, we introduced a number of financial crime risk management measures during this period to support the business and our customers. These included:

• We supported the most vulnerable customers and those in financial difficulty, including by increasing the awareness of fraud during this period.

• The Compliance function proactively engaged with other parts of the organisation to ensure financial crime risks were considered as part of Covid-19-related decisions.

• Compliance colleagues were seconded to other parts of the organisation to assist with supporting the establishment of government relief measures.

• We supported customers and the organisation through policy exceptions, including by allowing email instructions instead of face-to-face meetings, and introducing virtual onboarding.

We consistently review the effectiveness of our financial crime risk management framework, which includes consideration of geopolitical and wider economic factors. The sanctions regulatory environment remained changeable and uncertain during the course of 2020 due to the ongoing geopolitical tensions between the US and China, the end of the transition period following the UK's departure from the EU, and the increasing divergence in sanctions policies between the US and the EU on Iran and Russia. Our policy is to comply with all applicable sanctions regulations in the jurisdictions in which we operate, and we continue to monitor the geopolitical landscape for ongoing developments. We also continued to progress several key financial crime risk management initiatives, including:

• We continued to strengthen our anti-fraud capabilities, focusing on threats posed by new and existing technologies, and have delivered a comprehensive fraud training programme across the Group.

• We continued to invest in the use of artificial intelligence ('AI') and advanced analytics techniques to manage financial crime risk, and we published our principles for the ethical use of Big Data and AI.

• We continued to work on strengthening our ability to combat money laundering and terrorist financing. In particular, we focused on the use of technology to enhance our risk management processes while minimising the impact to the customer. We also continued to develop our approach of intelligence-led financial crime risk management, in part, through enhancements to our automated transaction monitoring systems.

Governance and structure

Since establishing a global framework of financial crime risk management committees in 2018, we have continued to strengthen and review the effectiveness of our governance framework to manage financial crime risk. Formal governance committees are held across all countries, territories, regions and global businesses, and are chaired by the respective chief executive officers. They help to enable compliance with the letter and the spirit of all applicable financial crime laws and regulations, as well as our own standards, values and policies relating to financial crime risks. At a Group level, the Financial Crime Risk Management Meeting, chaired by the Group Chief Compliance Officer, has served as the pinnacle of this governance structure, ultimately responsible for the management of financial crime risk. As a reflection of the growing maturity and effectiveness of our financial crime risk management, this meeting was integrated with the Group Risk Management Meeting in January 2021. During the course of 2021, we will review the management of financial crime risk across the Group to identify other areas that could be simplified.

During 2020, we redesigned and delivered an integrated operating model for our Compliance function, with the accompanying restructure providing greater accountability to our regional Compliance teams. These teams, led by regional chief compliance officers, will support the Group Chief Compliance Officer in aligning the way in which we manage all compliance risks, including financial crime risk, to the needs and aims of the wider business. They will also support making our compliance risk management processes and procedures more efficient and effective.

Key risk management processes

We continued to deliver a programme to further enhance the policies and controls around identifying and managing the risks of bribery and corruption across our business. Recognising that the fight against financial crime is a constant challenge, we maintained our investment in operational controls and new technology to deter and detect criminal activity in the banking system. We continued to simplify our governance and policy frameworks, and our management information reporting process, which demonstrates the effectiveness of our financial crime controls. We remain committed to enhancing our risk assessment capabilities and to delivering more proactive risk management, including our ongoing investment in the next generation of capabilities to fight financial crime by applying advanced analytics and AI.

We are committed to working in partnership with the wider industry and the public sector in managing financial crime risk, protecting the integrity of the financial system, and helping to protect the communities we serve. We are a strong advocate of public-private partnerships and participate in a number of information-sharing initiatives around the world. We are a constructive partner to national governments and international standard setters, and support reforms being undertaken in key markets such as the UK and the EU where the Group is represented on the joint public-private Economic Crime Strategic Board and the Centre for European Policy Studies taskforce on anti-money laundering, respectively. We also work closely with peer banks in Singapore, and with the Monetary Authority of Singapore. In the US, we are a member of the Bank Secrecy Act Advisory Group, which has put forward recommendations for reform that have been supported by the US Treasury and the Financial Crimes Enforcement Network.

We have been an advocate for a more effective international framework for managing financial crime risk, whether through engaging directly with intergovernmental bodies such as the Financial Action Task Force, or via our key role in industry groups such as the Wolfsberg Group and the Institute of International Finance.

Skilled Person/Independent Consultant

In December 2012, HSBC Holdings entered into a number of agreements, including an undertaking with the UK Financial Services Authority (replaced with a Direction issued by the UK Financial Conduct Authority ('FCA') in 2013 and again in 2020), as well as a cease-and-desist order with the US Federal Reserve Board ('FRB'), both of which contained certain forward-looking anti-money laundering ('AML') and sanctions-related obligations. HSBC also agreed to retain an independent compliance monitor (who was, for FCA purposes, a 'Skilled Person' under section 166 of the Financial Services and Markets Act and, for FRB purposes, an 'Independent Consultant') to produce periodic assessments of the Group's AML and sanctions compliance programme.

In 2020, HSBC's engagement with the independent compliance monitor, acting in his roles as both Skilled Person and Independent Consultant, concluded. The role of FCA Skilled Person was assigned to a new individual in the second quarter of 2020. Separately, a new FRB Independent Consultant will be appointed pursuant to the cease-and-desist order.

The new Skilled Person has a narrower mandate to assess the remaining areas that require further work in order for HSBC to transition fully to business-as-usual financial crime risk management. The review is ongoing and is expected to complete later in 2021. The new Independent Consultant is expected to carry out the eighth annual review for the FRB during 2021.

In accordance with the Direction issued by the FCA to HSBC Holdings in 2020, the Group Risk Committee retains oversight of matters relating to anti-money laundering, sanctions, terrorist financing and proliferation financing. Throughout 2020, the Group Risk Committee received regular updates on the Skilled Person's and the Independent Consultant's reviews.

Model risk

Overview

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.

Key developments in 2020

In 2020, we carried out a number of initiatives to further develop and embed the Model Risk Management sub-function, including:

• We appointed a Group Chief Model Risk Officer, which is a senior role reporting to the Group Chief Risk Officer.

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

• Working with the businesses and functions, new model risk controls were developed in the risk control library. These controls formed the basis for model risk control assessments that have been implemented for businesses and functions.

• We updated the target operating model for Model Risk Management, referring to internal and industry best practice and added risk stewards for key businesses, functions and legal vehicles. The risk stewards will also provide close monitoring of changes in model behaviour, working closely with business and function model owners and sponsors.

• The independent model validation team began a transformation programme that will use advanced analytics and new workflow tools, with the objective of providing a more risk-based, efficient and effective management of model validation processes.

• The consequences of the Covid-19 outbreak on model performance and reliability resulted in enhanced monitoring of models and related model adjustments. Dramatic changes to model inputs such as GDP and unemployment rates made the model results unreliable. Model performance limitations have been most pronounced for IFRS 9 models, which calculate expected credit losses. As a result, greater reliance has been placed on management underlays and overlays based on business judgement to derive expected credit losses.

• New IFRS 9 models for portfolios that required the largest model overlays during 2020 have been redeveloped, validated and implemented in the fourth quarter of 2020. Limited new data was available for the use in the recalibrations, therefore judgemental post-model adjustments were required to allow for the economic effects of the pandemic not captured by the models.

Governance and structure

We placed greater focus on our model risk activities during 2020, and to reflect this, we elevated Model Risk Management to a function in its own right within the Global Risk structure. Previously, structured as a sub-function within the Global Risk Strategy function, the team now reports directly to the Group Chief Risk Officer. Regional Model Risk Management teams support and advise all areas of the Group.

Key risk management processes

We use a variety of modelling approaches, including regression, simulation, sampling, machine learning and judgemental scorecards for a range of business applications. These activities include customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting. Global responsibility for managing model risk is delegated from the RMM to the Group Model Risk Committee, which is chaired by the Group Chief Risk Officer. This committee regularly reviews our model risk management policies and procedures, and requires the first line of defence to demonstrate comprehensive and effective controls based on a library of model risk controls provided by Model Risk Management.

Model Risk Management also reports on model risk to senior management on a regular basis through the use of the risk map, risk appetite metrics and top and emerging risks.

We regularly review the effectiveness of these processes, including the model oversight committee structure, to help ensure appropriate understanding and ownership of model risk is embedded in the businesses and functions.

Insurance manufacturing operations risk
	Page
Overview	206
Insurance manufacturing operations risk management	206
Measurement	207
Key risk types	209
- Market risk	209
- Credit risk	210
- Capital and liquidity risk	210
- Insurance risk	211

Overview

The majority of the risk in our insurance business derives from manufacturing activities and can be categorised as financial risk or insurance risk. Financial risks include market risk, credit risk and liquidity risk. Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to HSBC, the issuer.

HSBC's bancassurance model

We operate an integrated bancassurance model that provides insurance products principally for customers with whom we have a banking relationship.

The insurance contracts we sell relate to the underlying needs of our banking customers, which we can identify from our point-of-sale contacts and customer knowledge. For the products we manufacture, the majority of sales are of savings, universal life and credit and term life contracts.

We choose to manufacture these insurance products in HSBC subsidiaries based on an assessment of operational scale and risk appetite. Manufacturing insurance allows us to retain the risks and rewards associated with writing insurance contracts by keeping part of the underwriting profit and investment income within the Group.

We have life insurance manufacturing subsidiaries in eight countries and territories, which are Hong Kong, France, Singapore, the UK, mainland China, Malta, Mexico and Argentina. We also have a life insurance manufacturing associate in India.

Where we do not have the risk appetite or operational scale to be an effective insurance manufacturer, we engage with a small number of leading external insurance companies in order to provide insurance products to our customers through our banking network and direct channels. These arrangements are generally structured with our exclusive strategic partners and earn the Group a combination of commissions, fees and a share of profits. We distribute insurance products in all of our geographical regions.

Insurance products are sold worldwide through branches, direct channels and third-party distributors.

Insurance manufacturing operations risk management

Key developments in 2020

There were no material changes to the insurance risk management framework in 2020. Policies and practices for the management of risks associated with the selling of insurance contracts outside of bancassurance channels were enhanced in response to this being an increasing area of importance for the insurance business. Also, enhancements were made to the capital risk framework for insurance operations to better align to the Group's capital risk framework.

Governance and structure

(Audited)

Insurance risks are managed to a defined risk appetite, which is aligned to the Group's risk appetite and risk management framework, including its three lines of defence model. For details of the Group's governance framework, see page 107. The Global Insurance Risk Management Meeting oversees the control framework globally and is accountable to the WPB Risk Management Meeting on risk matters relating to the insurance business.

The monitoring of the risks within our insurance operations is carried out by insurance risk teams. Specific risk functions, including Wholesale Credit and Market Risk, Operational and Resilience Risk, and Compliance, support Insurance Risk teams in their respective areas of expertise.

Stress and scenario testing

(Audited)

Stress testing forms a key part of the risk management framework for the insurance business. We participate in local and Group-wide regulatory stress tests, as well as internally-developed stress and scenario tests, including Group internal stress test exercises.

These have highlighted that a key risk scenario for the insurance business is a prolonged low interest-rate environment. In order to mitigate the impact of this scenario, the insurance operations have taken a number of actions, including repricing some products to reflect lower interest rates, launching less capital intensive products, investing in more capital efficient assets and developing investment strategies to optimise the expected returns against the cost of economic capital.

Key risk management processes

Market risk

(Audited)

All our insurance manufacturing subsidiaries have market risk mandates that specify the investment instruments in which they are permitted to invest and the maximum quantum of market risk that they may retain. They manage market risk by using, among others, some or all of the techniques listed below, depending on the nature of the contracts written:

• We are able to adjust bonus rates to manage the liabilities to policyholders for products with discretionary participating features ('DPF'). The effect is that a significant portion of the market risk is borne by the policyholder.

• We use asset and liability matching where asset portfolios are structured to support projected liability cash flows. The Group manages its assets using an approach that considers asset quality, diversification, cash flow matching, liquidity, volatility and target investment return. It is not always possible to match asset and liability durations due to uncertainty over the receipt of all future premiums, the timing of claims and because the forecast payment dates of liabilities may exceed the duration of the longest dated investments available. We use models to assess the effect of a range of future scenarios on the values of financial assets and associated liabilities, and ALCOs employ the outcomes in determining how best to structure asset holdings to support liabilities.

• We use derivatives to protect against adverse market movements to better match liability cash flows.

• For new products with investment guarantees, we consider the cost when determining the level of premiums or the price structure.

• We periodically review products identified as higher risk, such as those that contain investment guarantees and embedded optionality features linked to savings and investment products, for active management.

• We design new products to mitigate market risk, such as changing the investment return sharing portion between policyholders and the shareholder.

• We exit, to the extent possible, investment portfolios whose risk is considered unacceptable.

• We reprice premiums charged on new contracts to policyholders.

Credit risk

(Audited)

Our insurance manufacturing subsidiaries are responsible for the credit risk, quality and performance of their investment portfolios. Our assessment of the creditworthiness of issuers and counterparties is based primarily upon internationally recognised credit ratings and other publicly available information.

Investment credit exposures are monitored against limits by our insurance manufacturing subsidiaries and are aggregated and reported to the Group Insurance Credit Risk and Group Credit Risk functions. Stress testing is performed on investment credit exposures using credit spread sensitivities and default probabilities.

We use a number of tools to manage and monitor credit risk. These include a credit report containing a watch-list of investments with current credit concerns, primarily investments that may be at risk of future impairment or where high concentrations to counterparties are present in the investment portfolio. Sensitivities to credit spread risk are assessed and monitored regularly.

Liquidity risk

(Audited)

Risk is managed by cash flow matching and maintaining sufficient cash resources, investing in high credit-quality investments with deep and liquid markets, monitoring investment concentrations and restricting them where appropriate, and establishing committed contingency borrowing facilities.

Insurance manufacturing subsidiaries complete quarterly liquidity risk reports and an annual review of the liquidity risks to which they are exposed.

Insurance risk

HSBC Insurance primarily uses the following techniques to manage and mitigate insurance risk:

• a formalised product approval process covering product design, pricing and overall proposition management (for example, management of lapses by introducing surrender charges);

• underwriting policy;

• claims management processes; and

• reinsurance which cedes risks above our acceptable thresholds to an external reinsurer thereby limiting our exposure.

•

Insurance manufacturing operations risk in 2020

Measurement

(Audited)

The risk profile of our insurance manufacturing businesses is measured using an economic capital approach. Assets and liabilities are measured on a market value basis, and a capital requirement is defined to ensure that there is a less than one-in-200 chance of insolvency over a one-year time horizon, given the risks to which the businesses are exposed. The methodology for the economic capital calculation is largely aligned to the pan-European Solvency II insurance capital regulations. The economic capital coverage ratio (economic net asset value divided by the economic capital requirement) is a key risk appetite measure.

The Covid-19 outbreak caused sales of insurance products to be lower than forecast in 2020, although we responded by expanding digital and remote servicing capabilities. To date there has been limited impact on claims or lapse behaviours, although this remains under close monitoring. The largest effect on insurance entities came from volatility in the financial markets and the material fall in interest rates, which impact levels of capital and profitability. Businesses responded by executing de-risking strategies followed by subsequent re-risking of positions as markets recovered. Enhanced monitoring of risks and pricing conditions continues.

The following tables show the composition of assets and liabilities by contract type and by geographical region.

Balance sheet of insurance manufacturing subsidiaries by type of contract¹
(Audited)
		With DPF	Unit-linked	Other contracts²	Shareholder assets and liabilities	Total
	Footnotes	$m	$m	$m	$m	$m
Financial assets		84,478	8,802	18,932	8,915	121,127
- trading assets		-	-	-	-	-
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss		26,002	8,558	3,508	1,485	39,553
- derivatives		262	3	13	3	281
- financial investments at amortised cost		39,891	30	13,984	4,521	58,426
- financial investments at fair value through other comprehensive income		12,531	-	459	1,931	14,921
- other financial assets	3	5,792	211	968	975	7,946
Reinsurance assets		2,256	65	1,447	2	3,770
PVIF	4	-	-	-	9,435	9,435
Other assets and investment properties		2,628	1	227	721	3,577
Total assets		89,362	8,868	20,606	19,073	137,909
Liabilities under investment contracts designated at fair value		-	2,285	4,100	-	6,385
Liabilities under insurance contracts		84,931	6,503	15,827	-	107,261
Deferred tax	5	145	5	25	1,400	1,575
Other liabilities		-	-	-	7,244	7,244
Total liabilities		85,076	8,793	19,952	8,644	122,465
Total equity		-	-	-	15,444	15,444
Total liabilities and equity at 31 Dec 2020		85,076	8,793	19,952	24,088	137,909

Financial assets		73,929	7,333	17,514	8,269	107,045
- trading assets		-	-	-	-	-
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss		21,652	7,119	3,081	2,426	34,278
- derivatives		202	(6)	9	3	208
- financial investments at amortised cost		35,299	18	13,436	4,076	52,829
- financial investments at fair value through other comprehensive income		12,447	-	445	1,136	14,028
- other financial assets	3	4,329	202	543	628	5,702
Reinsurance assets		2,208	72	1,563	1	3,844
PVIF	4	-	-	-	8,945	8,945
Other assets and investment properties		2,495	2	211	602	3,310
Total assets		78,632	7,407	19,288	17,817	123,144
Liabilities under investment contracts designated at fair value		-	2,011	3,881	-	5,892
Liabilities under insurance contracts		77,147	6,151	14,141	-	97,439
Deferred tax	5	197	23	6	1,297	1,523
Other liabilities		-	-	-	4,410	4,410
Total liabilities		77,344	8,185	18,028	5,707	109,264
Total equity		-	-	-	13,879	13,879
Total liabilities and equity at 31 Dec 2019		77,344	8,185	18,028	19,586	123,143

1 Balance sheet of insurance manufacturing operations are shown before elimination of inter-company transactions with HSBC non-insurance operations.

2 'Other Contracts' includes term insurance, credit life insurance, universal life insurance and investment contracts not included in the 'Unit-linked' or 'With DPF' columns.

3 Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.

4 Present value of in-force long-term insurance business.

5 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.

Balance sheet of insurance manufacturing subsidiaries by geographical region^1,2
(Audited)
		Europe	Asia	Latin America	Total
	Footnotes	$m	$m	$m	$m
Financial assets		34,768	85,259	1,100	121,127
- trading assets		-	-	-	-
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss		17,184	22,099	270	39,553
- derivatives		107	174	-	281
- financial investments - at amortised cost		531	57,420	475	58,426
- financial investments - at fair value through other comprehensive income		13,894	706	321	14,921
- other financial assets	3	3,052	4,860	34	7,946
Reinsurance assets		245	3,521	4	3,770
PVIF	4	884	8,390	161	9,435
Other assets and investment properties		1,189	2,332	56	3,577
Total assets		37,086	99,502	1,321	137,909
Liabilities under investment contracts designated at fair value		1,288	5,097	-	6,385
Liabilities under insurance contracts		31,153	74,994	1,114	107,261
Deferred tax	5	204	1,348	23	1,575
Other liabilities		2,426	4,800	18	7,244
Total liabilities		35,071	86,239	1,155	122,465
Total equity		2,015	13,263	166	15,444
Total liabilities and equity at 31 Dec 2020		37,086	99,502	1,321	137,909

Financial assets		31,613	74,237	1,195	107,045
- trading assets		-	-	-	-
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss		15,490	18,562	226	34,278
- derivatives		84	124	-	208
- financial investments - at amortised cost		100	52,186	543	52,829
- financial investments - at fair value through other comprehensive income		13,071	582	375	14,028
- other financial assets	3	2,868	2,783	51	5,702
Reinsurance assets		237	3,604	3	3,844
PVIF	4	945	7,841	159	8,945
Other assets and investment properties		1,085	2,176	49	3,310
Total assets		33,880	87,858	1,406	123,144
Liabilities under investment contracts designated at fair value		1,139	4,753	-	5,892
Liabilities under insurance contracts		28,437	67,884	1,118	97,439
Deferred tax	5	229	1,275	19	1,523
Other liabilities		2,212	2,172	26	4,410
Total liabilities		32,017	76,084	1,163	109,264
Total equity		1,862	11,774	243	13,879
Total liabilities and equity at 31 Dec 2019		33,879	87,858	1,406	123,143

1 HSBC has no insurance manufacturing subsidiaries in the Middle East and North Africa or North America.

2 Balance sheet of insurance manufacturing operations are shown before elimination of inter-company transactions with HSBC non-insurance operations.

3 Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.

4 Present value of in-force long-term insurance business.

5 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.

Key risk types

The key risks for the insurance operations are market risks, in particular interest rate and equity, and credit risks, followed by insurance underwriting risk and operational risks. Liquidity risk, while significant for the bank, is minor for our insurance operations.

Market risk

(Audited)

Description and exposure

Market risk is the risk of changes in market factors affecting HSBC's capital or profit. Market factors include interest rates, equity and growth assets and foreign exchange rates.

Our exposure varies depending on the type of contract issued. Our most significant life insurance products are contracts with discretionary participating features ('DPF') issued in France and Hong Kong. These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in bonds, with a proportion allocated to other asset classes to provide customers with the potential for enhanced returns.

DPF products expose HSBC to the risk of variation in asset returns, which will impact our participation in the investment performance.

In addition, in some scenarios the asset returns can become insufficient to cover the policyholders' financial guarantees, in which case the shortfall has to be met by HSBC. Amounts are held against the cost of such guarantees, calculated by stochastic modelling.

The cost of such guarantees is accounted for as a deduction from the present value of in-force ('PVIF') asset, unless the cost of such guarantees is already explicitly allowed for within the insurance contract liabilities under the local rules.

The following table shows the total reserve held for the cost of guarantees, the range of investment returns on assets supporting these products and the implied investment return that would enable the business to meet the guarantees.

The cost of guarantees increased to $1,105m (2019: $693m) primarily due to the reduction in swap rates in France and Hong Kong, partly offset by the impact of modelling changes in France and Hong Kong.

For unit-linked contracts, market risk is substantially borne by the

policyholder, but some market risk exposure typically remains, as fees earned are related to the market value of the linked assets.

Financial return guarantees
(Audited)
	2020			2019
	Investment returns implied by guarantee	Long-term investment returns on relevant portfolios	Cost of guarantees	Investment returns implied by guarantee	Long-term investment returns on relevant portfolios	Cost of guarantees
	%	%	$m	%	%	$m
Capital	0.0	0.7-3.2	277	0.0	1.3-3.9	110
Nominal annual return	0.1-1.9	2.3-3.6	515	0.1-2.0	3.0-4.5	118
Nominal annual return	2.0-3.9	2.0-4.5	180	2.0-4.0	2.4-4.5	355
Nominal annual return	4.0-5.0	2.0-4.2	133	4.1-5.0	2.3-4.1	110
At 31 Dec			1,105			693

Sensitivities

Changes in financial market factors, from the economic assumptions in place at the start of the year, had a positive impact on reported profit before tax of $102m (2019: $124m). The following table illustrates the effects of selected interest rate, equity price and foreign exchange rate scenarios on our profit for the year and the total equity of our insurance manufacturing subsidiaries.

Where appropriate, the effects of the sensitivity tests on profit after tax and equity incorporate the impact of the stress on the PVIF.

Due in part to the impact of the cost of guarantees and hedging strategies, which may be in place, the relationship between the profit and total equity and the risk factors is non-

linear, particularly in a low interest-rate environment. Therefore, the results disclosed should not be extrapolated to measure sensitivities to different levels of stress. For the same reason, the impact of the stress is not necessarily symmetrical on the upside and downside. The sensitivities are stated before allowance for management actions, which may mitigate the effect of changes in the market environment. The sensitivities presented allow for adverse changes in policyholder behaviour that may arise in response to changes in market rates. The differences between the impacts on profit after tax and equity are driven by the changes in value of the bonds measured at fair value through other comprehensive income, which are only accounted for in equity.

Sensitivity of HSBC's insurance manufacturing subsidiaries to market risk factors
(Audited)
	2020		2019
	Effect on profit after tax	Effect on total equity	Effect on profit after tax	Effect on total equity
	$m	$m	$m	$m
+100 basis point parallel shift in yield curves	(67)	(188)	43	(37)
-100 basis point parallel shift in yield curves	(68)	58	(221)	(138)
10% increase in equity prices	332	332	270	270
10% decrease in equity prices	(338)	(338)	(276)	(276)
10% increase in US dollar exchange rate compared with all currencies	84	84	41	41
10% decrease in US dollar exchange rate compared with all currencies	(84)	(84)	(41)	(41)

Credit risk

(Audited)

Description and exposure

Credit risk is the risk of financial loss if a customer or counterparty fails to meet their obligation under a contract. It arises in two main areas for our insurance manufacturers:

• risk associated with credit spread volatility and default by debt security counterparties after investing premiums to generate a return for policyholders and shareholders; and

• risk of default by reinsurance counterparties and non-reimbursement for claims made after ceding insurance risk.

The amounts outstanding at the balance sheet date in respect of these items are shown in the table on page 191.

The credit quality of the reinsurers' share of liabilities under insurance contracts is assessed as 'satisfactory' or higher (as defined on page 121), with 100% of the exposure being neither past due nor impaired (2019: 100%).

Credit risk on assets supporting unit-linked liabilities is predominantly borne by the policyholder. Therefore, our exposure is primarily related to liabilities under non-linked insurance and

investment contracts and shareholders' funds. The credit quality of insurance financial assets is included in the table on page 138.

The risk associated with credit spread volatility is to a large extent mitigated by holding debt securities to maturity, and sharing a degree of credit spread experience with policyholders.

Capital and liquidity risk

(Audited)

Description and exposure

Liquidity risk is the risk that an insurance operation, though solvent, either does not have sufficient financial resources available to meet its obligations when they fall due, or can secure them only at excessive cost.

The following table shows the expected undiscounted cash flows for insurance liabilities at 31 December 2020. The liquidity risk exposure is wholly borne by the policyholder in the case of unit-linked business and is shared with the policyholder for non-linked insurance.

The profile of the expected maturity of insurance contracts at 31 December 2020 remained comparable with 2019.

The remaining contractual maturity of investment contract liabilities is included in Note 29 on page 347.

Expected maturity of insurance contract liabilities
(Audited)
	Expected cash flows (undiscounted)
	Within 1 year	1-5 years	5-15 years	Over 15 years	Total
	$m	$m	$m	$m	$m
Unit-linked	1,407	3,097	2,976	2,099	9,579
With DPF and Other contracts	8,427	30,156	51,383	75,839	165,805
At 31 Dec 2020	9,834	33,253	54,359	77,938	175,384

Unit-linked	1,296	3,153	2,654	1,955	9,058
With DPF and Other contracts	7,907	26,906	50,576	71,731	157,120
At 31 Dec 2019	9,203	30,059	53,230	73,686	166,178

Insurance risk

Description and exposure

Insurance risk is the risk of loss through adverse experience, in either timing or amount, of insurance underwriting parameters (non-economic assumptions). These parameters include mortality, morbidity, longevity, lapses and unit costs.

The principal risk we face is that, over time, the cost of the contract, including claims and benefits, may exceed the total amount of premiums and investment income received.

The tables on pages 191 and 192 analyse our life insurance risk exposures by type of contract and by geographical region.

The insurance risk profile and related exposures remain largely consistent with those observed at 31 December 2019.

Sensitivities

(Audited)

The following table shows the sensitivity of profit and total equity to reasonably possible changes in non-economic assumptions across all our insurance manufacturing subsidiaries.

Mortality and morbidity risk is typically associated with life insurance contracts. The effect on profit of an increase in mortality or morbidity depends on the type of business being written. Our largest exposures to mortality and morbidity risk exist in Hong Kong.

Sensitivity to lapse rates depends on the type of contracts being written. For a portfolio of term assurance, an increase in lapse rates typically has a negative effect on profit due to the loss of future income on the lapsed policies. However, some contract lapses have a positive effect on profit due to the existence of policy surrender charges. We are most sensitive to a change in lapse rates on unit-linked and universal life contracts in Hong Kong and DPF contracts in France.se rate risk is the exposure to a change in the cost of administering insurance contracts. To the extent that increased expenses cannot be passed on to policyholders, an increase in expense rates will have a negative effect on our profits.

Sensitivity analysis
(Audited)
	2020	2019
	$m	$m
Effect on profit after tax and total equity at 31 Dec
Effect on profit after tax and total equity at 10% increase in mortality and/or morbidity rates	(93)	(88)
Effect on profit after tax and total equity at 10% decrease in mortality and/or morbidity rates	98	88
Effect on profit after tax and total equity at 10% increase in lapse rates	(111)	(99)
Effect on profit after tax and total equity at 10% decrease in lapse rates	128	114
Effect on profit after tax and total equity at 10% increase in expense rates	(117)	(106)
Effect on profit after tax and total equity at 10% decrease in expense rates	115	105

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