Annual Financial Report - Part 6

HSBC Holdings PLC

21 February 2024

Personal lending - residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage (continued)
(Audited)

	Gross carrying/nominal amount				ECL coverage
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	%	%	%	%
Fully collateralised by LTV ratio	310,705	39,906	2,097	352,708	-	0.6	9.9	0.1
- less than 50%	154,337	12,250	1,077	167,664	-	0.7	7.2	0.1
- 51% to 70%	102,191	16,989	537	119,717	-	0.5	9.5	0.1
- 71% to 80%	25,458	6,770	212	32,440	-	0.5	14.7	0.2
- 81% to 90%	17,106	3,388	147	20,641	-	0.5	17.8	0.2
- 91% to 100%	11,613	509	124	12,246	-	1.1	18.1	0.3
Partially collateralised (A): LTV > 100%	6,964	143	133	7,240	-	6.9	46.9	1.0
- collateral value on A	6,521	123	79	6,723
Total at 31 Dec 2022	317,669	40,049	2,230	359,948	-	0.6	12.1	0.2
of which: UK
Fully collateralised by LTV ratio	134,044	34,541	676	169,261	-	0.4	11.1	0.1
- less than 50%	70,936	10,387	448	81,771	-	0.6	9.4	0.1
- 51% to 70%	43,617	14,943	158	58,718	-	0.4	11.6	0.1
- 71% to 80%	12,849	5,922	33	18,804	-	0.3	19.7	0.1
- 81% to 90%	5,922	2,918	10	8,850	-	0.2	24.5	0.1
- 91% to 100%	720	371	27	1,118	-	0.2	22.5	0.6
Partially collateralised (B): LTV > 100%	329	49	12	390	-	0.3	9.8	0.3
- collateral value on B	237	38	4	279
Total UK at 31 Dec 2022	134,373	34,590	688	169,651	-	0.4	11.1	0.1
of which: Hong Kong
Fully collateralised by LTV ratio	94,949	981	237	96,167	-	-	0.1	-
- less than 50%	44,740	577	105	45,422	-	-	-	-
- 51% to 70%	28,123	256	37	28,416	-	-	0.3	-
- 71% to 80%	4,167	37	25	4,229	-	-	0.1	-
- 81% to 90%	7,883	51	27	7,961	-	0.1	-	-
- 91% to 100%	10,036	60	43	10,139	-	0.2	-	-
Partially collateralised (C): LTV > 100%	6,441	47	1	6,489	-	0.2	0.3	-
- collateral value on C	6,146	44	1	6,191
Total Hong Kong at 31 Dec 2022	101,390	1,028	238	102,656	-	-	0.1	-

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 estate and construction¹	Non-bank financial institutions	Total	Corporate and commercial	of which: real estate and construction¹	Non-bank financial institutions	Total
	$m	$m	$m	$m	$m	$m	$m	$m
UK	105,536	17,852	18,343	123,879	(1,451)	(246)	(231)	(1,682)
- of which: HSBC UK Bank plc (ring-fenced bank)	80,248	17,060	9,372	89,620	(1,212)	(212)	(66)	(1,278)
- of which: HSBC Bank plc (non-ring-fenced bank)	24,791	792	8,971	33,762	(240)	(34)	(165)	(405)
- of which: Other trading entities	497	-	-	497	1	-	-	1
France	27,017	4,796	5,701	32,718	(636)	(53)	(18)	(654)
Germany	6,667	240	632	7,299	(74)	-	-	(74)
Switzerland	1,168	423	378	1,546	(12)	(1)	-	(12)
Hong Kong	125,340	48,594	19,319	144,659	(3,099)	(2,147)	(57)	(3,156)
Australia	12,685	4,443	1,564	14,249	(49)	(1)	-	(49)
India	10,856	2,083	5,315	16,171	(47)	(7)	(4)	(51)
Indonesia	3,100	162	411	3,511	(136)	(58)	-	(136)
Mainland China	28,655	6,709	7,775	36,430	(313)	(212)	(11)	(324)
Malaysia	5,797	1,137	258	6,055	(69)	(15)	-	(69)
Singapore	15,845	3,458	948	16,793	(321)	(40)	(1)	(322)
Taiwan	4,512	30	81	4,593	-	-	-	-
Egypt	899	45	86	985	(128)	(10)	(1)	(129)
UAE	13,740	1,979	823	14,563	(543)	(296)	-	(543)
US	26,993	5,143	9,155	36,148	(239)	(101)	(58)	(297)
Mexico	11,326	865	1,349	12,675	(320)	(19)	(5)	(325)
Other	27,519	3,496	2,294	29,813	(366)	(80)	(18)	(384)
At 31 Dec 2023	427,655	101,455	74,432	502,087	(7,803)	(3,286)	(404)	(8,207)

Wholesale lending - loans and advances to customers at amortised cost by country/territory (continued)
	Gross carrying amount				Allowance for ECL
	Corporate and commercial	of which: real estate and construction	Non-bank financial institutions	Total	Corporate and commercial	of which: real estate and construction	Non-bank financial institutions	Total
	$m	$m	$m	$m	$m	$m	$m	$m
UK	104,775	18,747	12,662	117,437	(1,522)	(420)	(131)	(1,653)
- of which: HSBC UK Bank plc (ring-fenced bank)	78,249	17,121	2,980	81,229	(1,247)	(279)	(6)	(1,253)
- of which: HSBC Bank plc (non-ring-fenced bank)	26,526	1,625	9,682	36,208	(275)	(141)	(125)	(400)
France	27,571	4,607	4,152	31,723	(621)	(49)	(4)	(625)
Germany	6,603	252	713	7,316	(154)	-	(3)	(157)
Switzerland	988	635	298	1,286	(8)	-	-	(8)
Hong Kong	144,256	58,531	20,798	165,054	(2,997)	(1,980)	(35)	(3,032)
Australia	11,641	3,339	1,157	12,798	(97)	(1)	-	(97)
India	9,052	1,901	4,267	13,319	(80)	(26)	(10)	(90)
Indonesia	3,214	206	226	3,440	(187)	(5)	-	(187)
Mainland China	31,790	7,499	8,908	40,698	(327)	(174)	(30)	(357)
Malaysia	5,986	1,351	180	6,166	(133)	(38)	-	(133)
Singapore	15,905	4,031	1,192	17,097	(387)	(44)	(1)	(388)
Taiwan	4,701	36	65	4,766	(1)	-	-	(1)
Egypt	1,262	111	101	1,363	(117)	(6)	(1)	(118)
UAE	13,503	2,091	149	13,652	(674)	(342)	-	(674)
US	28,249	6,491	8,640	36,889	(214)	(95)	(26)	(240)
Mexico	9,784	1,081	717	10,501	(334)	(34)	(1)	(335)
Other	33,922	3,676	2,699	36,621	(467)	(79)	(15)	(482)
At 31 Dec 2022	453,202	114,585	66,924	520,126	(8,320)	(3,293)	(257)	(8,577)

1 Real estate lending within this disclosure corresponds solely to the industry of the borrower. Commercial real estate on page 183 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
UK	168,469	19,503	8,056	187,972	(209)	(697)	(339)	(906)
- of which: HSBC UK Bank plc (ring-fenced bank)	164,878	17,884	7,975	182,762	(205)	(692)	(336)	(897)
- of which: HSBC Bank plc (non-ring-fenced bank)	3,226	141	81	3,367	(3)	(5)	(2)	(8)
- of which: Other trading entities	365	1,478	-	1,843	(1)	-	(1)	(1)
France¹	436	7,476	1	7,912	(13)	(8)	-	(21)
Germany	-	165	-	165	-	-	-	-
Switzerland	1,770	5,466	-	7,236	(1)	(20)	-	(21)
Hong Kong	107,182	31,248	9,663	138,430	(2)	(417)	(286)	(419)
Australia	23,001	446	396	23,447	(5)	(19)	(18)	(24)
India	1,537	680	185	2,217	(4)	(16)	(12)	(20)
Indonesia	58	288	137	346	(2)	(11)	(7)	(13)
Mainland China	7,503	754	287	8,257	(3)	(49)	(39)	(52)
Malaysia	2,313	2,115	882	4,428	(23)	(87)	(36)	(110)
Singapore	8,151	5,589	521	13,740	-	(38)	(17)	(38)
Taiwan	5,607	1,370	309	6,977	-	(17)	(4)	(17)
Egypt	-	341	89	341	-	(1)	(1)	(1)
UAE	1,957	1,325	440	3,282	(10)	(62)	(24)	(72)
US	18,340	673	199	19,013	(15)	(19)	(14)	(34)
Mexico	8,778	6,215	2,465	14,993	(176)	(757)	(297)	(933)
Other	5,807	2,959	1,050	8,766	(108)	(78)	(42)	(186)
At 31 Dec 2023	360,909	86,613	24,680	447,522	(571)	(2,296)	(1,136)	(2,867)

Personal lending - loans and advances to customers at amortised costs by country/territory (continued)
	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
UK	154,519	16,793	6,622	171,312	(227)	(838)	(449)	(1,065)
- of which: HSBC UK Bank plc (ring-fenced bank)	151,188	15,808	6,556	166,996	(222)	(828)	(447)	(1,050)
- of which: HSBC Bank plc (non-ring-fenced bank)	3,331	985	66	4,316	(5)	(10)	(2)	(15)
France¹	30	76	9	106	(14)	(8)	-	(22)
Germany	-	234	-	234	-	-	-	-
Switzerland	1,378	5,096	-	6,474	-	(20)	-	(20)
Hong Kong	101,478	31,409	8,644	132,887	(1)	(352)	(258)	(353)
Australia	21,372	456	396	21,828	(11)	(18)	(18)	(29)
India	1,078	590	162	1,668	(4)	(18)	(13)	(22)
Indonesia	70	278	141	348	(1)	(17)	(12)	(18)
Mainland China	9,305	921	378	10,226	(3)	(61)	(49)	(64)
Malaysia	2,292	2,437	843	4,729	(27)	(92)	(31)	(119)
Singapore	7,501	6,264	422	13,765	-	(35)	(14)	(35)
Taiwan	5,428	1,189	284	6,617	-	(18)	(5)	(18)
Egypt	-	310	83	310	-	(2)	(1)	(2)
UAE	2,104	1,339	426	3,443	(14)	(84)	(41)	(98)
US	16,847	704	213	17,551	(10)	(31)	(23)	(41)
Mexico	6,124	4,894	1,615	11,018	(145)	(593)	(196)	(738)
Other	7,295	5,071	1,150	12,366	(118)	(108)	(51)	(226)
At 31 Dec 2022	336,821	78,061	21,388	414,882	(575)	(2,295)	(1,161)	(2,870)

1 Included in other personal lending at 31 December 2023 is $7,424m (31 December 2022: nil) guaranteed by Crédit Logement.

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
- WPB	630,661	54,069	4,233	-	688,963	(621)	(1,551)	(977)	-	(3,149)
- CMB	464,893	66,688	12,698	49	544,328	(508)	(1,336)	(4,995)	(23)	(6,862)
- GBM	696,377	14,247	3,002	32	713,658	(119)	(199)	(1,161)	(7)	(1,486)
- Corporate Centre	75,805	37	6	-	75,848	(1)	(13)	-	-	(14)
Total gross carrying amount on-balance sheet at 31 Dec 2023	1,867,736	135,041	19,939	81	2,022,797	(1,249)	(3,099)	(7,133)	(30)	(11,511)
- WPB	253,333	3,811	333	-	257,477	(22)	-	(2)	-	(24)
- CMB	142,206	16,238	877	-	159,321	(100)	(101)	(102)	-	(303)
- GBM	250,007	10,752	314	4	261,077	(38)	(34)	(7)	-	(79)
- Corporate Centre	149	-	-	-	149	-	-	-	-	-
Total nominal amount off-balance sheet at 31 Dec 2023	645,695	30,801	1,524	4	678,024	(160)	(135)	(111)	-	(406)

- WPB	124,747	406	-	-	125,153	(14)	(17)	-	-	(31)
- CMB	86,021	405	-	-	86,426	(9)	(18)	-	-	(27)
- GBM	88,229	173	1	-	88,403	(13)	(6)	(1)	-	(20)
- Corporate Centre	2,201	165	-	-	2,366	(1)	(18)	-	-	(19)
Debt instruments measured at FVOCI at 31 Dec 2023	301,198	1,149	1	-	302,348	(37)	(59)	(1)	-	(97)

- WPB	593,424	53,302	3,959	-	650,685	(602)	(1,586)	(980)	-	(3,168)
- CMB	440,638	82,087	13,072	112	535,909	(484)	(1,620)	(4,988)	(38)	(7,130)
- GBM	700,267	20,577	3,344	17	724,205	(116)	(463)	(1,116)	-	(1,695)
- Corporate Centre	83,491	188	8	-	83,687	(3)	(13)	-	-	(16)
Total gross carrying amount on-balance sheet at 31 Dec 2022	1,817,820	156,154	20,383	129	1,994,486	(1,205)	(3,682)	(7,084)	(38)	(12,009)
- WPB	239,357	4,388	770	-	244,515	(25)	(1)	-	-	(26)
- CMB	130,342	20,048	642	-	151,032	(83)	(136)	(81)	-	(300)
- GBM	229,507	12,059	209	-	241,775	(39)	(56)	(17)	-	(112)
- Corporate Centre	248	1	-	-	249	-	-	-	-	-
Total nominal amount off-balance sheet at 31 Dec 2022	599,454	36,496	1,621	-	637,571	(147)	(193)	(98)	-	(438)
- WPB	112,591	1,066	-	1	113,658	(17)	(17)	-	-	(34)
- CMB	71,445	735	-	-	72,180	(9)	(14)	-	-	(23)
- GBM	75,228	434	-	1	75,663	(10)	(8)	-	-	(18)
- Corporate Centre	3,347	299	-	-	3,646	(31)	(19)	(1)	-	(51)
Debt instruments measured at FVOCI at 31 Dec 2022	262,611	2,534	-	2	265,147	(67)	(58)	(1)	-	(126)

Loans and advances to customers and banks - other supplementary information
	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	360,909	2,212	(571)	(269)	(10)	(53)	10
- second lien residential mortgages	396	21	(8)	(5)	(1)	(1)	2
- guaranteed loans in respect of residential property	8,593	90	(20)	(14)	2	(8)	2
- other personal lending which is secured	29,481	157	(42)	(24)	8	(2)	2
- credit cards	24,680	352	(1,136)	(203)	(577)	(571)	108
- other personal lending which is unsecured	21,251	659	(1,048)	(331)	(380)	(663)	99
- motor vehicle finance	2,212	14	(42)	(8)	(61)	(28)	3
Other personal lending	86,613	1,293	(2,296)	(585)	(1,009)	(1,273)	216
Personal lending	447,522	3,505	(2,867)	(854)	(1,019)	(1,326)	226
- agriculture, forestry and fishing	7,181	312	(130)	(64)	(21)	(9)	-
- mining and quarrying	7,223	325	(101)	(83)	27	(49)	-
- manufacturing	85,333	1,899	(1,143)	(860)	(355)	(273)	11
- electricity, gas, steam and air-conditioning supply	14,355	255	(119)	(88)	(26)	(10)	-
- water supply, sewerage, waste management and remediation	3,262	102	(63)	(51)	(44)	(2)	-
- real estate and construction	101,455	5,883	(3,286)	(2,561)	(1,358)	(1,191)	6
- wholesale and retail trade, repair of motor vehicles and motorcycles	79,121	2,362	(1,341)	(1,134)	(124)	(447)	12
- transportation and storage	21,456	445	(230)	(160)	(87)	(42)	-
- accommodation and food	15,874	1,058	(257)	(112)	(33)	(26)	-
- publishing, audiovisual and broadcasting	19,731	210	(173)	(50)	(106)	(73)	-
- professional, scientific and technical activities	26,753	740	(401)	(306)	(262)	(110)	1
- administrative and support services	22,203	597	(268)	(174)	39	(137)	-
- public administration and defence, compulsory social security	1,042	-	-	-	-	-	-
- education	1,460	46	(15)	(4)	(1)	(22)	-
- health and care	4,236	183	(56)	(26)	40	(7)	-
- arts, entertainment and recreation	1,961	99	(42)	(31)	15	(8)	-
- other services	8,355	318	(153)	(90)	22	(181)	12
- activities of households	694	-	-	-	-	-	-
- extra-territorial organisations and bodies activities	101	-	-	-	-	-	-
- government	5,827	205	(12)	(10)	(15)	-	-
- asset-backed securities	32	-	(13)	-	-	-	-
Corporate and commercial	427,655	15,039	(7,803)	(5,804)	(2,289)	(2,587)	42
Non-bank financial institutions	74,432	810	(404)	(322)	(168)	(9)	-
Wholesale lending	502,087	15,849	(8,207)	(6,126)	(2,457)	(2,596)	42
Loans and advances to customers	949,609	19,354	(11,074)	(6,980)	(3,476)	(3,922)	268
Loans and advances to banks	112,917	2	(15)	(2)	53	-	-
At 31 Dec 2023	1,062,526	19,356	(11,089)	(6,982)	(3,423)	(3,922)	268

Loans and advances to customers and banks - other supplementary information (continued)
	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	336,821	2,042	(575)	(270)	180	(48)	26
- second lien residential mortgages	379	6	(6)	(3)	9	(1)	4
- guaranteed loans in respect of residential property	1,367	125	(34)	(30)	(11)	(9)	2
- other personal lending which is secured	32,106	206	(55)	(30)	(16)	(5)	1
- credit cards	21,388	260	(1,161)	(160)	(638)	(471)	126
- other personal lending which is unsecured	20,880	687	(1,008)	(305)	(655)	(660)	119
- motor vehicle finance	1,941	13	(31)	(7)	39	(18)	5
Other personal lending	78,061	1,297	(2,295)	(535)	(1,272)	(1,164)	257
Personal lending	414,882	3,339	(2,870)	(805)	(1,092)	(1,212)	283
- agriculture, forestry and fishing	6,571	261	(122)	(68)	(32)	(42)	-
- mining and quarrying	8,120	233	(172)	(146)	(24)	(46)	-
- manufacturing	87,460	2,065	(1,153)	(896)	(191)	(171)	3
- electricity, gas, steam and air-conditioning supply	16,478	277	(108)	(67)	(75)	(16)	-
- water supply, sewerage, waste management and remediation	2,993	26	(21)	(13)	3	(1)	-
- real estate and construction	114,585	5,651	(3,293)	(2,232)	(1,630)	(310)	8
- wholesale and retail trade, repair of motor vehicles and motorcycles	82,429	2,810	(1,666)	(1,344)	(344)	(667)	8
- transportation and storage	24,686	556	(248)	(153)	(13)	(82)	1
- accommodation and food	17,174	789	(244)	(82)	103	(29)	-
- publishing, audiovisual and broadcasting	18,388	277	(117)	(59)	9	(47)	1
- professional, scientific and technical activities	17,935	542	(272)	(200)	(81)	(31)	1
- administrative and support services	25,077	980	(408)	(293)	(27)	(27)	1
- public administration and defence, compulsory social security	1,180	-	(1)	-	5	-	-
- education	1,593	87	(31)	(22)	1	(3)	-
- health and care	3,902	266	(90)	(67)	(30)	(7)	1
- arts, entertainment and recreation	1,862	146	(77)	(57)	1	(17)	-
- other services	12,471	589	(274)	(219)	120	(92)	7
- activities of households	744	-	-	-	-	-	-
- extra-territorial organisations and bodies activities	47	-	-	-	1	-	1
- government	9,475	270	(10)	(7)	(5)	-	-
- asset-backed securities	32	-	(13)	-	(4)	-	-
Corporate and commercial	453,202	15,825	(8,320)	(5,925)	(2,213)	(1,588)	32
Non-bank financial institutions	66,924	469	(257)	(137)	(165)	(1)	1
Wholesale lending	520,126	16,294	(8,577)	(6,062)	(2,378)	(1,589)	33
Loans and advances to customers	935,008	19,633	(11,447)	(6,867)	(3,470)	(2,801)	316
Loans and advances to banks	104,544	82	(69)	(22)	(53)	-	-
At 31 Dec 2022	1,039,552	19,715	(11,516)	(6,889)	(3,523)	(2,801)	316

HSBC Holdings

(Audited)

Risk in HSBC Holdings is overseen by the HSBC Holdings Asset and Liability Management Committee. 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.

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

- financial assets on the balance sheet, where maximum exposure equals the carrying amount (see page 338); and

- financial guarantees and other guarantees, where the maximum exposure is the maximum that we would have to pay if the guarantees were called upon (see Note 34).

In the case of our derivative asset balances (see page 338), there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes. These offsets also include collateral received in cash and other financial assets.

The total offset relating to our derivative asset balances was $3.0bn at 31 December 2023 (2022: $3.1bn).

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 (2022: 100%). For further details of credit quality classification, see page 148.

Treasury risk

Contents

203	Overview
203	Treasury risk management
205	Other Group risks
206	Capital risk in 2023
210	Liquidity and funding risk in 2023
213	Structural foreign exchange risk in 2023
214	Interest rate risk in the banking book in 2023

Overview

Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including the risk of adverse impact on earnings or capital due to structural and transactional foreign exchange exposures, as well as changes in market interest rates, together with pension and insurance risk.

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

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. The risk management 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 and transactional foreign exchange risk, and interest rate risk in the banking book.

For further details, refer to our Pillar 3 Disclosures at 31 December 2023.

Treasury risk management

Key developments in 2023

- Following high-profile banking failures in the first quarter of 2023, we reviewed our liquidity monitoring and metric assumptions as part of our internal liquidity adequacy assessment process cycle to ensure they continued to cover observed and emerging risks.

- In 2023, we reverted to a policy of paying quarterly dividends, with the Board approving three interim dividends of $0.10 per share. We announced $7bn of share buy-backs during 2023.

- Effective July 2023, the Bank of England's Financial Policy Committee doubled the UK countercyclical capital buffer rate from 1% to 2%, in line with the usual 12‑month implementation lag. This change increased our CET1 requirement by 0.2 percentage points.

- We further stabilised our net interest income against a backdrop of fluctuating interest rate expectations as the trajectory of inflation for major economies was reassessed.

- Following the acquisition of SVB UK in the first quarter of 2023, we launched HSBC Innovation Banking in June, which combined the expertise of SVB UK with the reach of our international network. We are in the process of integrating HSBC Innovation Banking into the Group. The acquisition was funded from existing resources, and the impacts on our Group LCR and CET1 ratio were minimal.

- In the fourth quarter of 2023, we reclassified our retail banking operations in France as held for sale, recognising a $2.0bn loss. In the first quarter, we had recognised a $2.1bn partial reversal of impairment for this business. The net result for the year was a favourable $0.1bn impact. On 1 January 2024, we completed the sale of this business with no material incremental impact on CET1.

- Having entered into an agreement to sell our banking business in Canada in 2022, the transaction is expected to complete at the end of the first quarter of 2024. The associated gain on sale is expected to add approximately 1.2 percentage points to the CET1 ratio as it stood at 31 December 2023.

For quantitative disclosures on capital ratios, own funds and risk-weighted assets ('RWAs'), see pages 206 to 207. For quantitative disclosures on liquidity and funding metrics, see pages 210 to 211. For quantitative disclosures on interest rate risk in the banking book, see pages 214 to 216.

Governance and structure

The Global Head of Traded and Treasury Risk Management and Risk Analytics is the accountable risk steward for all treasury risks. The Group Treasurer is the risk owner for all treasury risks, with the exception of pension risk and insurance risk. The Group Treasurer co-owns pension risk with the Group Head of Performance, Reward and Employee Relations. Insurance risk is owned by the Chief Executive Officer for Global Insurance.

Capital risk, liquidity risk, interest rate risk in the banking book, structural foreign exchange risk and transactional foreign exchange risk are the responsibility of the Group Executive Committee and the Group Risk Committee ('GRC'). Global Treasury actively manages these risks on an ongoing basis, supported by the Holdings Asset and Liability Management Committee ('ALCO') and local ALCOs, overseen by Treasury Risk Management and Risk Management Meetings.

Pension risk is overseen by a network of local and regional pension risk management meetings. The Global Pensions Risk Management Meeting provides oversight of all pension plans sponsored by HSBC globally, and is chaired by the accountable risk steward. Insurance risk is overseen by the Global Insurance Risk Management Meeting, chaired by the Chief Risk and Compliance Officer for Global Insurance.

Capital, liquidity and funding risk management processes

Assessment and risk appetite

Our capital management policy is supported by a global capital management framework. The framework sets out our approach to determining key capital risk appetites including CET1, total capital, minimum requirements for own funds and eligible liabilities ('MREL'), the leverage ratio and double leverage. Our internal capital adequacy assessment process ('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, interest rate risk in the banking book and Group risk. Climate risk is also considered as part of the ICAAP, and we are continuing to develop our approach. The Group's 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 in line with global guidance, while considering their local regulatory regimes to determine their own risk appetites and ratios.

HSBC Holdings is the provider of MREL to its subsidiaries, including equity and non-equity capital. These investments are funded by HSBC Holdings' own equity capital and MREL-eligible debt. MREL includes own funds and liabilities that can be written down or converted into capital resources in order to absorb losses or recapitalise a bank in the event of its failure. In line with our existing structure and business model, HSBC has three resolution groups - the European resolution group, the Asian resolution group and the US resolution group. There are some smaller entities that fall outside these resolution groups.

HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investments in subsidiaries.

As a matter of long-standing policy, the holding company group retains a substantial holdings capital buffer comprising cash and other high-quality liquid assets, which at 31 December 2023 was in excess of $27bn, within risk appetite.

We aim to ensure that management has oversight of our liquidity and funding risks at Group and entity level through robust governance, in line with our risk management framework. We manage liquidity and funding risk at an operating entity level in accordance with globally consistent policies, procedures and reporting standards. This ensures that obligations can be met in a timely manner, in the jurisdiction where they fall due.

Operating entities are required to meet internal minimum requirements and any applicable regulatory requirements at all times. These requirements are assessed through our internal liquidity adequacy assessment process ('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 Group's policies and controls.

Planning and performance

Capital and RWA plans form part of the annual financial resource 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 and a related economic profit measure.

Funding and liquidity plans also form part of the financial resource plan that is approved by the Board. The Board-level appetite measures are the liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR'), together with an internal liquidity metric. In addition, we use a wider set of measures to manage an appropriate funding and liquidity profile, including legal entity depositor concentration limits, intra-day liquidity, forward-looking funding assessments and other key measures.

Risks to capital and liquidity

Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs, capital and/or liquidity position. Downside and Upside scenarios are assessed against our management objectives, and mitigating actions are assigned as necessary. We closely monitor future regulatory developments and continue to evaluate the impact of these upon our capital and liquidity requirements, particularly those related to the UK's implementation of the outstanding measures to be implemented from the Basel III reforms ('Basel 3.1').

Regulatory developments

Future changes to our ratios will occur with the implementation of Basel 3.1. The Prudential Regulation Authority ('PRA') has published its consultation paper on the UK's implementation, with a proposed implementation date of 1 July 2025. The PRA has also published a set of near-final rules in relation to some Basel 3.1 elements. We are currently assessing the impact of implementation.

The RWA output floor under Basel 3.1 is proposed to be subject to a four-and-a-half year transitional provision. Any impact from the output floor is expected be towards the end of the transition period.

Regulatory reporting processes and controls

The quality of regulatory reporting remains a key priority for management and regulators. We are progressing with a comprehensive programme to strengthen our global processes, improve consistency and enhance controls across regulatory reports.

The ongoing programme of work focuses on our material regulatory reports and is being phased over a number of years. This programme includes data enhancement, transformation of the reporting systems and an uplift to the control environment over the report production process.

While this programme continues, there may be further impacts on some of our regulatory ratios, such as the CET1, LCR and NSFR, as we implement recommended changes and continue to enhance our controls across the process.

Stress testing and recovery and resolution planning

The Group uses stress testing to inform management of the capital and liquidity needed to withstand internal and external shocks, including a global economic downturn or a systems failure. Stress testing results are also used to inform risk mitigation actions, input into global business performance measures through tangible equity allocation, and recovery and resolution planning, as well as 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 ('BoE'), the US Federal Reserve Board, the European Banking Authority, the European Central Bank and the Hong Kong Monetary Authority. The results of regulatory stress testing and our internal stress tests are used when assessing our internal capital and liquidity requirements through the ICAAP and ILAAP. The outcomes of stress testing exercises carried out by the PRA and other regulators feed into the setting of regulatory minimum ratios and buffers.

We maintain recovery plans for the Group and material entities, which set out potential options management could take in a range of stress scenarios that could result in a breach of capital or liquidity buffers.

The Group recovery plan sets out the framework and governance arrangements to support restoring HSBC to a stable and viable position, and so lowering the probability of failure from either idiosyncratic company-specific stress or systemic market-wide issues. Our material entities' recovery plans provide 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. This is to help ensure that HSBC entities can stabilise their financial position and recover from financial losses in a stress environment.

The Group also has capabilities, resources and arrangements in place to address the unlikely event that HSBC might not be recoverable and would therefore need to be resolved by regulators. The Group and the BoE publicly disclosed the status of HSBC's progress against the BoE's Resolvability Assessment Framework in June 2022, following the submission of HSBC's inaugural resolvability self-assessment in October 2021. HSBC has continued to enhance its resolvability capabilities since this time and submitted its second self-assessment in October 2023. A subsequent update was provided to the BoE in January 2024. Further public disclosure by the Group and the BoE as to HSBC's progress against the Resolvability Assessment Framework will be made in June 2024.

Overall, HSBC's recovery and resolution planning helps safeguard the Group's financial and operational stability. The Group is committed to further developing its recovery and resolution capabilities, including in relation to the Resolvability Assessment Framework.

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 in order to hedge positions held with trading intent. Interest rate risk that can be economically hedged may be transferred to Global Treasury. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Global Treasury cannot economically hedge is not transferred and will remain within the global business where the risks originate.

Global Treasury uses a number of measures to monitor and control interest rate risk in the banking book, including:

- net interest income sensitivity;

- banking net interest income sensitivity; and

- economic value of equity sensitivity.

Net interest income and banking 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 and Group level, where a range of interest rate scenarios are monitored on a one-year basis.

NII sensitivity figures represent the effect of pro forma movements in projected yield curves based on a static balance sheet size and structure, except for certain mortgage products where balances are impacted by interest rate sensitive prepayments. These sensitivity calculations do not incorporate actions that would be taken by Global 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.

During 2023, we introduced an additional metric to measure and manage the sensitivity of our NII to interest rate shocks. In addition to NII sensitivity, we now also monitor banking NII sensitivity. HSBC has a significant quantity of trading book assets that are funded by banking book liabilities, and the NII sensitivity measure does not include the sensitivity of the internal transfer income from this funding. Banking NII sensitivity includes an adjustment on top of NII sensitivity to reflect this. Going forwards, this will be our primary metric for monitoring and management of interest rate risk in the banking book.

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 holders 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. 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.

Further details of HSBC's risk management of interest rate risk in the banking book can be found in the Group's Pillar 3 Disclosures at 31 December 2023.

Other Group risks

Non-trading book foreign exchange exposures

Structural foreign exchange exposures

Structural foreign exchange exposures arise from net assets or capital investments in foreign operations, together with any associated hedging. A foreign operation is defined as a subsidiary, associate, joint arrangement or branch where the activities are conducted in a currency other than that of the reporting entity. An entity's functional reporting 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 foreign operations.

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 positions where it is capital efficient to do so, and subject to approved limits. This is achieved through a combination of net investment hedges and economic hedges. Hedging positions are monitored and rebalanced periodically to manage RWA or downside risks associated with HSBC's foreign currency investments.

For further details of our structural foreign exchange exposures, see page 213.

Transactional foreign exchange exposures

Transactional foreign exchange risk arises primarily from day-to-day transactions in the banking book generating profit and loss or fair value through other comprehensive income ('FVOCI') reserves in a currency other than the reporting currency of the operating entity. Transactional foreign exchange exposure generated through profit and loss is periodically transferred to Markets and Securities Services and managed within limits, with the exception of limited residual foreign exchange exposure arising from timing differences or for other reasons. Transactional foreign exchange exposure generated through OCI reserves is managed by Global Treasury within approved appetite.

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, financial liabilities including debt capital issued, and structural foreign exchange hedges. 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. It also uses forward foreign exchange contracts to manage its structural foreign exchange exposures.

For quantitative disclosures on interest rate risk in the banking book, see pages 214 to 216.

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. Our most material defined benefit plans have been closed to new entrants for many years, and the majority (including the largest plan in the UK) are also closed to future accrual.

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 the level 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, including the review of de-risking opportunities.

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 fiduciaries 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 50% of the plan's pensioner liabilities.

Capital risk in 2023

Capital overview

Capital adequacy metrics
	At
	31 Dec	31 Dec
	2023	2022
Risk-weighted assets ('RWAs') ($bn)
Credit risk	683.9	679.1
Counterparty credit risk	35.5	37.1
Market risk	37.5	37.6
Operational risk	97.2	85.9
Total RWAs	854.1	839.7
Capital on a transitional basis ($bn)
Common equity tier 1 ('CET1') capital	126.5	119.3
Tier 1 capital	144.2	139.1
Total capital	171.2	162.4
Capital ratios on a transitional basis (%)
Common equity tier 1 ratio	14.8	14.2
Tier 1 ratio	16.9	16.6
Total capital ratio	20.0	19.3
Capital on an end point basis ($bn)
Common equity tier 1 ('CET1') capital	126.5	119.3
Tier 1 capital	144.2	139.1
Total capital	167.1	157.2
Capital ratios on an end point basis (%)
Common equity tier 1 ratio	14.8	14.2
Tier 1 ratio	16.9	16.6
Total capital ratio	19.6	18.7
Liquidity coverage ratio ('LCR')
Total high-quality liquid assets ($bn)	647.5	647.0
Total net cash outflow ($bn)	477.1	490.8
LCR (%)	136	132
Net stable funding ratio ('NSFR')
Total available stable funding ($bn)	1,601.9	1,552.0
Total required stable funding ($bn)	1,202.4	1,138.4
NSFR (%)	133	136

References to EU regulations and directives (including technical standards) should, as applicable, be read as references to the UK's version of such regulation or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, and as may be subsequently amended under UK law.

Capital figures and ratios in the previous table are calculated in accordance with the regulatory requirements of the Capital Requirements Regulation and Directive, the CRR II regulation and the PRA Rulebook ('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 liquidity coverage ratio is based on the average month-end value over the preceding 12 months. The net stable funding ratio is the average of the preceding four quarters.

Regulatory numbers and ratios are as presented at the date of reporting. Small changes may exist between these numbers and ratios and those submitted in regulatory filings. Where differences are significant, we may restate in subsequent periods.

Own funds disclosure
(Audited)		At
		31 Dec	31 Dec
		2023	2022
Ref*		$m	$m
	Common equity tier 1 ('CET1') capital: instruments and reserves
1	Capital instruments and the related share premium accounts	22,964	23,406
	- ordinary shares	22,964	23,406
2,3	Retained earnings, accumulated other comprehensive income (and other reserves)¹	128,419	121,609
5	Minority interests (amount allowed in consolidated CET1)	3,917	4,444
5a	Independently reviewed net profits net of any foreseeable charge or dividend	10,568	8,633
6	Common equity tier 1 capital before regulatory adjustments¹	165,868	158,092
28	Total regulatory adjustments to common equity tier¹	(39,367)	(38,801)
29	Common equity tier 1 capital	126,501	119,291
36	Additional tier 1 capital before regulatory adjustments	17,732	19,836
43	Total regulatory adjustments to additional tier 1 capital	(70)	(60)
44	Additional tier 1 capital	17,662	19,776
45	Tier 1 capital	144,163	139,067
51	Tier 2 capital before regulatory adjustments	28,148	24,779
57	Total regulatory adjustments to tier 2 capital	(1,107)	(1,423)
58	Tier 2 capital	27,041	23,356
59	Total capital	171,204	162,423

* The references identify lines prescribed in the PRA template, which are applicable and where there is a value.

1 On adoption of IFRS 17 'Insurance Contracts', comparative data previously published under IFRS 4 'Insurance Contracts' have been restated for 2022, with no impact on CET1 and total capital.

At 31 December 2023, our CET1 capital ratio increased to 14.8% from 14.2% at 31 December 2022, reflecting an increase in CET1 capital of $7.2bn, partly offset by an increase in RWAs of $14.4bn. The key drivers of the overall rise in our CET1 ratio during the year were:

- a 1.0 percentage point increase from capital generation, mainly through profits less dividends and share buy-backs;

- a 0.3 percentage point reduction due to an increase in regulatory deductions, primarily for expected excess loss and intangible assets; and

- a 0.1 percentage point decrease from the adverse impact of foreign exchange fluctuations and the increase in the underlying RWAs.

The impairment of BoCom had an insignificant impact on our capital and CET1 ratio. This is because the impairment charge had a partially offsetting reduction in threshold deductions from regulatory capital. For regulatory capital purposes, our share of BoCom's profits is not capital accretive, although the dividends we receive from BoCom are capital accretive.

Our Pillar 2A requirement at 31 December 2023, as per the PRA's Individual Capital Requirement based on a point-in-time assessment, was equivalent to 2.6% of RWAs, of which 1.5% was required to be met by CET1. Throughout 2023, we complied with the PRA's regulatory capital adequacy requirements.

Risk-weighted assets

RWAs by global business
	WPB	CMB¹	GBM¹	Corporate Centre	Total RWAs
	$bn	$bn	$bn	$bn	$bn
Credit risk	155.3	319.1	131.5	78.0	683.9
Counterparty credit risk	1.9	1.5	32.0	0.1	35.5
Market risk	1.3	1.0	22.2	13.0	37.5
Operational risk	34.4	32.9	32.8	(2.9)	97.2
At 31 Dec 2023	192.9	354.5	218.5	88.2	854.1
At 31 Dec 2022	182.9	342.4	225.9	88.5	839.7

1 In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers' respective needs, a portfolio of our customers within our entities in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly.

RWAs by legal entities¹
	HSBC UK Bank plc	HSBC Bank plc	The Hongkong and Shanghai Banking Corporation Limited	HSBC Bank Middle East Limited	HSBC North America Holdings Inc	HSBC Bank Canada	Grupo Financiero HSBC, S.A. de C.V.	Other trading entities	Holding companies, shared service centres and intra-Group eliminations	Total RWAs
	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
Credit risk	110.7	73.4	314.0	17.1	59.3	27.1	25.9	48.0	8.4	683.9
Counterparty credit risk	0.3	17.8	8.7	0.7	3.1	0.5	0.7	3.7	-	35.5
Market risk²	0.2	22.7	27.4	2.8	2.6	0.8	0.7	1.6	9.3	37.5
Operational risk	18.0	17.6	46.6	3.7	7.2	3.5	5.3	6.3	(11.0)	97.2
At 31 Dec 2023	129.2	131.5	396.7	24.3	72.2	31.9	32.6	59.6	6.7	854.1
At 31 Dec 2022	110.9	127.0	407.0	22.5	72.5	31.9	26.7	60.3	8.1	839.7

1 Balances are on a third-party Group consolidated basis.

2 Market risk RWAs are non-additive across the legal entities due to diversification effects within the Group.

RWA movement by global business by key driver
	Credit risk, counterparty credit risk and operational risk
	WPB	CMB¹	GBM¹	Corporate Centre	Market risk	Total RWAs
	$bn	$bn	$bn	$bn	$bn	$bn
RWAs at 1 Jan 2023	181.2	341.3	202.3	77.3	37.6	839.7
Asset size²	15.6	3.2	3.2	2.6	1.6	26.2
Asset quality	2.8	1.5	(0.6)	(1.2)	-	2.5
Model updates	(1.3)	(0.1)	(0.3)	-	(0.9)	(2.6)
Methodology and policy	(6.2)	(1.8)	(7.5)	(3.5)	(0.9)	(19.9)
Acquisitions and disposals	(1.3)	8.0	(0.7)	0.1	0.1	6.2
Foreign exchange movements³	0.8	1.4	(0.1)	(0.1)	-	2.0
Total RWA movement	10.4	12.2	(6.0)	(2.1)	(0.1)	14.4
RWAs at 31 Dec 2023	191.6	353.5	196.3	75.2	37.5	854.1

2 The movements in asset size include the increase in operational risk RWAs, which was driven by revenue.

3 Credit risk foreign exchange movements in this disclosure are computed by retranslating the RWAs into US dollars based on the underlying transactional currencies.

RWA movement by legal entities by key driver¹
	Credit risk, counterparty credit risk and operational risk
	HSBC UK Bank plc	HSBC Bank plc	The Hongkong and Shanghai Banking Corporation Limited	HSBC Bank Middle East Limited	HSBC North America Holdings Inc	HSBC Bank Canada	Grupo Financiero HSBC, S.A. de C.V.	Other trading entities	Holding companies, shared service centres and intra-Group eliminations	Market risk	Total RWAs
	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
RWAs at 1 Jan 2023	110.8	106.5	378.4	20.8	69.5	31.1	26.2	58.0	0.8	37.6	839.7
Asset size²	5.1	0.2	5.8	1.8	0.4	(0.2)	2.9	12.1	(3.5)	1.6	26.2
Asset quality	2.3	(0.9)	(1.9)	(1.0)	0.8	0.3	(0.5)	3.3	0.1	-	2.5
Model updates	(1.0)	(0.3)	(0.4)	0.1	-	-	-	(0.1)	-	(0.9)	(2.6)
Methodology and policy	(4.0)	0.8	(11.2)	(0.3)	(1.1)	(0.7)	0.2	(2.5)	(0.2)	(0.9)	(19.9)
Acquisitions and disposals	9.5	(0.2)	(0.1)	-	-	-	-	(3.2)	0.1	0.1	6.2
Foreign exchange movements³	6.3	2.7	(1.3)	0.1	-	0.6	3.1	(9.6)	0.1	-	2.0
Total RWA movement	18.2	2.3	(9.1)	0.7	0.1	-	5.7	-	(3.4)	(0.1)	14.4
RWAs at 31 Dec 2023	129.0	108.8	369.3	21.5	69.6	31.1	31.9	58.0	(2.6)	37.5	854.1

1 Balances are on a third-party Group consolidated basis.

2 The movements in asset size include the increase in operational risk RWAs, which was driven by revenue.

3 Credit risk foreign exchange movements in this disclosure are computed by retranslating the RWAs into US dollars based on the underlying transactional currencies.

Risk-weighted assets ('RWAs') rose by $14.4bn during the year, driven by an increase of $34.4bn from increased lending, higher operational risk RWAs, business acquisitions and foreign exchange movements. These were partly offset by a reduction of $19.9bn due to methodology and policy changes.

Asset size

Asset size RWAs increased by $26.2bn, including a $10.4bn rise in operational risk RWAs driven by growth in NII.

WPB RWAs increased by $15.6bn, notably due to an expansion of retail lending in Asia, the UK and Mexico, additional sovereign exposures in Asia and other trading entities, including a $2.9bn rise in operational risk RWAs.

CMB RWAs increased by $3.2bn, reflecting an increase in operational risk RWAs of $5.2bn and additional sovereign exposures across various entities. This was partly offset by a net decrease in corporate lending in Asia, the US and Europe.

GBM RWAs increased by $3.2bn, mainly from the $4.0bn rise in operational risk RWAs and additional sovereign exposures across various entities. This was partly offset by a fall in lending in Asia and Europe.

Corporate Centre RWAs rose by $2.6bn, primarily due to an increase in corporate exposures in Saudi Awwal Bank ('SAB').

Asset quality

Asset quality contributed to an RWA increase of $2.5bn due to credit risk rating migrations and portfolio mix changes, notably in Asia, the US and Europe.

Model updates

Model updates decreased RWAs by $2.6bn, mainly due to a change in our risk approach to multilateral development banks' exposures, following approval for change from the PRA, the implementation of the exposure at default mortgage model in the UK, and changes to the incremental risk charge model.

Methodology and policy

The decrease of RWAs from methodology and policy of $19.9bn was mainly driven by a decline of $7.7bn from regulatory changes related to the risk-weighting of residential mortgages in Hong Kong, and credit risk parameter refinements mainly in Asia and Europe.

Acquisitions and disposals

The increase in RWAs from acquisitions and disposals of $6.2bn was primarily due to a rise of $9.6bn from the acquisition of SVB UK. This was partly offset by a decline of $3.2bn from the disposal of our business in Oman.

Foreign currency movements increased total RWAs by $2.0bn.

Leverage ratio¹

	At
	31 Dec	31 Dec
	2023	2022
	$bn	$bn
Tier 1 capital (leverage)	144.2	139.1
Total leverage ratio exposure	2,574.8	2,417.2
	%	%
Leverage ratio	5.6	5.8

1 Leverage ratio calculation is in line with the PRA's UK leverage rules. This includes IFRS 9 transitional arrangement and excludes central bank claims.

Our leverage ratio was 5.6% at 31 December 2023, down from 5.8% at 31 December 2022. The increase in the leverage exposure was primarily due to growth in the balance sheet, which led to a fall of 0.4 percentage points in the leverage ratio. This was partly offset by a rise of 0.2 percentage points due to an increase in tier 1 capital.

At 31 December 2023, our UK minimum leverage ratio requirement of 3.25% was supplemented by a leverage ratio buffer of 0.9%, which consists of an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.2%. These buffers translated into capital values of $18.0bn and $5.1bn respectively.

Regulatory and other developments

In September 2023, the PRA announced changes to the UK implementation of Basel 3.1 with a new proposed implementation date of 1 July 2025. For further details related to the November 2022 consultation, see page 6 of our Pillar 3 Disclosures at 31 December 2022. We are currently assessing the impact of the consultation paper and the associated implementation challenges (including data provision) on our RWAs upon initial implementation. The RWA output floor under Basel 3.1 is now proposed to be subject to a four-and-a-half year transitional provision. Any impact from the output floor is expected to be towards the end of the transition period.

Regulatory transitional arrangements for IFRS 9 'Financial Instruments'

We have adopted the regulatory transitional arrangements of the Capital Requirements Regulation for IFRS 9, including paragraph four of article 473a. These allow banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances. Our capital and ratios are presented under these arrangements throughout the tables in this section, including the end point figures.

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.

For further details, see our Pillar 3 Disclosures at 31 December 2023, which is expected to be published on or around 21 February 2024 at www.hsbc.com/investors.

Liquidity and funding risk in 2023

Liquidity metrics

At 31 December 2023, all of the Group's material operating entities were above the required regulatory minimum liquidity and funding levels.

Each entity maintains sufficient unencumbered liquid assets to comply with local and regulatory requirements.

Each entity maintains a sufficient stable funding profile and is assessed using the NSFR or other appropriate metrics.

In addition to regulatory metrics, we use a wide set of measures to manage our liquidity and funding profile.

The Group liquidity and funding position on an average basis is analysed in the following sections.

Operating entities' liquidity¹
	At 31 December 2023
	LCR	HQLA	Net outflows	NSFR
	%	$bn $bn	$bn	%
HSBC UK Bank plc (ring-fenced bank)²	201	118	59	158
HSBC Bank plc (non-ring-fenced bank)³	148	132	89	116
The Hongkong and Shanghai Banking Corporation - Hong Kong branch⁴	192	147	77	127
HSBC Singapore⁵	292	26	9	174
Hang Seng Bank	254	52	21	163
HSBC Bank China	170	24	14	139
HSBC Bank USA	172	82	48	131
HSBC Continental Europe ^6,7	158	83	52	137
HSBC Bank Middle East Ltd - UAE branch	281	13	5	163
HSBC Canada	164	21	13	129
HSBC Mexico	149	8	5	124

	At 31 December 2022
HSBC UK Bank plc (ring-fenced bank)²	226	136	60	164
HSBC Bank plc (non-ring-fenced bank)³	143	128	90	115
The Hongkong and Shanghai Banking Corporation - Hong Kong branch⁴	179	147	82	130
HSBC Singapore⁵	247	21	9	173
Hang Seng Bank	228	50	22	156
HSBC Bank China	183	23	13	132
HSBC Bank USA	164	85	52	131
HSBC Continental Europe⁶	151	55	37	132
HSBC Bank Middle East Ltd - UAE branch	239	12	5	158
HSBC Canada	149	22	15	122
HSBC Mexico	155	8	5	129

1 The LCR and NSFR ratios presented in the above table are based on average values. The LCR is the average of the preceding 12 months. The NSFR is the average of the preceding four quarters.

2 HSBC UK Bank plc refers to the HSBC UK liquidity group, which comprises five legal entities: HSBC UK Bank plc, Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd, HSBC Innovation Bank Limited 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.

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

4 The Hongkong and Shanghai Banking Corporation - Hong Kong branch represents the material activities of The Hongkong and Shanghai Banking Corporation Limited. It is monitored and controlled for liquidity and funding risk purposes as a stand-alone operating entity.

5 HSBC Singapore includes HSBC Bank Singapore Limited and The Hongkong and Shanghai Banking Corporation - Singapore branch. Liquidity and funding risk is monitored and controlled at country level in line with the local regulator's approval.

6 In response to the requirement for an intermediate parent undertaking in line with the EU Capital Requirements Directive ('CRD V'), HSBC Continental Europe acquired control of HSBC Germany and HSBC Bank Malta on 30 November 2022. The averages for LCR and NSFR include the impact of the inclusion of the two entities from November 2022.

7 HSBC Continental Europe NSFR includes the impact of the sale of our retail banking operations in France.

Consolidated liquidity metrics

Net stable funding ratio

We manage funding risk based on the PRA's NSFR rules. The Group's NSFR at 31 December 2023, calculated from the average of the four preceding quarters average, was 133%.

	At¹
	31 Dec	30 Jun	31 Dec
	2023	2023	2022
	$bn	$bn	$bn
Total available stable funding ($bn)	1,602	1,575	1,552
Total required stable funding ($bn)	1,202	1,172	1,138
NSFR ratio (%)	133	134	136

1 Group NSFR numbers above are based on average values. The NSFR number is the average of the preceding four quarters.

Liquidity coverage ratio

At 31 December 2023, the average high-quality liquid assets ('HQLA') held at entity level amounted to $795bn (31 December 2022: $812bn). The Group consolidation methodology includes a deduction to reflect the impact of limitations in the transferability of entity liquidity around the Group. That resulted in an adjustment of $147bn to LCR HQLA and $7bn to LCR inflows on an average basis. Furthermore, this methodology was enhanced in 2023 to consider more accurately non-convertible currencies.

	At¹
	31 Dec	30 Jun	31 Dec
	2023	2023	2022
	$bn	$bn	$bn
High-quality liquid assets (in entities)	795	796	812
EC Delegated Act adjustment for transfer restrictions²	(154)	(172)	(174)
Group LCR HQLA	648	631	647
Net outflows	477	478	491
Liquidity coverage ratio (%)	136	132	132

1 Group LCR numbers above are based on average values. The LCR is the average of the preceding 12 months.

2 This includes adjustments made to high-quality liquid assets and inflows in entities to reflect liquidity transfer restrictions.

Liquid assets

After the $147bn deduction, the average Group LCR HQLA of $648bn (31 December 2022: $647bn) was held in a range of asset classes and currencies. Of these, 97% were eligible as level 1 (31 December 2022: 97%).

The following tables reflect the composition of the average liquidity pool by asset type and currency at 31 December 2023.

Liquidity pool by asset type¹
	Liquidity pool	Cash	Level 1²	Level 2²
	$bn	$bn	$bn	$bn
Cash and balance at central bank	310	310	-	-
Central and local government bonds	319	-	303	16
Regional government public sector entities	2	-	2	-
International organisation and multilateral developments banks	10	-	10	-
Covered bonds	6	-	2	4
Other	1	-	-	1
Total at 31 Dec 2023	648	310	317	21
Total at 31 Dec 2022	647	344	284	19

1 Group liquid assets numbers are based on average values.

2 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 currency¹
	$	£	€	HK$	Other	Total
	$bn	$bn	$bn	$bn	$bn	$bn
Liquidity pool at 31 Dec 2023	184	173	112	51	128	648
Liquidity pool at 31 Dec 2022	167	191	98	54	137	647

1 Group liquid assets numbers are based on average values.

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.

Funding sources
(Audited)
	2023	2022¹
	$m	$m
Customer accounts	1,611,647	1,570,303
Deposits by banks	73,163	66,722
Repurchase agreements - non-trading	172,100	127,747
Debt securities in issue	93,917	78,149
Cash collateral, margin and settlement accounts	85,255	88,476
Liabilities of disposal groups held for sale²	108,406	114,597
Subordinated liabilities	24,954	22,290
Financial liabilities designated at fair value	141,426	127,321
Insurance contract liabilities	120,851	108,816
Trading liabilities	73,150	72,353
- repos	12,198	16,254
- stock lending	3,322	3,541
- other trading liabilities	57,630	52,558
Total equity	192,610	185,197
Other balance sheet liabilities	341,198	387,315
At 31 Dec	3,038,677	2,949,286

Funding uses
(Audited)
	2023	2022¹
	$m	$m
Loans and advances to customers	938,535	923,561
Loans and advances to banks	112,902	104,475
Reverse repurchase agreements - non-trading	252,217	253,754
Cash collateral, margin and settlement accounts	89,911	82,984
Assets held for sale²	114,134	115,919
Trading assets	289,159	218,093
- reverse repos	16,575	14,798
- stock borrowing	14,609	10,706
- other trading assets	257,975	192,589
Financial investments	442,763	364,726
Cash and balances with central banks	285,868	327,002
Other balance sheet assets	513,188	558,772
At 31 Dec	3,038,677	2,949,286

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. We have restated 2022 comparative data.

2 'Liabilities of disposal groups held for sale' includes $82bn and 'Assets held for sale' includes $88bn in respect of the planned sale of our banking business in Canada. 'Liabilities of disposal groups held for sale' includes $26bn and 'Assets of disposal groups held for sale' includes $28bn in respect of the sale of our retail banking operations in France.

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 maturities¹
	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	17,620	9,798	14,284	13,226	12,226	20,882	64,010	50,045	202,091
- unsecured CDs and CP	6,400	6,777	7,601	6,429	6,513	1,179	1,073	925	36,897
- unsecured senior MTNs	8,190	1,160	4,365	3,627	3,267	12,903	54,984	41,007	129,503
- unsecured senior structured notes	2,307	1,491	1,617	2,513	1,978	2,924	2,793	5,910	21,533
- secured covered bonds	-	-	-	-	-	-	1,275	-	1,275
- secured asset-backed commercial paper	426	-	-	-	-	-	-	-	426
- secured ABS	22	44	62	58	55	188	861	539	1,829
- others	275	326	639	599	413	3,688	3,024	1,664	10,628
Subordinated liabilities	-	2,013	-	-	-	3,358	4,282	27,234	36,887
- subordinated debt securities	-	2,000	-	-	-	3,358	4,282	25,441	35,081
- preferred securities	-	13	-	-	-	-	-	1,793	1,806
At 31 Dec 2023	17,620	11,811	14,284	13,226	12,226	24,240	68,292	77,279	238,978

Debt securities issued	11,959	11,266	12,532	8,225	8,212	26,669	52,435	52,952	184,250
- unsecured CDs and CP	3,821	6,017	7,088	4,137	3,123	1,264	707	1,004	27,161
- unsecured senior MTNs	5,973	2,351	3,534	1,363	3,238	19,229	44,023	44,021	123,732
- unsecured senior structured notes	1,264	1,421	1,247	1,850	1,627	4,463	2,609	5,990	20,471
- secured covered bonds	-	-	-	-	-	-	602	-	602
- secured asset-backed commercial paper	690	-	-	-	-	-	-	-	690
- secured ABS	15	28	40	38	36	123	656	220	1,156
- others	196	1,449	623	837	188	1,590	3,838	1,717	10,438
Subordinated liabilities	-	-	11	160	-	2,000	5,581	25,189	32,941
- subordinated debt securities	-	-	11	160	-	2,000	5,581	23,446	31,198
- preferred securities	-	-	-	-	-	-	-	1,743	1,743
At 31 Dec 2022	11,959	11,266	12,543	8,385	8,212	28,669	58,016	78,141	217,191

1 Excludes financial liabilities of disposal groups.

Structural foreign exchange risk in 2023

Structural foreign exchange exposures represent net assets or capital investments in subsidiaries, branches, joint arrangements or associates, together with any associated hedges, the functional currencies of which are currencies other than the US dollar. Exchange differences on structural exposures are usually recognised in 'other comprehensive income'.

Net structural foreign exchange exposures
	2023
Currency of structural exposure	Net investment in foreign operations (excl non-controlling interest)	Net investment hedges	Structural foreign exchange exposures (pre-economic hedges)	Economic hedges - structural FX hedges¹	Economic hedges - equity securities (AT1)²	Net structural foreign exchange exposures
Currency of structural exposure	$m	$m	$m	$m	$m	$m
Hong Kong dollars	39,014	(5,792)	33,222	(7,979)	-	25,243
Pounds sterling	46,661	(16,415)	30,246	-	(1,275)	28,971
Chinese renminbi	33,809	(3,299)	30,510	(1,066)	-	29,444
Euros	15,673	(515)	15,158	-	(1,384)	13,774
Canadian dollars	5,418	(1,076)	4,342	-	-	4,342
Indian rupees	6,286	(2,110)	4,176	-	-	4,176
Mexican pesos	4,883	-	4,883	-	-	4,883
Saudi riyals	4,312	-	4,312	-	-	4,312
UAE dirhams	4,995	(613)	4,382	(2,761)	-	1,621
Malaysian ringgit	2,754	-	2,754	-	-	2,754
Singapore dollars	2,345	(224)	2,121	-	-	2,121
Australian dollars	2,362	-	2,362	-	-	2,362
Taiwanese dollars	2,212	(1,127)	1,085	-	-	1,085
Indonesian rupiah	1,535	(512)	1,023	-	-	1,023
Swiss francs	1,191	(526)	665	-	-	665
Korean won	1,354	(864)	490	-	-	490
Thai baht	1,022	-	1,022	-	-	1,022
Egyptian pound	959	-	959	-	-	959
Qatari rial	834	(215)	619	(299)	-	320
Argentinian peso	794	-	794	-	-	794
Vietnamese dong	872	-	872	-	-	872
Others, each less than $700m	4,386	(487)	3,899	-	-	3,899
At 31 Dec	183,671	(33,775)	149,896	(12,105)	(2,659)	135,132

	2022³
Hong Kong dollars	39,191	(4,597)	34,594	(8,363)	-	26,231
Pounds sterling	39,298	(14,000)	25,298	-	(1,205)	24,093
Chinese renminbi	35,712	(3,532)	32,180	(994)	-	31,186
Euros	14,436	(777)	13,659	-	(2,402)	11,257
Canadian dollars	4,402	(811)	3,591	-	-	3,591
Indian rupees	4,967	(1,380)	3,587	-	-	3,587
Mexican pesos	3,932	-	3,932	-	-	3,932
Saudi riyals	4,182	(109)	4,073	-	-	4,073
UAE dirhams	4,534	(731)	3,803	(2,285)	-	1,518
Malaysian ringgit	2,715	-	2,715	-	-	2,715
Singapore dollars	2,517	(358)	2,159	-	(559)	1,600
Australian dollars	2,264	-	2,264	-	-	2,264
Taiwanese dollars	2,058	(1,140)	918	-	-	918
Indonesian rupiah	1,453	(469)	984	-	-	984
Swiss francs	1,233	(727)	506	-	-	506
Korean won	1,283	(817)	466	-	-	466
Thai baht	908	-	908	-	-	908
Egyptian pound	746	-	746	-	-	746
Qatari rial	785	(200)	585	(277)	-	308
Argentinian peso	1,010	-	1,010	-	-	1,010
Vietnamese dong	665	-	665	-	-	665
Others, each less than $700m	4,470	(495)	3,975	(36)	-	3,939
At 31 Dec	172,761	(30,143)	142,618	(11,955)	(4,166)	126,497

1 Represents hedges that do not qualify as net investment hedges for accounting purposes.

2 Represents foreign currency-denominated preference share and AT1 instruments. These are accounted for at historical cost under IFRS Accounting Standards and do not qualify as net investment hedges for accounting purposes. The gain or loss arising from changes in the US dollar value of these instruments is recognised on redemption in retained earnings.

3 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data for the financial year ended 31 December 2022 have been restated accordingly.

For a definition of structural foreign exchange exposures, see page 205.

Interest rate risk in the banking book in 2023

Net interest income and banking net interest income

We have introduced a new metric to analyse sensitivity of our income to interest rate shocks. In addition to NII sensitivity, we are also disclosing banking NII sensitivity. HSBC has trading book assets that are funded by banking book liabilities and the NII sensitivity measure does not include the sensitivity of the internal transfer income from this funding. Banking NII sensitivity includes an adjustment on top of NII sensitivity to reflect this. The currency split of banking NII sensitivities includes the impact of vanilla foreign exchange swaps to optimise cash management across the Group.

In this disclosure we present the banking NII sensitivity alongside the NII sensitivity. Over time we expect to phase out NII sensitivity once the appropriate prior period comparables are available for banking NII sensitivity.

The following tables set out the assessed impact to a hypothetical base case projection of our NII and banking NII under an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 January 2024 (effects in the first, second and third years). For example, Year 3 shows the impact of an immediate rate shock on the NII and banking NII projected for the third year.

The sensitivities shown represent a hypothetical simulation of the base case income, assuming a static balance sheet (specifically no assumed migration from current account to term deposits), and no management actions from Global Treasury. This also incorporates the effect of interest rate behaviouralisation, hypothetical managed rate product pricing assumptions, prepayment of mortgages and deposit stability. The sensitivity calculations exclude pensions, insurance, and interests in associates.

The sensitivity analysis performed in the case of a down-shock does not include floors to market rates, and it does not include floors on some wholesale assets and liabilities. However, floors have been maintained for deposits and loans to customers where this is contractual or where negative rates would not be applied.

As market and policy rates move, the degree to which these changes are passed on to customers will vary based on a number of factors, including the absolute level of market rates, regulatory and contractual frameworks, and competitive dynamics. To aid comparability between markets, we have simplified the basis of preparation for our disclosure and have used a 50% pass-on assumption for major entities on certain interest-bearing deposits. Our pass-through asset assumptions are largely in line with our contractual agreements or established market practice, which typically results in a significant portion of interest rate changes being passed on.

An immediate interest rate rise of 100bps would increase projected NII for the 12 months to 31 December 2024 by $1.1bn and banking NII by $2.8bn. An immediate interest rate fall of 100bps would decrease projected NII for the 12 months to 31 December 2024 by $1.6bn and banking NII by $3.4bn.

The sensitivity of NII for 12 months as at 31 December 2023 decreased by $2.5bn in the plus 100bps parallel shock and by $2.4bn in the minus 100bps parallel shock, when compared with 31 December 2022. The key drivers of the reduction in NII sensitivity are the increase in stabilisation activities in line with our strategy, as well as deposit migration.

For further details of measurement of interest rate risk in the banking book, see page 205.

NII sensitivity to an instantaneous change in yield curves (12 months) - Year 1 sensitivity by currency
	Currency
	$	HK$	£	€	Other	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2024 to Dec 2024 (based on balance sheet at 31 December 2023)
+100bps parallel	(1,155)	148	325	503	1,232	1,053
-100bps parallel	1,004	(230)	(432)	(522)	(1,391)	(1,571)
Change in Jan 2023 to Dec 2023 (based on balance sheet at 31 December 2022)
+100bps parallel	(267)	413	1,026	674	1,689	3,535
-100bps parallel	236	(476)	(1,177)	(765)	(1,787)	(3,969)

NII sensitivity to an instantaneous down 100bps parallel change in yield curves - Year 2 and Year 3 sensitivity by currency
	Currency
	$	HK$	£	€	Other	Total
	$m	$m	$m	$m	$m	$m
Change in NII (based on balance sheet at 31 December 2023)
Year 2 (Jan 2025 to Dec 2025)	488	(431)	(768)	(552)	(1,733)	(2,996)
Year 3 (Jan 2026 to Dec 2026)	213	(499)	(1,269)	(624)	(1,861)	(4,040)
Change in NII (based on balance sheet at 31 December 2022)
Year 2 (Jan 2024 to Dec 2024)	(43)	(532)	(1,580)	(810)	(1,979)	(4,944)
Year 3 (Jan 2025 to Dec 2025)	(404)	(636)	(1,954)	(839)	(2,092)	(5,925)

Banking NII sensitivity to an instantaneous change in yield curves (12 months) - Year 1 sensitivity by currency
	Currency
	$	HK$	£	€	Other	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2024 to Dec 2024 (based on balance sheet at 31 December 2023)
+100bps parallel	343	411	496	285	1,297	2,832
-100bps parallel	(494)	(493)	(602)	(304)	(1,460)	(3,353)

Banking NII sensitivity to an instantaneous down 100bps parallel change in yield curves - Year 2 and Year 3 sensitivity by currency
	Currency
	$	HK$	£	€	Other	Total
	$m	$m	$m	$m	$m	$m
Change in banking NII (based on balance sheet at 31 December 2023)
Year 2 (Jan 2025 to Dec 2025)	(1,015)	(693)	(938)	(333)	(1,798)	(4,777)
Year 3 (Jan 2026 to Dec 2026)	(1,289)	(761)	(1,439)	(405)	(1,926)	(5,820)

Non-trading value at risk

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 non-trading portfolios

Value at risk ('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 the market risk management of non-trading portfolios to have a complete picture of risk, complementing risk sensitivity analysis.

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

- historical market rates and prices, which are calculated with reference to interest rates, credit spreads 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.

Although a valuable guide to risk, VaR is used for non-trading portfolios 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. As the model is calibrated on the last 500 business days, it does not adjust instantaneously to a change in the market regime.

- The use of a one-day holding period for risk management purposes of non-trading books is only an indication of exposure and not indicative of the time period required to hedge or liquidate positions.

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

The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included in the Group non-trading VaR. The management of this risk is described on page 217.

Non-trading VaR also excludes the equity risk on securities held at fair value and non-trading book foreign exchange risk.

The daily levels of total non-trading VaR in 2023 are set out in the graph below.

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

The Group non-trading VaR for 2023 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 2023	173.8	112.8	(104.2)	182.4
Average	156.2	84.2	(63.7)	176.6
Maximum	201.9	116.4		224.3
Minimum	108.8	55.2		127.0

	Interest rate	Credit spread	Portfolio diversification¹	Total²
	$m	$m	$m	$m
Balance at 31 Dec 2022	159.8	56.6	(45.3)	171.1
Average	134.6	56.9	(35.9)	155.6
Maximum	225.5	84.7		265.3
Minimum	98.3	43.4		106.3

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 and credit spreads - 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.

The VaR for non-trading activity increased by $11m from $171m at 31 December 2022 to $182m at 31 December 2023 due to relatively small changes in risk profile over the year. The average portfolio diversification effect between interest rate and credit spread exposure increased during the year, with the offset increasing to $104m from $45m.

Sensitivity of capital and reserves

Global Treasury maintains a portfolio of high-quality liquid assets for contingent liquidity and NII stabilisation purposes, which is in part accounted for under a hold-to-collect-and-sell business model. This

hold-to-collect-and-sell portfolio, together with any associated derivatives in designated hedge accounting relationships, is accounted for at fair value through other comprehensive income and has an impact on CET1. The portfolio represents the vast majority of our hold-to-collect-and-sell capital risk and is risk managed with a variety of tools, including risk sensitivities and value at risk measures.

The table below measures the sensitivity of the value of this portfolio to an instantaneous 100 basis point increase in interest rates, based on the risk sensitivity of a shift in value for a 1 basis point ('bps') parallel movement in interest rates.

Sensitivity of hold-to-collect-and-sell reserves to interest rate movements
	$m
At 31 Dec 2023
+100 basis point parallel move in all yield curves	(2,264)
As a percentage of total shareholders' equity	(1.22)%

At 31 Dec 2022
+100 basis point parallel move in all yield curves	(1,199)
As a percentage of total shareholders' equity	(0.64)%

The increase in the sensitivity of the portfolio during 2023 was mainly driven by an increase in NII stabilisation in line with our strategy. The figures in the table above do not take into account the effects of interest rate convexity. The portfolio mostly comprises vanilla sovereign bonds in a variety of currencies, and the primary risk is interest rate duration risk, although the portfolio also generates asset swap, credit spread and asset spread risks that are managed within appetite as part of our risk management framework. A minus 100bps shock would lead to an approximately symmetrical gain.

Alongside our monitoring of the hold-to-collect-and-sell reserve sensitivity, 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.

The following table describes the sensitivity of our cash flow hedging reserves to the stipulated movements in yield curves at the

year end. The sensitivities are indicative and based on simplified scenarios. These particular exposures form only a part of our overall interest rate exposure. We apply flooring on negative rates in the minus 100bps scenario in this assessment. Due to increases in interest rates in most markets, the effect of this flooring is immaterial at the end of 2023.

Comparing 31 December 2023 with 31 December 2022, the sensitivity of the cash flow hedging reserve increased by $1,537m in the plus 100bps scenario and increased by $1,562m in the minus 100bps scenario. The increase in the sensitivity of this reserve was mainly driven by an increase in our NII stabilisation. Our exposure to fixed rate pound sterling hedges continued to be the largest in size and in terms of year-on-year increase. Hong Kong dollar and euro hedges contributed to the majority of the rest of the increase in exposure, partly offset by a reduction in the size of US dollar hedges.

Sensitivity of cash flow hedging reported reserves to interest rate movements
	$m
At 31 Dec 2023
+100 basis point parallel move in all yield curves	(3,436)
As a percentage of total shareholders' equity	(1.85)%
-100 basis point parallel move in all yield curves	3,474
As a percentage of total shareholders' equity	1.87%

At 31 Dec 2022
+100 basis point parallel move in all yield curves	(1,899)
As a percentage of total shareholders' equity	(1.01)%
-100 basis point parallel move in all yield curves	1,912
As a percentage of total shareholders' equity	1.02%

Third-party assets in Markets Treasury

Third-party assets in Markets Treasury increased by 5% compared with 31 December 2022. The net increase of $38bn is partly reflective of higher commercial surpluses during the year, with the

increase of $76bn in 'Financial Investments' and the decrease of $39bn in 'Cash and balances at central banks' largely driven by NII stabilisation activity.

Third-party assets in Markets Treasury
	2023	2022
	$m	$m
Cash and balances at central banks	278,289	317,479
Trading assets	238	498
Loans and advances:
- to banks	78,667	67,612
- to customers	1,083	2,102
Reverse repurchase agreements	45,419	53,016
Financial investments	396,259	319,852
Other	34,651	36,192
At 31 Dec	834,606	796,751

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 206.

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.

Foreign exchange risk

HSBC Holdings' foreign exchange exposures derive almost entirely from the execution of structural foreign exchange hedges on behalf of the Group. At 31 December 2023, HSBC Holdings had forward foreign exchange contracts of $33.8bn (2022: $30.1bn) to manage the Group's structural foreign exchange exposures.

For further details of our structural foreign exchange exposures, see page 213.

Sensitivity of net interest income

HSBC Holdings monitors NII sensitivity in the first, second and third years, 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 redeem at a future call date is called at this date.

The tables below set out the effect on HSBC Holdings' future NII of an immediate shock of +/-100bps to the current market-implied path of interest rates across all currencies on 1 January 2024.

The NII sensitivities shown are indicative and based on simplified scenarios. An immediate interest rate rise of 100bps would decrease projected NII for the 12 months to 31 December 2024 by $233m. Conversely, an immediate fall of 100bps would increase projected NII for the 12 months to 31 December 2024 $233m.

Overall the NII sensitivity is mainly driven by floating liabilities funding equity (non-interest bearing) investments in subsidiaries.

During 2023, HSBC Holdings hedged $3.6bn of previously unhedged issuances, which increased the negative NII sensitivity to positive parallel shifts in interest rates. In year 1, that impact is offset by a shorter repricing profile of assets.

As of the Annual Report and Accounts 2023, HSBC Holdings is no longer disclosing the interest rate repricing gap table, as the sensitivity of net interest income table captures HSBC Holdings' exposure to interest rate risk and is aligned to the way we disclose interest rate risk internally to key management.

NII sensitivity to an instantaneous change in yield curves (12 months) - Year 1 sensitivity by currency
	$	HK$	£	€	Other	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2024 to Dec 2024 (based on balance sheet at 31 December 2023)
+100bps parallel	(258)	-	12	5	8	(233)
-100bps parallel	258	-	(12)	(5)	(8)	233
Change in Jan 2023 to Dec 2023 (based on balance sheet at 31 December 2022)
+100bps parallel	(265)	-	16	9	-	(240)
-100bps parallel	265	-	(16)	(9)	-	240

NII sensitivity to an instantaneous down 100bps parallel change in yield curves - Year 2 and Year 3 sensitivity by currency
	$	HK$	£	€	Other	Total
	$m	$m	$m	$m	$m	$m
Change in NII (based on balance sheet at 31 December 2023)
Year 2 (Jan 2025 to Dec 2025)	219	-	(12)	1	(9)	199
Year 3 (Jan 2026 to Dec 2026)	218	-	(12)	-	(10)	196
Change in NII (based on balance sheet at 31 December 2022)					-
Year 2 (Jan 2024 to Dec 2024)	182	-	(12)	(8)	-	162
Year 3 (Jan 2025 to Dec 2025)	160	-	(10)	(7)	-	143

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 three 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.

Market risk

Contents

218	Overview
218	Market risk management
219	Market risk in 2023
219	Trading portfolios
220	Market risk balance sheet linkages

Overview

Market risk is the risk of an adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads. Market risk arises from both trading portfolios and non-trading portfolios.

For further details of market risk in non-trading portfolios, see page 215 of the Annual Report and Accounts 2023.

Market risk management

Key developments in 2023

There were no material changes to our policies and practices for the management of market risk in 2023.

Governance and structure

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

	Trading risk
	- Foreign exchange and commodities - Interest rates - Credit spreads - Equities
	GBM
	Value at risk \| Sensitivity \| Stress testing

The objective of our risk management policies and measurement techniques 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 and Compliance Officer for HSBC Holdings. These limits are allocated across business lines and to the Group's legal entities. 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 only those offices with appropriate levels of product expertise and 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 movements in individual market factors 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. 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 a one-day holding period for risk management purposes of 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.

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 and reverse stress testing provide senior management with insights regarding the 'tail risk' beyond VaR.

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. Market risk stress testing incorporates both historical and hypothetical events. 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 local or idiosyncratic in nature and complement the systematic top-down stress testing.

The risk appetite around potential stress losses for the Group is set and monitored against limits.

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 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 necessarily indicative of the actual performance of the business.

The number of hypothetical loss back-testing exceptions, together with a number of other indicators, is used to assess model performance and to consider whether enhanced internal monitoring of a VaR model is required. We back-test our VaR at set levels of our Group entity hierarchy.

Market risk in 2023

During 2023, global financial markets were mainly driven by the inflation outlook, interest rate expectations and recession risks, coupled with banking failures in March, and rising geopolitical tensions in the Middle East from October. Major central banks maintained restrictive monetary policies, and bond markets experienced a volatile year. After rising significantly in the second and third quarters of 2023, US treasury bond yields fell during the fourth quarter, as lower inflation pressures led markets to expect that key rates would be cut in 2024. The interest rate outlook was also a major driver of performance in global equity markets, alongside resilient corporate earnings and positive sentiment in the technology sector. Equities in developed markets advanced significantly amid low volatility, while performance in emerging markets was more subdued. In foreign exchange markets, the US dollar fluctuated against other major currencies, mostly in line with US Federal Reserve policy and bond yields expectations. Investor sentiment remained resilient in credit markets. High-yield and investment-grade credit spreads narrowed, in general, as fears of contagion in the banking sector in the first quarter of 2023 abated, and economic growth remained resilient throughout the year.

We continued to manage market risk prudently during 2023. Sensitivity exposures and VaR remained within appetite as the business pursued its core market-making activity in support of our customers. Market risk was managed using a complementary set of risk measures and limits, including stress testing and scenario analysis.

Trading portfolios

Value at risk of the trading portfolios

Trading VaR was predominantly generated by the Markets and Securities Services business.

Trading VaR as at 31 December 2023 increased by $3.3m compared with 31 December 2022. Interest rate risk factors were the major contributors to VaR at the end of December 2023. The VaR increase during 2023 peaked in September, and was mainly driven by:

- interest rate risk exposures in currencies held across the Fixed Income and Foreign Exchange business lines to facilitate client-driven activity; and

- the effects of relatively large short-term interest rate shocks for key currencies, which are captured in the VaR scenario window.

These factors were partly offset by lower losses from equity risks and interest rate risks that were captured within the RNIV framework.

The daily levels of total trading VaR during 2023 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 2023	13.4	55.9	15.2	7.2	(38.9)	52.8
Average	16.2	53.9	19.0	11.6	(40.8)	59.8
Maximum	24.6	86.0	27.8	16.5		98.2
Minimum	9.3	25.5	13.4	6.6		34.4

Balance at 31 Dec 2022	15.4	40.0	18.6	11.9	(36.4)	49.5
Average	13.6	29.6	16.1	16.8	(34.0)	42.1
Maximum	29.2	73.3	24.8	27.9		78.3
Minimum	5.7	20.2	11.5	9.1		29.1

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.

The table below shows trading VaR at a 99% confidence level compared with trading VaR at a 95% confidence level at 31 December 2023. This comparison facilitates the benchmarking of the trading VaR, which can be stated at different confidence levels, with financial institution peers. The 95% VaR is unaudited.

Comparison of trading VaR, 99% 1 day vs trading VaR, 95% 1 day

	Trading VaR, 99% 1 day	Trading VaR, 95% 1 day
	$m	$m
Balance at 31 Dec 2023	52.8	35.3
Average	59.8	36.8
Maximum	98.2	53.3
Minimum	34.4	21.0

Balance at 31 Dec 2022	49.5	31.7
Average	42.1	24.6
Maximum	78.3	49.0
Minimum	29.1	17.5

Back-testing

During 2023, the Group experienced no back-testing exceptions on losses against actual or hypothetical profit and losses.

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. Other than a limited number of exceptions, these assets and liabilities are treated as traded risk for the purposes of market risk management. The exceptions primarily arise in Global Banking where the short-term acquisition and disposal of 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.

Climate risk TCFD

Contents

221	Overview
222	Climate risk management
223	Embedding our climate risk approach
225	Insights from climate scenario analysis

Overview

Our climate risk approach is aligned to the framework outlined by the Taskforce on Climate-related Financial Disclosures ('TCFD'), which identifies two primary drivers of climate risk:

- physical risk, which arises from the increased frequency and severity of extreme weather events, such as hurricanes and floods, or chronic gradual shifts in weather patterns or rises in the sea level; and

- transition risk, which arises from the process of moving to a net zero economy, including changes in government policy and legislation, technology, market demand, and reputational implications triggered by a change in stakeholder expectations, action or inaction.

In addition to these primary drivers of climate risk, we have also identified the following thematic issues related to climate risk, which are most likely to materialise in the form of reputational, regulatory compliance and litigation risks:

- net zero alignment risk, which arises from the risk of HSBC failing to meet its net zero commitments or failing to meet external expectations related to net zero, because of inadequate ambition and/or plans, poor execution, or inability to adapt to changes in the external environment; and

- the risk of greenwashing, which arises from the act of knowingly or unknowingly making inaccurate, unclear, misleading or unsubstantiated claims regarding sustainability to our stakeholders.

Approach

We recognise that the physical impacts of climate change and the transition to a net zero economy can create significant financial risks for companies, investors and the financial system. HSBC may be affected by climate risks either directly or indirectly through our relationships with our customers, which could result in both financial and non-financial impacts.

Our climate risk approach aims to effectively manage the material climate risks that could impact our operations, financial performance and stability, and reputation. It is informed by the evolving expectations of our regulators.

We are developing our climate risk capabilities across our businesses, by prioritising sectors, portfolios and counterparties with the highest impacts.

We continue to make progress in enhancing our climate risk capabilities, and recognise it is a long-term iterative process.

We aim to regularly review our approach to increase coverage and incorporate maturing data, climate analytics capabilities, frameworks and tools, as well as respond to emerging industry best practice and climate risk regulations.

This includes updating our approach to reflect how the risks associated with climate change continue to evolve in the real world, and maturing how we embed climate risk factors into strategic planning, transactions and decision making across our businesses.

Our climate risk approach is aligned to our Group-wide risk management framework and three lines of defence model, which sets out how we identify, assess and manage our risks. For further details of the three lines of defence framework, see page 138.

The tables below provide an overview of the climate risk drivers and thematic issues considered within HSBC's climate risk approach.


Physical	Acute	Increased frequency and severity of weather events causing disruption to business operations	- Decreased real estate values or stranded assets - Decreased household income and wealth - Increased costs of legal and compliance - Increased public scrutiny - Decreased profitability - Lower asset performance	Short term Medium term Long term
	Chronic	Longer-term shifts in climate patterns (e.g. sustained higher temperatures, sea level rise, shifting monsoons or chronic heat waves)
Transition	Policy and legal	Mandates on, and regulation of products and services and/or policy support for low-carbon alternatives. Litigation from parties who have suffered loss and damage from climate impacts
	Technology	Replacement of existing products with lower emissions options
	End-demand (market)	Changing consumer demand from individuals and corporates
	Reputational	Increased scrutiny following a change in stakeholder perceptions of climate-related action or inaction


Net zero alignment risk	Net zero ambition risk	Failing to set or adapt our net zero ambition and broader business strategy in alignment with key stakeholder expectations, latest scientific understanding and commercial objectives.
	Net zero execution risk	Failing to meet our net zero targets due to taking insufficient or ineffective actions, or due to the actions of clients, suppliers and other stakeholders.
	Net zero reporting risk	Failing to report emissions baselines and targets, and performance against these accurately due to data, methodology and model limitations.
Risk of greenwashing	Firm	Making inaccurate, unclear, misleading, or unsubstantiated claims in relation to our sustainability commitments and targets, as well as the reporting of our performance towards them.
	Product	Making inaccurate, unclear, misleading or unsubstantiated claims in relation to products or services offered to clients that have stated sustainability objectives, characteristics, impacts or features.
	Client	Making inaccurate, unclear, misleading or unsubstantiated claims as a consequence of our relationships with clients or transactions we undertake with them, where their sustainability commitments or related performance are misrepresented or are not aligned to our own commitments.

In 2023, we updated our climate risk materiality assessment, to understand how climate risk may impact across HSBC's risk taxonomy. The assessment focused on a 12-month time horizon, as well as time horizons for the short-term, medium-term and long-term periods. We define short term as time periods up to 2025; medium term as between 2026 and 2035; and long term as between 2036 and 2050. These time periods align to the Climate Action 100+ disclosure framework v1.2. The table below provides a summary of how climate risk may impact a subset of HSBC's principal risks.

The assessment is refreshed annually, and the results may change as our understanding of climate risk and how it impacts HSBC evolve (for further details, see 'Impact on reporting and financial statements' on page 44).

In addition to this assessment, we also consider climate risk in our emerging risk reporting and scenario analysis (for further details, see 'Top and emerging risks' on page 38).


Physical risk	●	●	●		●	●
Transition risk	●	●	●	●	●	●

1 Our climate risk approach identifies thematic issues such as HSBC net zero alignment risk and the risk of greenwashing, which are most likely to materialise in the form of reputational, regulatory compliance and litigation risks.

Climate risk management

Key developments in 2023

Our climate risk programme continues to support the development of our climate risk management capabilities. The following outlines key developments in 2023:

- We updated our climate risk management approach to incorporate net zero alignment risk and developed guidance on how climate risk should be managed for non-financial risk types.

- We enhanced our climate risk materiality assessment to consider longer time horizons.

- We enhanced our approach to assessing the impact of climate change on capital, focusing on credit and market risks.

- We further developed our risk metrics to monitor our performance against our net zero targets for both financed emissions and own operations.

- We enhanced our internal climate scenario analysis, including through improvements to our use of customer transition plan data. For further details of scenario analysis, see page 65.

- We have updated our merger and acquisition process to consider potential climate and sustainability-related targets, net zero transition plans and climate strategy, and how this relates to HSBC.

While we have made progress in enhancing our climate risk framework, further work remains. This includes the need to develop additional metrics and tools to measure our exposure to climate-related risks, and to incorporate these tools within decision making.

Governance and structure

The Board takes overall supervisory responsibility for our ESG strategy, overseeing executive management in developing the approach, execution and associated reporting.

The ESG Committee supports the development and delivery of our ESG strategy, key policies and material commitments by providing oversight, coordination and management of ESG commitments and initiatives. It is co-chaired by the Group Chief Sustainability Officer and the Group Chief Financial Officer.

The Sustainability Execution Committee has oversight of the environmental strategy, including the commercial execution and operationalisation through the sustainability execution programme, which is a Group-wide programme established to enable the delivery of our sustainability agenda.

The Group Reputational Risk Committee considers climate-related matters arising from customers, transactions and third parties that either present a serious potential reputational risk to the Group or merit a Group-led decision to ensure a consistent approach to reputational risk management across the regions, global businesses and global functions.

The Group Risk Management Meeting and the Group Risk Committee receive regular updates on our climate risk profile and progress of our climate risk programme.

The Group Chief Risk and Compliance Officer is the senior manager responsible for the management of climate risk under the UK Senior Managers Regime, which involves holding overall accountability for the Group's climate risk programme.

The Environmental Risk Oversight Forum (formerly the Climate Risk Oversight Forum) oversees risk activities relating to climate and sustainability risk management, including the transition and physical risks from climate change. Equivalent forums have been established at a regional level.

For further details of the Group's ESG governance structure, see page 88.

Risk appetite

Our climate risk appetite forms part of the Group's risk appetite statement and supports the business in delivering our net zero ambition effectively and sustainably.

Our climate risk appetite statement is approved and overseen by the Board. It is supported by risk appetite metrics and tolerance thresholds. We have also defined additional key management information metrics. Both the risk appetite statement and key management information metrics are reported on a quarterly basis for oversight by the Group Risk Management Meeting and the Group Risk Committee.

Policies, processes and controls

We continue to integrate climate risk into policies, processes and controls across many areas of our organisation, and we will continue to update these as our climate risk management capabilities mature over time. For further details of how we manage climate risk across our global businesses, see page 65.

Embedding our climate risk approach

The table below provides further details of how we have embedded the management of climate risk across key risk types. For further details of our internal scenario analysis, see 'Insights from climate scenario analysis' on page 225.


Wholesale credit risk	We have metrics in place to monitor the exposure of our wholesale corporate lending portfolio to six high transition risk sectors, as shown in the below table. As at 31 December 2023, the overall exposure to six high transition risk sectors was $112bn. The sector classifications are based on internal HSBC definitions and can be judgemental in nature. The sector classifications are subject to the remediation of ongoing data quality challenges. This data will be enhanced and refined in future years. Our relationship managers engage with our key wholesale customers through a transition engagement questionnaire (formerly the transition and physical risk questionnaire) to gather information and assess the alignment of our wholesale customers' business models to net zero and their exposure to physical and transition risks. We use the responses to the questionnaire to create a climate risk score for our key wholesale customers. Our credit policies require that relationship managers comment on climate risk factors in credit applications for new money requests and annual credit reviews. Our credit policies also require manual credit risk rating overrides if climate is deemed to have a material impact on credit risk under 12 months if not already captured under the original credit risk rating. Key developments to our framework in 2023 include expanding the scope of our transition engagement questionnaire to capture new countries, territories and sectors. Key challenges for further embedding climate risk into credit risk management relate to the availability of adequate physical risk data to assess impacts to our wholesale customers.
	Wholesale loan exposure to high transition risk sectors at 31 December 2023¹
		Units	Automotive	Chemicals	Construction and building materials	Metals and mining	Oil and gas	Power and utilities	Total 2023
	Exposure to sector^{1, 2, 3, 4}	$bn	21	17	20	14	18	22	112
	Sector weight as a proportion of high transition risk sectors	%	18	16	18	13	16	19	100
	1 Amounts shown in the table also include green and other sustainable finance loans, which support the transition to the net zero economy. The methodology for quantifying our exposure to high transition risk sectors and the transition risk metrics will evolve over time as more data becomes available and is incorporated in our risk management systems and processes. 2 Counterparties are allocated to the high transition risk sectors via a two-step approach. Firstly, where the main business of a group of connected counterparties is in a high transition risk sector, all lending to the group is included in one high transition risk sector irrespective of the sector of each individual obligor within the group. Secondly, where the main business of a group of connected counterparties is not in a high transition risk sector, only lending to individual obligors in the high transition risk sectors is included. The main business of a group of connected counterparties is identified by the industry that generates the majority of revenue within a group. Customer revenue data utilised during this allocation process is the most recent readily available and will not align to our own reporting period. 3 These disclosures cover the whole of the value chain of the sector. For details of financed emissions coverage, please refer to page 53. 4 The six high transition risk sectors make up 17.4% of total wholesale loans and advances to customer and banks of $644bn. Amounts include assets held for sale.

Retail credit risk	We have implemented policies and tools to manage climate risk across our retail mortgage markets. Our retail credit risk management policy requires each mortgage market to conduct an annual review of their climate risk management procedures, including perils and data sources, to ensure they remain fit for purpose. In 2023 we introduced a global 'soft trigger' monitoring and review process for physical risk exposure where a market reaches or exceeds a set threshold, as this ensures markets are actively considering their balance sheet risk exposure to peril events. Within our mortgage portfolios, properties or areas with potentially heightened physical risk are identified and assessed locally and potential exposure is monitored through quarterly metrics. We have also set risk appetite metrics for physical risk in our largest mortgage markets, the UK and Hong Kong, as well as those with local regulatory requirements, including Singapore. The UK is our largest mortgage market, which as at September 2023 made up 40.0% of our global mortgage portfolio. We estimate that 0.2% of our UK retail mortgage portfolio is at very high risk of flooding and 3.5% is at high risk. This is based on approximately 94.2% climate risk data coverage by value of our UK portfolio as at September 2023. In the UK we also monitor the energy performance certificate ('EPC') ratings of individual properties in our mortgage portfolio. As at September 2023, approximately 64.5% of properties within the portfolio by value had a valid EPC dated within the last 10 years. Of these, 40.0% of properties had a current rating of A to C, and 97.0% had the potential to reach these rating bands, if appropriate energy efficiency improvement measures are taken. For both flood risk and EPC data, we disclose the end of September 2023 position. This is due to the time required for the data to be processed and our reliance on the government's public EPC data, which usually lags one month behind. The table below outlines the UK retail mortgage portfolio tenor as at the end of December 2023 (by balance split by remaining term). This table shows that the majority of our portfolio tenor is greater than five years, and that the average remaining loan term in the UK is 21.5 years.
	Residential mortgages tenor (remaining mortgage term by balance $m)¹
	Tenor	Remaining mortgage balance ($m)
	<1 years	382
	1 to 5 years	3,469
	>5 years	157,643
	Weighted average of remaining mortgage term (years)	21.50
	The average term for new mortgages in the UK is 25 years, although the average life of a loan is approximately five years due to refinancing. Despite this, our strategic approach to climate risk considers present day and long-term risk given customers may remain over the whole loan term. For further details of flood risk and the EPC breakdown of our UK retail mortgage portfolio, see our ESG Data Pack at www.hsbc.com/esg.
	1 The table includes instances where individual properties have multiple associated accounts and balances. These are aggregated to a property level and the longest term remaining is taken as the tenor.
Treasury risk	As part of our ICAAP in 2023, we enhanced our approach for assessing the impact of climate change on capital, focusing on credit and market risks. As part of our ILAAP, we conducted an initial analysis to identify the potential climate risk exposures across key liquidity risk drivers. We updated our treasury risk policies to ensure that the impact of climate risk is considered when assessing applicable treasury risks. We regularly discuss climate-related topics that may impact Global Treasury through climate-relevant governance forums, including the Treasury Risk Management Climate Risk Oversight Forum and the Group Treasury Sustainability Committee. Treasury portfolios are also included within the scope of the internal climate scenario analysis and the Hong Kong Monetary Authority's climate risk stress test, with potential quantitative impacts on relevant hold-to-collect-and-sell positions estimated. Pensions risk We conduct an annual exercise to monitor the exposure of our largest pension plans to climate risk. Our pension policies have also been updated to explicitly reflect climate considerations. Insurance risk We have an evolving programme to support the identification and management of climate risk. In 2023, we updated our sustainability procedures to align with the Group's updated energy and thermal coal-phase out policy.
Traded risk	We have implemented metrics and thresholds to monitor exposure to high physical and transition risk sectors for the different asset classes in the Markets and Securities Services ('MSS') business. The metrics use a risk taxonomy that categorises countries/territories and sectors into high, medium and low risk, for which we have set corresponding thresholds. We have implemented these metrics for key entities. In addition, we have identified key regions and business lines that contribute the most to the total MSS high-climate sensitive exposures and developed reports to monitor trends and pockets of risks. We have developed tools to provide a better understanding of key profit and loss drivers under different climate scenarios along different dimensions such as risk factors and business lines. These reports are available to traded risk managers to help monitor and understand how climate-sensitive exposures are impacted under different scenarios. Stress testing results have been presented to senior management for visibility during dedicated review and challenge sessions to provide awareness on the impact to the MSS portfolio and underlying business lines.
Reputational risk	We manage the reputational impact of climate risk through our broader reputational risk framework, supported by our sustainability risk policies and metrics. Our sustainability risk policies set out our appetite for financing activities in certain sectors. Our thermal coal phase-out and energy policies aim to drive down greenhouse gas emissions while supporting a just transition. Our global network of sustainability risk managers provides local policy guidance to relationship managers for the oversight of policy compliance and in support of implementation across our wholesale banking activities. For further details of our sustainability risk policies, see the ESG review on page 42. We have developed risk appetite metrics to monitor our performance against our financed emissions targets. For further details of our targets, see page 57.

Regulatory compliance risk	Our policies set the Group-wide standards that are required to manage the risk of breaches of our regulatory duty to customers, including those related to climate risk, ensuring fair customer outcomes are achieved. To make sure our responsibilities are met in this regard, our policies are subject to continuous review and enhancement. We are also focused on the ongoing development and improvement of our monitoring capabilities, ensuring appropriate alignment to the broader focus on regulatory compliance risks. Regulatory Compliance is particularly focused on mitigating climate risks inherent to the product lifecycle. To support this, we have enhanced a number of processes including: - ensuring Regulatory Compliance provides risk oversight and review of new product marketing materials with any reference to climate, sustainability and ESG; - developing our product marketing controls to ensure climate claims are robustly evidenced and substantiated within product marketing materials; and - clarifying and improving product marketing framework, procedures and associated guidance, to ensure product-related marketing materials comply with both internal and external standards, and are subject to robust governance. Regulatory Compliance operates an ESG and Climate Risk Working Group to track and monitor the integration and embedding of climate risk management into the functions' activities, while monitoring regulatory and legislative changes across the ESG and climate risk agenda. Regulatory Compliance also continues to be an active member of the Group's Environmental Risk Oversight Forums.
Resilience risk	Our Enterprise Risk Management function is responsible for overseeing the identification and assessment of physical and transition climate risks that may impact on the organisation's operational and resilience capabilities. We have developed metrics to assess how physical risk may impact our critical properties. In 2023, we also developed an energy and travel risk appetite metric for our own operations to establish and monitor progress against our net zero ambitions. Our resilience risk policies are subject to continuous improvement to remain relevant to evolving climate risks. New developments relevant to our own operations are reviewed to ensure climate risk considerations are effectively captured.
Model risk	The impact of climate risk on model risk is driven by the increasing number of climate risk models and the expanding model use cases. Review and challenge of models mitigates some risk but given the nascent nature of climate modelling and the lack of benchmarks, the validation of model assumptions and results remains a key challenge. Model Risk has published a new climate risk and ESG model category standard, which sets out minimum control requirements for identifying, measuring and managing model risk for climate-related models. We completed independent model validation for a number of models used for financed emissions calculations and climate scenario analysis using both qualitative and quantitative assessments of modelling decisions and outputs.
Financial reporting risk	We have expanded the scope of financial reporting risk to explicitly include oversight over accuracy and completeness of ESG and climate reporting. In 2023, we updated the risk appetite statement to reference our ESG and climate-related disclosures. We also updated our internal controls to incorporate requirements for addressing the risk of misstatement in ESG and climate reporting. To support this, we have developed a framework to guide control implementation over ESG and climate reporting disclosures, which includes areas such as process and data governance, and risk assessment. As the landscape for ESG and climate-related disclosures develops, we continue to focus on horizon scanning and interpretation of relevant external reporting requirements, to ensure a timely response for producing the required disclosures. As the volume and nature of these requirements continue to evolve, the level of risk is heightened. Part of our response to this heightened risk includes undertaking a range of assurance procedures over these disclosures.

Challenges

While we have continued to develop our climate risk framework, our remaining challenges include:

- the diverse range of internal and external data sources and data structures needed for climate-related reporting, which introduces data accuracy and reliability risks;

- data limitations on customer assets and supply chains, and methodology gaps, which hinder our ability to assess physical risks accurately;

- industry-wide data gaps on customer emissions and transition plan and methodology gaps, which limit our ability to assess transition risks accurately; and

- limitations in our management of net zero alignment risk is due to known and unknown factors, including the limited accuracy and reliability of data, merging methodologies, and the need to develop new tools to better inform decision making.

Insights from climate scenario analysis

Scenario analysis supports our strategy by assessing our potential exposures to risks and vulnerabilities under a range of climate scenarios. It helps to build our awareness of climate change, plan for the future and meet our growing regulatory requirements.

In 2023, we enhanced our internal climate scenario analysis exercise by focusing our efforts on generating more granular insights for key sectors and regions to support core decision-making processes, and to respond to our regulatory requirements. We also produced several climate stress tests for regulators around the world, including the Hong Kong Monetary Authority ('HKMA') and the Central Bank of the United Arab Emirates.

We continue to enhance our climate scenario analysis exercises so that we can have a more comprehensive understanding of climate headwinds, risks and opportunities to support our strategic planning and actions.

In climate scenario analysis, we consider, jointly, both physical risks and transition risks. For further details about these risks, see 'Climate risk' on page 221.

We also analyse how these climate risks impact principal risk types within our organisation, including credit and traded market risks, non-financial risks, and pension risk.

Our climate scenarios

In our 2023 climate scenario analysis exercises, we explored five scenarios that were created to examine the potential impacts from climate change for the Group and its entities.

The analysis considered the key regions in which we operate, and assessed the impact on our balance sheet across three distinct timeframes: short term up to 2025; medium term from 2026 to 2035; and long term from 2036 to 2050. The time horizons are aligned to the Climate Action 100+ framework v1.2.

We created our internal scenarios using external publicly available climate scenarios as a reference, including those produced by the Network for Greening the Financial System ('NGFS'), the Intergovernmental Panel on Climate Change ('IPCC') and the International Energy Agency. Using these external scenarios as a template, we adapted them by incorporating the unique climate risks and vulnerabilities to which our organisation and customers across different business sectors and regions are exposed. This helped us produce the scenarios, which vary by severity to analyse how climate risks will impact our portfolios.

Our scenarios were:

- the Net Zero scenario, which is consistent with the Paris Agreement. This assumes that there will be orderly but considerable climate action, limiting global warming to no more than 1.5°C by 2100, when compared with pre-industrial levels;

- the Current Commitments scenario, which assumes that climate action is limited to current governmental committed policies, including already implemented actions, leading to global temperature rises of 2.4°C by 2100. This slow transition scenario helps us to determine the actions we need to take to reach our net zero ambition while operating in a world that is not net zero;

- the Delayed Transition Risk scenario, which assumes that climate action is delayed until 2030 with a late disorderly transition to net zero but stringent and rapid enough to limit global warming to under 2°C by 2100. This scenario allows us to stress test severe but plausible transition risk impacts;

- the Downside Physical Risk scenario, which assumes climate action is limited to currently implemented governmental policies, leading to extreme global warming with global temperatures increasing by greater than 4°C by 2100. This scenario allows us to assess physical risks associated with climate change; and

-
the Near Term scenario, which assumes both a sharp increase in policies that drive a disorderly transition towards net zero and a sharp increase in extreme climate events over a five-year period until 2027. This scenario focused on our business in Asia.

We have chosen these scenarios to provide a holistic view that will supplement the Group's current and future strategic thinking. They reflect inputs from our key stakeholders and experts across the Group, and have been reviewed through internal governance.

Our scenarios reflect different levels of physical and transition risks over a variety of time periods. The scenario assumptions include varying levels of governmental climate policy changes, macroeconomic factors and technological developments. However, these scenarios rely on the development of technologies that are still unproven, such as global hydrogen production to decarbonise aviation and shipping.

The nature of the scenarios, our developing capabilities, and limitations of the analysis lead to outcomes that are indicative of climate change headwinds, although they are not a direct forecast.

Developments in climate science, data, methodology and scenario analysis techniques will help us shape our approach further. We therefore expect this view to change over time.

Characteristics of our scenarios

Scenarios

Net zero

Current Commitments

Delayed Transition Risk

Downside

Physical Risk

Near Term

Scenario outcomes

Rise in global temperatures by 2100 (vs pre-industrial levels)

1.5˚c

2.4˚c

1.6˚c

4.2˚c

1.4˚c

Focus horizon

Medium term

Short/medium term

Medium/long term

Short/medium term

Underlying assumptions based on global averages

Assumed variation in global climate policies

Low

Medium

High

Low

High

Assumed pace of technology change and adoption

Fast

Gradual

Accelerates from 2030

None

Based on existing technology

Assumed socioeconomic impact

High

Moderate

Very high

(in long term)

Very high

2030

2050

2030

2050

2030

2050

2030

2050

2027

Assumed carbon price

($/tCO₂)

161

623

558

193

Assumed change in energy consumption (% change after 2022)

(10)%

(16)%

12%

17%

12%

(11)%

24%

(14)%

Assumed change in CO₂ emissions (% change after 2022)

(37)%

(100)%

(7)%

(33)%

(7)%

(89)%

11%

(34)%

Scenario risk characteristics

Climate

risk

Physical

Lower

Moderate

Lower

Higher

Transition

Higher

Moderate

Higher

Lower

Higher

Our methodology

For our scenario analysis, we used models to assess how transition and physical risks may impact our portfolios under different scenarios. Our models incorporate a range of climate-specific metrics that will have an impact on our customers, including expected production volumes, revenue, costs and capital expenditure.

We assess how these metrics interplay with economic factors such as carbon prices, which represent the cost effect of climate-related policies that aim to discourage carbon-emitting activities and encourage low-carbon solutions. The expected result of higher carbon prices is a reduction in emissions as high-emission activities become uneconomical. We also assume carbon prices will vary from country to country.

The models for our wholesale corporate lending portfolio consider our customers' individual climate transition plans where available, while we refine and deepen our assessment of these plans. These results feed into the calculation of our risk-weighted assets and expected credit loss ('ECL') projections. For our real estate portfolio models, we focus on physical risk factors, including property locations, perils and insurance coverage when assessing the overall credit risk impact to the portfolio. The results are reviewed by our sector specialists who, subject to our governance procedures, make bespoke adjustments to our results based on their expert judgement where relevant.

Our models support the calculation of outputs that inform us about the level of climate-related ECL provisions required under IFRS 9, and also support the shaping of our climate-related capital approach under ICAAP. In 2023, in addition to incorporating our customers' transition plans, we enhanced our credit risk models for the wholesale portfolio by updating our assumptions regarding how we expect state-supported companies to be impacted, and improved how we model the impact of emissions on company financial forecasts.

Modelling limitations

We continue to look for ways of enhancing our methodology to improve the effectiveness of our climate scenario analyses. There are industry-wide limitations, particularly on data availability, although our models are designed to produce outputs that can support our assessment of the level of our climate resilience.

Climate scenario analysis requires considerable amounts of data, although data is only available for a subset of our counterparties. As a result, we have to extrapolate the results observed in the subset to the wider population or dataset. We do not capture the second order impacts of climate risk exposures within our modelling approach, such as impacts on our counterparties from their supply chains.

We continue to enhance our capabilities by incorporating lessons learnt from previous exercises and feedback from key stakeholders, including regulators.

For a broad overview of the models that we use for our climate scenario analysis, as well as graphs that show how global carbon prices and carbon emissions will differ under our climate scenarios, see our ESG Data Pack at www.hsbc.com/esg.

Analysing the outputs of climate scenario analysis

Climate scenario analysis allows us to model how different potential climate pathways may affect and impact the resilience of our customers and our portfolios, particularly in respect of credit losses. As the following chart shows, losses are influenced by their exposure

to a variety of climate risks under different climate scenarios.

1 The counterfactual scenario is modelled on a scenario where there would be no losses due to climate change.

2 The dotted line in the chart shows the impact of modelled expected credit losses following our strategic responses to reduce the effect of climate risks under the Net Zero scenario.

3 The projections shown in this chart were modelled during 2023 and are not intended to reflect the final 31 December 2023 position that is disclosed elsewhere in the Annual Report and Accounts 2023.

While climate-related losses are expected to remain minimal in the short term, they are likely to increase compared with the counterfactual scenario in the medium and longer term, driven by the transition to a net zero economy.

These losses are lower in the Net Zero orderly transition scenario, than in the Delayed Transition Risk scenario where climate action begins later and is more rapid and disruptive as our customers will have less time to restructure their business models and reduce their carbon emissions. As the dotted line in the graph shows, losses in these scenarios can be mitigated through active management approaches, which include identifying new climate-related business opportunities and adapting our portfolios to reduce exposure to climate risks and losses.

By building a more climate-resilient balance sheet, we can reduce impairment risks and improve longer-term stability.

Under the Current Commitments scenario, we expect lower levels of losses relating to transition risks, although we would expect an increase in the effects of climate-related physical risks over the longer term. If the world does not align with a net zero path, physical risks in the medium to long term are expected to continue to rise due to the increasing frequency of extreme weather events.

The Near Term scenario

Our Near Term scenario allowed us to explore the combined impacts of a disorderly transition towards net zero and extreme acute physical events occurring simultaneously. The scenario was designed to meet HKMA regulatory requirements and will help us to improve how we assess short-term impacts across the Group. As part of the HKMA exercise, our initial analysis was focused on our portfolio in Asia.

The exercise allowed us to understand the extent to which a stressed scenario exhibiting both high physical and transition risks in the near term could immediately impact our customers across all our sectors.

In the following sections, we assess the impacts to our banking portfolios under different climate scenarios.

How climate change is impacting our wholesale lending portfolio

In our internal climate scenario analysis, we assessed the impact of climate-related risks on our corporate counterparties under different climate scenarios, which we measured by reviewing the modelled effect on our ECL.

The climate scenario analysis exercise for the wholesale lending portfolio was designed to examine our climate risks and vulnerabilities, primarily in the short and medium term. We focused on the Current Commitment scenario, believing it to be the scenario most likely to unfold in this timeframe, and the Net Zero scenario, which allows us to assess the resilience of our strategy and to identify specific climate-related opportunities.

Within our wholesale lending portfolio, customers in higher emitting sectors continue to be most exposed to larger climate-related losses.

For each sector in both scenarios, we calculated the projected ECL increase as at 2035, where we compared the increase in ECL under the scenario against a counterfactual scenario that incorporates no climate change.

We use the sector's exposure at default ('EAD'), which represents the size of our exposure to potential losses from customer defaults. This helps to identify which sectors are the most material to us in terms of the impact of climate change.

The table below shows the relative size of exposures at default in 2023 and the increase in cumulative ECL under each scenario compared with a counterfactual scenario by 2035 (expressed as a multiple).

Impact on wholesale lending portfolios

Wholesale sectors	Exposure at default (2023)	ECL increase¹
Wholesale sectors	Exposure at default (2023)	Current Commitments	Net Zero
Conglomerates and industrials	n	<1.1x	<2.75x
Construction and building materials	n	<1.25x	<2.25x
Chemicals	n	<1.1x	<1.75x
Power and utilities	n	<1.1x	<1.75x
Oil and gas	n	<1.1x	<1.25x
Automotive	n	<1.25x	<1.75x
Land transport and logistics	n	<1.1x	<2.75x
Agriculture & soft commodities	n	<1.1x	<2.5x
Metals and mining	n	<1.1x	>3x
Aviation	n	<1.1x	<1.5x
Marine	n	<1.1x	<1.5x

1 Increase in cumulative ECL compared with counterfactual by 2035 expressed as a multiple.

We have continued to incorporate information from our customers' transition plans to consider more detailed information on how they and their sector will be impacted under different climate scenarios.

The levels of ECL observed across our wholesale lending portfolio are driven by: our customers' carbon emissions; the presence of realistic transition plans; the amount of capital investment required to support their transition; and the degree to which their competitive environment impacts their ability to pass on carbon costs.

In 2022, we used scenario analysis to assess the impacts on our corporate counterparties across the sectors that are most affected by climate-related risks.

In 2023, we enhanced our approach in some key high-emitting sectors, which includes the construction and building materials, power and utilities, and oil and gas sectors. The analysis below provides a more detailed view of the anticipated impacts on these portfolios and our customers, improving our understanding of climate risks and potential opportunities.

The construction and building materials sector faces an increase in losses because it includes companies with high emissions from manufacturing processes, such as steel or cement, or from their supply chains, which will increase cost pressures due to carbon taxes. The sector also has a high proportion of customers without transition plans.

Although our scenario analysis showed that companies with transition plans performed better on average, their plans typically fall short of requirements needed to meet net zero targets. Overall, we believe there are significant lending opportunities for us to help support our customers as they transition to a lower carbon economy while meeting their growing business demands.

These opportunities include the exploration of less carbon-intensive fuel sources, electrification, the integration of carbon capture and storage, and the adoption of new technologies in the search to reduce emissions.

In the power and utilities sector, our analysis showed that rising costs from increased carbon prices and the capital expenditure required to support transition requirements, infrastructure improvements and decommissioning costs, alongside greater downstream energy demands, will potentially lead to higher debt levels and worsening counterparty risk ratings for customers.

As technologies mature, the capital cost of some renewables infrastructure is expected to fall, becoming cheaper than non-renewable sources due to improved efficiencies. This will reduce the required expenditure for companies.

In the oil and gas sector, customers that commit to renewable energy should benefit from the additional greener revenue streams, which will help mitigate the impact of reduced profitability from fossil fuels and heightened carbon prices, enabling them to sustain their gross margins. This sector has relatively lower projected losses as a large proportion of customers provided transition plans with granular information about their climate-related impacts.

We have the opportunity to ease potential negative impacts as transition risks increase by supporting our customers to diversify into more renewable and greener revenue streams, and invest in emission-reducing technologies.

How climate change is impacting our retail mortgage portfolio

As part of our 2023 internal climate scenario analysis, we completed a detailed climate risk assessment for the UK, Hong Kong, mainland China and Australia, which together represent 75% of the balances in our global retail mortgage portfolio.

Our analysis shows that over the longer term, we expect minimal losses to materialise when considering the Current Commitments scenario. Although the severity of climate perils is expected to worsen over time, our overall losses also remain low under a Downside Physical Risk scenario.

In 2023, we widened the scope of our climate modelling to include new markets, such as mainland China, and increased the peril coverage within markets already covered.

In our analysis of the retail mortgage portfolio, we reassessed the physical perils that could impact the value of properties, which include flooding, wildfire and windstorms. The underlying peril data we use has been enhanced to include updated and higher resolution flood maps where available. We have also worked with external vendors to improve outputs from peril projections and to increase the granularity of data to provide more detailed insights into the impact of climate risks across our portfolio of properties, in particular the impact of wildfires.

Our scenario analysis methodology was enriched further in 2023 by combining the impacts of physical risk with transition risks, including rising energy costs and impacts from direct government legislation such as homeowner energy efficiency upgrades in the UK. We have enhanced our modelling by considering customers' affordability incorporating increased debt servicing costs and the impacts on property valuations. As insurance remains a key mitigator against climate losses, we further refined our assumptions including the assessment of insurance availability for properties that experience frequent climate events.

Projected peril risk

Flooding has the potential to drive significant impacts at an aggregate level but this is localised to specific areas that are close to water sources such as rivers or the coast, or areas that are located in valleys where surface water can 'pool'.

The 'Exposure to flooding' table below shows that the majority of properties located in four of our largest markets are predicted to experience zero to low risk of flooding, with flood depths of less than 0.5 metres, under a 1-in-100-year event in each of the scenarios.

Flood depths outlined here do not consider building type and property floor level, which would potentially further mitigate the impacts. However, they are considered within our climate risk modelling and loss projections.

The table below sets out the proportion of properties with projected flood depths in a 1-in-100-year severity flood event, under the Current Commitments and Downside Physical Risk scenarios.

Exposure to flooding (%)¹

		Scenarios
Number of properties²	Flood depth (metres)	Baseline flood risk 2023³ (%)	Current Commitments 2050 (%)	Downside Physical Risk 2050 (%)
UK	0-0.5	97.4	97.4	96.9
n	0.5-1.5	2.4	2.5	2.8
n	>1.5	0.2	0.2	0.3
Hong Kong	0-0.5	85.3	81.4	79.5
n	0.5-1.5	14.6	18.4	20.4
n	>1.5	0.1	0.1	0.1
Australia	0-0.5	95.7	95.4	95.3
n	0.5-1.5	2.9	3.0	3.1
n	>1.5	1.5	1.5	1.5
Mainland China	0-0.5	88.0	86.5	84.7
Mainland China	0.5-1.5	11.1	12.5	12.7
n	>1.5	0.9	1.0	2.7

1 Severe flood events include river and surface flooding and coastal inundation. The table compares 2050 snapshots under the Current Commitments and Downside Physical Risk scenarios with a baseline view in 2023. We do expect to see changes to our flood depth distributions as climate risk data is refreshed.

2 The size of the bubbles represents the size of the portfolios, in terms of number of properties where exposure to flooding data is available, relative to one another.

3 Baseline flood risk is the flood risk for a 1 in 100 year event, based on current peril data.

How climate change is impacting our commercial real estate portfolios

We assessed our commercial real estate customers' vulnerability to various perils, including flooding and windstorms. Our commercial real estate portfolio is globally diversified with larger concentrations in Hong Kong, the UK and the US.

Geographical location is a key determinant in our exposure to potential physical risk events, which can lead to higher ECL due to the cost of repairing damage as well as impact property valuations in areas where physical risk events are increasing in frequency.

The 'Exposure to peril' table below shows the proportion of our commercial real estate portfolio exposed to specific physical perils in our key markets.

Exposure to peril (%)¹

	Exposure at default²	Coastal inundation (%)	Cyclone wind (%)	Surface water flooding (%)	Riverine flooding (%)
Hong Kong	n	2.0	94.8	19.0	10.0
UK	n	15.8	0.0	16.5	7.1
US	n	10.1	81.5	11.4	28.6

1 Proportion of our commercial real estate portfolio exposed to specific physical perils in the Downside Physical scenario.

2 The size of the bubbles represents the size of the portfolios, in terms of EAD, relative to one another.

Overall, and in line with our 2022 disclosure, our commercial real estate portfolio remains resilient to climate risk, with the more severe impacts mitigated by insurance coverage.

Our most significant credit exposure is in Hong Kong, a region with material physical risk exposures to wind and flooding due to strong tropical cyclones. The impact on prospective credit losses remains low, due to stringent building standards and existing measures in place against flooding and storm surges.

Our largest exposure to transition risk is within our UK portfolio. Under the Net Zero scenario, we assessed the impacts of the UK government consultation on non-domestic rental properties being required to hold an energy performance certificate rating of at least 'B' by 2030. To meet these proposed minimum standards, more than 80% of the properties in our portfolio would potentially need to be retrofitted, which would increase impairments and lead to a small uplift in ECL for this portfolio.

In 2023, as part of the scenario analysis exercise for the Central Bank of the United Arab Emirates, we also assessed in more detail the climate risk impacts on our UAE portfolio. Our findings showed that many properties could become chronically exposed to permanent inundation over time due to their relatively low elevation above sea level.

How we assess climate risk impacts on other risk types

We use climate scenario analysis to assess the impacts on other risks beyond credit risk. These include traded market risks, non-financial risks and pension risk.

Traded market risk

In 2023, we explored the potential impacts of climate risks on our trading and banking portfolio under the Delayed Transition Risk and Downside Physical Risk scenarios.

The analysis considered all relevant asset classes including interest rates, exchange rates, corporate and sovereign bonds and equities. The analysis applied shocks reflecting the impact of abrupt increases in carbon prices or physical risk perils resulting in structural economic impacts that affect the productivity of high-risk sectors at a country level.

We have developed tools to provide us with a more granular understanding of the key profit and loss drivers under different climate scenarios. These can be viewed by risk factor, business line or at trading desk level to help traded risk managers to monitor and understand how climate sensitive exposures are impacted.

Sovereign credit risk

We assessed the impacts of climate risks on sovereign debt under the different climate scenarios. In particular, our models considered the impacts of climate change on a country's GDP, the amount of headroom sovereign nations have in terms of their fiscal and external reserves, and their dependency and exposure to particular corporate sectors.

Pension risk

We modelled balance sheet and income statement projections for the main pension plans. Our modelling capability has been enhanced to incorporate climate-specific modelling over a longer timeframe, with the initial exercise being focused on assessing the impacts of a disruptive transition to net zero using the Delayed Transition scenario.

Non-financial risk

We assessed the potential impacts of errors in sustainable lending volumes contained within our ESG disclosures as part of our financial reporting risks. To understand our regulatory compliance risks we assessed any misrepresentations within the marketing of our ESG funds.

Use of climate scenario analysis outputs

Climate scenario analysis plays a crucial role helping us to identify and understand the impact of climate-related risks and potential opportunities as we navigate the transition to net zero.

Scenario analysis results have been used to support the Group's ICAAP. This is an internal assessment of the capital the Group needs to hold to meet the risks identified on a current and projected basis, including climate risk.

In addition, scenario analysis informs our risk appetite statement metrics. As an example, it supports the calibration of physical risk metrics for our retail mortgage portfolios and it is used to consider climate impact in our IFRS 9 assessment.

From a financial planning perspective, internal climate scenario analysis results are used to assess whether additional short-term climate-specific ECL are required within our financial plan.

Next steps

We plan to continue to enhance our capabilities for climate scenario analysis including addressing model limitations and data gaps and developing our assessment of liquidity, resilience and insurance risks. We also plan to use the results for decision making, particularly in:

- client engagement, by identifying climate opportunities and vulnerabilities in specific regions and sectors such as renewables, carbon capture technologies and electric vehicles, and using this information to engage and support clients in their transition to net zero;

- portfolio steering, by using scenario analysis outputs to inform how to reallocate our portfolio to maximise returns and mitigate risk while achieving our net zero targets; and

- looking beyond climate change by building capabilities to assess our resilience to wider environmental risks.

Understanding the resilience of our critical properties

Climate change poses a physical risk to the buildings that we occupy as an organisation, including our offices, retail branches and data centres, both in terms of loss and damage, and business interruption.

We measure the impacts of climate and weather events to our buildings on an ongoing basis using historical, current and scenario modelled forecast data. In 2023, there were 27 major storms that had a minor impact on five premises with no impact on the availability of our buildings.

We use stress testing to evaluate the potential for impact on our owned or leased premises. Our scenario stress test, conducted in 2023, analysed how eight climate change-related hazards could impact 1,000 of our critical and important buildings. These hazards were coastal inundation, extreme heat, extreme winds, wildfires, riverine flooding, pluvial flooding, soil movement due to drought, and surface water flooding.

The 2023 stress test modelled climate change with IPCC's Taking the Highway scenario (SSP5-8.5), which projects that the rise in global temperatures will likely exceed 4°C by 2100. It also modelled a less severe IPCC Middle of the Road scenario (SSP2-4.5), which projects that global warming will likely be limited to 2°C.

Key findings from the Taking the Highway scenario included that by 2050, 20 of our 1,000 critical and important buildings will have a high potential for impact due to climate change, with insurance-related losses estimated to be in excess of 10% of the insured value of the buildings.

These include 16 retail properties primarily impacted by extreme temperatures and four data centres, where three face the risk of water stress and one faces extreme temperatures and water stress. This could lead to failure of mechanical cooling equipment or soil movement resulting from drought.

A further 248 properties have the potential to be impacted by climate change, albeit to a lesser extent, with insurance-related losses estimated at between 5% and 10% of the insured value of our buildings. The principal risks are temperature extremes and water stress.

A key finding from the Middle of the Road scenario showed that the total number of buildings at risk reduced from 20 to 13. The highlighted facilities are still at risk from the same perils of extreme temperature and water stress by 2050.

This forward-looking data along with historical data helps inform real estate planning. We will continue to enhance our understanding of how extreme weather events impact our building portfolio as climate risk assessment tools improve and evolve. We buy insurance for property damage and business interruption and consider insurance as a loss mitigation strategy depending on its availability and price.

We regularly review and enhance our building selection process and global engineering standards and will continue to assess historical claims data to help ensure our building selection and design standards address the potential impacts of climate change.

Resilience risk

Overview

Resilience risk is the risk of sustained and significant business disruption from execution, delivery, physical security or safety events, causing the inability to provide critical services to our customers, affiliates and counterparties. Resilience risk arises from failures or inadequacies in processes, people, systems or external events.

Resilience risk management

Key developments in 2023

During the year, we carried out several initiatives to keep pace with geopolitical, regulatory and technology changes, and strengthened the management of resilience risk:

- We focused on enhancing our understanding of our risk and control environment, by updating our risk taxonomy and control libraries, and refreshing risk and control assessments.

- We continued to recognise that our customers are impacted by service disruptions, and responded to these urgently and aimed to recover with minimum delay. We continued to initiate post-incident review processes to prevent recurrence. Where we identify that investment is required to further enhance the Group's operational resilience capabilities, findings are fed into the Group's financial planning, helping to ensure we continue to meet the expectations of our customers and our regulators.

- We continued to monitor markets affected by the Russia-Ukraine and Israel-Hamas wars, as well as other geopolitical events, for any potential impact they may have on our colleagues and operations.

- We strengthened the way third-party risk is overseen and managed across all non-financial risks, and enhanced the processes, framework and reporting capabilities used by our global businesses, functions and regions.

- We provided analysis and easy-to-access risk and control information and metrics to enable management to focus on non-financial risks in their decision making and appetite setting.

- We further strengthened our non-financial risk governance and senior leadership, and improved our coverage and risk steward oversight for data risk and change execution.

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 Enterprise Risk Management 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 sub-risk types related to: third-party risk; technology and cybersecurity risk; transaction processing risk; business interruption and incident risk; data risk; change execution risk; and facilities availability, safety and security risk.

Risk appetite and key escalations for resilience risk are reported to the Non-Financial Risk Management Board, chaired by the Group Chief Risk and Compliance Officer, with an escalation path to the Group Risk Management Meeting and Group Risk Committee.

Key risk management processes

Operational resilience is our ability to anticipate, prevent, adapt, respond to, recover and learn from operational disruption while minimising customer and market impact. Resilience is determined by assessing whether we can continue to provide our important business services, within an agreed impact tolerance. This is achieved via day-to-day oversight and periodic and ongoing assurance, such as deep dive reviews and controls testing, which may result in challenges being raised to the business by risk stewards. Further challenge is also raised in the form of risk steward opinion papers to formal governance. We accept we will not be able to prevent all disruption but we must prioritise investment to continually improve the response and recovery strategies for our important business services and important group business services to meet regulatory expectations.

Business operations continuity

We continue to monitor the Russia-Ukraine and Israel-Hamas wars, and remain ready to take measures to ensure business continuity in affected markets should the situations require. There have been no significant disruptions to our services, although businesses and functions in nearby markets continually review their plans and responses to minimise any potential impacts.

Regulatory compliance risk

Overview

Regulatory compliance risk is the risk associated with breaching our duty to clients and other counterparties, inappropriate market conduct (including unauthorised trading) and breaching related financial services regulatory standards. Regulatory compliance risk arises from the failure to observe relevant laws, codes, rules and regulations and can manifest itself in poor market or customer outcomes and lead to fines, penalties and reputational damage to our business.

Regulatory compliance risk management

Key developments in 2023

The dedicated programme to embed our updated purpose-led conduct approach has concluded. Work to map applicable regulations to our risks and controls continued in 2023, alongside the adoption of new tooling to support enterprise-wide horizon scanning for new regulatory obligations and supporting wider work on regulatory reporting enhancements. Climate risk has been integrated into regulatory compliance policies and processes, with enhancements made to the product governance framework and controls to ensure the effective consideration of climate - and in particular the risk of greenwashing - risks.

Governance and structure

The Compliance function has now been restructured and integrated into a combined Risk and Compliance function with the appointment

of a Group Head of Regulatory Compliance reporting directly into the

Group Chief Risk and Compliance Officer. Regulatory Compliance and Financial Crime teams work together and with relevant stakeholders to achieve good conduct outcomes, and provide enterprise-wide support on the compliance risk agenda in close collaboration with colleagues from the Group Risk and Compliance function.

Key risk management processes

The Global Regulatory Compliance capability is responsible for setting global policies, standards and risk appetite to guide the Group's management of regulatory compliance risk. It also devises the required frameworks, support processes and tooling to protect against regulatory compliance risks. The Group capability provides oversight, review and challenge of the global market, regional and line of business 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 identification and escalation of any actual or potential regulatory breaches, and relevant events and issues are escalated to the Group's Non-Financial Risk Management Board, the Group Risk Management Meeting and the Group Risk Committee, as appropriate. The Group Head of Regulatory Compliance reports to the Group Chief Risk and Compliance Officer, and attends the Risk and Compliance Executive Committee, the Group Risk Management Meeting and the Group Risk Committee.

Financial crime risk

Overview

Financial crime risk is the risk that HSBC's products and services will be exploited for criminal activity. This includes fraud, bribery and corruption, tax evasion, sanctions and export control violations, money laundering, terrorist financing 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 2023

We regularly review the effectiveness of our financial crime risk management framework, which includes continued consideration of the complex and dynamic nature of sanctions compliance and export control risk. We continued to respond to the financial sanctions and trade restrictions that have been imposed on Russia, including methods used to limit sanctions evasion.

We continued to make progress with several key financial crime risk management initiatives, including:

- We deployed our intelligence-led, dynamic risk assessment capability for customer account monitoring in additional entities and global businesses, including in the UK, the Channel Islands and the Isle of Man, Hong Kong and the UAE.

- We deployed a next generation capability to increase our monitoring coverage on correspondent banking activity.

- We successfully introduced the required changes to our transaction screening capability to accommodate the global change to payment systems formatting under ISO 20022 requirements.

- We made enhancements in response to the rapidly evolving and complex global payments landscape and refined our digital assets and currencies strategy.

Governance and structure

The structure of the Financial Crime function remained substantively unchanged in 2023, although we continued to review the effectiveness of our governance framework to manage financial crime risk. The Group Head of Financial Crime and Group Money Laundering Reporting Officer continues to report to the Group Chief Risk and Compliance Officer, while the Group Risk Committee retains oversight of matters relating to financial crime.

Key risk management processes

We will not tolerate knowingly conducting business with individuals or entities believed to be engaged in criminal activity. We require everybody in HSBC to play their role in maintaining effective systems and controls to prevent and detect financial crime. Where we believe we have identified suspected criminal activity or vulnerabilities in our control framework, we will take appropriate mitigating action.

We manage financial crime risk because it is the right thing to do to protect our customers, shareholders, staff, the communities in which we operate, as well as the integrity of the financial system on which we all rely. We operate in a highly regulated industry in which these same policy goals are codified in law and regulation.

We are committed to complying with the laws and regulations of all the markets in which we operate and applying a consistently high financial crime standard globally.

We continue to assess the effectiveness of our end-to-end financial crime risk management framework, and invest in enhancing our operational control capabilities and technology solutions to deter and detect criminal activity. We have simplified our framework and consolidated previously separate financial crime policies into a single policy to drive consistency and provide a more holistic assessment of financial crime risk. We further strengthened our financial crime risk

taxonomy and control libraries and our monitoring capabilities through technology deployments. We developed more targeted metrics, and continued to seek to enhance our governance and reporting. We are committed to working in partnership with the wider industry and the public sector in managing financial crime risk and we participate in numerous public-private partnerships and information sharing initiatives around the world. In 2023, our focus remained on measures to improve the overall effectiveness of the global financial crime framework, notably by providing input into legislative and regulatory reform activities. We did this by contributing to the

development of responses to consultation papers focused on how financial crime risk management frameworks can deliver more effective outcomes in detecting and deterring criminal activity. Through our work with the Wolfsberg Group and the Institute of International Finance, we supported the efforts of the global standard setter, the Financial Action Task Force. In addition, we participated in a number of public events related to enhancing public-private partnerships, payment transparency, asset recovery, tackling forestry crimes, wildlife trafficking and human trafficking.

Model risk

Overview

Model risk is the risk of the potential for adverse consequences from model errors or the inappropriate use of modelled outputs to inform business decisions.

Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models.

Key developments in 2023

In 2023, we continued to make improvements in our model risk management processes amid regulatory changes in model requirements.

Initiatives during the year included:

- Following regulatory feedback on a number of our model submissions for our internal ratings-based ('IRB') approach for credit risk, internal model method ('IMM') for counterparty credit risk and internal model approach ('IMA') for market risk, we implemented approved models for IMM and IMA alongside an approved IRB model for UK mortgages. We began a programme of work to address feedback from the PRA and other regulators on the IRB models for wholesale credit.

- We made changes to our VaR model in response to multiple breaches that had been observed from market volatility resulting from changes in monetary policy in major markets.

- We introduced a new procedure to ensure any new tool developed using generative AI would require validation by Model Risk Management before its use.

- We enhanced our frameworks and controls as climate risk and AI and machine learning models become more embedded in business processes.

- Following the publication of Supervisory Statement 1/23 - the PRA's guiding principles for how model risks should be managed across the industry - we began a programme of work to seek to meet the enhanced model risk management requirements, with representation from all global businesses and key functions, including Internal Audit.

Governance and structure

Model risk governance committees at the Group, business and functional levels provide oversight of model risk. The committees include senior leaders from the three global businesses and the Group Risk and Compliance function, and focus on model-related concerns and are supported by key model risk metrics. We also have Model Risk Committees in our geographical regions focused on local delivery and requirements. The Group-level Model Risk Committee is chaired by the Group Chief Risk and Compliance Officer, and the heads of key businesses participate in these meetings.

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 Board to the Group Chief Risk and Compliance Officer, who authorises the Group Model Risk Committee. 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 and the Group Risk Committee 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 risk committee structure, to help ensure appropriate understanding and ownership of model risk is embedded in the businesses and functions.

Insurance manufacturing operations risk

Contents

233	Overview
233	Insurance manufacturing operations risk management
234	Insurance manufacturing operations risk in 2023
234	Measurement
235	Key risk types
235	- Market risk
236	- Credit risk
236	- Liquidity risk
237	- Insurance underwriting risk

Overview

The key risks for our insurance manufacturing operations are market risk, in particular interest rate and equity, credit risk and insurance underwriting risk. These have a direct impact on the financial results and capital positions of the insurance operations. Liquidity risk, while significant in other parts of the Group, is less material for our insurance operations.

HSBC's insurance business

We sell insurance products through a range of channels including our branches, insurance sales forces, direct channels and third-party distributors. The majority of sales are through an integrated bancassurance model that provides insurance products principally for customers with whom we have a banking relationship, although the proportion of sales through other sources such as independent financial advisers, tied agents and digital platforms is increasing.

For the insurance products we manufacture, the majority of sales are savings, universal life and protection 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 markets, which are Hong Kong, Singapore, mainland China, France, UK, Malta, Mexico and Argentina. In addition, we have: an interest in a life insurance manufacturing associate in India; a captive insurance entity in Bermuda that insures the non-financial risks of the wider Group; and a reinsurance entity in Bermuda.

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. 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.

This section focuses only on the risks relating to the insurance products we manufacture.

Insurance manufacturing operations risk management

Key developments in 2023

The insurance manufacturing subsidiaries follow the Group's risk management framework. In addition, there are specific policies and practices relating to the risk management of insurance contracts, which did not change materially over 2023. During the year, there was continued market volatility observed across interest rates, equity and credit markets and foreign exchange rates. This was predominantly driven by geopolitical factors and wider inflationary concerns. One key area of risk management focus during 2023 was the implementation of the new accounting standard, IFRS 17 'Insurance Contracts', which became effective on 1 January 2023. Given the fundamental change the new accounting standard represented in insurance accounting, and the complexity of the new standard, this presented additional financial reporting and model risks for the Group, which were managed via the IFRS 17 implementation project. Other areas of focus were the ongoing integration of the insurance business that was acquired through AXA Singapore in 2022 into the Group's risk management framework, the establishment of a reinsurance entity in Bermuda and controls supporting IFRS 17 implementation.

Governance and structure

(Audited)

Insurance manufacturing 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 137. 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. The Group's risk stewardship functions support the 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.

The results of these stress tests and the adequacy of management action plans to mitigate these risks are considered in the Group's ICAAP and the entities' regulatory Own Risk and Solvency Assessments, which are produced by all material entities.

Key risk management processes

Market risk

(Audited)

All our insurance manufacturing subsidiaries have market risk mandates and limits 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 participating features. The effect is that a significant proportion 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. 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 and other financial instruments to protect against adverse market movements.

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

Credit risk

(Audited)

Our insurance manufacturing subsidiaries also have credit risk mandates and limits within which they are permitted to operate, which consider the credit risk exposure, 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.

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.

Capital and liquidity risk

(Audited)

Capital risk for our insurance manufacturing subsidiaries is assessed in the Group's ICAAP based on their financial capacity to support the risks to which they are exposed. Capital adequacy is assessed on both the Group's economic capital basis, and the relevant local insurance regulatory basis.

Risk appetite buffers are set to ensure that the operations are able to remain solvent, allowing for business-as-usual volatility and extreme but plausible stress events.

Liquidity risk is less material for the insurance business. It 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 underwriting risk

Our insurance manufacturing subsidiaries primarily use the following frameworks and processes to manage and mitigate insurance underwriting risks:

- a formal approval process for launching new products or making changes to products;

- a product pricing and profitability framework, which requires initial and ongoing assessment of the adequacy of premiums charged on new insurance contracts to meet the risks associated with them;

- a framework for customer underwriting;

- reinsurance, which cedes risks to third-party reinsurers to keep risks within risk appetite, reduce volatility and improve capital efficiency; and

- oversight by financial reporting committees in each of our entities of the methodology and assumptions that underpin IFRS 17 reporting.

Insurance manufacturing operations risk in 2023

Measurement

The following tables show the composition of the fair value of underlying items of the Group's participating contracts at the reporting date.

Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
	Life direct participating and investment DPF contracts¹	Life other contracts²	Other contracts³	Shareholder assets and liabilities	Total
At 31 Dec 2023	$m	$m	$m	$m	$m
Financial assets	113,605	3,753	5,812	7,696	130,866
- trading assets	-	-	-	-	-
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss	100,427	3,593	4,177	1,166	109,363
- derivatives	258	10	-	6	274
- financial investments - at amortised cost	1,351	67	1,157	4,772	7,347
- financial assets at fair value through other comprehensive income	8,859	-	5	693	9,557
- other financial assets	2,710	83	473	1,059	4,325
Insurance contract assets	13	213	-	-	226
Reinsurance contract assets	-	4,871	-	-	4,871
Other assets and investment properties	2,782	164	35	1,636	4,617
Total assets at 31 Dec 2023	116,400	9,001	5,847	9,332	140,580
Liabilities under investment contracts designated at fair value	-	-	5,103	-	5,103
Insurance contract liabilities	116,389	3,961	-	-	120,350
Reinsurance contract liabilities	-	819	-	-	819
Deferred tax	-	1	-	3	4
Other liabilities	-	-	-	6,573	6,573
Total liabilities	116,389	4,781	5,103	6,576	132,849
Total equity	-	-	-	7,731	7,731
Total liabilities and equity at 31 Dec 2023	116,389	4,781	5,103	14,307	140,580

Balance sheet of insurance manufacturing subsidiaries by type of contract (continued)
(Audited)
	Life direct participating and investment DPF contracts¹	Life other contracts²	Other contracts³	Shareholder assets and liabilities	Total
At 31 Dec 2022⁴	$m	$m	$m	$m	$m
Financial assets	102,539	4,398	6,543	7,109	120,589
- trading assets	-	-	-	-	-
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss	89,671	3,749	4,916	1,088	99,424
- derivatives	432	9	21	15	477
- financial investments - at amortised cost	981	165	1,221	4,660	7,027
- financial assets at fair value through other comprehensive income	9,030	-	-	569	9,599
- other financial assets	2,425	475	385	777	4,062
Insurance contract assets	4	130	-	-	134
Reinsurance contract assets	-	4,413	-	-	4,413
Other assets and investment properties	2,443	60	30	1,666	4,199
Total assets at 31 Dec 2022⁴	104,986	9,001	6,573	8,775	129,335
Liabilities under investment contracts designated at fair value	-	-	5,374	-	5,374
Insurance contract liabilities	104,662	3,766	-	-	108,428
Reinsurance contract liabilities	-	748	-	-	748
Deferred tax	23	-	-	2	25
Other liabilities	-	-	-	7,524	7,524
Total liabilities	104,685	4,514	5,374	7,526	122,099
Total equity	-	-	-	7,236	7,236
Total liabilities and equity at 31 Dec 2022⁴	104,685	4,514	5,374	14,762	129,335

1 'Life direct participating and investment DPF contracts' are substantially measured under the variable fee approach measurement model.

2 'Life other contracts' are measured under the general measurement model and mainly includes protection insurance contracts as well as reinsurance contracts. The reinsurance contracts primarily provide diversification benefits over the life direct participating and investment discretionary participation feature ('DPF') contracts.

3 'Other contracts' includes investment contracts for which HSBC does not bear significant insurance risk.

4 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

Key risk types

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, credit spreads and foreign exchange rates.

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

Participating 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 in the larger entities.

The cost of such guarantees are generally not material and are absorbed by the insurance fulfilment cash flows.

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.

Sensitivities

(Audited)

The following table provides the impacts on the CSM, profit after tax and equity of our insurance manufacturing subsidiaries from reasonably possible effects of changes in selected interest rate, credit spread, equity price, growth assets and foreign exchange rate scenarios for the year. These sensitivities are prepared in accordance with current IFRS Accounting Standards and are based on changing one assumption at a time with other variables being held constant, which in practice could be correlated.

Due in part to the impact of the cost of guarantees and hedging strategies, which may be in place, the relationship between the CSM, profit after tax and total equity and the risk factors is non-linear. 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 method used for deriving sensitivity information and significant market risk factors remain consistent between 2022 and 2023. In 2022, due to a lower CSM level, some portfolios generated onerous contracts in the 100bps up scenarios for interest rate and credit spread sensitivities, generating income statement losses and equity reductions in those scenarios. This was less prevalent in 2023 as the base CSMs were higher from changing market conditions and changes in lapse rate assumptions.

Sensitivity of HSBC's insurance manufacturing subsidiaries to market risk factors¹
(Audited)
	2023			2022²
	Effect on profit after tax	Effect on CSM	Effect on total equity	Effect on profit after tax	Effect on CSM	Effect on total equity
	$m	$m	$m	$m	$m	$m
+100 basis point parallel shift in yield curves	66	(92)	32	(210)	(82)	(240)
- Insurance and reinsurance contracts	69	(92)	69	(214)	(82)	(214)
- Financial instruments	(3)	-	(37)	4	-	(26)
-100 basis point parallel shift in yield curves	(137)	(390)	(103)	(49)	(57)	(19)
- Insurance and reinsurance contracts	(133)	(390)	(133)	(41)	(57)	(41)
- Financial instruments	(4)	-	30	(8)	-	22
+100 basis point shift in credit spreads	(11)	(884)	(45)	(324)	(843)	(354)
- Insurance and reinsurance contracts	(9)	(884)	(9)	(322)	(843)	(322)
- Financial Instruments	(2)	-	(36)	(2)	-	(32)
-100 basis point shift in credit spreads	104	806	138	119	1,133	149
- Insurance and reinsurance contracts	102	806	102	117	1,133	117
- Financial instruments	2	-	36	2	-	32
10% increase in growth assets³	78	436	78	68	400	68
- Insurance and reinsurance contracts	43	436	43	38	400	38
- Financial instruments	35	-	35	30	-	30
10% decrease in growth assets³	(85)	(507)	(86)	(81)	(560)	(81)
- Insurance and reinsurance contracts	(49)	(507)	(49)	(49)	(560)	(49)
- Financial instruments	(36)	-	(36)	(32)	-	(32)
10% appreciation in US dollar exchange rate against local functional currency	117	390	117	95	272	95
- Insurance and reinsurance contracts	27	390	27	20	272	20
- Financial instruments	90	-	90	75	-	75
10% depreciation in US dollar exchange rate against local functional currency	(117)	(390)	(117)	(95)	(272)	(95)
- Insurance and reinsurance contracts	(27)	(390)	(27)	(20)	(272)	(20)
- Financial instruments	(90)	-	(90)	(75)	-	(75)

1 Sensitivities presented for 'Insurance and reinsurance Contracts' includes the impact of the sensitivity stress on underlying assets held to support insurance and reinsurance contracts. Sensitivities presented for 'Financial instruments' includes the impact of the sensitivity stress on other financial instruments, primarily shareholder assets.

2 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

3 'Growth assets' primarily comprise equity securities and investment properties. Variability in growth asset fair value constitutes a market risk to HSBC insurance manufacturing subsidiaries.

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 234.

The credit quality of the reinsurers' share of liabilities under insurance contracts is assessed as 'satisfactory' or higher (as defined on page 148), with 100% of the exposure being neither past due nor impaired (2022: 100%).

Credit risk on assets supporting unit-linked liabilities is predominantly borne by the policyholders. 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 172.

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.

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. Liquidity risk may be able to be shared with policyholders for products with participating features.

The remaining maturity of insurance contract liabilities is included in Note 4 on page 362.

The amounts of insurance contract liabilities that are payable on demand are set out by the product grouping below:

Amounts payable on demand (Audited)
	2023		2022¹
	Amounts payable on demand	Carrying amount for these contracts	Amounts payable on demand	Carrying amount for these contracts
	$m	$m	$m	$m
Life direct participating and investment DPF contracts	107,287	116,389	100,273	104,669
Life other contracts	2,765	3,961	2,813	3,759
At 31 Dec	110,052	120,350	103,086	108,428

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

Insurance underwriting risk

Description and exposure

Insurance underwriting 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, lapse and expense rates. Lapse risk exposure on products with premium financing increased over the year as rising interest rates led to an increase in the cost of financing for customers.

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 234 analyse our life insurance underwriting risk exposures by composition of the fair value of the underlying items.

The insurance underwriting risk profile and related exposures remain largely consistent with those observed at 31 December 2022.

Sensitivities

(Audited)

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

These sensitivities are prepared in accordance with current IFRS Accounting Standards, which have changed following the adoption of IFRS 17 'Insurance Contracts', effective from 1 January 2023. Further information about the adoption of IFRS 17 is provided on page 342.

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.

Sensitivity to lapse rates depends on the type of contracts being written. An increase in lapse rates typically has a negative effect on CSM (and therefore expected future profits) 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.

Expense rate risk is the exposure to a change in the allocated 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. This risk is generally greatest for our smaller entities.

The impact of changing insurance underwriting risk factors is primarily absorbed within the CSM, unless contracts are onerous in which case the impact is directly to profits. The impact of changes to the CSM is released to profits over the expected coverage periods of the related insurance contracts.

Sensitivity of HSBC's insurance manufacturing subsidiaries to insurance underwriting risk factors (Audited)
	Effect on CSM (gross)¹	Effect on profit after tax (gross)¹	Effect on profit after tax (net)²	Effect on total equity (gross)¹	Effect on total equity (net)²
At 31 Dec 2023	$m	$m	$m	$m	$m
10% increase in mortality and/or morbidity rates	(392)	(49)	(24)	(49)	(24)
10% decrease in mortality and/or morbidity rates	440	22	30	22	30
10% increase in lapse rates	(316)	(33)	(24)	(33)	(24)
10% decrease in lapse rates	348	22	29	22	29
10% increase in expense rates	(68)	(9)	(6)	(9)	(6)
10% decrease in expense rates	69	8	11	8	11
At 31 Dec 2022³
10% increase in mortality and/or morbidity rates	(354)	(23)	(21)	(23)	(21)
10% decrease in mortality and/or morbidity rates	374	16	18	16	18
10% increase in lapse rates	(225)	(23)	(23)	(23)	(23)
10% decrease in lapse rates	232	22	22	22	22
10% increase in expense rates	(59)	(7)	(7)	(7)	(7)
10% decrease in expense rates	60	4	5	4	5

1 The 'gross' sensitivities impacts are provided before considering the impacts of reinsurance contracts held as risk mitigation.

2 The 'net' sensitivities impacts are provided after considering the impacts of reinsurance contracts held as risk mitigation.

3 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our Privacy Policy.

END

Companies

HSBC Holdings (HSBA)

Thursday, 23rd January 2025

COMPANIES COVERED:

SXS MTO MAB1

Spectris jumps as profit forecasts upgraded, Mortgage Advice Bureau gains as company notes outperformance and strong demand for 2025, whilst Mitie languishes despite bumper revenue update.

Full Archive

UK 100

Latest directors dealings

8 hours ago The Gym Group
8 hours ago Manchester & London Investment Trust
8 hours ago Carr's Group
8 hours ago Carr's Group
9 hours ago Playtech

All directors dealings today