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Annual Financial Report - Part 5

22nd Feb 2022 16:30

RNS Number : 4603C

HSBC Holdings PLC

22 February 2022

Commercial real estate

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

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

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

Commercial real estate lending declined $7.5bn, including adverse foreign exchange movements of $1.2bn, mainly in the UK and, to a lesser extent, within the US.

Commercial real estate lending
							Of which:
	Europe	Asia	MENA	North America	Latin America	Total	UK	Hong Kong
	$m	$m	$m	$m	$m	$m	$m	$m
Gross loans and advances
Stage 1	20,317	56,734	781	8,328	1,073	87,233	14,235	42,951
Stage 2	3,505	17,103	569	1,265	218	22,660	2,781	13,300
Stage 3	1,062	543	206	9	249	2,069	905	435
POCI	-	98	-	-	-	98	-	98
At 31 Dec 2021	24,884	74,478	1,556	9,602	1,540	112,060	17,921	56,784
- of which: renegotiated loans	440	251	145	-	-	836	436	170
Allowance for ECL	(450)	(693)	(158)	(26)	(130)	(1,457)	(366)	(604)

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

Refinance risk in commercial real estate

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

Commercial real estate gross loans and advances maturity analysis
							Of which:
	Europe	Asia	MENA	North America	Latin America	Total	UK	Hong Kong
	$m	$m	$m	$m	$m	$m	$m	$m
On demand, overdrafts or revolving
< 1 year	12,980	26,736	478	5,961	336	46,491	10,546	20,466
1-2 years	4,794	18,192	159	1,098	280	24,523	3,921	14,399
2-5 years	5,352	26,668	631	2,297	559	35,507	2,805	19,562
> 5 years	1,758	2,882	288	246	365	5,539	649	2,357
At 31 Dec 2021	24,884	74,478	1,556	9,602	1,540	112,060	17,921	56,784

On demand, overdrafts or revolving
< 1 year	13,728	25,075	750	5,793	263	45,609	12,131	19,998
1-2 years	6,373	18,396	119	3,112	434	28,434	4,991	13,237
2-5 years	6,241	27,699	668	2,288	927	37,823	3,135	21,694
> 5 years	2,961	3,829	296	315	266	7,667	1,215	2,929
At 31 Dec 2020	29,303	74,999	1,833	11,508	1,890	119,533	21,472	57,858

The following table presents the Group's total exposure to mainland China commercial real estate at 31 December 2021, by country/territory and credit quality. Mainland China reported real estate exposures comprise exposures booked in mainland China and offshore where the ultimate parent and beneficial owner is based in mainland China, and all exposures booked on mainland China balance sheets.

Mainland China commercial real estate
	Hong Kong	Mainland China	Rest of the Group	Total
	$m	$m	$m	$m
Loans and advances to customers1	9,903	6,811	410	17,124
Guarantees issued and others2	1,747	2,376	79	4,202
Total mainland China commercial real estate exposure at 31 Dec 2021	11,650	9,187	489	21,326
Distribution of mainland China commercial real estate exposure by credit quality
- Strong	3,543	3,864	155	7,562
- Good	2,652	2,354	73	5,079
- Satisfactory	3,383	2,855	106	6,344
- Sub-standard	1,570	12	155	1,737
- Credit impaired	502	102	-	604
At 31 Dec 2021	11,650	9,187	489	21,326
Allowance for ECL	560	49	2	611

1 Amounts represent gross carrying amount.

2 Amounts represent nominal amount.

At 31 December 2021, the Group had no direct credit exposure to developers in the 'red' category of the Chinese government's 'three red lines' framework. The Group's exposures related to companies whose primary activities are focused on residential, commercial and mixed-use real estate activities. Lending is generally focused on tier 1 and 2 cities.

Booked in Hong Kong are higher risk exposures to a combination of state and privately owned enterprises. This portfolio had 89% of exposure booked with a credit quality of 'satisfactory' or above, but had a higher degree of uncertainty due to tightening liquidity and increased refinancing risks. In addition, offshore exposures are typically higher risk than onshore exposures. At 31 December 2021, the Group had allowances for ECL of $560m held against mainland China commercial real estate exposures booked in Hong Kong. We will continue to monitor the prevailing situation closely.

Collateral and other credit enhancements

(Audited)

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

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

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

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

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

Collateral on loans and advances

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

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

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

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

For credit-impaired loans, the collateral values cannot be directly compared with impairment allowances recognised. The LTV figures use open market values with no adjustments. Impairment allowances are calculated on a different basis, by considering other cash flows and adjusting collateral values for costs of realising collateral as explained further on page 324.

Commercial real estate loans and advances

The value of commercial real estate collateral is determined by using a combination of external and internal valuations

and physical inspections. For commercial real estate, where the facility exceeds regulatory threshold requirements, Group policy requires an independent review of the valuation at least every three years, or more frequently as the need arises.

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

Wholesale lending - commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories (by stage)
(Audited)
			Of which:
	Total		UK		Hong Kong
	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage
	$m	%	$m	%	$m	%
Stage 1
Not collateralised	50,603	0.1	7,623	0.4	23,864	-
Fully collateralised	71,769	0.1	13,139	0.2	32,951	-
LTV ratio:
- less than 50%	35,984	0.1	4,142	0.2	22,645	-
- 51% to 75%	26,390	0.1	6,460	0.2	8,082	-
- 76% to 90%	5,284	0.2	1,859	0.2	1,181	-
- 91% to 100%	4,111	0.1	678	-	1,043	0.1
Partially collateralised (A):	5,429	0.1	2,018	0.1	714	-
- collateral value on A	2,942		874		447
Total	127,801	0.1	22,780	0.3	57,529	-
Stage 2
Not collateralised	11,729	4.3	1,970	0.9	7,758	5.9
Fully collateralised	12,741	1.1	1,131	2.3	6,385	0.4
LTV ratio:
- less than 50%	5,759	1.0	605	3.1	3,633	0.3
- 51% to 75%	4,804	1.1	471	1.3	2,389	0.5
- 76% to 90%	757	1.5	43	-	269	0.4
- 91% to 100%	1,421	1.5	12	-	94	-
Partially collateralised (B):	1,783	2.7	366	0.3	172	2.9
- collateral value on B	930		223		70
Total	26,253	2.7	3,467	1.3	14,315	3.4
Stage 3
Not collateralised	828	40.9	407	42.0	198	35.9
Fully collateralised	1,176	22.0	346	5.2	290	11.0
LTV ratio:
- less than 50%	645	19.8	36	2.8	284	10.9
- 51% to 75%	286	9.1	250	5.2	-	-
- 76% to 90%	62	14.5	11	-	2	-
- 91% to 100%	183	52.5	49	8.2	4	25.0
Partially collateralised (C):	265	47.9	204	49.0	-	-
- collateral value on C	149		97		-
Total	2,269	32.0	957	30.2	488	21.1
POCI
Not collateralised	-	-	-	-	-	-
Fully collateralised	98	-	-	-	98	-
LTV ratio:
- less than 50%	98	-	-	-	98	-
- 51% to 75%	-	-	-	-	-	-
- 76% to 90%	-	-	-	-	-	-
- 91% to 100%	-	-	-	-	-	-
Partially collateralised (D):	-	-	-	-	-	-
- collateral value on D	-		-		-
Total	98	-	-	-	98	-
At 31 Dec 2021	156,421	1.0	27,204	1.5	72,430	0.8

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

Wholesale lending - commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories
(Audited)
			Of which:
	Total		UK		Hong Kong
	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage
	$m	%	$m	%	$m	%
Rated CRR/PD1 to 7
Not collateralised	61,279	0.5	9,586	0.5	30,917	0.6
Fully collateralised	83,456	0.2	14,218	0.2	38,817	0.1
Partially collateralised (A):	7,059	0.5	2,379	0.2	886	0.6
- collateral value on A	3,729		1,092		517
Total	151,794	0.3	26,183	0.3	70,620	0.3
Rated CRR/PD8
Not collateralised	1,053	26.5	7	42.9	705	38.6
Fully collateralised	1,054	3.8	52	38.5	519	2.1
LTV ratio:
- less than 50%	503	4.8	41	41.5	378	0.8
- 51% to 75%	447	3.1	8	25.0	137	5.8
- 76% to 90%	60	1.7	1	-	4	-
- 91% to 100%	44	2.3	2	-	-	-
Partially collateralised (B):	153	15.0	5	20.0	-	-
- collateral value on B	143		5		-
Total	2,260	15.1	64	37.5	1,224	23.1
Rated CRR/PD9 to 10
Not collateralised	828	40.9	407	42.0	198	35.9
Fully collateralised	1,274	20.3	346	5.2	388	8.2
LTV ratio:
- less than 50%	743	17.2	36	2.8	382	8.1
- 51% to 75%	286	9.1	250	5.2	-	-
- 76% to 90%	62	14.5	11	-	2	-
- 91% to 100%	183	52.5	49	8.2	4	25.0
Partially collateralised (C):	265	47.9	204	49.0	-	-
- collateral value on C	149		97		-
Total	2,367	30.6	957	30.2	586	17.6
At 31 Dec 2021	156,421	1.0	27,204	1.5	72,430	0.8

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

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

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

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

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

Wholesale lending - other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories (by stage)
(Audited)
			Of which:
	Total		UK		Hong Kong
	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage
	$m	%	$m	%	$m	%
Stage 1
Not collateralised	624,935	0.1	112,188	0.2	111,948	-
Fully collateralised	112,905	0.1	22,971	0.2	45,479	0.1
LTV ratio:
- less than 50%	40,636	0.1	6,512	0.2	16,915	-
- 51% to 75%	38,709	0.1	9,431	0.2	16,533	0.1
- 76% to 90%	13,284	0.1	2,556	0.1	4,920	0.1
- 91% to 100%	20,276	0.1	4,472	-	7,111	0.1
Partially collateralised (A):	64,058	0.1	8,665	0.1	20,358	-
- collateral value on A	30,890		4,826		9,322
Total	801,898	0.1	143,824	0.2	177,785	-
Stage 2
Not collateralised	85,394	1.1	18,562	2.0	8,310	1.1
Fully collateralised	32,019	1.1	8,231	1.3	11,503	0.7
LTV ratio:
- less than 50%	10,892	1.2	3,148	1.5	3,378	0.5
- 51% to 75%	14,281	1.1	4,161	1.2	5,202	0.9
- 76% to 90%	2,752	1.2	687	1.5	1,148	0.9
- 91% to 100%	4,094	0.9	235	1.7	1,775	0.2
Partially collateralised (B):	12,484	1.0	1,824	1.9	1,788	0.4
- collateral value on B	6,675		937		785
Total	129,897	1.1	28,617	1.8	21,601	0.8
Stage 3
Not collateralised	8,122	47.3	2,979	21.6	732	74.7
Fully collateralised	2,278	12.7	1,212	3.4	240	2.1
LTV ratio:
- less than 50%	603	20.9	249	4.8	76	-
- 51% to 75%	1,110	5.0	786	1.4	110	3.6
- 76% to 90%	295	11.5	115	9.6	26	-
- 91% to 100%	270	27.4	62	9.7	28	3.6
Partially collateralised (C):	2,134	38.7	318	35.5	616	28.9
- collateral value on C	1,200		186		358
Total	12,534	39.6	4,509	17.7	1,588	46.0
POCI
Not collateralised	114	36.0	28	21.4	4	-
Fully collateralised	61	34.4	-	-	57	36.8
LTV ratio:
- less than 50%	-	-	-	-	-	-
- 51% to 75%	57	36.8	-	-	57	36.8
- 76% to 90%	-	-	-	-	-	-
- 91% to 100%	4	-	-	-	-	-
Partially collateralised (D):	2	100.0	-	-	-	-
- collateral value on D	2		-		-
Total	177	36.2	28	21.4	61	34.4
At 31 Dec 2021	944,506	0.8	176,978	0.9	201,035	0.5

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

Wholesale lending - other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories
(Audited)
			Of which:
	Total		UK		Hong Kong
	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage
	$m	%	$m	%	$m	%
Rated CRR/PD8
Not collateralised	4,790	3.9	1,587	3.1	79	30.4
Fully collateralised	1,653	3.9	259	6.6	32	-
LTV ratio:
- less than 50%	803	3.5	113	6.2	2	-
- 51% to 75%	583	3.8	110	8.2	1	-
- 76% to 90%	116	5.2	23	4.3	29	-
- 91% to 100%	151	5.3	13	-	-	-
Partially collateralised (A):	1,253	3.7	138	8.0	11	-
- collateral value on A	921		40		6
Total	7,696	3.9	1,984	3.9	122	20.5
Rated CRR/PD9 to 10
Not collateralised	8,239	47.1	3,007	21.5	736	74.3
Fully collateralised	2,335	13.3	1,212	3.4	297	9.1
LTV ratio:
- less than 50%	604	20.9	249	4.8	75	-
- 51% to 75%	1,166	6.7	786	1.4	168	14.9
- 76% to 90%	295	11.5	115	9.6	26	-
- 91% to 100%	270	27.4	62	9.7	28	3.6
Partially collateralised (B):	2,137	38.7	318	35.5	616	28.9
- collateral value on B	1,203		186		358
Total	12,711	39.5	4,537	17.7	1,649	45.6
At 31 Dec 2021	20,407	26.1	6,521	13.5	1,771	43.8

Rated CRR/PD8
Not collateralised	3,787	7.1	924	8.7	103	25.2
Fully collateralised	1,107	5.2	171	9.4	15	-
LTV ratio:
- less than 50%	269	4.1	29	10.3	1	-
- 51% to 75%	480	6.3	87	6.9	-	-
- 76% to 90%	140	5.0	13	23.1	14	-
- 91% to 100%	218	4.1	42	9.5	-	-
Partially collateralised (A):	493	8.1	174	9.2	27	3.7
- collateral value on A	352		83		13
Total	5,387	6.8	1,269	8.7	145	18.6
Rated CRR/PD9 to 10
Not collateralised	8,062	49.7	2,847	29.1	865	66.0
Fully collateralised	2,003	18.1	585	7.9	388	11.6
LTV ratio:
- less than 50%	644	24.2	151	8.6	84	6.0
- 51% to 75%	538	18.8	182	12.6	139	5.0
- 76% to 90%	327	15.0	211	1.9	83	34.9
- 91% to 100%	494	11.3	41	14.6	82	4.9
Partially collateralised (B):	2,851	35.6	553	23.1	592	26.4
- collateral value on B	1,623		337		322
Total	12,916	41.7	3,985	25.2	1,845	41.8
At 31 Dec 2020	18,303	31.4	5,254	21.2	1,990	40.2

Other credit risk exposures

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

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

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

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

Collateral accepted as security that the Group is permitted to sell or repledge under these arrangements is described on page 358 of the financial statements.

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

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

Derivatives

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

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

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

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

Notional contract amounts and fair values of derivatives
	2021			2020
	Notional	Fair value		Notional	Fair value
	amount	Assets	Liabilities	amount	Assets	Liabilities
	$m	$m	$m	$m	$m	$m
Total OTC derivatives	21,964,665	246,108	241,136	22,749,280	372,373	368,010
- total OTC derivatives cleared by central counterparties	10,086,344	59,147	60,686	9,898,260	74,054	75,253
- total OTC derivatives not cleared by central counterparties	11,878,321	186,961	180,450	12,851,020	298,319	292,757
Total exchange traded derivatives	1,359,692	4,152	3,306	1,332,438	4,456	4,094
Gross	23,324,357	250,260	244,442	24,081,718	376,829	372,104
Offset		(53,378)	(53,378)		(69,103)	(69,103)
At 31 Dec		196,882	191,064		307,726	303,001

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

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

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

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

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

See page 378 and Note 30 on the financial statements for details regarding legally enforceable right of offset in the event of counterparty default and collateral received in respect of derivatives.

Personal lending

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

This section also provides a reconciliation of the opening 1 January 2021 to 31 December 2021 closing gross carrying/nominal amounts and associated allowance for ECL. Further product granularity is also provided by stage, with geographical data presented for loans and advances to customers, loan and other credit-related commitments and financial guarantees.

At 31 December 2021, total personal lending for loans and advances to customers of $478bn increased by $17.5bn compared with 31 December 2020. This increase included adverse foreign exchange movements of $6.4bn. Excluding foreign exchange movements, there was growth of $24.0bn, primarily driven by $11.4bn in Asia and $10.2bn in Europe. The allowance for ECL attributable to personal lending, excluding off-balance sheet loan commitments and guarantees and foreign exchange movements, decreased $1.5bn to $3.1bn at 31 December 2021.

Excluding foreign exchange movements, total personal lending was primarily driven by mortgage growth, which grew by $22.8bn. Mortgages grew $10.1bn in the UK; $9.9bn in Asia, notably $6.6bn in Hong Kong and $2.1bn in Australia; and $3.4bn in Canada. This was partly offset by a decrease of $1.8bn due to domestic mass market retail banking in the US being reclassified to assets held for sale. The allowance for ECL, excluding foreign exchange, attributable to mortgages of $0.7bn decreased by $0.1bn compared with 31 December 2020.

The quality of both our Hong Kong and UK mortgage books remained high, with low levels of impairment allowances. The average LTV ratio on new mortgage lending in Hong Kong was 62%, compared with an estimated 47% for the overall mortgage portfolio. The average LTV ratio on new lending in the UK was 67%, compared with an estimated 51% for the overall mortgage portfolio.

Excluding foreign exchange movements, other personal lending balances at 31 December 2021 increased by $1.2bn compared with 31 December 2020, mainly from unsecured personal lending in Hong Kong (up $1.0bn) and in Latin America (up $0.7bn), as well as from guaranteed loans in respect of residential property in France (up $0.8bn). These were offset by a decrease in credit cards mainly in the US (down $0.9bn).

The allowance for ECL, excluding foreign exchange, attributable to other personal lending of $2.4bn decreased by $1.5bn compared with 31 December 2020. Excluding foreign exchange, the allowance for ECL attributable to credit cards decreased by $0.9bn while unsecured personal lending decreased by $0.6bn.

Total personal lending for loans and advances to customers at amortised cost by stage distribution
	Gross carrying amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
By portfolio
First lien residential mortgages	360,686	7,637	3,045	371,368	(128)	(131)	(416)	(675)
- of which: interest only (including offset)	28,506	1,795	255	30,556	(5)	(24)	(81)	(110)
- affordability (including US adjustable rate mortgages)	13,621	712	452	14,785	(6)	(6)	(5)	(17)
Other personal lending	96,270	8,802	1,897	106,969	(530)	(1,088)	(810)	(2,428)
- second lien residential mortgages	314	44	37	395	(1)	(4)	(9)	(14)
- guaranteed loans in respect of residential property	20,643	731	236	21,610	(9)	(7)	(42)	(58)
- other personal lending which is secured	36,533	1,096	366	37,995	(21)	(15)	(120)	(156)
- credit cards	18,623	3,897	338	22,858	(246)	(675)	(214)	(1,135)
- other personal lending which is unsecured	18,743	2,820	915	22,478	(240)	(378)	(421)	(1,039)
- motor vehicle finance	1,414	214	5	1,633	(13)	(9)	(4)	(26)
- IPO loans	-	-	-	-	-	-	-	-
At 31 Dec 2021	456,956	16,439	4,942	478,337	(658)	(1,219)	(1,226)	(3,103)
By geography
Europe	212,284	5,639	2,148	220,071	(199)	(499)	(637)	(1,335)
- of which: UK	176,547	4,668	1,488	182,703	(167)	(480)	(399)	(1,046)
Asia	187,391	7,796	1,303	196,490	(158)	(381)	(226)	(765)
- of which: Hong Kong	125,854	4,959	202	131,015	(65)	(231)	(43)	(339)
MENA	4,965	252	202	5,419	(38)	(40)	(94)	(172)
North America	43,489	2,126	1,005	46,620	(43)	(67)	(118)	(228)
Latin America	8,827	626	284	9,737	(220)	(232)	(151)	(603)
At 31 Dec 2021	456,956	16,439	4,942	478,337	(658)	(1,219)	(1,226)	(3,103)

Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution
	Nominal amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	57,109	558	107	57,774	(11)	(1)	-	(12)
- of which: UK	54,704	407	104	55,215	(10)	(1)	-	(11)
Asia	160,248	894	21	161,163	-	-	-	-
- of which: Hong Kong	121,597	292	19	121,908	-	-	-	-
MENA	2,568	30	16	2,614	(5)	-	-	(5)
North America	15,039	251	23	15,313	(15)	(1)	-	(16)
Latin America	3,920	29	2	3,951	(6)	-	-	(6)
At 31 Dec 2021	238,884	1,762	169	240,815	(37)	(2)	-	(39)

Total personal lending for loans and advances to customers at amortised cost by stage distribution (continued)1
	Gross carrying amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
By portfolio
First lien residential mortgages	336,666	12,233	3,383	352,282	(125)	(188)	(442)	(755)
- of which: interest only (including offset)	29,143	3,074	351	32,568	(9)	(19)	(88)	(116)
- affordability (including US adjustable rate mortgages)	13,265	2,209	606	16,080	(11)	(11)	(5)	(27)
Other personal lending	93,468	12,831	2,228	108,527	(702)	(2,214)	(1,060)	(3,976)
- second lien residential mortgages	593	100	51	744	(3)	(9)	(10)	(22)
- guaranteed loans in respect of residential property	21,558	835	159	22,552	(4)	(7)	(32)	(43)
- other personal lending which is secured	36,230	1,357	448	38,035	(13)	(19)	(127)	(159)
- credit cards	17,327	5,292	680	23,299	(386)	(1,281)	(380)	(2,047)
- other personal lending which is unsecured	16,338	5,096	882	22,316	(288)	(888)	(506)	(1,682)
- motor vehicle finance	1,374	151	8	1,533	(8)	(10)	(5)	(23)
- IPO loans	48	-	-	48	-	-	-	-
At 31 Dec 2020	430,134	25,064	5,611	460,809	(827)	(2,402)	(1,502)	(4,731)
By geography
Europe	200,120	11,032	2,511	213,663	(247)	(1,271)	(826)	(2,344)
- of which: UK	163,338	9,476	1,721	174,535	(223)	(1,230)	(545)	(1,998)
Asia	178,175	7,969	1,169	187,313	(234)	(446)	(241)	(921)
- of which: Hong Kong	118,252	5,133	206	123,591	(102)	(237)	(48)	(387)
MENA	4,879	403	251	5,533	(54)	(112)	(152)	(318)
North America	40,387	4,613	1,378	46,378	(93)	(200)	(132)	(425)
Latin America	6,573	1,047	302	7,922	(199)	(373)	(151)	(723)
At 31 Dec 2020	430,134	25,064	5,611	460,809	(827)	(2,402)	(1,502)	(4,731)

1 During the period, the Group has re-presented the other personal lending with additional granularity.

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

Exposure to UK interest-only mortgage loans

The following information is presented for HSBC branded UK interest-only mortgage loans with balances of $15.2bn. This excludes offset mortgages in the first direct brand and Private Bank mortgages.

At the end of 2021, the average LTV ratio in the portfolio was 40% and 99% of mortgages had an LTV ratio of 75% or less.

Of the interest-only mortgage loans that expired in 2019, 89%

were repaid within 12 months of expiry with a total of 91% being repaid within 24 months of expiry. For those expiring during 2020, 73% were repaid within 12 months of expiry. The drop in the amount fully repaid within the 12 months is explained by the extensions granted as part of the FCA guidance on helping borrowers with maturing interest-only mortgages during the pandemic that ended in October 2021. Excluding the extensions, only $3.9m remains outstanding.

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

UK interest-only mortgage loans
	$m
Expired interest-only mortgage loans	167
Interest-only mortgage loans by maturity
- 2022	267
- 2023	401
- 2024	330
- 2025	420
- 2026-2030	3,288
- post-2030	10,333
At 31 Dec 2021	15,206

Expired interest-only mortgage loans	169
Interest-only mortgage loans by maturity
- 2021	356
- 2022	392
- 2023	500
- 2024	407
- 2025-2029	3,317
- post-2030	9,914
At 31 Dec 2020	15,055

Exposure to offset mortgage in first direct

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

At 31 December 2021, exposures were worth a total $7.0bn with an average LTV ratio of 35% (31 December 2020: $8.6bn exposure and 37% LTV ratio).

Personal lending - reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2021	665,346	(866)	26,770	(2,405)	5,762	(1,503)	697,878	(4,774)
Transfers of financial instruments	1,822	(1,154)	(4,502)	1,713	2,680	(559)	-	-
Net remeasurement of ECL arising from transfer of stage	-	825	-	(363)	-	(7)	-	455
Net new and further lending/repayments	39,946	148	(2,877)	533	(1,517)	270	35,552	951
Change in risk parameters - credit quality	-	318	-	(778)	-	(1,007)	-	(1,467)
Changes to models used for ECL calculation	-	(2)	-	-	-	1	-	(1)
Assets written off	-	-	-	-	(1,525)	1,520	(1,525)	1,520
Foreign exchange and other1	(11,274)	36	(1,190)	79	(289)	59	(12,753)	174
At 31 Dec 2021	695,840	(695)	18,201	(1,221)	5,111	(1,226)	719,152	(3,142)
ECL income statement change for the period		1,289		(608)		(743)		(62)
Recoveries								355
Other								(9)
Total ECL income statement change for the period								284

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

As shown in the above table, the allowance for ECL for loans and advances to customers and relevant loan commitments and financial guarantees decreased $1,632m during the period from $4,774m at 31 December 2020 to $3,142m at 31 December 2021.

This decrease was primarily driven by:

• $1,520m of assets written off;

• $951m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further lending/repayment;

• $455m relating to the net remeasurement impact of stage transfers; and

• foreign exchange and other movements of $174m.

These were partly offset by:

• $1,467m relating to underlying credit quality changes, including

the credit quality impact of financial instruments transferring between stages.

The ECL charge for the period of $62m presented in the above table consisted of $1,467m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages. This was partly offset by $951m relating to underlying net book volume movements and $455m relating to the net remeasurement impact of stage transfers.

The net transfer of gross carrying/nominal amounts to stage 1 of $1,822m reflects the overall improvement in the economic outlook as the effects of the Covid-19 outbreak subsided. It was primarily driven by $2,854m in Europe and $1,074m in North America, and was partly offset by a net transfer out of stage 1 of $2,346m in Asia, mainly driven by management judgemental adjustments primarily in Hong Kong during 1H21.

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

Personal lending - credit risk profile by internal PD band for loans and advances to customers at amortised cost
		Gross carrying amount				Allowance for ECL
	PD range1	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total	ECL coverage
	%	$m	$m	$m	$m	$m	$m	$m	$m	%
First lien residential mortgages		360,686	7,637	3,045	371,368	(128)	(131)	(416)	(675)	0.2
- Band 1	0.000 to 0.250	310,042	451	-	310,493	(30)	(5)	-	(35)	-
- Band 2	0.251 to 0.500	19,741	203	-	19,944	(7)	(2)	-	(9)	-
- Band 3	0.501 to 1.500	25,835	1,936	-	27,771	(79)	(8)	-	(87)	0.3
- Band 4	1.501 to 5.000	4,976	2,657	-	7,633	(12)	(30)	-	(42)	0.6
- Band 5	5.001 to 20.000	88	1,416	-	1,504	-	(35)	-	(35)	2.3
- Band 6	20.001 to 99.999	4	974	-	978	-	(51)	-	(51)	5.2
- Band 7	100.000	-	-	3,045	3,045	-	-	(416)	(416)	13.7
Other personal lending		96,270	8,802	1,897	106,969	(530)	(1,088)	(810)	(2,428)	2.3
- Band 1	0.000 to 0.250	45,049	187	-	45,236	(50)	(13)	-	(63)	0.1
- Band 2	0.251 to 0.500	12,625	605	-	13,230	(27)	(6)	-	(33)	0.2
- Band 3	0.501 to 1.500	22,791	1,518	-	24,309	(102)	(30)	-	(132)	0.5
- Band 4	1.501 to 5.000	13,006	2,360	-	15,366	(213)	(108)	-	(321)	2.1
- Band 5	5.001 to 20.000	2,732	3,257	-	5,989	(138)	(554)	-	(692)	11.6
- Band 6	20.001 to 99.999	67	875	-	942	-	(377)	-	(377)	40.0
- Band 7	100.000	-	-	1,897	1,897	-	-	(810)	(810)	42.7
At 31 Dec 2021		456,956	16,439	4,942	478,337	(658)	(1,219)	(1,226)	(3,103)	0.6

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

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

Collateral on loans and advances

(Audited)

The following table provides a quantification of the value of fixed charges we hold over specific assets where we have a history of enforcing, and are able to enforce, collateral in satisfying a debt in the event of the borrower failing to meet its contractual

obligations, and where the collateral is cash or can be realised by sale in an established market. The collateral valuation excludes any adjustments for obtaining and selling the collateral and, in particular, loans shown as not collateralised or partially collateralised may also benefit from other forms of credit mitigants.

Personal lending - residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage
(Audited)
			Of which:
	Total		UK		Hong Kong
	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage
	$m	%	$m	%	$m	%
Stage 1
Fully collateralised	377,454	-	168,737	-	98,020	-
LTV ratio:
- less than 50%	190,370	-	81,582	-	61,234	-
- 51% to 60%	64,217	-	28,555	-	12,070	-
- 61% to 70%	51,842	-	25,949	-	4,649	-
- 71% to 80%	46,932	0.1	24,114	-	8,360	-
- 81% to 90%	18,778	0.1	7,899	-	8,420	-
- 91% to 100%	5,315	0.1	638	-	3,287	-
Partially collateralised (A):	682	0.3	358	-	30	-
LTV ratio:
- 101% to 110%	254	0.6	104	-	26	-
- 111% to 120%	98	0.4	60	-	1	-
- greater than 120%	330	0.1	194	-	3	-
- collateral value on A	484		235		28
Total	378,136	-	169,095	-	98,050	-
Stage 2
Fully collateralised	7,710	1.7	2,738	2.1	1,166	-
LTV ratio:
- less than 50%	4,380	1.5	1,846	1.6	905	-
- 51% to 60%	1,317	1.4	397	2.4	106	-
- 61% to 70%	1,016	1.6	282	3.0	34	-
- 71% to 80%	725	2.3	175	4.7	50	-
- 81% to 90%	208	4.3	32	5.6	58	-
- 91% to 100%	64	4.1	6	1.9	13	-
Partially collateralised (B):	24	13.6	3	7.7	-	-
LTV ratio:
- 101% to 110%	7	18.6	1	1.0	-	-
- 111% to 120%	8	16.6	-	-	-	-
- greater than 120%	9	6.7	2	11.1	-	-
- collateral value on B	20		2		-
Total	7,734	1.7	2,741	2.1	1,166	-
Stage 3
Fully collateralised	2,853	11.5	954	14.2	68	0.3
LTV ratio:
- less than 50%	1,490	9.2	635	13.0	48	0.5
- 51% to 60%	443	8.6	129	14.0	10	0.1
- 61% to 70%	371	10.9	79	16.2	2	0.1
- 71% to 80%	256	15.4	67	19.1	3	-
- 81% to 90%	171	20.4	21	25.2	4	-
- 91% to 100%	122	32.2	23	18.6	1	-
Partially collateralised (C):	220	39.6	7	30.8	-	-
LTV ratio:
- 101% to 110%	56	27.5	4	22.3	-	-
- 111% to 120%	29	29.2	-	-	-	-
- greater than 120%	135	46.9	3	45.5	-	-
- collateral value on C	143		6		-
Total	3,073	13.5	961	14.4	68	0.3
At 31 Dec 2021	388,943	0.2	172,797	0.1	99,284	-

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

Supplementary information

Wholesale lending - loans and advances to customers at amortised cost by country/territory
	Gross carrying amount				Allowance for ECL
	Corporate and commercial	Of which: real estate1	Non-bank financial institutions	Total	Corporate and commercial	Of which: real estate1	Non-bank financial institutions	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	163,341	23,137	17,818	181,159	(2,770)	(546)	(41)	(2,811)
- UK	115,386	16,233	11,306	126,692	(1,855)	(489)	(32)	(1,887)
- France	34,488	5,520	4,391	38,879	(654)	(47)	(2)	(656)
- Germany	6,746	306	987	7,733	(120)	-	(3)	(123)
- Switzerland	1,188	731	688	1,876	(8)	-	-	(8)
- other	5,533	347	446	5,979	(133)	(10)	(4)	(137)
Asia	263,821	81,453	36,321	300,142	(3,297)	(731)	(44)	(3,341)
- Hong Kong	162,684	62,792	20,182	182,866	(1,585)	(624)	(7)	(1,592)
- Australia	9,937	2,596	717	10,654	(108)	(3)	-	(108)
- India	8,221	1,786	4,003	12,224	(84)	(29)	(8)	(92)
- Indonesia	3,436	86	226	3,662	(246)	(2)	(1)	(247)
- mainland China	33,555	6,811	9,359	42,914	(198)	(41)	(28)	(226)
- Malaysia	7,229	1,741	197	7,426	(172)	(21)	-	(172)
- Singapore	16,401	4,158	782	17,183	(792)	(5)	-	(792)
- Taiwan	6,291	31	47	6,338	-	-	-	-
- other	16,067	1,452	808	16,875	(112)	(6)	-	(112)
Middle East and North Africa (excluding Saudi Arabia)	21,963	1,555	376	22,339	(1,207)	(158)	(3)	(1,210)
- Egypt	1,788	69	152	1,940	(161)	(7)	-	(161)
- UAE	12,942	1,370	190	13,132	(811)	(149)	-	(811)
- other	7,233	116	34	7,267	(235)	(2)	(3)	(238)
North America	52,577	13,639	10,197	62,774	(427)	(87)	(18)	(445)
- US	27,002	5,895	8,511	35,513	(207)	(64)	(1)	(208)
- Canada	25,048	7,650	1,546	26,594	(198)	(15)	(6)	(204)
- other	527	94	140	667	(22)	(8)	(11)	(33)
Latin America	11,837	1,476	643	12,480	(503)	(122)	(4)	(507)
- Mexico	9,561	1,475	618	10,179	(452)	(122)	(4)	(456)
- other	2,276	1	25	2,301	(51)	-	-	(51)
At 31 Dec 2021	513,539	121,260	65,355	578,894	(8,204)	(1,644)	(110)	(8,314)

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

1 Real estate lending within this disclosure corresponds solely to the industry of the borrower. Commercial real estate on page 168 includes borrowers in multiple industries investing in income-producing assets and to a lesser extent, their construction and development.

Personal lending - loans and advances to customers at amortised cost by country/territory
	Gross carrying amount				Allowance for ECL
	First lien residential mortgages	Other personal	Of which: credit cards	Total	First lien residential mortgages	Other personal	Of which: credit cards	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	170,818	49,253	8,624	220,071	(329)	(1,006)	(437)	(1,335)
- UK	163,549	19,154	8,213	182,703	(223)	(823)	(434)	(1,046)
- France1	3,124	22,908	366	26,032	(38)	(91)	(3)	(129)
- Germany	-	282	-	282	-	-	-	-
- Switzerland	1,367	6,615	-	7,982	-	(75)	-	(75)
- other	2,778	294	45	3,072	(68)	(17)	-	(85)
Asia	149,709	46,781	11,413	196,490	(59)	(706)	(428)	(765)
- Hong Kong	98,019	32,996	8,154	131,015	(1)	(338)	(217)	(339)
- Australia	21,149	504	427	21,653	(5)	(33)	(32)	(38)
- India	981	543	181	1,524	(10)	(30)	(20)	(40)
- Indonesia	76	272	147	348	(1)	(20)	(14)	(21)
- mainland China	10,525	1,103	563	11,628	(4)	(72)	(66)	(76)
- Malaysia	2,532	2,657	791	5,189	(33)	(122)	(34)	(155)
- Singapore	7,811	6,649	367	14,460	-	(40)	(13)	(40)
- Taiwan	5,672	1,188	271	6,860	-	(17)	(5)	(17)
- other	2,944	869	512	3,813	(5)	(34)	(27)	(39)
Middle East and North Africa (excluding Saudi Arabia)	2,262	3,157	761	5,419	(26)	(146)	(60)	(172)
- Egypt	-	368	98	368	-	(3)	(1)	(3)
- UAE	1,924	1,232	417	3,156	(18)	(88)	(39)	(106)
- other	338	1,557	246	1,895	(8)	(55)	(20)	(63)
North America	43,529	3,091	555	46,620	(141)	(87)	(47)	(228)
- US	16,642	799	232	17,441	(12)	(53)	(36)	(65)
- Canada	25,773	2,123	284	27,896	(33)	(27)	(8)	(60)
- other	1,114	169	39	1,283	(96)	(7)	(3)	(103)
Latin America	5,050	4,687	1,505	9,737	(120)	(483)	(163)	(603)
- Mexico	4,882	4,006	1,172	8,888	(119)	(450)	(148)	(569)
- other	168	681	333	849	(1)	(33)	(15)	(34)
At 31 Dec 2021	371,368	106,969	22,858	478,337	(675)	(2,428)	(1,135)	(3,103)

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

1 Included in other personal lending at 31 December 2021 is $19,972m (31 December 2020: $20,625m) 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
Loans and advances to customers at amortised cost	918,936	119,224	18,797	274	1,057,231	(1,367)	(3,119)	(6,867)	(64)	(11,417)
- WPB	469,477	17,285	5,211	-	491,973	(664)	(1,247)	(1,276)	-	(3,187)
- CMB	267,517	76,798	11,462	245	356,022	(571)	(1,369)	(4,904)	(53)	(6,897)
- GBM	181,247	25,085	2,124	29	208,485	(132)	(493)	(687)	(11)	(1,323)
- Corporate Centre	695	56	-	-	751	-	(10)	-	-	(10)
Loans and advances to banks at amortised cost	81,636	1,517	-	-	83,153	(14)	(3)	-	-	(17)
- WPB	20,464	481	-	-	20,945	(1)	(1)	-	-	(2)
- CMB	15,269	352	-	-	15,621	(1)	-	-	-	(1)
- GBM	36,875	654	-	-	37,529	(10)	(2)	-	-	(12)
- Corporate Centre	9,028	30	-	-	9,058	(2)	-	-	-	(2)
Other financial assets measured at amortised cost	875,016	4,988	304	43	880,351	(91)	(54)	(42)	(6)	(193)
- WPB	207,335	1,407	175	43	208,960	(51)	(44)	(14)	(6)	(115)
- CMB	163,457	2,370	61	-	165,888	(12)	(8)	(20)	-	(40)
- GBM	409,808	1,204	62	-	411,074	(28)	(2)	(8)	-	(38)
- Corporate Centre	94,416	7	6	-	94,429	-	-	-	-	-
Total gross carrying amount on-balance sheet at 31 Dec 2021	1,875,588	125,729	19,101	317	2,020,735	(1,472)	(3,176)	(6,909)	(70)	(11,627)
Loans and other credit-related commitments	594,473	32,389	775	-	627,637	(165)	(174)	(40)	-	(379)
- WPB	235,722	2,111	153	-	237,986	(37)	(3)	-	-	(40)
- CMB	126,728	17,490	555	-	144,773	(80)	(118)	(37)	-	(235)
- GBM	231,890	12,788	67	-	244,745	(48)	(53)	(3)	-	(104)
- Corporate Centre	133	-	-	-	133	-	-	-	-	-
Financial guarantees	24,932	2,638	225	-	27,795	(11)	(30)	(21)	-	(62)
- WPB	1,295	15	1	-	1,311	-	(1)	-	-	(1)
- CMB	6,105	1,606	126	-	7,837	(7)	(16)	(17)	-	(40)
- GBM	17,531	1,017	98	-	18,646	(4)	(13)	(4)	-	(21)
- Corporate Centre	1	-	-	-	1	-	-	-	-	-
Total nominal amount off-balance sheet at 31 Dec 2021	619,405	35,027	1,000	-	655,432	(176)	(204)	(61)	-	(441)

WPB	143,373	718	-	35	144,126	(20)	(7)	-	(5)	(32)
CMB	86,247	471	-	10	86,728	(11)	(1)	-	(1)	(13)
GBM	111,473	526	-	1	112,000	(13)	(2)	-	-	(15)
Corporate Centre	4,038	311	-	-	4,349	(25)	(11)	-	-	(36)
Debt instruments measured at FVOCI at 31 Dec 2021	345,131	2,026	-	46	347,203	(69)	(21)	-	(6)	(96)

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied - by global business (continued)
	Gross carrying/nominal amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Loans and advances to customers at amortised cost	869,920	163,185	19,095	277	1,052,477	(1,974)	(4,965)	(7,439)	(112)	(14,490)
- WPB	442,641	25,694	5,753	-	474,088	(854)	(2,458)	(1,590)	-	(4,902)
- CMB	238,517	101,960	10,408	212	351,097	(917)	(2,029)	(4,874)	(96)	(7,916)
- GBM	187,564	35,461	2,934	65	226,024	(203)	(465)	(975)	(16)	(1,659)
- Corporate Centre	1,198	70	-	-	1,268	-	(13)	-	-	(13)
Loans and advances to banks at amortised cost	79,654	2,004	-	-	81,658	(33)	(9)	-	-	(42)
- WPB	16,837	519	-	-	17,356	(2)	(2)	-	-	(4)
- CMB	12,253	222	-	-	12,475	(2)	-	-	-	(2)
- GBM	33,361	1,166	-	-	34,527	(23)	(7)	-	-	(30)
- Corporate Centre	17,203	97	-	-	17,300	(6)	-	-	-	(6)
Other financial assets measured at amortised cost	768,216	3,975	177	40	772,408	(80)	(44)	(42)	(9)	(175)
- WPB	167,053	1,547	50	39	168,689	(41)	(22)	(7)	(9)	(79)
- CMB	111,299	1,716	65	1	113,081	(17)	(19)	(25)	-	(61)
- GBM	391,967	705	56	-	392,728	(22)	(3)	(10)	-	(35)
- Corporate Centre	97,897	7	6	-	97,910	-	-	-	-	-
Total gross carrying amount on-balance sheet at 31 Dec 2020	1,717,790	169,164	19,272	317	1,906,543	(2,087)	(5,018)	(7,481)	(121)	(14,707)
Loans and other credit-related commitments	604,485	54,217	1,080	1	659,783	(290)	(365)	(78)	(1)	(734)
- WPB	232,027	2,591	136	-	234,754	(41)	(2)	-	-	(43)
- CMB	111,800	29,150	779	1	141,730	(157)	(203)	(72)	(1)	(433)
- GBM	260,527	22,476	165	-	283,168	(92)	(160)	(6)	-	(258)
- Corporate Centre	131	-	-	-	131	-	-	-	-	-
Financial guarantees	14,090	4,024	269	1	18,384	(37)	(62)	(26)	-	(125)
- WPB	1,048	23	2	-	1,073	-	-	-	-	-
- CMB	5,556	2,519	146	1	8,222	(19)	(36)	(12)	-	(67)
- GBM	7,482	1,482	121	-	9,085	(17)	(26)	(14)	-	(57)
- Corporate Centre	4	-	-	-	4	(1)	-	-	-	(1)
Total nominal amount off-balance sheet at 31 Dec 2020	618,575	58,241	1,349	2	678,167	(327)	(427)	(104)	(1)	(859)

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

Loans and advances to customers and banks metrics
	Gross carrying amount	Of which: stage 3 and POCI	Allowance for ECL	Of which: stage 3 and POCI	Change in ECL	Write-offs	Recoveries
	$m	$m	$m	$m	$m	$m	$m
First lien residential mortgages	371,368	3,045	(675)	(416)	-	(70)	31
- second lien residential mortgages	395	37	(14)	(9)	12	(1)	6
- guaranteed loans in respect of residential property	21,610	236	(58)	(42)	(5)	(8)	2
- other personal lending which is secured	37,995	366	(156)	(120)	(11)	(11)	1
- credit cards	22,858	338	(1,135)	(214)	172	(751)	153
- other personal lending which is unsecured	22,478	915	(1,039)	(421)	135	(659)	156
- motor vehicle finance	1,633	5	(26)	(4)	(22)	(20)	6
- IPO loans	-	-	-	-	-	-	-
Other personal lending	106,969	1,897	(2,428)	(810)	281	(1,450)	324
Personal lending	478,337	4,942	(3,103)	(1,226)	281	(1,520)	355
- agriculture, forestry and fishing	7,899	363	(138)	(105)	61	(5)	-
- mining and quarrying	9,685	463	(227)	(171)	72	(57)	(1)
- manufacturing	93,743	2,107	(1,248)	(962)	102	(222)	7
- electricity, gas, steam and air-conditioning supply	16,618	78	(68)	(31)	5	-	-
- water supply, sewerage, waste management and remediation	3,895	51	(29)	(20)	3	(7)	-
- construction	13,954	843	(508)	(440)	(13)	(94)	9
- wholesale and retail trade, repair of motor vehicles and motorcycles	94,944	3,005	(2,107)	(1,937)	163	(238)	15
- transportation and storage	29,592	667	(363)	(191)	100	(10)	2
- accommodation and food	23,376	1,200	(423)	(111)	12	(17)	6
- publishing, audiovisual and broadcasting	18,471	250	(184)	(100)	(12)	(4)	1
- real estate	121,260	2,473	(1,644)	(775)	(674)	(152)	5
- professional, scientific and technical activities	19,685	637	(238)	(172)	97	(39)	1
- administrative and support services	28,675	749	(431)	(307)	48	(37)	-
- public administration and defence, compulsory social security	1,271	-	(8)	-	6	-	1
- education	1,793	65	(37)	(18)	1	(1)	-
- health and care	4,854	183	(72)	(37)	44	(69)	1
- arts, entertainment and recreation	2,598	152	(92)	(42)	27	(26)	-
- other services	12,297	448	(373)	(246)	(59)	(109)	6
- activities of households	977	-	-	-	-	-	-
- extra-territorial organisations and bodies activities	2	-	-	-	1	-	1
- government	7,612	-	(4)	-	(6)	-	-
- asset-backed securities	338	-	(10)	-	3	-	-
Corporate and commercial	513,539	13,734	(8,204)	(5,665)	(19)	(1,087)	54
Non-bank financial institutions	65,355	395	(110)	(40)	129	(5)	-
Wholesale lending	578,894	14,129	(8,314)	(5,705)	110	(1,092)	54
Loans and advances to customers	1,057,231	19,071	(11,417)	(6,931)	391	(2,612)	409
Loans and advances to banks	83,153	-	(17)	-	22	-	-
At 31 Dec 2021	1,140,384	19,071	(11,434)	(6,931)	413	(2,612)	409

Loans and advances to customers and banks metrics (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	352,282	3,383	(755)	(442)	(259)	(92)	35
- second lien residential mortgages	744	51	(22)	(10)	(5)	-	-
- guaranteed loans in respect of residential property	22,552	159	(43)	(32)	1	(3)	-
- other personal lending which is secured	38,035	448	(159)	(127)	(62)	(5)	1
- credit cards	23,299	680	(2,047)	(380)	(1,194)	(736)	131
- other personal lending which is unsecured	22,316	882	(1,682)	(506)	(1,085)	(543)	108
- motor vehicle finance	1,533	8	(23)	(5)	(18)	(28)	5
- IPO loans	48	-	-	-	-	-	-
Other personal lending	108,527	2,228	(3,976)	(1,060)	(2,363)	(1,315)	245
Personal lending	460,809	5,611	(4,731)	(1,502)	(2,622)	(1,407)	280
- agriculture, forestry and fishing	7,445	332	(207)	(150)	(28)	(3)	-
- mining and quarrying	11,947	813	(365)	(220)	(513)	(311)	-
- manufacturing	93,906	2,163	(1,588)	(945)	(652)	(375)	7
- electricity, gas, steam and air-conditioning supply	16,200	53	(73)	(8)	(7)	(14)	-
- water supply, sewerage, waste management and remediation	3,174	47	(37)	(22)	(8)	-	-
- construction	14,600	777	(590)	(430)	(151)	(135)	13
- wholesale and retail trade, repair of motor vehicles and motorcycles	90,663	3,208	(2,532)	(2,032)	(1,560)	(280)	11
- transportation and storage	29,433	780	(493)	(240)	(308)	(62)	1
- accommodation and food	26,071	537	(491)	(130)	(365)	(28)	-
- publishing, audiovisual and broadcasting	19,979	164	(189)	(59)	(94)	(2)	-
- real estate	127,027	1,908	(1,167)	(738)	(424)	(47)	4
- professional, scientific and technical activities	24,072	531	(398)	(193)	(219)	(36)	1
- administrative and support services	26,423	977	(534)	(315)	(298)	(61)	-
- public administration and defence, compulsory social security	2,008	3	(14)	(1)	(5)	-	-
- education	2,122	29	(41)	(9)	(26)	(6)	1
- health and care	5,510	269	(186)	(120)	(127)	(2)	1
- arts, entertainment and recreation	3,437	236	(158)	(87)	(170)	(2)	-
- other services	13,110	410	(408)	(249)	(360)	(168)	4
- activities of households	802	-	(1)	-	-	-	-
- extra-territorial organisations and bodies activities	10	-	-	-	1	-	1
- government	8,538	1	(9)	(1)	2	(5)	-
- asset-backed securities	611	-	(13)	-	1	-	-
Corporate and commercial	527,088	13,238	(9,494)	(5,949)	(5,311)	(1,537)	44
Non-bank financial institutions	64,580	523	(265)	(100)	(146)	(30)	2
Wholesale lending	591,668	13,761	(9,759)	(6,049)	(5,457)	(1,567)	46
Loans and advances to customers	1,052,477	19,372	(14,490)	(7,551)	(8,079)	(2,974)	326
Loans and advances to banks	81,658	-	(42)	-	(23)	-	-
At 31 Dec 2020	1,134,135	19,372	(14,532)	(7,551)	(8,102)	(2,974)	326

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 and its investments in those subsidiaries.

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

• financial instruments on the balance sheet (see page 315); and

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

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

The total offset relating to our derivative balances was $1.6bn at 31 December 2021 (2020: $1.7bn).

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 (2020: 100%). For further details of credit quality classification, see page 138.

Treasury risk
	Page
Overview	189
Treasury risk management	189
Other Group risks	191
Capital risk in 2021	193
Liquidity and funding risk in 2021	196
Structural foreign exchange risk in 2021	199
Interest rate risk in the banking book in 2021	200

Overview

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

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

Approach and policy

(Audited)

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

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

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

For further details, refer to our Pillar 3 Disclosures at 31 December 2021.

Treasury risk management

Key developments in 2021

• Global Treasury initiated a new flagship programme to deliver a more resilient, effective and efficient Treasury function over the next four years with a focus on safeguarding and optimising financial resources. The programme will aim to deliver modernised infrastructure and upgraded modelling capabilities alongside a broad reorganisation of the Global Treasury function.

• As announced in February 2021, we intend to maintain a common equity tier 1 ('CET1') ratio above 14%, normalising within our target operating range of 14% to 14.5% by the end of 2022. For the financial year 2021, we were at the lower end of our target dividend payout ratio range of between 40% and 55% of reported earnings per ordinary share ('EPS'), driven by ECL releases and higher restructuring costs.

• We continued to build our recovery and resolution capabilities, including in relation to the Bank of England ('BoE') Resolvability Assessment Framework, which had an overall compliance deadline of 1 January 2022. We submitted a self-assessment report on our resolvability to the Prudential Regulation Authority ('PRA') and the BoE on 1 October 2021. This included an assessment of how we addressed resolvability outcomes that impact treasury risk, including valuations, and capital, liquidity and funding capabilities in resolution. We will publish a summary of our self-assessment report in June 2022. The BoE will similarly publish a statement relating to the resolvability of HSBC at the same time.

• The BoE's Financial Policy Committee ('FPC') confirmed its guidance on the path for the UK countercyclical capital buffer rate. It has announced that it is increasing the rate from 0% to 1%, effective December 2022 in line with the usual 12‑month implementation lag. Absent a material change in the outlook for the UK's financial stability, the FPC would expect to further increase the rate to 2% in the second quarter of 2022, which would take effect 12 months later. The Hong Kong Monetary Authority ('HKMA') maintained the countercyclical capital buffer rate at 1% for Hong Kong, but it will continue to monitor credit and economic conditions closely.

• The PRA has confirmed that the capitalisation of structural foreign exchange risk should align to a Pillar 1 approach. In response, we adopted this approach from 31 December 2021. As a result, market risk RWAs increased by $8.4bn, offset by a reduction in Pillar 2 requirements. In advance of this change, we undertook incremental hedging transactions to reduce structural foreign exchange risk and RWAs.

• We revised the approach to calculate the Group liquidity coverage ratio ('LCR') better reflecting the free transferability of liquidity within the Group, in consideration with currency convertibility and regulatory intra-Group limits. A risk appetite has been set against the Group LCR. We first published the Group LCR as part of our 30 June 2021 disclosures. Based on the consolidation methodology, the Group LCR was 138.4% at 31 December 2021.

• As part of our continuing focus on enhancing the quality of our regulatory reporting, we are progressing with a comprehensive programme to strengthen our global processes, improve consistency and enhance control standards on various aspects of regulatory reporting. Further details can be found in the subsequent sub-section 'Regulatory reporting processes and controls'.

• We worked with the fiduciaries of all our pension plans to ensure the measures taken in response to the Covid-19 pandemic, including remote working for plan providers and dealing appropriately with affected plan members, were properly maintained and supported. Our de-risking programmes continued to provide protection against the volatility in financial markets that resulted from the pandemic's economic impact.

• We created a new team within the Global Treasury function to be accountable for monitoring and managing the financial risk and capital implications of the Group's employee defined benefit pension plans. This change creates clearer delineation of the roles and responsibilities of the first and second lines of defence.

The Group's CET1 ratio was 15.8% at 31 December 2021 and the leverage ratio, calculated in accordance with the Capital Requirements Regulation, was 5.2%. The Group continues to maintain and plan for the appropriate resources required to manage its risk and deliver its strategic objectives while supporting local economies.

All of the Group's material operating entities were above regulatory minimum levels of liquidity and funding at 31 December 2021.

For quantitative disclosures on capital ratios, own funds and RWAs, see pages 193 to 194. For quantitative disclosures on liquidity and funding metrics, see pages 196 to 197. For quantitative disclosures on interest rate risk in the banking book, see pages 200 to 201.

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, which is co-owned together with the Group Head of Performance, Reward and Employee Relations.

Capital risk, liquidity risk, interest rate risk in the banking book and non-trading book foreign exchange risk are the responsibility of the Group Executive Committee and the Group Risk Committee ('GRC'). The Global Treasury function 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 the Risk Management Meeting ('RMM').

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.

Capital, liquidity and funding risk management processes

Assessment and risk appetite

Our capital management policy is underpinned by a global capital management framework and our ICAAP. The framework incorporates key capital risk appetites including CET1, total capital, minimum requirements for own funds and eligible liabilities ('MREL'), leverage ratio and double leverage. The ICAAP is an assessment of the Group's capital position, outlining both regulatory and internal capital resources and requirements resulting from HSBC's business model, strategy, risk profile and management, performance and planning, risks to capital, and the implications of stress testing. Our assessment of capital adequacy is driven by an assessment of risks. These risks include credit, market, operational, pensions, insurance, structural foreign exchange, interest rate risk in the banking book and Group risk driven by credit concentration risk in HSBC UK. 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 equity capital and MREL-eligible debt to its subsidiaries, and also provides them with non-equity capital where necessary. These investments are funded by HSBC Holdings' own equity capital and MREL-eligible debt.

HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investments in subsidiaries, including management of double leverage. Double leverage reflects the extent to which equity investments in operating entities are funded by holding company debt. Where Group capital requirements are less than the aggregate of operating entity capital requirements, double leverage can be used to improve Group capital efficiency provided it is managed appropriately. In 2021, we updated the basis of preparation for the calculation of double leverage, to better reflect the economics of the risk and align with the Group accounting view. The Group recognises that double leverage can give rise to holding company cash flow risk, and the risk framework reflects the view that the holding company should be a source of support for its subsidiaries in times of stress. Double leverage is one of the constraints on managing our capital position, given the complexity of the Group's subsidiary structure and the multiple regulatory regimes under which we operate. As a matter of long-standing policy, the holding company retains a substantial holdings capital buffer comprising high-quality liquid assets ('HQLA'), which at 31 December 2021 was in excess of $13bn. The portfolio of HQLA helps to mitigate the risks associated with double leverage. Further mitigation is provided by additional tier 1 ('AT1') securities issued in excess of the regulatory requirements of our subsidiaries.

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

Planning and performance

Capital and risk-weighted asset ('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.

Funding and liquidity plans form part of the financial resource plan that is approved by the Board. The Board-level appetite measures are the LCR and net stable funding ratio ('NSFR'), together with an internal liquidity metric which was introduced in January 2021 to supplement the LCR and NSFR. 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 changes and continue to evaluate the impact of these upon our capital and liquidity requirements. These include the UK's implementation of amendments to the Capital Requirements Regulation ('CRR II'), the Basel III Reforms, and the regulatory impact from the UK's withdrawal from the EU, as well as other regulatory statements including changes to internal ratings-based ('IRB') modelling requirements.

Regulatory developments

The PRA has confirmed that software assets are deducted in full from CET1 capital, starting 1 January 2022. This reverses the beneficial changes to the treatment of software assets that were implemented as part of the EU's response to the Covid-19 pandemic. As a result, the CET1 capital ratio will reduce by approximately 25bps.

Overall, we expect RWAs to increase by around 3% as a result of changes in regulations during 2022. These include the changes to the UK's version of the CRR II, as well as other regulatory statements including changes to IRB modelling requirements and the expiry of transitional provisions in relation to the UK's withdrawal from the EU. The CRR II changes, including the PRA's new rules on NSFR, counterparty credit risk, equity investment in funds, and leverage ratio, will be reflected in disclosures starting in the first quarter of 2022.

Further changes will occur with the introduction of the remaining Basel III Reforms on which the PRA is expected to consult in the second half of 2022. We currently do not foresee a material net impact on initial implementation. The RWA output floor under the Basel III reforms will be subject to a five-year transitional provision. Any impact from the output floor would 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. Notably, the PRA published a Dear CEO letter addressed to UK regulated banks, which highlighted areas of concern over the processes firms use to deliver regulatory returns. Recent sanctions issued by the PRA demonstrate their intent in this respect. We are progressing with a comprehensive programme to strengthen our processes, improve consistency, and enhance controls on various aspects of regulatory reporting. We have commissioned a number of independent external reviews, some at the request of our regulators, including one on our credit risk RWA reporting process, which is currently ongoing. As a result of these initiatives, there may be an impact on some of our regulatory ratios, such as the CET1 and LCR.

Stress testing and recovery planning

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

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

The Group and subsidiaries have established recovery plans, which set out potential options management could take in a range of stress scenarios that could result in a breach of capital or liquidity buffers. All entities monitor internal and external triggers that could threaten their capital, liquidity or funding positions. Entities have established recovery plans providing detailed actions that management would consider taking in a stress scenario should their positions deteriorate and threaten to breach risk appetite and regulatory minimum levels. This is to help ensure that our capital and liquidity position can be recovered even in an extreme stress event.

Overall, recovery and resolution plans form part of the integral framework safeguarding the Group's financial stability. The Group is committed to developing its recovery and resolution capabilities further, including in relation to the BoE's 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 the Markets Treasury business. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Markets Treasury cannot economically hedge is not transferred and will remain within the global business where the risks originate.

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

• net interest income sensitivity; and

• economic value of equity sensitivity

Net interest income sensitivity

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

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

The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the 'up-shock' scenario. The sensitivity calculations in the 'down-shock' scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable.

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. EVE can be used to assess the economic capital required to support interest rate risk in the banking book. An EVE sensitivity represents the expected movement in EVE due to pre-specified interest rate shocks, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivities as a percentage of capital resources.

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 2021.

Other Group risks

Non-trading book foreign exchange exposures

Structural foreign exchange exposures

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. An entity's functional currency is normally that of the primary economic environment in which the entity operates.

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

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

We hedge structural foreign exchange 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 199.

Transactional foreign exchange exposures

Transactional foreign exchange exposures arise from transactions in the banking book generating profit and loss or OCI reserves in a currency other than the reporting currency of the operating entity. Transactional foreign exchange exposure 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 the Markets Treasury business within a limit framework to be agreed in the first half of 2022.

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 and forward foreign exchange contracts to manage its structural foreign exchange exposures.

For quantitative disclosures on interest rate risk in the banking book, see pages 200 to 201.

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. We will continue to review and enhance our risk appetite metrics to assist the internal monitoring of our de-risking programmes.

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

In defined benefit pension plans, the level of pension benefit is

known. Therefore, the level of contributions required by HSBC will vary due to a number of risks, including:

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

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

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

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

Pension risk is assessed using an economic capital model that takes into account potential variations in these factors. The impact of these variations on both pension assets and pension liabilities is assessed using a one-in-200-year stress test. Scenario analysis and other stress tests are also used to support pension risk management.

To fund the benefits associated with defined benefit plans, sponsoring Group companies, and in some instances employees, make regular contributions in accordance with advice from actuaries and in consultation with the plan's 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 60% of the plan's pensioner liabilities.

Capital risk in 2021

Capital overview

Capital adequacy metrics
	At
	31 Dec	31 Dec
	2021	2020
Risk-weighted assets ('RWAs') ($bn)
Credit risk	680.6	691.9
Counterparty credit risk	35.9	42.8
Market risk	32.9	28.5
Operational risk	88.9	94.3
Total RWAs	838.3	857.5
Capital on a transitional basis ($bn)
Common equity tier 1 ('CET1') capital	132.6	136.1
Tier 1 capital	156.3	160.2
Total capital	177.8	184.4
Capital ratios on a transitional basis (%)
Common equity tier 1 ratio	15.8	15.9
Tier 1 ratio	18.6	18.7
Total capital ratio	21.2	21.5
Capital on an end point basis ($bn)
Common equity tier 1 ('CET1') capital	132.6	136.1
Tier 1 capital	155.0	158.5
Total capital	167.5	173.2
Capital ratios on an end point basis (%)
Common equity tier 1 ratio	15.8	15.9
Tier 1 ratio	18.5	18.5
Total capital ratio	20.0	20.2
Liquidity coverage ratio ('LCR')
Total high-quality liquid assets ($bn)	717.0	677.9
Total net cash outflow ($bn)	518.0	487.3
LCR ratio (%)	138.4	139.1

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 revised Capital Requirements Regulation and Directive, as implemented ('CRR II'). The table presents them under the transitional arrangements in CRR II for capital instruments and after their expiry, known as the end point. The end point figures in the table above include the benefit of the regulatory transitional arrangements in CRR II for IFRS 9, which are more fully described below. Where applicable, they also reflect government relief schemes intended to mitigate the impact of the Covid-19 pandemic.

At 31 December 2021, our common equity tier 1 ('CET1') capital ratio decreased to 15.8% from 15.9% at 31 December 2020. RWAs decreased due to RWA reductions under the transformation programme and favourable movements in asset quality. CET1 capital fell due to higher regulatory deductions and fair value movements net of capital generation.

Own funds

The $3.5bn fall in CET1 capital was mainly as a result of:

• a $2.9bn net increase in deductions for excess expected loss, investment in financial sector entities and defined benefit pension assets surplus;

• $2.5bn unfavourable foreign currency translation differences; and

• a $2.2bn decrease in fair value through other comprehensive income reserve.

These decreases were partly offset by capital generation of $3.9bn through profits net of share buy-back, foreseeable dividend and dividends paid.

Our Pillar 2A requirement at 31 December 2021, as per the PRA's Individual Capital Requirement based on a point-in-time assessment, was $22.5bn, equivalent to 2.7% of RWAs, of which 1.5% was required to be met by CET1. With effect from 31 December 2021, structural foreign exchange risk is capitalised in RWAs under Pillar 1, with a consequent reduction in Pillar 2A. Going forward, structural foreign exchange risk will be assessed for Pillar 2A in the same manner as other risks capitalised under Pillar 1.

Own funds disclosure
(Audited)
		At
		31 Dec	31 Dec
		2021	2020
Ref*		$m	$m
	Common equity tier 1 ('CET1') capital: instruments and reserves
1	Capital instruments and the related share premium accounts	23,513	23,219
	- ordinary shares	23,513	23,219
2	Retained earnings1	121,059	126,314
3	Accumulated other comprehensive income (and other reserves)	8,273	9,768
5	Minority interests (amount allowed in consolidated CET1)	4,186	4,079
5a	Independently reviewed interim net profits net of any foreseeable charge or dividend	5,887	(252)
6	Common equity tier 1 capital before regulatory adjustments1	162,918	163,128
28	Total regulatory adjustments to common equity tier 11	(30,353)	(27,078)
29	Common equity tier 1 capital	132,565	136,050
36	Additional tier 1 capital before regulatory adjustments	23,787	24,183
43	Total regulatory adjustments to additional tier 1 capital	(60)	(60)
44	Additional tier 1 capital	23,727	24,123
45	Tier 1 capital	156,292	160,173
51	Tier 2 capital before regulatory adjustments	23,018	25,722
57	Total regulatory adjustments to tier 2 capital	(1,524)	(1,472)
58	Tier 2 capital	21,494	24,250
59	Total capital	177,786	184,423

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

1 The figures for 31 December 2020 have been restated to reflect the reclassification of the IFRS 9 transitional adjustment from retained earnings (within row 6) to 'Total regulatory adjustments to common equity tier 1' (row 28).

Throughout 2021, we complied with the PRA's regulatory capital adequacy requirements, including those relating to stress testing.

Regulatory and other developments

During 2022, we expect our CET1 ratio to be affected by regulatory developments including:

• the change in the treatment of software assets;

• the implementation of the standardised approach for counterparty credit risk calculation, which came into effect on 1 January 2022;

• measures to improve the comparability of internal ratings-based ('IRB') models, including the introduction of a minimum risk weight for performing mortgage portfolios in the UK; and

• the expiry of transitional provisions in relation to the UK's withdrawal from the EU.

Based on our capital position at 31 December 2021, we would expect that the proposed classification of our retail banking operations in France as being held for sale would reduce our CET1 ratio by around 30bps. Separately, our recent strategic actions are likely to lead to a fall in our CET1 ratio of around 15bps, of which we expect approximately half will occur in the first quarter of 2022. These actions include the acquisitions of AXA Singapore, L&T Investment Management and HSBC Life China, and the exit of mass market retail banking in the US.

Risk-weighted assets

RWAs by global business
	WPB	CMB	GBM	Corporate Centre	Total
	$bn	$bn	$bn	$bn	$bn
Credit risk	143.0	305.4	151.8	80.4	680.6
Counterparty credit risk	1.1	0.7	33.5	0.6	35.9
Market risk	1.7	0.9	20.3	10.0	32.9
Operational risk	32.5	25.9	30.6	(0.1)	88.9
At 31 Dec 2021	178.3	332.9	236.2	90.9	838.3

RWAs by geographical region
	Europe	Asia	MENA	North America	Latin America	Total
	$bn	$bn	$bn	$bn	$bn	$bn
Credit risk	193.7	318.1	50.6	90.6	27.6	680.6
Counterparty credit risk	19.4	9.9	1.3	3.3	2.0	35.9
Market risk1	24.6	25.3	2.3	5.3	1.0	32.9
Operational risk	23.4	43.0	6.0	11.2	5.3	88.9
At 31 Dec 2021	261.1	396.3	60.2	110.4	35.9	838.3

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

RWA movement by global business by key driver
	Credit risk, counterparty credit risk and operational risk
	WPB	CMB	GBM	Corporate Centre	Market risk	Total RWAs
	$bn	$bn	$bn	$bn	$bn	$bn
RWAs at 1 Jan 2021	171.2	326.8	242.2	88.8	28.5	857.5
Asset size	5.5	12.5	(12.1)	0.6	(1.8)	4.7
Asset quality	(2.2)	(4.9)	(0.4)	(0.5)	-	(8.0)
Model updates	2.0	(0.4)	-	-	(1.2)	0.4
Methodology and policy	3.4	3.3	(9.8)	(7.3)	7.4	(3.0)
Acquisitions and disposals	(0.4)	-	-	-	-	(0.4)
Foreign exchange movements	(2.9)	(5.3)	(4.0)	(0.7)	-	(12.9)
Total RWA movement	5.4	5.2	(26.3)	(7.9)	4.4	(19.2)
RWAs at 31 Dec 2021	176.6	332.0	215.9	80.9	32.9	838.3

RWA movement by geographical region by key driver
	Credit risk, counterparty credit risk and operational risk
	Europe	Asia	MENA	North America	Latin America	Market risk	Total RWAs
	$bn	$bn	$bn	$bn	$bn	$bn	$bn
RWAs at 1 Jan 2021	260.8	363.3	57.8	113.1	34.0	28.5	857.5
Asset size	(15.9)	17.2	2.3	0.8	2.1	(1.8)	4.7
Asset quality	2.9	(4.9)	(0.5)	(6.2)	0.7	-	(8.0)
Model updates	-	1.7	-	(0.1)	-	(1.2)	0.4
Methodology and policy	(5.5)	(3.2)	0.6	(2.3)	-	7.4	(3.0)
Acquisitions and disposals	-	-	-	(0.4)	-	-	(0.4)
Foreign exchange movements	(5.8)	(3.1)	(2.3)	0.2	(1.9)	-	(12.9)
Total RWA movement	(24.3)	7.7	0.1	(8.0)	0.9	4.4	(19.2)
RWAs at 31 Dec 2021	236.5	371.0	57.9	105.1	34.9	32.9	838.3

Risk-weighted assets ('RWAs') fell by $19.2bn during the year, including a drop of $12.9bn due to foreign currency translation differences. The $6.3bn decrease (excluding foreign currency translation differences) resulted from RWA saves and favourable movements in asset quality, which more than offset increases due to lending growth and regulatory change. At 31 December 2021, our cumulative RWA saves as part of our transformation programme were $104bn, including accelerated reductions of $9.6bn from 31 December 2019.

Asset size

The $12.5bn increase in CMB RWAs reflected corporate loan growth in mainland China, Hong Kong and North America, while lending in Europe reduced.

WPB RWAs rose by $5.5bn, primarily due to lending growth in Asia, largely in the mortgage portfolio. Sovereign exposures drove the $0.6bn rise in Corporate Centre RWAs.

The $12.1bn fall in GBM was mostly due to lower lending, management initiatives and mark-to-market movements in Europe, North America and Latin America, partly offset by growth in Asia.

Market risk RWAs decreased by $1.8bn, largely as a result of reduced exposures and risk mitigation actions.

Asset quality

The RWA decreases in CMB, WPB and Corporate Centre were mostly due to favourable portfolio mix changes in Asia and North America, and credit migration in Europe and North America.

In GBM, favourable portfolio mix changes in Asia and credit migration in North America were partly offset by increases in the UK due to portfolio changes, leading to an overall fall of $0.4bn.

Model updates

The $2.0bn increase in WPB was mostly due to changes to our Australian mortgages model.

This was partly offset by the $1.2bn reduction in market risk RWAs, largely from the implementation of an options risk model. The fall in CMB RWAs was driven by corporate model updates.

Methodology and policy

Changes to Markets Treasury allocation methodologies decreased RWAs in Corporate Centre and increased RWAs in WPB, CMB and GBM. However, the increase in GBM was more than offset by parameter refinements across our major regions.

The $7.4bn rise in market risk included an $8.4bn increase on our adoption of a Pillar 1 approach to the capitalisation of structural foreign exchange risk, following confirmation from the PRA. This was partly offset by enhancements to foreign exchange risk calculations under the standardised approach.

Acquisitions and disposals

The sale of a US credit card portfolio led to a $0.4bn fall in WPB RWAs.

Leverage ratio1

		At
		31 Dec	31 Dec
		2021	2020
Ref*		$bn	$bn
20	Tier 1 capital	155.0	158.5
21	Total leverage ratio exposure	2,962.7	2,897.1
		%	%
22	Leverage ratio	5.2	5.5
EU-23	Choice of transitional arrangements for the definition of the capital measure	Fully phased-in	Fully phased-in
	UK leverage ratio exposure - quarterly average2	2,545.6	2,555.5
		%	%
	UK leverage ratio - quarterly average2	6.0	6.1
	UK leverage ratio - quarter end2	6.2	6.2

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

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

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

Our leverage ratio calculated in accordance with the Capital Requirements Regulation was 5.2% at 31 December 2021, down from 5.5% at 31 December 2020, due to a decrease in tier 1 capital and an increase in leverage exposure, primarily due to growth in central bank deposits and customer lending, offset by a decrease in financial investments.

At 31 December 2021, our UK minimum leverage ratio requirement of 3.25% under the PRA's UK leverage framework was supplemented by an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.1%. These additional buffers translated into capital values of $17.6bn and $2.5bn respectively. We exceeded these leverage requirements.

Regulatory transitional arrangements for IFRS 9 'Financial Instruments'

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

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

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

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

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

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

In the current period, the add-back to CET1 capital amounted to $1.0bn under the STD approach with a tax impact of $0.2bn. At 31 December 2020, the add-back to the capital base under the STD approach was $1.6bn with a tax impact of $0.4bn.

Pillar 3 disclosure requirements

Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 31 December 2021 is published on our website at www.hsbc.com/investors.

Liquidity and funding risk in 2021

Liquidity metrics

At 31 December 2021, all of the Group's material operating entities were above regulatory minimum liquidity and funding levels.

Each entity maintains sufficient unencumbered liquid assets to comply with local and regulatory requirements. The liquidity value of these assets for each entity is shown in the following table along with the individual LCR levels based on European Commission Delegated Regulation (EU) 2015/61. This basis may differ from local LCR measures due to differences in the way non-EU regulators have implemented the Basel III standards. Each

entity maintains sufficient stable funding relative to the required stable funding assessed using the NSFR or other appropriate metrics. From 1 January 2022, we started managing funding risk based on the PRA's NSFR rules.

In addition to regulatory metrics, we enhanced our liquidity framework in 2021 to include an internal liquidity metric, which is being used to monitor and manage liquidity risk via a low-point measure across a 270-day horizon, taking into account recovery capacity.

The Group liquidity and funding position at the end of 2021 is analysed in the following sections.

Operating entities' liquidity
	At 31 December 2021
	LCR	HQLA	Net outflows	NSFR
	%	$bn $bn	$bn	%
HSBC UK Bank plc (ring-fenced bank)1	241	163	68	178
HSBC Bank plc (non-ring-fenced bank)2	150	135	90	107
The Hongkong and Shanghai Banking Corporation - Hong Kong branch3	154	145	94	135
The Hongkong and Shanghai Banking Corporation - Singapore branch3	179	18	10	145
Hang Seng Bank	169	43	25	144
HSBC Bank China	141	17	12	130
HSBC Bank USA	119	98	83	140
HSBC Continental Europe4, 5	145	54	37	128
HSBC Bank Middle East Ltd - UAE branch	210	12	6	146
HSBC Canada4	119	22	18	123
HSBC Mexico	200	9	5	141


	At 31 December 2020
HSBC UK Bank plc (ring-fenced bank)1	198	121	61	164
HSBC Bank plc (non-ring-fenced bank)2	136	138	102	124
The Hongkong and Shanghai Banking Corporation - Hong Kong branch3	195	146	75	146
The Hongkong and Shanghai Banking Corporation - Singapore branch3	162	16	10	135
Hang Seng Bank	212	50	24	151
HSBC Bank China	232	24	10	158
HSBC Bank USA	130	106	82	130
HSBC Continental Europe4	143	48	34	130
HSBC Bank Middle East Ltd - UAE branch	280	11	4	164
HSBC Canada4	165	30	18	136
HSBC Mexico	198	10	5	139

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

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

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

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

5 The net stable funding ratio for HSBC Continental Europe is based on the EU's CRR II rules.

At 31 December 2021, all of the Group's principal operating entities were above regulatory minimum levels.

The most significant movements in 2021 are explained below:

• HSBC UK Bank plc retained a strong liquidity position, reflecting growth in its commercial surplus that was driven by customer deposits and the drawdown of a central bank term funding scheme.

• HSBC Bank plc's liquidity ratio increased to 150%, mainly due to growth in customer deposits and a decline in loans.

• HSBC Continental Europe maintained a strong liquidity position, reflecting growth in deposits.

• The Hongkong and Shanghai Banking Corporation - Hong Kong branch's liquidity position remained strong, although its

liquidity ratio dropped to 154%, mainly due to growth in equity holding and loans.

• Hang Seng Bank's liquidity ratio dropped to 169%, mainly due to growth in loans.

• HSBC Bank China's liquidity ratio dropped to 141%, mainly driven by growth in loans coupled with lower deposits and debt issuances.

• HSBC Bank Middle East Ltd - UAE branch retained a strong liquidity position, with a liquidity ratio of 210%.

• HSBC Canada's liquidity ratio dropped to 119%, mainly driven by the maturity of the short-term funding raised during the pandemic and growth in loans.

Consolidated liquidity metrics

Liquidity coverage ratio

At 31 December 2021, the total HQLA held at entity level amounted to $880bn (31 December 2020: $857bn), an increase of $23bn. In 2021, we implemented a revised approach to the application of the requirements under the European Commission Delegated Regulation (EU) 2015/61. This revised approach was used to assess the limitations in the transferability of entity liquidity around the Group and resulted in an adjustment of $163bn to LCR HQLA and $9bn to LCR inflows. This reflected an increase in the adjustment of $62bn compared with the approach used for the disclosure in the Annual Report and Accounts 2020. The change in methodology was designed to better incorporate local regulatory restrictions on the transferability of liquidity.

	At
	31 Dec	30 Jun	31 Dec
	2021	2021	20201
	$bn	$bn	$bn
High-quality liquid assets (in entities)	880	844	857
EC Delegated Act adjustment for transfer restrictions2	(172)	(189)	(179)
Group LCR HQLA	717	659	678
Net outflows	518	494	487
Liquidity coverage ratio	138%	134%	139%

1 Group LCR numbers above for 31 December 2020 are based on the approach used before the methodology was revised.

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

Liquid assets

After the $163bn adjustment, the Group LCR HQLA of $717bn (31 December 2020: $678bn) was held in a range of asset classes and currencies. Of these, 97% were eligible as level 1 (31 December 2020: 90%).

The following tables reflect the composition of the liquidity pool by asset type and currency at 31 December 2021.

Liquidity pool by asset type
	Liquidity pool	Cash	Level 11	Level 21
	$bn	$bn	$bn	$bn
Cash and balance at central bank	390	390	-	-
Central and local government bonds	302	-	281	21
Regional government public sector entities	3	-	2	1
International organisation and multilateral developments banks	9	-	9	-
Covered bonds	4	-	2	2
Other	9	-	8	1
Total at 31 Dec 2021	717	390	302	25
Total at 31 Dec 2020	678	307	301	70

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

Liquidity pool by currency
	$	£	€	HK$	Other	Total
	$bn	$bn	$bn	$bn	$bn	$bn
Liquidity pool at 31 Dec 2021	189	211	104	56	157	717
Liquidity pool at 31 Dec 2020	218	176	117	74	93	678

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)
	2021	2020
	$m	$m
Customer accounts	1,710,574	1,642,780
Deposits by banks	101,152	82,080
Repurchase agreements - non-trading	126,670	111,901
Debt securities in issue	78,557	95,492
Cash collateral, margin and settlement accounts	65,452	78,565
Liabilities of disposal groups held for sale	9,005	-
Subordinated liabilities	20,487	21,951
Financial liabilities designated at fair value	145,502	157,439
Liabilities under insurance contracts Liabilities under insurance contracts	112,745	107,191
Trading liabilities	84,904	75,266
- repos	11,004	11,728
- stock lending	2,332	4,597
- other trading liabilities	71,568	58,941
Total equity	206,777	204,995
Other balance sheet liabilities	296,114	406,504
At 31 Dec	2,957,939	2,984,164

Funding uses
(Audited)
	2021	2020
	$m	$m
Loans and advances to customers	1,045,814	1,037,987
Loans and advances to banks	83,136	81,616
Reverse repurchase agreements - non-trading	241,648	230,628
Cash collateral, margin and settlement accounts	59,884	76,859
Assets held for sale	3,411	299
Trading assets	248,842	231,990
- reverse repos	14,994	13,990
- stock borrowing	8,082	8,286
- other trading assets	225,766	209,714
Financial investments	446,274	490,693
Cash and balances with central banks	403,018	304,481
Other balance sheet assets	425,912	529,611
At 31 Dec	2,957,939	2,984,164

Wholesale term debt maturity profile

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

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

Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities
	Due not more than 1 month	Due over 1 month but not more than 3 months	Due over 3 months but not more than 6 months	Due over 6 months but not more than 9 months	Due over 9 months but not more than 1 year	Due over 1 year but not more than 2 years	Due over 2 years but not more than 5 years	Due over 5 years	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m
Debt securities issued	17,602	14,593	9,293	9,249	5,233	25,058	55,388	56,639	193,055
- unsecured CDs and CP	4,586	6,795	4,281	2,837	1,189	947	834	931	22,400
- unsecured senior MTNs	8,542	4,140	2,633	2,078	2,074	14,932	45,063	45,259	124,721
- unsecured senior structured notes	2,090	1,610	1,017	975	1,206	2,996	3,382	8,604	21,880
- secured covered bonds	-	1,137	-	997	-	2,417	1,997	-	6,548
- secured asset-backed commercial paper	956	-	-	-	-	-	-	-	956
- secured ABS	1	133	33	31	193	896	1,696	98	3,081
- others	1,427	778	1,329	2,331	571	2,870	2,416	1,747	13,469
Subordinated liabilities	-	-	11	-	-	417	7,023	21,274	28,725
- subordinated debt securities	-	-	11	-	-	417	7,023	19,427	26,878
- preferred securities	-	-	-	-	-	-	-	1,847	1,847
At 31 Dec 2021	17,602	14,593	9,304	9,249	5,233	25,475	62,411	77,913	221,780


Debt securities issued	18,057	16,848	20,314	15,208	7,561	20,768	49,948	59,911	208,615
- unsecured CDs and CP	4,048	8,440	9,977	6,186	2,945	1,474	1,454	1,546	36,070
- unsecured senior MTNs	9,625	3,363	3,915	4,684	2,005	9,295	35,834	49,209	117,930
- unsecured senior structured notes	2,075	1,539	1,451	1,242	1,241	3,702	4,979	6,765	22,994
- secured covered bonds	-	-	28	-	750	2,514	3,917	-	7,209
- secured asset-backed commercial paper	1,094	-	-	-	-	-	-	-	1,094
- secured ABS	19	119	171	45	41	410	1,865	646	3,316
- others	1,196	3,387	4,772	3,051	579	3,373	1,899	1,745	20,002
Subordinated liabilities	618	-	237	-	12	12	6,081	22,941	29,901
- subordinated debt securities	618	-	237	-	12	12	6,081	21,085	28,045
- preferred securities	-	-	-	-	-	-	-	1,856	1,856
At 31 Dec 2020	18,675	16,848	20,551	15,208	7,573	20,780	56,029	82,852	238,516

Structural foreign exchange risk in 2021

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
	20211
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 hedges2	Economic hedges - equity securities (AT1)3	Net structural foreign exchange exposures
Currency of structural exposure	$m	$m	$m	$m	$m	$m
Hong Kong dollars	44,714	(4,992)	39,722	(7,935)	-	31,787
Pounds sterling	47,935	(15,717)	32,218	-	(1,353)	30,865
Chinese renminbi	35,879	-	35,879	(1,255)	-	34,624
Euros	14,671	-	14,671	-	(4,262)	10,409
Canadian dollars	5,147	(1,093)	4,054	-	-	4,054
Indian rupees	5,106	-	5,106	-	-	5,106
Mexican pesos	3,598	-	3,598	-	-	3,598
Saudi riyals	4,115	-	4,115	-	-	4,115
UAE dirhams	4,155	(700)	3,455	(1,985)	-	1,470
Malaysian ringgit	2,713	-	2,713	-	-	2,713
Singapore dollars	2,339	(680)	1,659	-	(1,298)	361
Australian dollars	2,300	-	2,300	-	-	2,300
Taiwanese dollars	2,105	(1,019)	1,086	-	-	1,086
Indonesian rupiah	1,748	-	1,748	-	-	1,748
Swiss francs	1,107	(809)	298	-	-	298
Korean won	1,219	(696)	523	-	-	523
Thai baht	859	-	859	-	-	859
Egyptian pound	1,051	-	1,051	-	-	1,051
Qatari rial	725	-	725	(332)	-	393
Argentinian peso	795	-	795	-	-	795
Others, each less than $700m	5,242	(200)	5,042	(36)	-	5,006
At 31 Dec	187,523	(25,906)	161,617	(11,543)	(6,913)	143,161

	20201
Hong Kong dollars	47,623	-	47,623	(5,564)	-	42,059
Pounds sterling	46,506	(11,221)	35,285	-	(1,365)	33,920
Chinese renminbi	32,165	-	32,165	(1,191)	-	30,974
Euros	15,672	-	15,672	-	(4,596)	11,076
Canadian dollars	5,123	-	5,123	-	-	5,123
Indian rupees	4,833	-	4,833	-	-	4,833
Mexican pesos	4,139	-	4,139	-	-	4,139
Saudi riyals	3,892	-	3,892	-	-	3,892
UAE dirhams	3,867	-	3,867	(1,985)	-	1,882
Malaysian ringgit	2,771	-	2,771	-	-	2,771
Singapore dollars	2,473	-	2,473	-	(1,324)	1,149
Australian dollars	2,357	-	2,357	-	-	2,357
Taiwanese dollars	2,036	-	2,036	-	-	2,036
Indonesian rupiah	1,726	-	1,726	-	-	1,726
Swiss francs	1,444	-	1,444	-	-	1,444
Korean won	1,368	-	1,368	-	-	1,368
Thai baht	991	-	991	-	-	991
Egyptian pound	889	-	889	-	-	889
Qatari rial	667	-	667	(382)	-	285
Argentinian peso	614	-	614	-	-	614
Others, each less than $700m	5,577	-	5,577	(75)	-	5,502
At 31 Dec	186,733	(11,221)	175,512	(9,197)	(7,285)	159,030

1 Incremental hedging transactions were undertaken in 2021 to reduce structural foreign exchange risk. The disclosure has therefore been expanded and comparatives re-presented.

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

3 Represents foreign currency denominated preference share and AT1 instruments. These are accounted for at historical cost under IFRSs 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.

Shareholders' equity would decrease by $2,981m (2020: $2,427m) if euro and sterling foreign currency exchange rates weakened by 5% relative to the US dollar.

Interest rate risk in the banking book in 2021

Net interest income sensitivity

The following tables set out the assessed impact to a hypothetical base case projection of our banking book NII under the following scenarios:

• an immediate shock of 25 basis points ('bps') to the current market-implied path of interest rates across all currencies on1 January 2022 (effects over one year and five years);

• an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 January 2022 (effects over one year and five years).

The sensitivities shown represent a hypothetical simulation of the base case NII, assuming a static balance sheet, no management actions from the Markets Treasury business and a simplified 50% pass-on assumption applied for material entities as described below. This incorporates the effect of interest rate behaviouralisation, hypothetical managed rate product pricing assumptions and customer behaviour, including prepayment of mortgages under the specific interest rate scenarios. The scenarios represent interest rate shocks to the current market implied path of rates. The sensitivity calculations exclude pensions, insurance and investments in subsidiaries.

The NII 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 in particular markets. Previously we disclosed NII sensitivity using a range of different pass-on assumptions, varying by currency, product and market. 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. Using this basis has resulted in a modest reduction in interest rate sensitivities in comparison with the previous basis of preparation. Comparatives have not been restated.

The one-year and five-year NII sensitivities in the down-shock scenarios increased at 31 December 2021 at Group level when compared with 31 December 2020. This was driven by the changes in the forecasted yield curves and changes in balance sheet composition. The NII sensitivities are forecasted for the whole period of one and five years each quarter.

The NII sensitivities shown are hypothetical and based on simplified scenarios. Immediate interest rate rises of 25bps and 100bps would increase projected NII for the 12 months to31 December 2022 by $1,309m and $5,414m, respectively. Conversely, falls of 25bps and 100bps would decrease projected NII for the 12 months to 31 December 2022 by $1,952m and $5,761m, respectively.

The sensitivity of NII for 12 months increased by $66m in the plus 100bps parallel shock and increased by $907m in the minus 100bps parallel shock, comparing 31 December 2021 with31 December 2020. The increase in the sensitivity of NII for 12 months in the plus 100bps parallel shock was mainly driven by change in market sentiment, reflecting current market expectations of main policy rates and changes in pass-on assumptions referred to above.

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

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

For further details on measurement of interest rate risk in the banking book, see page 191.

NII sensitivity to an instantaneous change in yield curves (12 months) - 1 year NII sensitivity by currency
	Currency
	$	HK$	£	€	Other	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2022 to Dec 2022 (based on balance sheet at 31 December 2021)
+25bps parallel	125	265	420	106	393	1,309
-25bps parallel	(257)	(536)	(594)	(170)	(395)	(1,952)
+100bps parallel	458	1,054	1,739	632	1,532	5,414
-100bps parallel	(466)	(1,020)	(2,070)	(595)	(1,610)	(5,761)
Change in Jan 2021 to Dec 2021 (based on balance sheet at 31 December 2020)
+25bps parallel	223	423	555	126	320	1,647
-25bps parallel	(227)	(343)	(548)	(88)	(302)	(1,508)
+100bps parallel	546	1,267	1,811	502	1,222	5,348
-100bps parallel	(565)	(749)	(1,906)	(299)	(1,335)	(4,854)

NII sensitivity to an instantaneous change in yield curves (5 years) - Cumulative 5 years NII sensitivity by currency
	Currency
	$	HK$	£	€	Other	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2022 to Dec 2026 (based on balance sheet at 31 December 2021)
+25bps parallel	1,026	1,410	3,333	827	2,510	9,106
-25bps parallel	(1,701)	(2,887)	(4,216)	(997)	(2,600)	(12,401)
+100bps parallel	3,922	4,870	13,389	3,919	9,841	35,941
-100bps parallel	(5,060)	(7,052)	(14,893)	(3,571)	(10,481)	(41,057)
Change in Jan 2021 to Dec 2025 (based on balance sheet at 31 December 2020)
+25bps parallel	1,233	1,732	3,718	761	2,128	9,571
-25bps parallel	(1,466)	(1,968)	(3,826)	(605)	(2,094)	(9,959)
+100bps parallel	3,891	6,465	12,571	3,020	8,203	34,149
-100bps parallel	(4,650)	(5,285)	(13,469)	(1,888)	(8,808)	(34,098)

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

NII sensitivity to an instantaneous change in yield curves (5 years) - NII sensitivity by years
	Year 1	Year 2	Year 3	Year 4	Year 5	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2022 to Dec 2026 (based on balance sheet at 31 December 2021)
+25bps parallel	1,309	1,758	1,896	2,002	2,141	9,106
-25bps parallel	(1,952)	(2,324)	(2,593)	(2,687)	(2,845)	(12,401)
+100bps parallel	5,414	6,738	7,492	7,937	8,359	35,941
-100bps parallel	(5,761)	(7,664)	(8,675)	(9,354)	(9,603)	(41,057)
Change in Jan 2021 to Dec 2025 (based on balance sheet at 31 December 2020)
+25bps parallel	1,647	1,866	1,930	2,028	2,100	9,571
-25bps parallel	(1,508)	(1,986)	(2,307)	(2,045)	(2,113)	(9,959)
+100bps parallel	5,348	6,538	7,083	7,444	7,736	34,149
-100bps parallel	(4,854)	(6,174)	(7,087)	(7,660)	(8,323)	(34,098)

Sensitivity of capital and reserves

Hold-to-collect-and-sell stressed value at risk ('VaR') is a quantification of the potential losses to a 99% confidence level of the portfolio of high-quality liquid assets held under a hold-to-collect-and-sell business model in the Markets Treasury business. The portfolio is accounted for at fair value through other comprehensive income together with the derivatives held in designated hedging relationships with these securities. The mark-to-market of this portfolio therefore has an impact on CET1. Stressed VaR is quantified based on the worst losses over a one-year period going back to the beginning of 2007 and the assumed holding period is 60 days. At the end of 2021, the stressed VaR of the portfolio was $3.63bn (2020: $2.94bn). The increase was mainly driven by the extension in the duration of our mortgage- backed securities exposures in US dollars as well as increases to the hold-to-collect-and-sell portfolios in US dollars and pounds sterling, partially offset by a reduction of exposure in a variety of other currencies.

Alongside our monitoring of the stressed VaR of this portfolio, we also monitor the sensitivity of reported cash flow hedging reserves to interest rate movements on a yearly basis by assessing the expected reduction in valuation of cash flow hedges due to parallel movements of plus or minus 100bps in all yield curves. Although we allow rates to go negative in this assessment, we apply a floor on the shocks in the minus 100bps scenario set at the lower of either minus 50bps or the central bank deposit rate. Due to increases in interest rates during 2021, the effect of this flooring has reduced significantly when compared with 2020.

The following table describes the sensitivity of our cash flow hedge reported reserves to the stipulated movements in yield curves at the year end. The sensitivities are indicative and based on simplified scenarios. These particular exposures form only a part of our overall interest rate exposure.

Comparing 31 December 2021 with 31 December 2020, the sensitivity of the cash flow hedging reserve increased by $866m in the plus 100bps scenario and increased by $1.13bn in the minus 100bps scenario. The increase in both scenarios was mainly driven by an increase in fixed rate pound sterling hedges transacted in HSBC UK Bank plc against a change in the interest rate risk behaviouralisation profile for non-interest-bearing current accounts. The increase in the down scenario is also driven by the reduced effect of flooring as interest rates increased over the year.

Sensitivity of cash flow hedging reported reserves to interest rate movements
	$m
At 31 Dec 2021
+100 basis point parallel move in all yield curves	(1,531)
As a percentage of total shareholders' equity	(0.77)%
-100 basis point parallel move in all yield curves	1,537
As a percentage of total shareholders' equity	0.78%

At 31 Dec 2020
+100 basis point parallel move in all yield curves	(665)
As a percentage of total shareholders' equity	(0.34)%
-100 basis point parallel move in all yield curves	409
As a percentage of total shareholders' equity	0.21%

Third-party assets in Markets Treasury

Third-party assets in Markets Treasury increased by 8% compared with 31 December 2020. The net increase of $57bn is reflective of higher commercial surpluses during the year, with the increase of $115bn in 'Cash and balances at central banks' and decrease of

$52bn in 'Financial investments' being largely attributed to the reduction of investments in high-quality liquid assets driven by the change in outlook for interest rate expectations across many markets, with the resulting cash deployed with central banks.

Third-party assets in Markets Treasury
	2021	2020
	$m	$m
Cash and balances at central banks	379,106	263,656
Trading assets	329	392
Loans and advances:
- to banks	47,363	34,555
- to customers	371	1,167
Reverse repurchase agreements	47,067	61,693
Financial investments	338,692	391,017
Other	5,451	8,724
At 31 Dec	818,379	761,204

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 192.

Additional market risk measures applicable only to the parent company

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

During 2021, HSBC Holdings issued approximately $19.3bn of debt, replacing $5.6bn of maturing or callable debt and generating $13.7bn of net new debt. A total $3.1bn of this new debt was left unhedged and the impact can be observed in the NII sensitivity tables where the 12 months sensitivity increased compared with last year.

Foreign exchange risk

HSBC Holdings' foreign exchange exposures derive almost entirely from the execution of structural foreign exchange hedges on behalf of the Group as its business-as-usual foreign exchange exposures are managed within tight risk limits. At 31 December 2021, HSBC Holdings had forward foreign exchange contracts of

$25.9bn (2020: $11.2bn) to manage the Group's structural foreign exchange exposures.

For further details of our structural foreign exchange exposures, see page 199.

Sensitivity of net interest income

HSBC Holdings monitors NII sensitivity over 12-month and five-year time horizons, reflecting the longer-term perspective on interest rate risk management appropriate to a financial services holding company. These sensitivities assume that any issuance where HSBC Holdings has an option to reimburse at a future call date is called at this date. The tables below set out the effect on HSBC Holdings' future NII based on the following scenarios:

• an immediate shock of 25 basis points ('bps') to the current market-implied path of interest rates across all currencies on1 January 2022; and

• an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 January 2022.

The NII sensitivities shown are indicative and based on simplified scenarios. Immediate interest rate rises of 25bps and 100bps would increase projected NII for the 12 months to 31 December 2022 by $29m and $113m, respectively. Conversely, falls of 25bps and 100bps would decrease projected NII for the 12 months to 31 December 2022 by $28m and $109m, respectively.

NII sensitivity to an instantaneous change in yield curves (12 months)
	$	HK$	£	€	Other	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2022 to Dec 2022 (based on balance sheet at 31 December 2021)
+25bps	16	-	8	4	-	29
-25bps	(16)	-	(8)	(4)	-	(28)
+100bps	65	-	31	16	-	113
-100bps	(64)	-	(31)	(14)	-	(109)
Change in Jan 2021 to Dec 2021 (based on balance sheet at 31 December 2020)
+25bps	13	-	8	2	-	23
-25bps	(13)	-	(8)	(3)	-	(23)
+100bps	50	-	33	7	-	91
-100bps	(51)	-	(32)	(13)	-	(95)

NII sensitivity to an instantaneous change in yield curves (5 years)
	Year 1	Year 2	Year 3	Year 4	Year 5	Total
	$m	$m	$m	$m	$m	$m
Change in Jan 2022 to Dec 2022 (based on balance sheet at 31 December 2021)
+25bps	29	44	45	38	28	184
-25bps	(28)	(44)	(45)	(38)	(28)	(183)
+100bps	113	177	180	152	112	733
-100bps	(109)	(174)	(174)	(148)	(109)	(715)
Change in Jan 2021 to Dec 2021 (based on balance sheet at 31 December 2020)					-
+25bps	23	40	43	39	31	176
-25bps	(23)	(42)	(46)	(41)	(32)	(184)
+100bps	91	159	171	156	126	702
-100bps	(95)	(169)	(189)	(169)	139	(761)

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

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

Interest rate repricing gap table

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

Repricing gap analysis of HSBC Holdings
	Total	Up to 1 year	From over 1 to 5 years	From over 5 to 10 years	More than 10 years	Non-interest bearing
	$m	$m	$m	$m	$m	$m
Cash at bank and in hand:
- balances with HSBC undertakings	2,590	2,590
Derivatives	2,811					2,811
Loans and advances to HSBC undertakings	76,516	22,545	29,759	20,347	2,000	1,865
Financial investments in HSBC undertakings	26,194	22,917	3,268			9
Investments in subsidiaries	163,211	5,425	8,395	600		148,791
Other assets	1,850					1,850
Total assets	273,172	53,477	41,422	20,947	2,000	155,326
Amounts owed to HSBC undertakings	(111)					(111)
Financial liabilities designated at fair values	(32,418)	(5,925)	(10,801)	(14,942)	(750)
Derivatives	(1,220)					(1,220)
Debt securities in issue	(67,483)	(11,244)	(34,917)	(19,322)	(2,000)
Other liabilities	(4,551)					(4,551)
Subordinated liabilities	(17,059)	(1,131)	(3,705)	(1,780)	(10,443)
Total equity	(150,330)	(2,446)	(11,096)	(8,721)		(128,067)
Total liabilities and equity	(273,172)	(20,746)	(60,519)	(44,765)	(13,193)	(133,949)
Off-balance sheet items attracting interest rate sensitivity		(18,797)	(10,871)	1,434	6,184	308
Net interest rate risk gap at 31 Dec 2021		13,952	(8,226)	(22,384)	(5,009)	21,667
Cumulative interest rate gap		13,952	5,726	(16,658)	(21,667)

Cash at bank and in hand:
- balances with HSBC undertakings	2,913	2,913	-	-	-	-
Derivatives	4,698	-	-	-	-	4,698
Loans and advances to HSBC undertakings	75,696	25,610	22,190	20,398	2,000	5,498
Financial investments in HSBC undertakings	17,485	15,112	2,771	-	-	(398)
Investments in subsidiaries	156,485	5,381	7,660	1,500	-	141,944
Other assets	1,721	257	-	-	-	1,464
Total assets	258,998	49,273	32,621	21,898	2,000	153,206
Amounts owed to HSBC undertakings	(330)	(330)	-	-	-	-
Financial liabilities designated at fair values	(25,664)	(1,827)	(6,533)	(13,535)	(750)	(3,019)
Derivatives	(3,060)	-	-	-	-	(3,060)
Debt securities in issue	(64,029)	(9,932)	(29,026)	(22,063)	(2,000)	(1,008)
Other liabilities	(5,375)	-	-	-	-	(5,375)
Subordinated liabilities	(17,916)	-	(3,839)	(1,780)	(10,463)	(1,834)
Total equity	(142,624)	(1,464)	(11,439)	(9,198)		(120,523)
Total liabilities and equity	(258,998)	(13,553)	(50,837)	(46,576)	(13,213)	(134,819)
Off-balance sheet items attracting interest rate sensitivity		(20,324)	11,562	2,492	6,200	70
Net interest rate risk gap at 31 Dec 20201		15,396	(6,654)	(22,186)	(5,013)	18,457
Cumulative interest rate gap		15,396	8,742	(13,444)	(18,457)	-

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

Market risk
	Page
Overview	209
Market risk management	209
Market risk in 2021	210
Trading portfolios	211
Non-trading portfolios	212
Market risk balance sheet linkages	213

Overview

Market risk is the risk of adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads. Exposure to market risk is separated into two portfolios: trading portfolios and non-trading portfolios

Market risk management

Key developments in 2021

There were no material changes to our policies and practices for the management of market risk in 2021.

Governance and structure

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

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

1 The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included in the Group value at risk. The management of this risk is described on page 202.

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

Market risk is managed and controlled through limits approved by the Group Chief Risk 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 offices with appropriate levels of product expertise and robust control systems.

Key risk management processes

Monitoring and limiting market risk exposures

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

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

Sensitivity analysis

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

Value at risk

(Audited)

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

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

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

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

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

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

VaR model limitations

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

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

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

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

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

Risk not in VaR framework

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

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

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

Stress testing

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

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

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

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

Trading portfolios

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

Back-testing

We routinely validate the accuracy of our VaR models by back-testing the VaR metric against both actual and hypothetical profit and loss. Hypothetical profit and loss excludes non-modelled items such as fees, commissions and revenue of intra-day transactions. The 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 back-testing exceptions is used to gauge how well the models are performing. We consider enhanced internal monitoring of a VaR model if more than five profit exceptions or more than five loss exceptions occur in a 250-day period.

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

Market risk in 2021

Financial markets performed well in 2021. During the first half of the year, the roll-out of Covid-19 vaccination programmes, as well as continued monetary and fiscal support, contributed to a gradual recovery of major economies. Concerns of rising inflationary pressures were mainly interpreted as transitory. While the path of monetary policies remained uncertain, central banks continued to provide liquidity. This supported risk asset valuations, while volatility in most asset classes was subdued. In the second half of 2021, amid the emergence of new Covid-19 variants, global equities reached further record highs, as investors focused on global economic resilience and strong corporate earnings. Bond yields followed a downward trend for most of the third quarter of 2021, before reversing in the final weeks of the year, when markets began pricing in expectations of a faster pace of interest rate rises in some of the major economies, due to persistently elevated inflation. Credit markets remained strong, with credit benchmark indices for investment-grade and high-yield debt close to pre-pandemic levels.

We continued to manage market risk prudently during 2021. 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 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 at 31 December 2021 did not change materially compared with 31 December 2020 and it remained within a relatively narrow range for most of 2021. On a consolidated portfolio basis, larger contributions from credit spread risks and foreign exchange risks were offset by:

• gains from exposures to equity risks and interest rate risks; and

• reduced equity risks captured in the RNIV framework.

On a stand-alone basis, credit spread risks and interest rate risks from fixed income market-making activities were the main drivers of VaR at the end of 2021, with larger contributions compared with the end of 2020.

The daily levels of total trading VaR during 2021 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 2021	9.1	25.9	15.4	24.8	(36.5)	38.8
Average	12.9	33.8	16.7	19.2	(45.5)	37.1
Maximum	31.8	51.7	24.3	29.4		53.8
Minimum	6.7	18.5	12.1	12.2		27.7

Balance at 31 Dec 2020	13.7	20.3	21.5	24.3	(36.4)	43.4
Average	11.0	26.6	27.3	21.6	(38.3)	48.1
Maximum	25.7	43.5	42.0	44.1		69.3
Minimum	5.6	19.1	13.6	12.6		33.6

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 at31 December 2021. 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 2021	38.8	21.6
Average	37.1	24.0
Maximum	53.8	30.0
Minimum	27.7	18.9

Balance at 31 Dec 2020	43.4	27.6
Average	48.1	32.7
Maximum	69.3	47.3
Minimum	33.6	22.4

Back-testing

During 2021, the Group experienced two loss back-testing exceptions against hypothetical profit and loss and two loss back-testing exceptions against actual profit and loss.

These exceptions comprised:

• a loss back-testing exception against hypothetical profit and loss in March, mainly driven by the effect of lower volatility in the equity markets and by the increase in some emerging markets foreign exchange forward rates volatilities;

• a loss exception against actual profit and loss in September, attributable to the payment of novation fees under our RWA optimisation programme; and

• a loss back-testing exception against both hypothetical and actual profit and loss in late November, due to a number of relatively small losses spread across credit spread, equity and interest rates asset classes.

Non-trading portfolios

Non-trading portfolios comprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments measured at

fair value through other comprehensive income, debt instruments measured at amortised cost, and exposures arising from our insurance operations.

Value at risk of the non-trading portfolios

The VaR for non-trading activity at 31 December 2021 was lower than at 31 December 2020. The decrease arose mainly from an increase in the diversification benefit across interest rate and credit exposures. On a stand-alone basis, interest rate VaR increased, mainly due to higher levels of market volatility observed in February 2021, while credit VaR reduced over the year driven by a reduction in credit spread exposure in the portfolio of non-trading financial instruments managed by Markets Treasury.

Non-trading VaR includes the interest rate risk in the banking book transferred to and managed by Markets Treasury and the exposures generated by the portfolio of high-quality liquid assets held by Markets Treasury to meet liquidity requirements. The management of interest rate risk in the banking book is described further in the 'Net interest income sensitivity' section.

The daily levels of total non-trading VaR in 2021 are set out in the graph below.

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

The Group non-trading VaR for 2021 is shown in the table below.

Non-trading VaR, 99% 1 day
(Audited)
	Interest rate	Credit spread	Portfoliodiversification1	Total2
	$m	$m	$m	$m
Balance at 31 Dec 2021	216.4	70.3	(66.3)	220.4
Average	200.7	76.9	(40.3)	237.3
Maximum	248.7	99.3	-	298.8
Minimum	163.3	64.7	-	193.5

Balance at 31 Dec 2020	166.6	87.0	(5.7)	247.8
Average	150.2	82.5	(42.0)	190.7
Maximum	196.4	133.4	-	274.6
Minimum	59.0	44.2	-	79.7

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.

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

Market risk balance sheet linkages

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

Trading assets and liabilities

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

Derivative assets and liabilities

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

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

Resilience risk

Overview

Resilience risk is the risk that we are unable to provide critical services to our customers, affiliates and counterparties as a result of sustained and significant operational disruption. Resilience risk arises from failures or inadequacies in processes, people, systems or external events.

Resilience risk management

Key developments in 2021

The Operational and Resilience Risk sub-function provides robust non-financial risk steward oversight of the management of risk by the Group businesses, functions and legal entities. It also provides effective and timely independent challenge. During the year, we carried out a number of initiatives to strengthen the management of non-financial risks:

• We developed a more robust understanding of our risk and control environment, by updating our material risk taxonomy and control libraries, and refreshing material risk and control assessments.

• We further strengthened our non-financial risk governance and senior leadership.

• We created a consolidated view of all risk issues across the Group, enabling better senior management focus on non-financial risk, and the ability to identify material control issues and intervention as required.

• We improved how we provide analysis and reporting of non-financial risks, with more risk practitioners now having access to a wider range of management information on their risks and controls.

• We increased the capability of risk stewards to allow for effective stewardship to be in place across the Group.

• We strengthened our approach in the comparison of issues and near misses by implementing a Group-wide harmonised approach across businesses, functions and regions.

• We enhanced risk management oversight across our most material change initiatives to support growth in our strategic transformation.

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

Governance and structure

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

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

Key risk management processes

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

Business operations continuity

Business continuity, in response to the Covid-19 pandemic, remains in place across a number of locations where the Group operates, allowing the majority of service level agreements to be maintained. There were no significant impacts to service delivery in locations where the Group operates.

Regulatory compliance risk

Overview

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

Regulatory compliance risk management

Key developments in 2021

We continued to embed the structural changes made in 2020 to our wider approach to compliance risk management. The integration of the Risk and Compliance functions in May 2021 has brought together two complementary functions, which will strengthen the regulatory compliance function's mandate and our capability to drive the right standards with regard to the conduct of our business.

In June 2021, we also announced our new purpose-led approach to conduct. As part of this, we took the opportunity to align and simplify our approach, making conduct easier to understand and showing how it relates to and helps fulfil our value: 'we take responsibility'.

Governance and structure

Following the integration of the Global Risk and Compliance functions, the Group Head of Compliance and the Group Head of Financial Crime - who is also the Group Money Laundering Reporting Officer - each report to the Group Chief Risk and Compliance Officer. They also each attend the Risk and Compliance Executive Committee, the Group RMM and the GRC. The structure of the Compliance function below this level is substantively unchanged and the Group Regulatory Conduct capability and Group Financial Crime capability both continue to work closely with the regional chief compliance officers and their respective teams to help them identify and manage regulatory and financial crime compliance risks across the Group. They also work together to ensure we achieve good conduct outcomes and provide enterprise-wide support on the Compliance risk agenda in collaboration with the Group's Risk function.

Key risk management processes

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

Conduct of business

Our new, simplified conduct approach, which was launched in 2021, guides us to do the right thing and to recognise the real impact we have for our customers and the financial markets in which we operate. It complements our purpose and values, setting outcomes to be achieved for our customers and markets. It recognises cultural and behavioural drivers of good conduct outcomes and applies across all risk disciplines, operational processes and technologies. During 2021:

• We understood and served our customers' ongoing needs, and continued to champion a strong conduct and customer-focused culture. This was demonstrated through the continued provision of support to our customers facing financial difficulties as a result of the prolonged impacts of the pandemic and the resulting uncertainty in trading conditions.

• We began the integration of climate risk into the Group's risk management approach to recognise the importance of strengthened controls and oversight for our related activities.

• We operated resiliently and securely to avoid harm to our customers and markets by continuing to embed conduct within our business line processes and through our non-financial and financial risk steward activities.

• We continued our focus on culture and behaviours as a driver of good conduct outcomes.

• We placed a particular focus on the importance of well-being and collaborative working as we continued to adapt to changing working practices as the pace of change resulting from the pandemic varied across our markets.

• We continued to emphasise - and worked to create - an environment in which employees are encouraged and feel safe to speak up.

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

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

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

Financial crime risk

Overview

Financial crime risk is the risk of knowingly or unknowingly helping parties to commit or to further illegal activity through HSBC, including money laundering, fraud, bribery and corruption, tax evasion, sanctions breaches, and terrorist and proliferation financing. Financial crime risk arises from day-to-day banking operations involving customers, third parties and employees.

Financial crime risk management

Key developments in 2021

We continuously review the effectiveness of our financial crime risk management framework, which includes consideration of the complex and dynamic nature of sanctions risk, notably with respect to the array of new regulations and designations in 2021 and in alignment with our policy, which is to comply with all applicable sanctions regulations in the jurisdictions in which we operate.

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

• We deployed a key component of our intelligence-led, dynamic risk assessment capabilities for customer account monitoring in the UK, and undertook important enhancements to our traditional transaction monitoring systems globally.

• We strengthened our anti-fraud capabilities, notably with respect to the early identification of first-party lending fraud and the development of new strategic detection tools.

• We continued the development of leading-edge surveillance technology and capabilities to identify potential market abuse, including testing machine learning capabilities to detect unauthorised trading.

• We invested in the use of AI and advanced analytics techniques to manage financial crime risk, notably new automated capabilities in name and transaction screening (for further details, see page 120).

• We implemented a gifts and entertainment recording and approval system, which, in combination with an expenses reconciliation tool, allows us to better manage our gifts and entertainment risk.

Governance and structure

We have continued to review the effectiveness of our governance framework to manage financial crime risk. The framework aims to enable us to comply with the letter and the spirit of applicable financial crime laws and regulations in the jurisdictions in which we operate, as well as our own policies, standards, and values relating to financial crime risks.

In 2021, the Group Risk and Compliance functions were integrated, allowing us to make better use of a broader range of perspectives from other risk disciplines.

Key risk management processes

We will not tolerate knowingly conducting business with individuals or entities believed to be engaged in illicit 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 illicit activity or vulnerabilities in our control framework, we will take appropriate mitigating action.

We continue to assess the effectiveness of our end-to-end financial crime risk management framework on an ongoing basis, and invest in enhancing our operational control capabilities and technology solutions to deter and detect criminal activity. We have simplified our framework by streamlining and de-duplicating policy requirements. We also strengthened our financial crime risk taxonomy and control libraries and our investigative and monitoring capabilities through technology deployments. We developed more targeted metrics, and have also enhanced our governance and reporting.

We are committed to working in partnership with the wider industry and the public sector in managing financial crime risk, protecting the integrity of the financial system and the communities we serve. We participate in numerous public-private partnerships and information-sharing initiatives around the world. In 2021, the UK, the EU, the US and Singapore, were particularly focused on anti-money laundering ('AML') reforms, to which we provided significant input. We played a key role in the industry responses to a number of consultation papers focused on the overall effectiveness of the global AML framework. We were also active participants in a key pilot undertaken by the Monetary Authority of Singapore, which establishes a framework to enable financial institutions to share information with each other when certain financial crime risk concerns have been identified. We took part in a number of roundtables organised by the Financial Action Task Force, supporting its strategic review. We also supported its work on digitisation and beneficial ownership registers. These align with our objectives of promoting a public policy and regulatory environment that embraces the use and harnessing of technology in building a financial crime framework for the future to ensure our organisation is more resilient and secure, while benefiting our customers.

Skilled Person/Independent Consultant

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

The Skilled Person issued its final report in June 2021, which contained a number of limited recommendations. Following publication of the report, the FCA determined that no further Skilled Person work is required. The Group Risk Committee will continue to retain oversight of matters relating to AML, sanctions, terrorist financing and proliferation financing. Separately, the Independent Consultant carried out its eighth annual review for the FRB and, in November 2021, issued its report, which contained a limited number of recommendations.

Model risk

Overview

Model risk is the risk of inappropriate or incorrect business decisions arising from the use of models that have been inadequately designed, implemented or used, or from models that do not perform in line with expectations and predictions.

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

Key developments in 2021

In 2021, we continued to make improvements in our model risk management processes amid regulatory changes in model requirements.

Initiatives during the year included:

• In response to regulatory capital charges, we redeveloped, validated and submitted to the PRA our models for the internal ratings-based ('IRB') approach for credit risk, internal model method ('IMM') for counterparty credit risk and internal model approach ('IMA') for market risk. These new models have been built to enhanced standards using improved data as a result of investment in processes and systems.

• We redeveloped and validated models impacted by changes to alternative rate setting mechanisms due to the Ibor transition.

• We made further enhancements to our control framework for our Sarbanes-Oxley models to address the control weaknesses that emerged as a result of significant increases in adjustments and overlays that were applied to compensate for the impact of the Covid-19 pandemic on models. We also introduced a requirement for the model risk stewards to approve material models prior to use.

• Our businesses and functions were more involved in the development and management of models, and hiring colleagues who had strong model risk skills. They also put an enhanced focus on key model risk drivers such as data quality and model methodology.

• Our model owners in businesses and functions fully embedded the requirements included in the model risk policy and standards introduced in 2020.

• We delivered a suite of training on model risk to front-line teams to improve their awareness of model risk and their adherence to the governance framework.

• We rolled out new model risk appetite measures, which are more forward looking and will help our businesses and functions manage model risk more effectively.

• We continued the transformation of the Model Risk Management team, with changes to the model validation processes, including new systems and processes. Key senior hires were made during the year to lead the business areas and regions to strengthen oversight and expertise within the function. We also made changes to the model inventory system to provide businesses and functions with improved functionality and more detailed information related to model risk.

We initiated a programme of development related to climate risk and models using advanced analytics and machine learning, which have become critical areas of focus that will grow in importance in 2022 and beyond. We also added qualified specialist skills to the model risk teams to manage the increased model risk in these areas.Governance and structure

The new governance structure implemented in 2020 is fully operational. 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 Global Risk and Compliance function, and focus on model-related concerns and are supported by key model risk metrics. The Group-level Model Risk Committee is chaired by the Group Chief Risk and Compliance Officer and the heads of key businesses participate in those 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 RMM to the Group Model Risk Committee, which is chaired by the Group Chief Risk and Compliance Officer. This committee regularly reviews our model risk management policies and procedures, and requires the first line of defence to demonstrate comprehensive and effective controls based on a library of model risk controls provided by Model Risk Management.

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

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

Insurance manufacturing operations risk
	Page
Overview	210
Insurance manufacturing operations risk management	210
Insurance manufacturing operations risk in 2021	212
Measurement	212
Key risk types	214
- Market risk	214
- Credit risk	215
- Liquidity risk	215
- Insurance underwriting risk	216

Overview

The key risks for our insurance manufacturing operations are market risks, in particular interest rate and equity, credit risks and insurance underwriting and operational risks. 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 relatively minor for our insurance operations.

HSBC's insurance business

We sell insurance products worldwide through a range of channels including our branches, 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.

The insurance contracts we sell relate to the underlying needs of our customers, which we can identify from our point-of-sale contacts and customer knowledge. For the 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, the UK, Malta, Mexico and Argentina. We also have a life insurance manufacturing associate in India.

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

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

Insurance manufacturing operations risk management

Key developments in 2021

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. There were no material changes to the policies and practices over 2021, although enhancements were made to the product pricing and profitability framework to allow for the transition to IFRS 17.

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 122. 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 ('ORSAs').

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 discretionary participating features ('DPF'). The effect is that a significant portion of the market risk is borne by the policyholder.

• We use asset and liability matching where asset portfolios are structured to support projected liability cash flows. The Group manages its assets using an approach that considers asset quality, diversification, cash flow matching, liquidity, volatility and target investment return. We use models to assess the effect of a range of future scenarios on the values of financial assets and associated liabilities, and ALCOs employ the outcomes in determining how best to structure asset holdings to support liabilities.

• We use derivatives to protect against adverse market movements.

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

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

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. The Group's economic capital basis is largely aligned to European Solvency II regulations, other than in Hong Kong where this is based on the emerging Hong Kong risk based capital regulations.

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

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

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

Insurance 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 above our appetite thresholds to a third-party reinsurer thereby limiting our exposure; and

• oversight of expense and reserve risks by entity Actuarial Control Committees.

•

Insurance manufacturing operations risk in 2021

Measurement

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

Balance sheet of insurance manufacturing subsidiaries by type of contract1
(Audited)
	With DPF	Unit-linked	Other contracts2	Shareholderassets and liabilities	Total
	$m	$m	$m	$m	$m
Financial assets	88,969	8,881	19,856	9,951	127,657
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss	30,669	8,605	3,581	1,827	44,682
- derivatives	129	1	15	2	147
- financial investments at amortised cost	42,001	61	14,622	4,909	61,593
- financial investments at fair value through other comprehensive income	10,858	-	459	1,951	13,268
- other financial assets3	5,312	214	1,179	1,262	7,967
Reinsurance assets	2,180	72	1,666	3	3,921
PVIF4	-	-	-	9,453	9,453
Other assets and investment properties	2,558	1	206	820	3,585
Total assets	93,707	8,954	21,728	20,227	144,616
Liabilities under investment contracts designated at fair value	-	2,297	3,641	-	5,938
Liabilities under insurance contracts	89,492	6,558	16,757	-	112,807
Deferred tax5	179	9	24	1,418	1,630
Other liabilities	-	-	-	7,269	7,269
Total liabilities	89,671	8,864	20,422	8,687	127,644
Total equity	-	-	-	16,972	16,972
Total liabilities and equity at 31 Dec 2021	89,671	8,864	20,422	25,659	144,616

Financial assets	84,478	8,802	18,932	8,915	121,127
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss	26,002	8,558	3,508	1,485	39,553
- derivatives	262	3	13	3	281
- financial investments at amortised cost	39,891	30	13,984	4,521	58,426
- financial investments at fair value through other comprehensive income	12,531	-	459	1,931	14,921
- other financial assets3	5,792	211	968	975	7,946
Reinsurance assets	2,256	65	1,447	2	3,770
PVIF4	-	-	-	9,435	9,435
Other assets and investment properties	2,628	1	227	721	3,577
Total assets	89,362	8,868	20,606	19,073	137,909
Liabilities under investment contracts designated at fair value	-	2,285	4,100	-	6,385
Liabilities under insurance contracts	84,931	6,503	15,827	-	107,261
Deferred tax5	145	5	25	1,400	1,575
Other liabilities	-	-	-	7,244	7,244
Total liabilities	85,076	8,793	19,952	8,644	122,465
Total equity	-	-	-	15,444	15,444
Total liabilities and equity at 31 Dec 2020	85,076	8,793	19,952	24,088	137,909

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

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

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

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

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

Balance sheet of insurance manufacturing subsidiaries by geographical region1,2
(Audited)
	Europe	Asia	Latin America	Total
	$m	$m	$m	$m
Financial assets	34,264	92,535	858	127,657
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss	19,030	25,248	404	44,682
- derivatives	65	82	-	147
- financial investments - at amortised cost	1,161	60,389	43	61,593
- financial investments - at fair value through other comprehensive income	12,073	817	378	13,268
- other financial assets3	1,935	5,999	33	7,967
Reinsurance assets	213	3,703	5	3,921
PVIF4	1,098	8,177	178	9,453
Other assets and investment properties	1,091	2,431	63	3,585
Total assets	36,666	106,846	1,104	144,616
Liabilities under investment contracts designated at fair value	1,396	4,542	-	5,938
Liabilities under insurance contracts	30,131	81,840	836	112,807
Deferred tax5	250	1,357	23	1,630
Other liabilities	2,711	4,523	35	7,269
Total liabilities	34,488	92,262	894	127,644
Total equity	2,178	14,584	210	16,972
Total liabilities and equity at 31 Dec 2021	36,666	106,846	1,104	144,616

Financial assets	34,768	85,259	1,100	121,127
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss	17,184	22,099	270	39,553
- derivatives	107	174	-	281
- financial investments - at amortised cost	531	57,420	475	58,426
- financial investments - at fair value through other comprehensive income	13,894	706	321	14,921
- other financial assets3	3,052	4,860	34	7,946
Reinsurance assets	245	3,521	4	3,770
PVIF4	884	8,390	161	9,435
Other assets and investment properties	1,189	2,332	56	3,577
Total assets	37,086	99,502	1,321	137,909
Liabilities under investment contracts designated at fair value	1,288	5,097	-	6,385
Liabilities under insurance contracts	31,153	74,994	1,114	107,261
Deferred tax5	204	1,348	23	1,575
Other liabilities	2,426	4,800	18	7,244
Total liabilities	35,071	86,239	1,155	122,465
Total equity	2,015	13,263	166	15,444
Total liabilities and equity at 31 Dec 2020	37,086	99,502	1,321	137,909

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

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

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

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

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

Key risk types

Market risk

(Audited)

Description and exposure

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

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

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

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

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

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

The cost of guarantees decreased to $938m (2020: $1,105m) primarily due to the increase in swap rates and positive equity performance in France and Hong Kong.

For unit-linked contracts, market risk is substantially borne by the policyholder, but some market risk exposure typically remains, as fees earned are related to the market value of the linked assets.

Financial return guarantees
(Audited)
	2021			2020
	Investment returns implied by guarantee	Long-term investment returns on relevant portfolios	Cost of guarantees	Investment returns implied by guarantee	Long-term investment returns on relevant portfolios	Cost of guarantees
	%	%	$m	%	%	$m
Capital	0.0	0.7-3.2	220	0.0	0.7-3.2	277
Nominal annual return	0.1-1.9	2.3-3.6	423	0.1-1.9	2.3-3.6	515
Nominal annual return	2.0-3.9	2.0-4.5	183	2.0-3.9	2.0-4.5	180
Nominal annual return	4.0-5.0	2.0-4.2	112	4.0-5.0	2.0-4.2	133
At 31 Dec			938			1,105

Sensitivities

Changes in financial market factors, from the economic assumptions in place at the start of the year, had a positive impact on reported profit before tax of $516m (2020: $102m). The following table illustrates the effects of selected interest rate, equity price and foreign exchange rate scenarios on our profit for the year and the total equity of our insurance manufacturing subsidiaries.

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

Due in part to the impact of the cost of guarantees and hedging strategies, which may be in place, the relationship between the

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

Sensitivity of HSBC's insurance manufacturing subsidiaries to market risk factors
(Audited)
	2021		2020
	Effect on profit after tax	Effect on total equity	Effect on profit after tax	Effect on total equity
	$m	$m	$m	$m
+100 basis point parallel shift in yield curves	(2)	(142)	(67)	(188)
-100 basis point parallel shift in yield curves	(154)	(9)	(68)	58
10% increase in equity prices	369	369	332	332
10% decrease in equity prices	(377)	(377)	(338)	(338)
10% increase in US dollar exchange rate compared with all currencies	80	80	84	84
10% decrease in US dollar exchange rate compared with all currencies	(80)	(80)	(84)	(84)

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 212.

The credit quality of the reinsurers' share of liabilities under insurance contracts is assessed as 'satisfactory' or higher (as defined on page 138), with 100% of the exposure being neither past due nor impaired (2020: 100%).

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

investment contracts and shareholders' funds. The credit quality of insurance financial assets is included in the table on page 155.

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.

The following table shows the expected undiscounted cash flows for insurance liabilities at 31 December 2021. The liquidity risk exposure is wholly borne by the policyholder in the case of unit-linked business and is shared with the policyholder for non-linked insurance.

The profile of the expected maturity of insurance contracts at 31 December 2021 remained comparable with 2020.

The remaining contractual maturity of investment contract liabilities is included in Note 29 on page 373.

Expected maturity of insurance contract liabilities
(Audited)
	Expected cash flows (undiscounted)
	Within 1 year	1-5 years	5-15 years	Over 15 years	Total
	$m	$m	$m	$m	$m
Unit-linked	1,346	2,605	3,159	2,293	9,403
With DPF and Other contracts	8,803	31,334	51,891	94,168	186,196
At 31 Dec 2021	10,149	33,939	55,050	96,461	195,599

Unit-linked	1,407	3,097	2,976	2,099	9,579
With DPF and Other contracts	8,427	30,156	51,383	75,839	165,805
At 31 Dec 2020	9,834	33,253	54,359	77,938	175,384

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.

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 212 and 213 analyse our life insurance risk exposures by type of contract and by geographical region.

The insurance risk profile and related exposures remain largely consistent with those observed at 31 December 2020.

Sensitivities

(Audited)

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

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

Sensitivity to lapse rates depends on the type of contracts being written. For a portfolio of term assurance, an increase in lapse rates typically has a negative effect on profit due to the loss of future income on the lapsed policies. However, some contract lapses have a positive effect on profit due to the existence of policy surrender charges. We are most sensitive to a change in lapse rates on unit-linked and universal life contracts.

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.

Sensitivity analysis
(Audited)
	2021	2020
	$m	$m
Effect on profit after tax and total equity at 31 Dec
Effect on profit after tax and total equity at 10% increase in mortality and/or morbidity rates	(112)	(93)
Effect on profit after tax and total equity at 10% decrease in mortality and/or morbidity rates	115	98
Effect on profit after tax and total equity at 10% increase in lapse rates	(115)	(111)
Effect on profit after tax and total equity at 10% decrease in lapse rates	129	128
Effect on profit after tax and total equity at 10% increase in expense rates	(108)	(117)
Effect on profit after tax and total equity at 10% decrease in expense rates	107	115

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