16th Aug 2013 16:32
Securitisation exposures and other structured products
This section contains information about our exposure to the following:
· asset-backed securities ('ABS's), including mortgage-backed securities ('MBS's) and related collateralised debt obligations ('CDO's);
· direct lending at fair value through profit or loss;
· monoline insurance companies ('monolines');
· leveraged finance transactions; and
· representations and warranties related to mortgage sales and securitisation activities.
Within the above is included information on the GB&M legacy credit activities in respect of Solitaire Funding Limited ('Solitaire'), the securities investment conduits ('SIC's), the ABSs trading portfolios and derivative transactions with monolines.
Business model
Balance Sheet Management (see page 169) holds ABSs primarily issued by government agency and sponsored enterprises as part of our investment portfolios.
Our investment portfolios include SICs and money market funds. We also originate leveraged finance loans for the purpose of syndicating or selling them down to generate trading profit or holding them to earn interest margin over their lives.
Exposure in the first half of 2013
Early 2013 saw an improvement in the US housing market and a continued increase in the market appetite for structured assets. This appetite reduced in the second quarter with the expectation that the scale of government repurchase schemes and quantitative measures may reduce. This particularly affected the values of ABSs issued by government agencies and sponsored enterprises. Unrealised losses in our available-for-sale portfolios reduced in the first half of 2013 from US$2.2bn to US$1.9bn, as price appreciation in other ABS asset classes offset movements in the government related assets.
Within the following table are assets held in the GB&M legacy credit portfolio with a carrying value of US$29.2bn (30 June 2012: US$33.3bn; 31 December 2012: US$31.6bn).
A summary of the nature of HSBC's exposures is provided in the Appendix to Risk on page 259 of the Annual Report and Accounts 2012. |
Overall exposure of HSBC
At 30 June 2013 | At 30 June 2012 | At 31 December 2012 | |||||||||
Carrying amount26 | Including sub-prime and Alt-A | Carrying amount26 | Including sub-prime and Alt-A | Carrying amount26 | Including sub-prime and Alt-A | ||||||
US$bn | US$bn | US$bn | US$bn | US$bn | US$bn | ||||||
Asset-backed securities ('ABS's) ............... | 54.6 | 7.0 | 60.5 | 6.6 | 59.0 | 7.0 | |||||
- fair value through profit or loss ............ | 3.1 | 0.2 | 3.2 | 0.2 | 3.4 | 0.2 | |||||
- available for sale27 ................................ | 46.4 | 6.2 | 50.3 | 5.5 | 49.6 | 6.1 | |||||
- held to maturity27 ................................. | 1.3 | - | 1.8 | 0.2 | 1.6 | 0.1 | |||||
- loans and receivables ............................. | 3.8 | 0.6 | 5.2 | 0.7 | 4.4 | 0.6 | |||||
Direct lending at fair value through profitor loss ................................................... | 0.2 | 0.1 | 1.1 | 0.8 | 1.0 | 0.6 | |||||
Total ABSs and direct lending at fair value through profit or loss ............................ | 54.8 | 7.1 | 61.6 | 7.4 | 60.0 | 7.6 | |||||
Less securities subject to risk mitigation from credit derivatives with monolines and other financial institutions ............. | (1.7) | (0.2) | (2.4) | (0.3) | (1.9) | (0.2) | |||||
53.1 | 6.9 | 59.2 | 7.1 | 58.1 | 7.4 | ||||||
Leveraged finance loans ........................... | 1.3 | - | 3.0 | - | 2.8 | - | |||||
- fair value through profit or loss ............ | - | - | 0.1 | - | - | - | |||||
- loans and receivables ............................. | 1.3 | - | 2.9 | - | 2.8 | - | |||||
54.4 | 6.9 | 62.2 | 7.1 | 60.9 | 7.4 | ||||||
Exposure including securities mitigated by credit derivatives with monolines and other financial institutions .................... | 56.1 | 7.1 | 64.6 | 7.4 | 62.8 | 7.6 | |||||
For footnotes, see page 178.
ABSs classified as available for sale
Our principal holdings of available-for-sale ABSs are in GB&M through structured entities ('SE's) which were established with the benefit of external investor first loss protection support from the outset, together with positions held directly and by Solitaire, where we provide first loss risk protection of US$1.2bn through credit enhancement and a liquidity facility.
Movement in the available-for-sale reserve
Half-year to 30 June 2013 | Half-year to 30 June 2012 | Half-year to 31 December 2012 | |||||||||||||||
Directly held/ Solitaire28 | SEs | Total | Directly held/ Solitaire28 | SEs | Total | Directly held/ Solitaire28 | SEs | Total | |||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||||
Available-for-sale reserve at beginning of period ........ | (1,473) | (720) | (2,193) | (3,085) | (2,061) | (5,146) | (2,365) | (1,554) | (3,919) | ||||||||
Increase/(decrease) in fair value of securities .......... | (215) | 374 | 159 | 475 | 267 | 742 | 720 | 647 | 1,367 | ||||||||
Effect of impairments29 .... | 124 | 8 | 132 | 79 | 119 | 198 | 260 | 275 | 535 | ||||||||
Repayment of capital ........ | (35) | 55 | 20 | 18 | 99 | 117 | 146 | 75 | 221 | ||||||||
Other movements ............. | 13 | (79) | (66) | 148 | 22 | 170 | (234) | (163) | (397) | ||||||||
Available-for-sale reserve at end of period ................. | (1,586) | (362) | (1,948) | (2,365) | (1,554) | (3,919) | (1,473) | (720) | (2,193) | ||||||||
For footnotes, see page 178.
Securities investment conduits
The total carrying amount of ABSs held through SEs in the table overleaf represents holdings in which significant first loss protection is provided through capital notes issued by SICs, excluding Solitaire.
At each reporting date, we assess whether there is any objective evidence of impairment in the value of the ABSs held by SEs. Impairment charges incurred on these assets are offset by a credit to the impairment line for the amount of the loss allocated to capital note holders, subject to the carrying amount of the capital notes being sufficient to offset the loss. In one SE, Mazarin Funding Limited ('Mazarin'), the aggregate impairment charges exceeded the carrying value of the capital notes liability. Writebacks of US$33m (30 June 2012: a charge of US$108m; 31 December 2012: a charge of US$11m) were attributed to HSBC as shown in the table below. In respect of the SICs, the capital notes held by third parties are expected to absorb the cash losses in the vehicles.
Available-for-sale reserve and economic first loss protection in SICs, excluding Solitaire
SICs excluding Solitaire at | |||||
30 Jun | 30 Jun | 31 Dec | |||
2013 | 2012 | 2012 | |||
US$m | US$m | US$m | |||
Available-for-sale reserve ..................................................................................... | (382) | (1,873) | (787) | ||
- related to ABSs ............................................................................................. | (362) | (1,554) | (720) | ||
Economic first loss protection ............................................................................. | 2,286 | 2,286 | 2,286 | ||
Carrying amount of capital notes liability ............................................................ | 373 | 167 | 249 | ||
Impairment (writeback)/charge for the period: | |||||
- borne by HSBC ............................................................................................. | (33) | 108 | 11 | ||
- allocated to capital note holders ................................................................... | (70) | 11 | (11) | ||
Impairment methodologies
The accounting policy for impairment and indicators of impairment is set out on page 389 of the Annual Report and Accounts 2012.
A summary of our impairment methodologies is provided in the Appendix to Risk on page 260 of the Annual Report and Accounts 2012. |
Carrying amount of HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss
Trading | Available for sale | Held to maturity | Designatedat fair value through profit or loss | Loans and receivables | Total | Of whichheld through consolidated SEs | Gross principal exposure30 | Credit default swap protection31 | Net principal exposure32 | ||||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | ||||||||||
At 30 June 2013 | |||||||||||||||||||
Mortgage-related assets: | |||||||||||||||||||
Sub-prime residential ............................. | 195 | 2,607 | - | - | 419 | 3,221 | 2,380 | 4,318 | 121 | 4,197 | |||||||||
- direct lending .................................... | 54 | - | - | - | - | 54 | - | 127 | - | 127 | |||||||||
- MBSs and MBS CDOs ........................ | 141 | 2,607 | - | - | 419 | 3,167 | 2,380 | 4,191 | 121 | 4,070 | |||||||||
US Alt-A residential .............................. | 104 | 3,641 | 30 | - | 127 | 3,902 | 2,996 | 6,208 | 100 | 6,108 | |||||||||
- direct lending .................................... | 11 | - | - | - | - | 11 | - | 17 | - | 17 | |||||||||
- MBSs ................................................ | 93 | 3,641 | 30 | - | 127 | 3,891 | 2,996 | 6,191 | 100 | 6,091 | |||||||||
US Government agency and sponsored enterprises: | |||||||||||||||||||
MBSs ................................................ | 196 | 21,814 | 1,257 | - | - | 23,267 | - | 22,663 | - | 22,663 | |||||||||
Other residential ................................... | 579 | 1,877 | - | - | 449 | 2,905 | 1,324 | 3,727 | 62 | 3,665 | |||||||||
- direct lending .................................... | 166 | - | - | - | - | 166 | - | 166 | - | 166 | |||||||||
- MBSs ................................................ | 413 | 1,877 | - | - | 449 | 2,739 | 1,324 | 3,561 | 62 | 3,499 | |||||||||
Commercial property | |||||||||||||||||||
MBSs and MBS CDOs ........................ | 197 | 6,082 | - | 105 | 1,155 | 7,539 | 5,270 | 8,260 | - | 8,260 | |||||||||
1,271 | 36,021 | 1,287 | 105 | 2,150 | 40,834 | 11,970 | 45,176 | 283 | 44,893 | ||||||||||
Leveraged finance-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 279 | 4,980 | - | - | 239 | 5,498 | 4,164 | 5,845 | 374 | 5,471 | |||||||||
Student loan-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 205 | 4,003 | - | - | 120 | 4,328 | 3,662 | 5,286 | 199 | 5,087 | |||||||||
Other assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 1,398 | 1,395 | - | 63 | 1,279 | 4,135 | 1,016 | 5,352 | 1,143 | 4,209 | |||||||||
3,153 | 46,399 | 1,287 | 168 | 3,788 | 54,795 | 20,812 | 61,659 | 1,999 | 59,660 |
Trading | Available for sale | Held to maturity | Designatedat fair value throughprofit or loss | Loans and receivables | Total | Of whichheld through consolidated SEs | Gross principal exposure30 | Credit default swap protection31 | Net principal exposure32 | ||||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | ||||||||||
At 30 June 2012 | |||||||||||||||||||
Mortgage-related assets: | |||||||||||||||||||
Sub-prime residential ............................. | 835 | 2,086 | - | - | 506 | 3,427 | 2,308 | 5,835 | 266 | 5,569 | |||||||||
- direct lending .................................... | 668 | - | - | - | - | 668 | 441 | 1,555 | - | 1,555 | |||||||||
- MBSs and MBS CDOs ........................ | 167 | 2,086 | - | - | 506 | 2,759 | 1,867 | 4,280 | 266 | 4,014 | |||||||||
US Alt-A residential .............................. | 169 | 3,414 | 146 | - | 200 | 3,929 | 2,772 | 7,825 | 100 | 7,725 | |||||||||
- direct lending .................................... | 91 | - | - | - | - | 91 | - | 97 | - | 97 | |||||||||
- MBSs ................................................ | 78 | 3,414 | 146 | - | 200 | 3,838 | 2,772 | 7,728 | 100 | 7,628 | |||||||||
US Government agency and sponsored enterprises: | |||||||||||||||||||
MBSs ................................................ | 214 | 23,103 | 1,656 | - | - | 24,973 | - | 23,401 | - | 23,401 | |||||||||
Other residential ................................... | 568 | 3,052 | - | - | 952 | 4,572 | 1,855 | 5,221 | 97 | 5,124 | |||||||||
- direct lending .................................... | 321 | - | - | - | - | 321 | - | 316 | - | 316 | |||||||||
- MBSs ................................................ | 247 | 3,052 | - | - | 952 | 4,251 | 1,855 | 4,905 | 97 | 4,808 | |||||||||
Commercial property | |||||||||||||||||||
MBSs and MBS CDOs ........................ | 295 | 7,107 | - | 107 | 1,450 | 8,959 | 5,898 | 10,440 | - | 10,440 | |||||||||
2,081 | 38,762 | 1,802 | 107 | 3,108 | 45,860 | 12,833 | 52,722 | 463 | 52,259 | ||||||||||
Leveraged finance-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 389 | 5,322 | - | - | 317 | 6,028 | 4,306 | 6,837 | 758 | 6,079 | |||||||||
Student loan-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 172 | 4,651 | - | - | 151 | 4,974 | 4,036 | 6,505 | 99 | 6,406 | |||||||||
Other assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 1,455 | 1,598 | - | 65 | 1,586 | 4,704 | 1,716 | 6,593 | 1,326 | 5,267 | |||||||||
4,097 | 50,333 | 1,802 | 172 | 5,162 | 61,566 | 22,891 | 72,657 | 2,646 | 70,011 |
Carrying amount of HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss (continued)
Trading | Available for sale | Held to maturity | Designatedat fair value throughprofit or loss | Loans and receivables | Total | Of whichheld through consolidated SEs | Gross principal exposure30 | Credit default swap protection31 | Net principal exposure32 | ||||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | ||||||||||
At 31 December 2012 | |||||||||||||||||||
Mortgage-related assets: | |||||||||||||||||||
Sub-prime residential ............................. | 698 | 2,455 | - | - | 435 | 3,588 | 2,723 | 5,483 | 130 | 5,353 | |||||||||
- direct lending .................................... | 566 | - | - | - | - | 566 | 482 | 1,221 | - | 1,221 | |||||||||
- MBSs and MBS CDOs......................... | 132 | 2,455 | - | - | 435 | 3,022 | 2,241 | 4,262 | 130 | 4,132 | |||||||||
US Alt-A residential .............................. | 157 | 3,658 | 118 | - | 157 | 4,090 | 2,994 | 6,992 | 100 | 6,892 | |||||||||
- direct lending .................................... | 71 | - | - | - | - | 71 | - | 77 | - | 77 | |||||||||
- MBSs ................................................ | 86 | 3,658 | 118 | - | 157 | 4,019 | 2,994 | 6,915 | 100 | 6,815 | |||||||||
US Government agency and sponsored enterprises: | |||||||||||||||||||
MBSs ................................................ | 369 | 23,341 | 1,455 | - | - | 25,165 | - | 23,438 | - | 23,438 | |||||||||
Other residential ................................... | 695 | 2,084 | - | - | 499 | 3,278 | 1,459 | 3,888 | 87 | 3,801 | |||||||||
- direct lending .................................... | 322 | - | - | - | - | 322 | - | 322 | - | 322 | |||||||||
- MBSs ................................................ | 373 | 2,084 | - | - | 499 | 2,956 | 1,459 | 3,566 | 87 | 3,479 | |||||||||
Commercial property | |||||||||||||||||||
MBSs and MBS CDOs ........................ | 164 | 6,995 | - | 109 | 1,319 | 8,587 | 5,959 | 9,489 | - | 9,489 | |||||||||
2,083 | 38,533 | 1,573 | 109 | 2,410 | 44,708 | 13,135 | 49,290 | 317 | 48,973 | ||||||||||
Leveraged finance-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 450 | 5,330 | - | - | 284 | 6,064 | 4,303 | 6,726 | 717 | 6,009 | |||||||||
Student loan-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 179 | 4,219 | - | - | 156 | 4,554 | 3,722 | 5,826 | 199 | 5,627 | |||||||||
Other assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 1,511 | 1,553 | - | 49 | 1,537 | 4,650 | 1,140 | 5,769 | 1,318 | 4,451 | |||||||||
4,223 | 49,635 | 1,573 | 158 | 4,387 | 59,976 | 22,300 | 67,611 | 2,551 | 65,060 |
For footnotes, see page 178.
The above table excludes leveraged finance transactions, which are shown separately on page 152.
Exposures and significant movements
Sub-prime residential mortgage-related assets
There was an increase in market prices for sub-prime assets during the first half of 2013. A further net writeback of US$91m on assets was recognised in the first half of 2013 (30 June 2012: writebacks of US$29m; 31 December 2012: writebacks of US$15m). Of the above, there were US$83m of writebacks (30 June 2012: writebacks of US$30m; 31 December 2012: writebacks of US$37m) in the SICs of which US$46m (30 June 2012: US$14m; 31 December 2012: US$13m) were attributed to the capital note holders.
US Alt-A residential mortgage-related assets
In respect of US Alt-A assets there were writebacks of US$72m (30 June 2012: impairments of US$144m; 31 December 2012: writebacks of US$163m). Writebacks of US$26m (30 June 2012: impairments of US$149m; 31 December 2012: impairments of US$41m) occurred in the SICs, of which writebacks of US$24m (30 June 2012: impairments of US$25m; 31 December 2012: impairments of US$7m) were attributed to the capital note holders.
Commercial property mortgage-related assets
Spreads continued to tighten on both US and non-US commercial property mortgage-related assets during the first half of 2013. Impairments of US$9m were recognised (30 June 2012: impairments of US$127m; 31 December 2012: writebacks of US$2m).
Transactions with monoline insurers
HSBC's exposure to derivative transactions entered into directly with monolines
Our principal exposure to monolines is through a number of over-the-counter ('OTC') derivative transactions, mainly credit default swaps ('CDS's). We entered into these CDSs primarily to purchase credit protection against securities held in the trading portfolio at the time.
During the first half of 2013, the notional value of contracts with monolines reduced. The table overleaf sets out the fair value of the derivative transactions at 30 June 2013, and hence the amount at risk if the CDS protection purchased were to be wholly ineffective because, for example, the monoline insurer was unable to meet its obligations. The value of protection purchased is divided between those monolines that were rated by Standard and Poor's ('S&P') at 'BBB- or above' at 30 June 2013, and those that were 'below BBB-' ('BBB-' is the S&P cut-off for an investment grade classification). The 'Credit valuation adjustment' column indicates the valuation adjustment taken against the net exposures, and reflects our best estimate of the likely loss of value on purchased protection arising from the deterioration in creditworthiness of the monolines. These valuation adjustments, which reflect a measure of the irrecoverability of the protection purchased, have been charged to the income statement.
Market prices are generally not readily available for CDSs, so they are valued on the basis of market prices of the referenced securities.
HSBC's exposure to derivative transactions entered into directly with monoline insurers
Notional amount | Net exposure before credit valuation adjustment33 | Credit valuation adjustment34 | Net exposure after credit valuation adjustment | ||||
US$m | US$m | US$m | US$m | ||||
At 30 June 2013 | |||||||
Derivative transactions with monoline counterparties | |||||||
Monolines - investment grade (BBB- or above) ..... | 3,439 | 388 | (68) | 320 | |||
Monolines - sub-investment grade (below BBB-) .... | 947 | 217 | (130) | 87 | |||
4,386 | 605 | (198) | 407 | ||||
At 30 June 2012 | |||||||
Derivative transactions with monoline counterparties | |||||||
Monolines - investment grade (BBB- or above) ..... | 4,213 | 789 | (118) | 671 | |||
Monolines - sub-investment grade (below BBB-) .... | 1,502 | 343 | (216) | 127 | |||
5,715 | 1,132 | (334) | 798 | ||||
At 31 December 2012 | |||||||
Derivative transactions with monoline counterparties | |||||||
Monolines - investment grade (BBB- or above) ..... | 4,191 | 606 | (121) | 485 | |||
Monolines - sub-investment grade (below BBB-) .... | 957 | 303 | (158) | 145 | |||
5,148 | 909 | (279) | 630 |
For footnotes, see page 178.
Credit valuation adjustments for monolines
· For monolines, the standard CVA methodology (as described on page 56 of the Annual Report and Accounts 2012) applies, with the exception that the future exposure profile is deemed to be constant (equal to the current market value) over the weighted average life of the referenced security.
HSBC's exposure to debt securities which benefit from guarantees provided by monolines
Within both the trading and available-for-sale portfolios, we hold bonds that are 'wrapped' with a credit enhancement from a monoline. As the bonds are traded explicitly with the benefit of this enhancement, any deterioration in the credit profile of the monoline is reflected in market prices and, therefore, in the carrying amount of these securities at 30 June 2013. For wrapped bonds held in our trading portfolio, the mark-to-market movement has been reflected through the income statement. For wrapped bonds held in the available-for-sale portfolio, the mark-to-market movement is reflected in equity unless there is objective evidence of impairment, in which case the impairment loss is reflected in the income statement.
Leveraged finance transactions
Leveraged finance transactions include sub-investment grade acquisition or event-driven financing. The following table shows our exposure to leveraged finance transactions arising from primary transactions. Our additional exposure to leveraged finance loans through holdings of ABSs from our trading and investment activities is shown in the table on page 148.
We held leveraged finance commitments of US$1.3bn at 30 June 2013 (30 June 2012: US$3.0bn; 31 December 2012: US$2.8bn), of which US$1.2bn (30 June 2012: US$2.7bn; 31 December 2012: US$2.6bn) was funded. At 30 June 2013, our principal exposures were to companies in two sectors: US$0.1bn to data processing (30 June 2012: US$0.8bn; 31 December 2012: US$0.7bn) and US$1.1bn to communications and infrastructure (30 June 2012: US$1.9bn; 31 December 2012: US$1.8bn).
HSBC's exposure to leveraged finance transactions
Exposures at 30 June 2013 | Exposures at 30 June 2012 | Exposures at 31 December 2012 | |||||||||||||||
Funded35 | Un- funded36 | Total | Funded35 | Un- funded36 | Total | Funded35 | Un- funded36 | Total | |||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||||
Europe .................................... | 1,183 | 142 | 1,325 | 2,194 | 221 | 2,415 | 2,108 | 162 | 2,270 | ||||||||
North America ....................... | - | - | - | 443 | 126 | 569 | 414 | 92 | 506 | ||||||||
1,183 | 142 | 1,325 | 2,637 | 347 | 2,984 | 2,522 | 254 | 2,776 | |||||||||
Held within: | |||||||||||||||||
- loans and receivables ....... | 1,183 | 142 | 1,325 | 2,593 | 323 | 2,916 | 2,522 | 252 | 2,774 | ||||||||
- fair value through profitor loss ............................. | - | - | - | 44 | 24 | 68 | - | 2 | 2 | ||||||||
For footnotes, see page 178.
Representations and warranties related to mortgage sales and securitisation activities
We have been involved in various activities related to the sale and securitisation of residential mortgages, which are not recognised on our balance sheet. These activities include:
· the purchase of US$24bn of third-party originated mortgages by HSBC Bank USA and the securitisation of these by HSBC Securities (USA) Inc. ('HSI') between 2005 and 2007;
· HSI acting as underwriter for third-party issuance of private label MBSs with an original issuance value of US$37bn, most of which were sub-prime; and
· the origination and sale by HSBC Bank USA of mortgage loans, primarily to government sponsored entities.
In sales and securitisations of mortgage loans, various representations and warranties regarding the loans may be made to purchasers of the mortgage loans and MBSs. In respect of the purchase and securitisation of third-party originated mortgages and the underwriting of third-party MBSs, the obligation to repurchase loans in the event of a breach of loan level representations and warranties resides predominantly with the organisation that originated the loan.
Participants in the US mortgage securitisation market that purchased and repackaged whole loans have been the subject of lawsuits and governmental and regulatory investigations and inquiries which have been directed at groups within the US mortgage market such as servicers, originators, underwriters, trustees or sponsors of securitisations. Further details are provided in Note 24 on the Financial Statements.
At 30 June 2013, a liability of US$217m (30 June 2012: US$222m; 31 December 2012: US$219m) was recognised in respect of various representations and warranties relating to the origination and sale by HSBC Bank USA of mortgage loans, primarily to government sponsored entities. These relate to, among other things, the ownership of the loans, the validity of the liens, the loan selection and origination process, and compliance with the origination criteria established by the agencies. In the event of a breach of our representations and warranties, HSBC Bank USA may be obliged to repurchase the loans with identified defects or to indemnify the buyers. The liability is estimated based on the level of outstanding repurchase demands, the level of outstanding requests for loan files and estimated future demands in respect of mortgages sold to date which are either two or more payments delinquent or are expected to become delinquent at an estimated conversion rate. Repurchase demands of US$53m were outstanding at 30 June 2013 (30 June 2012: US$167m; 31 December 2012: US$89m).
Exposures to countries in the eurozone
Eurozone countries are members of the EU and part of the euro single currency bloc. The peripheral eurozone countries are those that exhibited levels of market volatility that exceeded other eurozone countries, demonstrating fiscal or political uncertainty which may persist through the second half of 2013. The peripheral eurozone countries have been identified as Greece, Ireland, Italy, Portugal, Spain and Cyprus as they continued to exhibit a high ratio of sovereign debt to gross domestic product and excessive fiscal deficits. Other eurozone countries analysed in the table on page 154 are those to which HSBC has a net on-balance sheet exposure exceeding 5% of the Group's total equity at 30 June 2013. The remaining eurozone countries have been reported together under 'Others'.
In the Annual Report and Accounts 2012, we disclosed detailed information on our exposures to peripheral eurozone countries. At 30 June 2013, there were no significant changes in our exposures to peripheral eurozone countries compared with 31 December 2012.
The basis of preparation for our reported exposures is described on page 192 in the Annual Report and Accounts 2012.
Our total net exposures to eurozone countries increased by 6% or US$18.1bn, to US$328bn at 30 June 2013. This movement was due to increases in net exposures to France of US$11.1bn, and the Netherlands of US$5.2bn. While our total exposure to France, Germany and the Netherlands was commensurate with the size of our operations in these countries the increase in exposures to France was due to increased reverse repo activity with French banks and the increase in the Netherlands was due to increased exposures to other financial institutions and corporates. Exposures to other eurozone countries not specifically mentioned which are reported together in 'Others' are not significant to the Group.
Summary of exposures to eurozone countries
Total net exposure | |||||||||||||||||
On- balance sheet exposures | Off- balance sheet exposures |
| Total gross exposures | Risk miti- gation | Total net exposure | Sovereign and agencies |
| Banks | Other financial institutions and corporates | Personal | |||||||
US$bn | US$bn | US$bn | US$bn | US$bn | US$bn | US$bn | US$bn | US$bn | |||||||||
At 30 June 2013 | |||||||||||||||||
Spain .................. | 13.6 | 3.7 | 17.3 | (5.3) | 12.0 | 0.2 | 3.7 | 8.0 | 0.1 | ||||||||
Ireland ............... | 15.1 | 1.8 | 16.9 | (7.1) | 9.8 | 0.4 | 1.6 | 7.7 | 0.1 | ||||||||
Italy ................... | 13.8 | 2.7 | 16.5 | (8.3) | 8.2 | 2.0 | 1.3 | 4.8 | 0.1 | ||||||||
Greece ................ | 6.9 | 0.8 | 7.7 | (0.5) | 7.2 | 0.1 | 1.8 | 4.4 | 0.9 | ||||||||
Portugal ............. | 1.0 | 0.1 | 1.1 | (0.4) | 0.7 | 0.4 | 0.1 | 0.2 | − | ||||||||
Cyprus ............... | 0.3 | 0.2 | 0.5 | (0.1) | 0.4 | - | - | 0.4 | − | ||||||||
France ................ | 166.2 | 28.9 | 195.1 | (38.5) | 156.6 | 25.6 | 48.1 | 66.3 | 16.6 | ||||||||
Germany ............ | 98.0 | 11.8 | 109.8 | (41.2) | 68.6 | 33.1 | 13.6 | 21.4 | 0.5 | ||||||||
The Netherlands | 39.9 | 4.6 | 44.5 | (9.9) | 34.6 | 11.4 | 4.8 | 18.3 | 0.1 | ||||||||
Others ................ | 36.3 | 5.0 | 41.3 | (11.6) | 29.7 | 10.1 | 4.4 | 12.1 | 3.1 | ||||||||
391.1 | 59.6 | 450.7 | (122.9) | 327.8 | 83.3 | 79.4 | 143.6 | 21.5 | |||||||||
At 31 December 2012 | |||||||||||||||||
Spain .................. | 15.3 | 3.2 | 18.5 | (6.4) | 12.1 | 1.0 | 2.8 | 8.3 | - | ||||||||
Ireland ............... | 20.7 | 1.3 | 22.0 | (12.1) | 9.9 | 0.4 | 1.8 | 7.6 | 0.1 | ||||||||
Italy ................... | 12.6 | 3.0 | 15.6 | (6.0) | 9.6 | 2.7 | 1.6 | 5.2 | 0.1 | ||||||||
Greece ................ | 5.9 | 0.7 | 6.6 | (0.8) | 5.8 | 0.1 | 0.6 | 4.1 | 1.0 | ||||||||
Portugal ............. | 1.1 | 0.3 | 1.4 | (0.4) | 1.0 | 0.2 | 0.4 | 0.4 | - | ||||||||
Cyprus ............... | 0.3 | 0.1 | 0.4 | - | 0.4 | - | - | 0.4 | - | ||||||||
France ................ | 158.3 | 28.0 | 186.3 | (40.8) | 145.5 | 33.0 | 30.5 | 65.7 | 16.3 | ||||||||
Germany ............ | 112.4 | 11.6 | 124.0 | (56.6) | 67.4 | 27.4 | 14.3 | 25.1 | 0.6 | ||||||||
The Netherlands | 39.7 | 4.1 | 43.8 | (14.4) | 29.4 | 10.0 | 5.3 | 14.0 | 0.1 | ||||||||
Others ................ | 38.0 | 4.9 | 42.9 | (14.3) | 28.6 | 9.8 | 3.6 | 12.0 | 3.2 | ||||||||
404.3 | 57.2 | 461.5 | (151.8) | 309.7 | 84.6 | 60.9 | 142.8 | 21.4 | |||||||||
Redenomination risk
As the peripheral eurozone countries of Greece, Ireland, Italy, Portugal, Spain and Cyprus continue to exhibit distress, there is the continuing possibility of a member state exiting from the eurozone. There remains no established legal framework within the European treaties to facilitate such an event; consequently, it is not possible to accurately predict the course of events and legal consequences that would ensue.
In the Annual Report and Accounts 2012, we disclosed information on our in-country funding exposures to the peripheral eurozone countries. At 30 June 2013, there were no significant changes in our in-country funding exposures to peripheral eurozone countries compared with 31 December 2012. Our view remains that there would be a greater potential impact on HSBC from a euro exit of Greece, Italy or Spain than from Ireland, Portugal or Cyprus. As a result, only exposures to Greece, Italy or Spain are reported in the table below.
In-country funding exposure
Denominated in: | ||||||||
Euros |
| US dollars | Other currencies | Total | ||||
US$bn | US$bn | US$bn | US$bn | |||||
At 30 June 2013 | ||||||||
Greece | In-country assets ................................. | 1.6 | 0.1 | - | 1.7 | |||
In-country liabilities ............................ | (1.6) | (0.7) | (0.1) | (2.4) | ||||
Net in-country funding exposure ......... | - | (0.6) | (0.1) | (0.7) | ||||
Off-balance sheet exposure .................. | (0.3) | - | 0.3 | - | ||||
Italy | In-country assets ................................. | 1.0 | - | - | 1.0 | |||
In-country liabilities37 ......................... | (1.9) | (0.2) | - | (2.1) | ||||
Net in-country funding exposure ......... | (0.9) | (0.2) | - | (1.1) | ||||
Off-balance sheet exposure .................. | 0.6 | - | - | 0.6 | ||||
Spain | In-country assets ................................. | 1.7 | 0.9 | - | 2.6 | |||
In-country liabilities ............................ | (1.4) | (0.1) | - | (1.5) | ||||
Net in-country funding exposure ......... | 0.3 | 0.8 | - | 1.1 | ||||
Off-balance sheet exposure .................. | 0.8 | 0.1 | - | 0.9 | ||||
At 31 December 2012 | ||||||||
Greece | In-country assets ................................. | 2.1 | 0.1 | - | 2.2 | |||
In-country liabilities ............................ | (1.5) | (0.8) | (0.1) | (2.4) | ||||
Net in-country funding exposure ......... | 0.6 | (0.7) | (0.1) | (0.2) | ||||
Off-balance sheet exposure .................. | (0.3) | 0.2 | 0.2 | 0.1 | ||||
Italy | In-country assets ................................. | 1.0 | - | - | 1.0 | |||
In-country liabilities37 ......................... | (2.0) | - | - | (2.0) | ||||
Net in-country funding exposure ......... | (1.0) | - | - | (1.0) | ||||
Off-balance sheet exposure .................. | 0.8 | - | - | 0.8 | ||||
Spain | In-country assets ................................. | 2.4 | 0.8 | - | 3.2 | |||
In-country liabilities ............................ | (1.7) | (0.1) | - | (1.8) | ||||
Net in-country funding exposure ......... | 0.7 | 0.7 | - | 1.4 | ||||
Off-balance sheet exposure .................. | 0.7 | 0.2 | - | 0.9 | ||||
For footnote, see page 178.
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HSBC Holdings