
Risk		Operational risk management	84
Risk		Regulatory compliance risk management	84
	Page	Financial crime risk management	85
Our conservative risk appetite	69	Insurance manufacturing operations risk management	86
Top and emerging risks	69	Other material risks
Externally driven	69	- Reputational risk management	86
Internally driven	71	- Sustainability risk management	87
Areas of special interest	72	- Pension risk management	87
Process of UK withdrawal from the European Union	72	Key developments and risk profile in 2018	88
Risk management	73	Key developments in 2018	88
Our risk management framework	73	Credit risk profile	88
Our material banking and insurance risks	77	Liquidity and funding risk profile	134
Credit risk management	78	Market risk profile	138
Liquidity and funding risk management	80	Operational risk profile	144
Market risk management	81	Insurance manufacturing operations risk profile	145

Our conservative risk appetite

Throughout its history, HSBC has maintained an evolving conservative risk profile. This is central to our business and strategy.

The following principles guide the Group's overarching risk appetite and determine how its businesses and risks are managed.

Financial position

· Strong capital position, defined by regulatory and internal capital ratios.

· Liquidity and funding management for each operating entity, on a stand-alone basis.

Operating model

· Ambition and capability to generate returns in line with a conservative risk appetite and strong risk management capability.

· Ambition and capability to deliver sustainable earnings and consistent returns for shareholders.

Top and emerging risks

Our approach to identifying and monitoring top and emerging risks is described on page

Externally driven

Economic outlook and capital flows

Economic activity diverged across the global economy during 2018. The US benefited from a fiscal stimulus that helped to drive GDP growth above its long-term trend. The growth rate in trade-dependent regions like the European Union ('EU') declined on the back of a slowing Chinese economy, and trade and geopolitical tensions. Tightening global financial conditions alongside the tapering off of fiscal stimulus in the US is expected to lead to more moderate growth in global economic activity in 2019. Oil prices will likely remain volatile as contrasting supply and demand factors prevail in turn.

The stand-off between the US and China on a variety of economic and technological issues is likely to continue in 2019, although further liberalising initiatives in a vein similar to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ('CPTPP') and the EU-Japan trade deal, as well as some re-organisation of global supply chains, could partly offset rising protectionism. Nevertheless, the net impact on trade flows could be negative, and may damage HSBC's traditional lines of business.

Emerging markets are set to face challenging cross-currents. The reduction in global liquidity and consequent increase in the cost of external funding could expose vulnerabilities that spread more broadly. However, China has pledged to enact some stimulus to offset the effects of tariff hikes. This should help emerging markets achieve reasonable growth rates even in the face of headwinds, though downside risks abound.

US midterm elections brought in a divided Congress, while two of Latin America's largest economies, Mexico and Brazil, elected new presidents. In Europe, populist parties have made political gains and could make further breakthroughs. In conjunction with continuing significant uncertainty around the ultimate shape of the UK's exit from the EU, as well as developments in countries such as Italy, severe bouts of economic and financial turbulence could spread beyond Europe. We believe HSBC's strong UK and European

Business practice

· Zero tolerance for knowingly engaging in any business, activity or association where foreseeable reputational risk or damage has not been considered and/or mitigated.

· No appetite for deliberately or knowingly causing detriment to consumers, or incurring a breach of the letter or spirit of regulatory requirements.

· No appetite for inappropriate market conduct by a member of staff or by any Group business.

Enterprise-wide application

Our risk appetite encapsulates consideration of financial and non-financial risks and is expressed in both quantitative and qualitative terms. It is applied at the global business level, at the regional level, and to material operating entities.

. During 2018, we made a number of changes to our top and emerging risks to reflect our assessment of the issues facing HSBC. Our current top and emerging risks are as follows.

franchises are well placed to weather risks, but would nevertheless be affected by severe shocks.

Mitigating actions

· We actively assess the impact of economic developments in key markets on specific customer segments and portfolios and take appropriate mitigating actions. These actions include revising risk appetite and/or limits, as circumstances evolve.

· We use internal stress testing and scenario analysis, as well as regulatory stress test programmes, to evaluate the potential impact of macroeconomic shocks on our businesses and portfolios. Our approach to stress testing is described on page 76.

· We have carried out detailed reviews and stress tests of our wholesale credit, retail credit and trading portfolios to determine those sectors and customers most vulnerable to the UK's exit from the EU, in order to proactively manage and mitigate this risk.

Geopolitical risk

Our operations and portfolios are exposed to risks associated with political instability, civil unrest and military conflict, which could lead to disruption to our operations, physical risk to our staff and/or physical damage to our assets. In addition, rising protectionism and the increasing trend of using trade and investment policies as diplomatic tools may also adversely affect global trade flows.

Geopolitical risk remained heightened throughout 2018. The growing presence of populist parties means political systems across Europe are increasingly fragmented, volatile and less predictable. Political uncertainty remains high in the UK as its departure from the EU continues to dominate the political agenda in 2019 (see 'Process of UK withdrawal from the European Union' on page 73).

In the Middle East, the US has reinstated components of its Iran sanctions regime that were previously lifted to implement the Iran Nuclear Deal. The US is also putting pressure to end the war in Yemen and the boycott of Qatar. In Turkey, which has local elections in March 2019, the president may face increasing pressure to solve economic challenges after the Turkish lira came under pressure in 2018.

In Asia, US-China competition and confrontation across multiple dimensions will likely continue, including concerning economic power and technology leadership. US investment and export restrictions on Chinese imports could disrupt investment decisions, leading to a slow decoupling of the US and Chinese technology sectors.

Key presidential votes in HSBC markets Mexico and Brazil have changed the political status quo. A major source of uncertainty for Mexico was removed with the negotiation of the United States-Mexico-Canada Agreement ('USMCA'), which replaces NAFTA as a key driver of the Mexican economy, but still must be ratified. In Argentina, elections due in October 2019 will be shaped by economic factors and potential further market volatility. Corruption and security dynamics will continue to shape voter preferences.

Mitigating actions

We continually monitor the geopolitical outlook, in particular in countries where we have material exposures and/or a physical presence. We have also established dedicated forums to monitor geopolitical developments.

· We use internal stress tests and scenario analysis as well as regulatory stress test programmes, to adjust limits and exposures to reflect our risk appetite and mitigate risks as appropriate. Our internal credit risk ratings of sovereign counterparties take into account geopolitical developments that could potentially disrupt our portfolios and businesses.

· We continue to carry out contingency planning for the UK's exit from the EU and we are assessing the potential impact on our portfolios, operations and staff. This includes the increased possibility of an exit with no transition agreement.

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

The credit cycle

Steadily rising US interest rates and the looming end of the ECB's quantative easing programme, alongside the uncertainty caused by trade and geopolitical tensions, caused a correction in stock indices and a widening in corporate bond spreads in the fourth quarter of 2018. The Bank for International Settlements ('BIS') estimates that 80% of US leveraged loans are 'covenant-lite'. Pressures in this segment could come to a head and spill over to other asset classes. The International Monetary Fund deems that thin liquidity coverage ratios ('LCRs') and stable funding ratios ('SFRs') for international banks' US dollar positions could cause offshore dollar liquidity to tighten abruptly during periods of high volatility, possibly affecting HSBC's positions.

After reining in excess leverage during 2018, China has pledged renewed stimulus in 2019 to counter various adverse effects on economic activity. This could lead to renewed global concerns about Chinese debt levels. In addition, debt-servicing burdens are high in some emerging markets, making them vulnerable to shocks.

Mitigating actions

· We closely monitor economic developments in key markets and sectors and undertake scenario analysis. This helps enable us to take portfolio actions where necessary, including enhanced monitoring, amending our risk appetite and/or reducing limits and exposures.

· We stress test portfolios of particular concern to identify sensitivity to loss under a range of scenarios, with management actions being taken to rebalance exposures and manage risk appetite where necessary.

· We undertake regular reviews of key portfolios to help ensure that individual customer or portfolio risks are understood and our ability to

manage the level of facilities offered through any downturn is appropriate.

Cyber threat and unauthorised access to systems

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

Key threats include unauthorised access to online customer accounts, advanced malware attacks and distributed denial of service ('DDOS') attacks.

Destructive malware (including ransomware), DDOS attacks and organised cyber criminals targeting payments are increasingly dominant threats across the industry. In 2018, the Group was subjected to a small number of DDOS attacks on our external facing websites, which were successfully mitigated across the Group with no destructive malware (including ransomware) or payment infrastructure attacks reported.

Mitigating actions

· We continue to strengthen and significantly invest in both business and technical controls in order to prevent, detect and respond to an increasingly hostile cyber threat environment. We continually evaluate the threat environment for the most prevalent attack types and their potential outcomes to determine the most effective controls to mitigate those threats.

· Specifically, we continue to enhance our controls to protect against advanced malware, data leakage, infiltration of payment systems and denial of service attacks as well as enhance our ability to quickly detect and respond to increasingly sophisticated cyber-attacks. Ensuring our staff continue to be 'cyber aware' is a key element of our defence strategy.

· Cyber risk is a priority area for the Board and is routinely reported at Board level to ensure appropriate visibility, governance and executive support for our ongoing cybersecurity programme.

Regulatory developments including conduct, with adverse impact on business model and profitability

Financial service providers continue to face stringent regulatory and supervisory requirements, particularly in the areas of capital and liquidity management, conduct of business, financial crime, internal control frameworks, the use of models and the integrity of financial services delivery. The competitive landscape in which the Group operates may be significantly altered by future regulatory changes and government intervention. Regulatory changes, including any resulting from the UK's exit from the EU, may affect the activities of the Group as a whole, or of some or all of its principal subsidiaries. This would include the loss of passporting rights and free movement of services, which are likely to arise in the event of the UK leaving the EU without an exit deal. Changes to business models and structures will be necessary to accommodate any such restrictions. For further details, see page 73.

Additionally, as described in Note 35 on the Financial Statements, we continue to be subject to a number of material legal proceedings, regulatory actions and investigations, including, for example, our January 2018 deferred prosecution agreement with the US DoJ arising from its investigation into HSBC's historical foreign exchange activities (the 'FX DPA').

Mitigating actions

· We are fully engaged, wherever possible, with governments and regulators in the countries in which we operate, to help ensure that new requirements are considered properly by regulatory authorities and the financial sector and can be implemented effectively. Significant regulatory programmes are overseen by the Group Change Committee.

· We hold regular meetings with all relevant authorities to discuss strategic contingency plans covering a wide range of scenarios relating to the UK's exit from the EU. In the absence of an agreement on the terms of the UK's withdrawal from the EU, these discussions increasingly focus on no deal scenarios and our plans to navigate the restrictions that are likely to arise regarding our ability to access EU markets and customers from the UK if passporting rights are withdrawn.

· We have invested significant resources and have taken, and will continue to take, a number of steps to improve our compliance systems and controls relating to our activities in global markets. These included enhancements to trade, voice and audio surveillance and the implementation of algorithmic trading for benchmark orders. For further details, see 'Regulatory compliance risk management' on page 84.

Financial crime risk environment

Financial institutions remain under considerable regulatory scrutiny regarding their ability to prevent and detect financial crime. Financial crime threats continue to evolve, often in tandem with geopolitical developments. The highly speculative, volatile and opaque nature of virtual currencies, as well as the pace of new currencies and associated technological developments, create challenges in effectively managing financial crime risks. The evolving regulatory environment continues to present execution challenge. An increasing trend towards greater data privacy requirements may affect our ability to effectively manage financial crime risks.

In December 2012, among other agreements, HSBC Holdings plc ('HSBC Holdings') consented to a cease-and-desist order with the US Federal Reserve Board ('FRB') and agreed to an undertaking with the UK Financial Conduct Authority ('FCA') to comply with certain forward-looking anti-money laundering ('AML') and sanctions-related obligations. HSBC Holdings also agreed to retain an independent compliance monitor - who is for FCA purposes a 'Skilled Person' under section 166 of the Financial Services and Markets Act, and for FRB purposes an 'Independent Consultant' - to produce periodic assessments of the Group's AML and sanctions compliance programme. In December 2012, HSBC Holdings also entered into an agreement with the Office of Foreign Assets Control ('OFAC') regarding historical transactions involving parties subject to OFAC sanctions. The Skilled Person/Independent Consultant will continue to conduct country reviews and provide periodic reports for a period of time at the FCA's and FRB's discretion. The role of the Skilled Person/Independent Consultant is discussed on page 85.

Mitigating actions

· We continued to enhance our financial crime risk management capabilities. We are investing in the next generation of tools to fight financial crime through the application of advanced analytics and artificial intelligence.

· We are developing procedures and controls to manage the risks associated with direct and indirect exposure to virtual currencies.

· We continue to work with jurisdictions and relevant international bodies to address data privacy challenges through international standards, guidance, and legislation to enable effective management of financial crime risk.

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

Ibor transition

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

Following the recommendations of the Financial Stability Board, a fundamental review and reform of the major interest rates benchmarks, including Ibors, are underway across the world's largest financial markets. In some cases, the reform will include replacing interest rate benchmarks with alternative risk-free rates ('RFRs'). This replacement process is at different stages, and is progressing at different speeds, across several major currencies. There is therefore uncertainty as to the basis, method and timing of transition and their implications on the participants in the financial markets.

HSBC has identified a number of potential prudential, conduct and systemic risks associated with the transition.

Mitigating actions

· We have established a global programme across all of our global businesses to coordinate HSBC's transition activities and to assess the potential risks and impacts of any transition.

· We will continue to engage with industry participants and the official sector to support an orderly transition.

Climate-related risks

Climate change can create physical risks such as severe weather events of increasing severity and/or frequency. The move to a low-carbon economy also creates transition risks both at idiosyncratic and systemic levels, such as through policy, regulatory and technological changes. These physical and transition risks create potential financial impacts for HSBC through higher risk-weighted assets ('RWAs), greater transactional losses and increased capital requirements.

There is potential for a rapid deterioration of credit quality in sectors and/or countries most exposed to transition risks, particularly if policy changes are radical or quickly enacted. HSBC could be significantly impacted by increased credit RWAs and losses through exposure to pools of stranded assets if the Group does not adequately respond to the changing landscape.

Physical risks from natural disasters, such as floods and hurricanes, could also impact credit RWAs, while the financial losses caused by these events could impair asset values and the creditworthiness of customers.

Mitigating actions

· We are increasingly incorporating climate-related risk, both physical and transition, into how we manage and oversee risks internally and with our customers.

· A programme of work to measure and monitor the transition risk of our portfolio is underway. This includes identifying those customers that need to adapt most rapidly to a transition to a low-carbon economy and integrating climate change risk considerations into credit risk analysis, decision making and credit policies.

· We have a number of sustainability risk policies covering sectors that have particular risks and/or public exposure. In 2018, we updated our energy policy to limit the financing of high-carbon intensity energy projects, while still supporting energy customers on their transition to a low-carbon economy.

· We continue to expand our thinking with regards to stress testing of climate risks. Over time, we will articulate narratives for a baseline and a number of alternative scenarios, as well as undertake portfolio-specific sensitivity tests. We expect to learn more about the impacts of climate risk as scenario analysis and stress testing evolves.

· Our enterprise risk management framework continues to be enhanced to develop and embed the measurement, monitoring and management of climate-related risks.

We continue to invest in the reliability and resilience of our IT systems and critical services. We do so to help prevent disruption to customer services, which could result in reputational and regulatory damage.

Mitigating actions

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

· We continue to upgrade our IT systems, simplify our service provision and replace older IT infrastructure and applications. Enhancements have led to continued global improvements in service availability for both our customers and employees.

Risks associated with workforce capability, capacity and environmental factors with potential impact on growth

Our success in delivering our strategic priorities, as well as proactively managing the regulatory environment, depends on the development and retention of our leadership and high-performing employees. The ability to continue to attract, train, motivate and retain highly qualified professionals in an employment market where expertise is often mobile and in short supply is critical, particularly as our business lines execute their strategic business outlooks. This may be affected by external and environmental factors, such as the UK's exit from the EU, changes to immigration policies and regulations and tax reforms in key markets that require active responses. Although potential people impacts related to the UK's exit from the EU have not yet materialised, we continue to monitor retention trends and the recruitment of key roles.

Mitigating actions

· HSBC University is focused on developing opportunities and tools for current and future skills, personal skills and leaders to create an environment for success.

· We continue to develop succession plans for key management roles, with actions agreed and reviewed on a regular basis by the Group Management Board.

· We actively respond to immigration changes through the global immigration programme. Other political and regulatory challenges are being closely monitored to minimise the impact on the attraction and retention of talent and key performers.

· HSBC is building the healthiest human system where colleagues can thrive. A number of initiatives have been launched to improve our ways of working and encourage an open and positive culture (e.g. simplifying processes and governance, and adopting new behaviours). We also promote a diverse and inclusive workforce and provide active support across a wide range of health and well-being activities.

Risks arising from the receipt of services from third parties

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

Mitigating actions

Areas of special interest

During 2018, a number of areas have been identified and considered as part of our top and emerging risks because of the effect they may have on the

Process of UK withdrawal from the European Union

The UK is due to formally leave the EU in March 2019. Before then, the UK and the EU have to finalise the Article 50 Withdrawal Agreement, which will need to be approved by their respective parliaments. A comprehensive trade deal will not be concluded within this time frame. A period of transition until

·
We continued to embed our delivery model in the first line of defence through a dedicated team. Processes, controls and technology to assess third-party service providers against key criteria and associated control monitoring, testing and assurance have been deployed.

· A dedicated oversight forum in the second line of defence monitors the embedding of policy requirements and performance against risk appetite. In the fourth quarter of 2018, regional second line of defence oversight capabilities were established in the major markets.

Enhanced model risk management expectations

We use models for a range of purposes in managing our business, including regulatory capital calculations, stress testing, credit approvals, financial crime risk management and financial reporting. Internal and external factors have had a significant impact on our approach to model risk management. Moreover, the adoption of more sophisticated modelling techniques and technology across the industry could also lead to increased model risk.

Mitigating actions

· We established a model risk management sub-function in the second line of defence to strengthen governance and oversight of this risk type.

· We further strengthened model oversight by reconfiguring the Global Model Oversight Committee, which is chaired by the Group Chief Risk Officer and attended by CEOs of the global businesses.

· We incorporated model risk-specific metrics within the Group risk appetite statement as part of the embedding of model risk as a risk discipline.

· We enhanced our model risk governance framework while partnering with the business to help enable more effective management of model risk in a commercial context. As we adopt new modelling technologies, we are updating our model risk management framework and governance standards to help drive the evolution of the overall governance framework to ensure best practice.

· We are refreshing the existing model risk controls to enable better understanding of control objectives and to provide the modelling areas with implementation guidance to enhance effectiveness.

Data management

The Group uses a large number of systems and applications to support key business processes and operations. As a result, we often need to reconcile multiple data sources, including customer data sources, to reduce the risk of error. HSBC, along with other organisations, also needs to meet external/regulatory obligations such as the General Data Protection Regulation ('GDPR'), which requires implementation of data privacy and protection capabilities across our customer data systems.

Mitigating actions

· We continue to improve data quality across a large number of systems globally. Our data management, aggregation and oversight continues to strengthen and enhance the effectiveness of internal systems and processes. We are implementing data controls for critical processes in the front-office systems to improve our data capture at the point of entry. We have achieved our objectives of meeting a 'largely compliant' rating in support of the Basel Committee for Banking Supervision (BCBS 239) principles.

· Through our global data management framework, we have commenced embedding governance processes to monitor proactively the quality of critical customer, product and transaction data and resolving associated data issues in a timely manner. We continue to implement controls to improve the reliability of data used by our customers and staff.

· We are leveraging our investment in the GDPR initiative to roll out and implement a global and consistent data privacy framework.

Group. We have placed particular focus on the UK withdrawal from the European Union ('EU') in this section.

31 December 2020 has been agreed between the UK and the EU. However, there will be no legal certainty until this is enshrined in the Withdrawal Agreement. To ensure continuity of service, independent of the outcome of negotiations, our contingency plan is based on the assumption of a scenario whereby the UK exits the EU without the existing passporting or regulatory equivalence framework that supports cross-border business.

Our programme to manage the impact of the UK leaving the EU was set up in 2017 and now has in excess of 1,000 employees covering all businesses and functions. It focuses on four main components: legal entity restructuring; product offering; customer migrations; and employees.

Legal entity restructuring

The Group currently has branches in seven European Economic Area ('EEA') countries (Belgium, the Netherlands, Luxembourg, Spain, Italy, Ireland and Czech Republic), which rely on passporting out of the UK. Assuming a UK departure from the EU without the existing passporting or regulatory equivalence framework that supports cross-border business, this will no longer be possible. As a result, we have now completed the establishment of new branches of HSBC France ('HBFR'), our primary banking entity authorised in the EU, after receiving regulatory approval in 2018. We are on track to complete the business transfer in the first quarter of 2019, and are making good progress on the operational integration of our EEA branch network into HBFR.

Product offering

To accommodate for customer migrations and new business after the UK's departure from the EU, we are expanding and enhancing our existing product offering in France, the Netherlands and Ireland. HBFR's euro clearing capabilities are now available and further product launches are planned during the first quarter of 2019.

Customer migrations

The UK's departure from the EU is likely to have an impact on our clients' operating models, including their working capital requirements, investment decisions and financial markets infrastructure access. Our priority is to provide continuity of service, and while our intention is to minimise the level of change for our customers, we will be required to migrate some EEA-incorporated clients from the UK to HBFR, or another EEA entity. We are in active dialogue with affected clients to make the transition as smooth as possible. We are organising client events and communications to provide clients with a better understanding of these implications.

Employees

The migration of EEA-incorporated clients will require us to strengthen our local teams in the EU, and France in particular. We expect the majority of roles to be filled through hires and we have started a recruitment process. Throughout, our objective is to minimise the level of change for our people and ensure any transition is as smooth as possible.

Given the scale and capabilities of our existing business in France, we are well prepared to take on additional roles and activities.

Looking beyond the transfer of roles to the EU, we are also providing support to our UK employees resident in EEA countries and EEA employees resident in the UK (e.g. on settlement applications).

Nevertheless, London will continue to be an important global financial centre and the best location for our global headquarters. As at 31 December 2018, HSBC employed approximately 39,000 people in the UK.

Across the programme, we have made good progress in terms of ensuring we are prepared for the UK leaving the EU in the first quarter of 2019 under the terms described above. However, there remain execution risks, many of them linked to the uncertain outcome of negotiations and potentially tight timelines to implement significant changes to our UK and European operating models. If these risks materialise, HSBC's clients and employees are likely to be affected. The exact impact on our clients will depend on their individual circumstances and, in a worst case scenario, could include disruption to the provision of products and services.

We have carried out detailed reviews of our credit portfolios to determine those sectors and customers most vulnerable to the UK's exit from the EU. For further details, please see 'Impact of UK economic uncertainty on ECL' on page 98.

Risk culture refers to HSBC's norms, attitudes and behaviours related to risk awareness, risk taking and risk management.

HSBC has long recognised the importance of a strong risk culture, the fostering of which is a key responsibility of senior executives. Our risk culture is reinforced by the HSBC Values and our Global Standards programme. It is instrumental in aligning the behaviours of individuals with our attitude to assuming and managing risk, which helps to ensure that our risk profile remains in line with our risk appetite.

We use clear and consistent employee communication on risk to convey strategic messages and to set the tone from senior management and the Board. We also deploy mandatory training on risk and compliance topics to embed skills and understanding in order to strengthen our risk culture and reinforce the attitude to risk in the behaviour expected of employees, as described in our risk policies.

We operate a global whistleblowing platform, HSBC Confidential, allowing staff to report matters of concern confidentially. We also maintain an external email address for concerns about accounting and internal financial controls or auditing matters ([email protected]). The Group has a strict policy prohibiting retaliation against those who raise their concerns. All allegations of retaliation reported are escalated to senior management. For further details on whistleblowing, see page 25. For details on the governance of our whistleblowing procedures, see page 158.

Our risk culture is also reinforced by our approach to remuneration. Individual awards, including those for senior executives, are based on compliance with the HSBC Values and the achievement of financial and non-financial objectives, which are aligned to our risk appetite and global strategy.

For further information on remuneration, see the Directors' remuneration report on page 172.

Risk governance

The Board has ultimate responsibility for the effective management of risk and approves HSBC's risk appetite. It is advised on risk-related matters by the Group Risk Committee ('GRC') and the Financial System Vulnerabilities Committee ('FSVC').

Executive accountability for the ongoing monitoring, assessment and management of the risk environment and the effectiveness of the risk management framework resides with the Group Chief Risk Officer. He is supported by the Risk Management Meeting of the Group Management Board ('RMM').

The management of financial crime risk resides with the Group Chief Compliance Officer. He is supported by the Financial Crime Risk Management Meeting, as described under 'Financial crime risk management' on page 85.

Day-to-day responsibility for risk management is delegated to senior managers with individual accountability for decision making. All employees have a role to play in risk management. These roles are defined using the three lines of defence model, which takes into account the Group's business and functional structures as described in the following commentary, under 'Our responsibilities'.

We use a defined executive risk governance structure to help ensure appropriate oversight and accountability of risk, which facilitates reporting and escalation to the RMM. This structure is summarised in the following table.

Governance structure for the management of risk


Risk Management Meeting of the Group Management Board	Group Chief Risk Officer Chief Legal Officer Group Chief Executive Group Chief Financial Officer All other Group Managing Directors	• • •	Supporting the Group Chief Risk Officer in exercising Board-delegated risk management authority Overseeing the implementation of risk appetite and the enterprise risk management framework Forward-looking assessment of the risk environment, analysing possible risk impacts and taking appropriate action
		•	Monitoring all categories of risk and determining appropriate mitigating action
		•	Promoting a supportive Group culture in relation to risk management and conduct
Global Risk Management Board	Group Chief Risk Officer Chief Risk Officers of HSBC's	•	Supporting the Group Chief Risk Officer in providing strategic direction for the Global Risk function, setting priorities and providing oversight
	global businesses and regions	•	Overseeing a consistent approach to accountability for, and mitigation of, risk across the
	Heads of Global Risk sub-functions		Global Risk function
Global business/regional risk	Global business/regional Chief Risk Officer	•	Supporting the Chief Risk Officer in exercising Board-delegated risk management authority
management meetings	Global business/regional Chief Executive Global business/regional Chief Financial	•	Forward-looking assessment of the risk environment, analysing the possible risk impact and taking appropriate action
	Officer	•	Implementation of risk appetite and the enterprise risk management framework
	Global business/regional heads of global	•	Monitoring all categories of risk and determining appropriate mitigating actions
	functions	•	Embedding a supportive culture in relation to risk management and controls

The Board committees with responsibility for oversight of risk-related matters are set out on page 158.

Our responsibilities

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

Three lines of defence

To create a robust control environment to manage risks, we use an activity-based three lines of defence model. This model delineates management accountabilities and responsibilities for risk management and the control environment.

The model underpins our approach to risk management by clarifying responsibility, encouraging collaboration, and enabling efficient coordination of risk and control activities. The three lines of defence are summarised below:

· The first line of defence owns the risks and is responsible for identifying, recording, reporting and managing them, and ensuring that the right controls and assessments are in place to mitigate them.

· The second line of defence sets the policy and guidelines for managing specific risk areas, provides advice and guidance in relation to the risk, and challenges the first line of defence on effective risk management.

· The third line of defence is our Internal Audit function, which provides independent and objective assurance of the adequacy of the design and operational effectiveness of the Group's risk management framework and control governance process.

Global Risk function

We have a Global Risk function, headed by the Group Chief Risk Officer, which is responsible for the Group's risk management framework. This responsibility includes establishing global policy, monitoring risk profiles, and forward-looking risk identification and management. Global Risk is made up of sub-functions covering all risks to our operations. Global Risk forms part of the second line of defence. It is independent from the global businesses, including sales and trading functions, to provide challenge, appropriate oversight and balance in risk/return decisions.

Enterprise-wide risk management tools

The Group uses a range of tools to identify, monitor and manage risk. The key enterprise-wide risk management tools are as follows:

Risk appetite

The risk appetite statement ('RAS') sets out the aggregate level and types of risk that HSBC is willing to accept to achieve its business objectives. It provides a benchmark for business decisions that are based on balancing risk and return, and making the best use of our capital. The Group RAS is interlinked with the Group's strategic and financial plans, as well as remuneration, and is therefore forward-looking in describing the Group's desired risk appetite profile. The RAS consists of qualitative statements and quantitative metrics, covering financial and non-financial risks and is formally approved by the Board every six months on the recommendation of

the GRC. It is fundamental to the development of business line strategies, strategic and business planning, and senior management balanced scorecards.

At a Group level, performance against the RAS is reported to the GRMM on a monthly basis so that any actual performance that falls outside the approved risk appetite is discussed and appropriate mitigating actions are determined. This reporting allows risks to be promptly identified and mitigated, and informs risk-adjusted remuneration to drive a strong risk culture.

Global businesses, regions and strategically important countries are required to have their own RASs, which are monitored to ensure they remain aligned with the Group's. All RASs and business activities are guided and underpinned by qualitative principles. Additionally, for key risk areas, quantitative metrics are defined along with appetite and tolerance thresholds.

Risk map

The Group risk map provides a point-in-time view of the risk profiles of countries, regions and global businesses across HSBC's risk taxonomy. It assesses the potential for these risks to have a material impact on the Group's financial results, reputation and the sustainability of its business. Risks that have an 'amber' or 'red' risk rating require monitoring and mitigating action plans to be either in place or initiated to manage the risk down to acceptable levels.

Descriptions of our material banking and insurance risks are set out on page 77.

Top and emerging risks

We use a top and emerging risks process to provide a forward-looking view of issues with the potential to threaten the execution of our strategy or operations over the medium to long term.

We proactively assess the internal and external risk environment, as well as review the themes identified across our regions and global businesses, for any risks that may require global escalation, updating our top and emerging risks as necessary.

We define a 'top risk' as a thematic issue that may form and crystallise in between six months and one year, and that has the potential to materially affect the Group's financial results, reputation or business model. It may arise across any combination of risk types, regions or global businesses. The impact may be well

understood by senior management and some mitigating actions may already be in place. Stress tests of varying granularity may also have been carried out to assess the impact.

An 'emerging risk' is a thematic issue with large unknown components that may form and crystallise beyond a one-year time horizon. If it were to materialise, it could have a material effect on the Group's long-term strategy,

Stress testing

HSBC operates a wide-ranging stress testing programme that supports our risk management and capital planning. It includes execution of stress tests mandated by our regulators. Our stress testing is supported by dedicated teams and infrastructure, and is overseen at the most senior levels of the Group.

Our stress testing programme assesses our capital strength through a rigorous examination of our resilience to external shocks. It also helps us understand and mitigate risks and informs our decisions about capital levels. As well as undertaking regulatory-driven stress tests, we conduct our own internal stress tests.

Many of our regulators - including the Bank of England ('BoE'), the Federal Reserve Board ('FRB') and the Hong Kong Monetary Authority ('HKMA') - use stress testing as a prudential regulatory tool, and the Group has focused significant governance and resources to meet their requirements.

Bank of England stress test results for 2018

The annual cyclical scenario ('ACS') used in the BoE's 2018 stress test was the same as that used in 2017 to allow the BoE to isolate the impact on the stress results of the introduction of IFRS 9 in 2018. The scenario specified a global downturn with severe effects in the UK, US, Hong Kong and mainland China, which accounted for approximately two-thirds of HSBC's RWAs at the end of 2017. We estimated that the economic shock to global GDP in this scenario was about as severe as in the global financial crisis of 2007-2009, but with a greater impact on emerging markets. In this scenario for example, there was a 1.2% contraction in the Chinese economy in the first year. In addition, the ACS featured a 32% depreciation of sterling in the first year and a rise of UK base rates to 4%.

The assumed GDP growth rates are detailed in the following table.


	2017 %
UK	1.6
US	2.5
Mainland China	6.8
Hong Kong	3.3

Source: Bank of England.

PRA assumed GDP growth rates are shown in terms of fourth quarter on fourth quarter annual

changes

In 2018, the results for HSBC as published by the BoE showed that our capital ratios, after taking account of CRD IV restrictions and strategic management actions, exceeded the BoE's requirements on both an IFRS 9 transitional and non-transitional basis.

This outcome reflected our strong capital position, conservative risk appetite and diversified geographical and business mix.

profitability and/or reputation. Existing mitigation plans are likely to be minimal, reflecting the uncertain nature of these risks at this stage. Some high-level analysis and/or stress testing may have been carried out to assess the potential impact.

Our current top and emerging risks are discussed on page 69.

The following table shows the results of the stress test for the past three years, and reflects HSBC's resilience. From a starting CET1 ratio of 14.6% at the end of 2017, the BoE's 2018 stress test results showed a projected minimum stressed CET1 ratio of 9.1% on an IFRS 9 transitional basis, after the impact of strategic management actions.

Results of Bank of England stress tests for the past three years

2017 2016

% %

CET1 ratio at scenario start point

Minimum stressed CET1 ratio after strategic management actions

Fall in CET1 ratio

Source: Bank of England.

Data is presented in terms of the minimum CET1 ratio on an IFRS 9 transitional basis, reached

net of strategic management actions.

Internal stress tests are an important element in our risk management and capital management frameworks. Our capital plan is assessed through a range of stress scenarios that explore risks identified by management. They include potential adverse macroeconomic, geopolitical and operational risk events, and other potential events that are specific to HSBC. The selection of scenarios reflects our top and emerging risks identification process and our risk appetite. Stress testing analysis helps management understand the nature and extent of vulnerabilities to which the Group is exposed. Using this information, management decides whether risks can or should be mitigated through management actions or, if they were to crystallise, should be absorbed through capital. This in turn informs decisions about preferred capital levels.

A particular area of focus during the year has been the analysis of the potential impact of a range of outcomes relating to the UK's exit from the EU. As part of our internal stress testing programme, a number of internal macroeconomic and event-driven scenarios were considered to support management's planning for, and assessment of, the impact of the UK's exit. In addition, the BoE judged the severity of the 2018 ACS sufficient to encompass outcomes based on a disorderly departure from the EU.

We conduct reverse stress tests each year at Group and, where required, subsidiary entity level in order to understand which potential extreme conditions would make our business model non-viable. Reverse stress testing identifies potential stresses and vulnerabilities we might face, and helps inform early warning triggers, management actions and contingency plans designed to mitigate risks.

In addition to the Group-wide stress testing scenarios, each major HSBC subsidiary conducts regular macroeconomic and event-driven scenario analyses specific to its region. They also participate, as required, in the regulatory stress testing programmes of the jurisdictions in which they operate, such as the Comprehensive Capital Analysis and Review and Dodd-Frank Act stress test programmes in the US, and the stress tests of the HKMA. Global functions and businesses also perform bespoke stress testing to inform their assessment of risks in potential scenarios.

The Group stress testing programme is overseen by the GRC and results are reported, where appropriate, to the RMM and GRC.

Our material banking and insurance risks

The material risk types associated with our banking and insurance manufacturing operations are described in the following tables:

Description of risks - banking operations

Credit risk (see page 79)

Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract.

Credit risk arises principally from direct lending, trade finance and leasing business, but also from certain other products such as guarantees and derivatives.

Credit risk is:

· measured as the amount that could be lost if a customer or counterparty fails to make repayments;

· monitored using various internal risk management measures and within limits approved by individuals within a framework of delegated authorities; and

· managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance for risk managers.

Liquidity and funding risk (see page 80) Liquidity risk is the risk that we do not have sufficient financial resources to meet our obligations as they fall due or that we can only do so at an excessive cost. Funding risk is the risk that funding considered to be sustainable, and therefore used to fund assets, is not sustainable over time.		Liquidity risk arises from mismatches in the timing of cash flows. Funding risk arises when illiquid asset positions cannot be funded at the expected terms and when required.		Liquidity and funding risk is: · measured using a range of metrics, including liquidity coverage ratio and net stable funding ratio; · assessed through the internal liquidity adequacy assessment process ('ILAAP'); · monitored against the Group's liquidity and funding risk framework; and · managed on a stand-alone basis with no reliance on any Group entity (unless pre-committed) or central bank unless this represents routine established business-as-usual market practice.
Market risk (see page 81) Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices, will reduce our income or the value of our portfolios.			Exposure to market risk is separated into two portfolios: trading and non-trading. Market risk exposures arising from our insurance operations are discussed on page 145.		Market risk is: · measured using sensitivities, value at risk ('VaR') and stress testing, giving a detailed picture of potential gains and losses for a range of market movements and scenarios, as well as tail risks over specified time horizons; · monitored using VaR, stress testing and other measures, including the sensitivity of net interest income and the sensitivity of structural foreign exchange; and · managed using risk limits approved by the RMM and the risk management meeting in various global businesses.
Operational risk (see page 84) Operational risk is the risk to achieving our strategy or objectives as a result of inadequate or failed internal processes, people and systems or from external events.	Operational risk arises from day-to-day operations or external events, and is relevant to every aspect of our business. Regulatory compliance risk and financial crime compliance risk are discussed below.					Operational risk is: · measured using the risk and control assessment process, which assesses the level of risk and the effectiveness of controls, and is also measured for economic capital management using risk event losses and scenario analysis; · monitored using key indicators and other internal control activities; and · managed primarily by global business and functional managers who identify and assess risks, implement controls to manage them and monitor the effectiveness of these controls using the operational risk management framework.

Regulatory compliance risk (see page 84) Regulatory compliance risk is the risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice, and incur fines and penalties and suffer damage to our business as a consequence.

Regulatory compliance risk is part of operational risk, and arises from the risks associated with breaching our duty to clients and other

counterpa rties, inappropriate market conduct and breaching other regulatory requirements.

Regulatory compliance risk is:

· measured by reference to identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our regulatory compliance teams;

· monitored against the first line of defence risk and control assessments, the results of the monitoring and control assurance activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and

· managed by establishing and communicating appropriate policies and procedures, training employees in them, and monitoring activity to help ensure their observance. Proactive risk control and/or remediation work is undertaken where required.

Financial crime risk (see page 85) Financial crime risk is the risk that we knowingly or unknowingly help parties to commit or to further potentially illegal activity through HSBC.

Financial crime risk is part of operational risk and arises from day-to-day banking operations.

Financial crime risk is:

· measured by reference to identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our financial crime risk teams;

· monitored against our financial crime risk appetite statements and metrics, the results of the monitoring and control activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and

Description of risks - banking operations (continued)

Other material risks

Reputational risk (see page 86)

HSBC Holdings plc Annual Report and Accounts 2018 77

Prior to the implementation of IFRS 9, the Risk function had pre-existing Basel and behavioural scorecards in most geographies. These were then enhanced or supplemented to address the IFRS 9 requirements, with the appropriate governance and independent review.

Implementation

A centralised impairment engine performs the expected credit loss ('ECL') calculation using data, which is subject to a number of validation checks and enhancements, from a variety of client, finance and risk systems. Where possible, these checks and processes are performed in a globally consistent and centralised manner.

Governance

A series of regional management review forums has been established in key sites and regions in order to review and approve the impairment results. Regional management review forums have representatives from Credit Risk and Finance. The key site and regional approvals are reported up to the global business impairment committee for final approval of the Group's ECL for the period. Required members of the committee are the global heads of Wholesale Credit, Market Risk, and Retail Banking and Wealth Management ('RBWM') Risk, as well as the global business CFOs and the Group Chief Accounting Officer.

Credit risk sub-function

(Audited)

Credit approval authorities are delegated by the Board to the Group Chief Executive together with the authority to sub-delegate them. The Credit Risk sub-function in Global Risk is responsible for the key policies and processes for managing credit risk, which include formulating Group credit policies and risk rating frameworks, guiding the Group's appetite for credit risk exposures, undertaking independent reviews and objective assessment of credit risk, and monitoring performance and management of portfolios.

The principal objectives of our credit risk management are:

· to maintain across HSBC a strong culture of responsible lending, and robust risk policies and control frameworks;

· to both partner and challenge our businesses in defining, implementing and continually re-evaluating our risk appetite under actual and scenario conditions; and

· to ensure there is independent, expert scrutiny of credit risks, their costs and their mitigation.

Concentration of exposure

(Audited)

Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic characteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas or industry sectors so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. We use a number of controls and measures to minimise undue concentration of exposure in our portfolios across industries, countries and global businesses. These include portfolio and counterparty limits, approval and review controls, and stress testing.

Credit quality of financial instruments

(Audited)

Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the Group to support the calculation of our minimum credit regulatory capital requirement.

The five credit quality classifications each encompass a range of granular internal credit rating grades assigned to wholesale and retail lending businesses, and the external ratings attributed by external agencies to debt securities.

For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications based upon the mapping of related customer risk rating ('CRR') to external credit rating.

Wholesale lending

The CRR 10-grade scale summarises a more granular underlying 23-grade scale of obligor probability of default ('PD'). All corporate customers are rated using the 10- or 23-grade scale, depending on the degree of sophistication of the Basel approach adopted for the exposure.

Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by the average of issuer-weighted historical default rates. This mapping between internal and external ratings is indicative and may vary over time.

Retail lending

Previously, we disclosed retail lending credit quality under IAS 39, which was based on expected-loss percentages. Now, retail lending credit quality is disclosed on an IFRS 9 basis, which is based on a 12-month point-in-time ('PIT') probability-weighted probability of default ('PD').

Quality classification
Strong	1,2	BBB and above A- and above	CRR 1 to CRR 2	0 - 0.169	Band 1 and 2	0.000 - 0.500
Good		BBB- to BB BBB+ to BBB-	CRR 3	0.170 - 0.740	Band 3	0.501 - 1.500
Satisfactory		BB- to B and unrated BB+ to B and unrated	CRR 4 to CRR 5	0.741 - 4.914	Band 4 and 5	1.501 - 20.000
Sub-standard		B- to C B- to C	CRR 6 to CRR 8	4.915 - 99.999	Band 6	20.001 - 99.999
Credit impaired		Default Default	CRR 9 to CRR 10	100	Band 7	100

For footnotes, see page 147.

Quality classification definitions

· 'Strong' exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of expected loss.

· 'Good' exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk.

· 'Satisfactory' exposures require closer monitoring and demonstrate an average-to-fair capacity to meet financial commitments, with moderate default risk.

· 'Sub-standard' exposures require varying degrees of special attention and default risk is of greater concern.

· 'Credit-impaired' exposures have been assessed as described on Note 1.2(d) on the Financial Statements.

Renegotiated loans and forbearance
(Audited)

'Forbearance' describes concessions made on the contractual terms of a loan in response to an obligor's financial difficulties.

A loan is classed as 'renegotiated' when we modify the contractual payment terms on concessionary terms because we have significant concerns about the borrowers' ability to meet contractual payments when due.

Non-payment-related concessions (e.g. covenant waivers), while potential indicators of impairment, do not trigger identification as renegotiated loans.

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

For details of our policy on derecognised renegotiated loans, see Note 1.2(d) on the Financial Statements.

Credit quality of renegotiated loans

On execution of a renegotiation, the loan will also be classified as credit impaired if it is not already so classified. In wholesale lending, all facilities with a customer, including loans that have not been modified, are considered credit impaired following the identification of a renegotiated loan.

Those loans that are considered credit impaired retain this classification for a minimum of one year. Renegotiated loans will continue to be disclosed as credit impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows (the evidence typically comprises a history of payment performance against the original or revised terms), and there is no other objective evidence of credit impairments. For retail lending generally, renegotiated loans retain this classification until maturity or write-off.

Renegotiated loans and recognition of expected credit losses (Audited)

For retail lending, unsecured renegotiated loans are generally segmented from other parts of the loan portfolio. Renegotiated expected credit loss assessments reflect the higher rates of losses typically encountered with renegotiated loans. For wholesale lending, renegotiated loans are typically assessed individually. Credit risk ratings are intrinsic to the impairment assessments. The individual impairment assessment takes into account the higher risk of the future non-payment inherent in renegotiated loans.

Liquidity and funding risk management

Details of HSBC's liquidity and funding risk management framework ('LFRF') can be found in the Group's Pillar 3 Disclosures at 31 December 2018.

Liquidity and funding risk management framework

Impairment assessment
(Audited)

For details of our impairment policies on loans and advances and financial investments, see Note 1.2(d) on the Financial Statements.

Write-off of loans and advances
(Audited)

For details of our policy on the write-off of loans and advances, see Note 1.2(d) on the Financial Statements.

Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due. The standard period runs until the end of the month in which the account becomes 180 days contractually delinquent. Write-off periods may be extended, generally to no more than 360 days past due. However, in exceptional circumstances, they may be extended further.

For secured facilities, write-off should occur upon repossession of collateral, receipt of proceeds via settlement, or determination that recovery of the collateral will not be pursued.

Any secured assets maintained on the balance sheet beyond 60 months of consecutive delinquency-driven default require additional monitoring and review to assess the prospect of recovery.

There are exceptions in a few countries where local regulation or legislation constrain earlier write-off, or where the realisation of collateral for secured real estate lending takes more time. In the event of bankruptcy or analogous proceedings, write-off may occur earlier than the maximum periods stated above. Collection procedures may continue after write-off.

The LFRF aims to allow us to withstand very severe liquidity stresses. It is designed to be adaptable to changing business models, markets and regulations. The Group Treasurer, who reports to the Group Chief Financial Officer, has responsibility for the oversight of the LFRF. Asset, Liability and Capital Management ('ALCM') teams are responsible for the application of the LFRF at a local operating entity level. This comprises the following elements:

· stand-alone management of liquidity and funding by operating entity;

· minimum liquidity coverage ratio ('LCR') requirement;

· minimum net stable funding ratio ('NSFR') requirement;

· legal entity depositor concentration limit;

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

· annual individual liquidity adequacy assessment by principal operating entity;

· minimum LCR requirement by currency;

· management and monitoring of intra-day liquidity;

· liquidity funds transfer pricing; and

· forward-looking funding assessments.
Risk governance and oversight

The elements of the LFRF are underpinned by a robust governance framework, the two major elements of which are:

· Group, regional and entity level Asset and Liability Management Committees ('ALCOs').

· Annual internal liquidity adequacy assessment process ('ILAAP') for principal operating entities used to validate risk tolerance and set risk appetite.

Liquidity and funding are predominantly managed at an entity level. Where appropriate, management may be expanded to cover a consolidated group of legal entities or narrowed to a principal office (branch) of a wider legal entity to reflect the management under internal or regulatory definitions.

The RMM reviews and agrees annually the list of countries, legal entities or consolidated groups it directly oversees and the composition of these entities. This list forms the basis of liquidity and funding risk disclosures.

There were no material changes to the policies and practices for the management of liquidity and funding risk in 2018.

HSBC Holdings

HSBC Holdings' primary sources of liquidity are dividends received from subsidiaries, interest on and repayment of intra-Group loans and securities, and interest earned on its own liquid funds. HSBC Holdings also raises funds in the debt capital markets to meet the Group's minimum requirement for own funds and eligible liabilities. HSBC Holdings uses this liquidity to meet its obligations, including interest and principal repayments on external debt liabilities, operating expenses and collateral on derivative transactions.

HSBC Holdings is also subject to contingent liquidity risk by virtue of credit-related commitments and guarantees and similar contracts issued relating to its subsidiaries. Such commitments and guarantees are only issued after due consideration of HSBC Holdings' ability to finance the commitments and guarantees and the likelihood of the need arising.

HSBC Holdings actively manages the cash flows from its subsidiaries to optimise the amount of cash held at the holding company level. During 2018, consistent with the Group's capital plan, the Group's subsidiaries did not experience any significant restrictions on paying dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged with regard to planned dividends or payments. However, the ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial and operating performance.

HSBC Holdings currently has sufficient liquidity to meet its present requirements.

Market risk management

Details of changes in our market risk profile in 2018 can be found on page 88, in 'Key developments and risk profile in 2018'.

There were no material changes to our policies and practices for the management of market risk in 2018.

Market risk in global businesses

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

· Structural foreign exchange

· Interest rates³

· Credit spreads

		GB&M and BSM⁴		GB&M, BSM⁴, GPB, CMB and RBWM

		VaR \| Sensitivity \| Stress testing		VaR \| Sensitivity \| Stress testing

For footnotes, see page 147.

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.

The nature of the hedging and risk mitigation strategies performed across the Group corresponds to the market risk management instruments available within each operating jurisdiction. These strategies range from the use of traditional market instruments, such as interest rate swaps, to more sophisticated hedging strategies to address a combination of risk factors arising at the portfolio level.

HSBC Holdings plc Annual Report and Accounts 2018 81

Market risk measures

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, such as the effect of a one basis point change in yield. We use sensitivity measures to monitor the market risk positions within each risk type. Sensitivity limits are set for portfolios, products and risk types, with the depth of the market being a principal factor in determining the level.

Value at risk

(Audited)

Value at risk ('VaR') is a technique for estimating potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and calculated for all trading positions regardless of how we capitalise them. Where there is not an approved internal model, we use the appropriate local rules to capitalise exposures. 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 utilised for VaR, which are calculated with reference to data from the past two years; and

· VaR measures, which are calculated to a 99% confidence level and use 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 should always be viewed in the context of its limitations. For example:

· Use of historical data as a proxy for estimating future events may not encompass all potential events, particularly extreme ones.

· The use of a holding period assumes that all positions can be liquidated or the risks offset during that period, which may not fully reflect the market risk arising at times of severe illiquidity, when the holding period may be insufficient to liquidate or hedge all positions fully.

· The use of a 99% confidence level 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 necessarily reflect intra-day exposures.

Risk not in VaR framework

The risks not in VaR ('RNIV') framework aims to capture and capitalise 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 the VaR-based RNIV approach or a stress test approach within the RNIV framework. 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, a stressed VaR RNIV is computed for the risk factors considered in the VaR-based RNIV approach.

Stress-type RNIVs include a gap risk exposure measure, to capture risk on non-recourse margin loans, 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. Scenarios are tailored to capture the relevant potential events or market movements at each level. The risk appetite around potential stress losses for the Group is set and monitored against referral limits.

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.

Stressed VaR and stress testing, together with reverse stress testing and the management of gap risk, provide management with insights regarding the 'tail risk' beyond VaR, for which HSBC's appetite is limited.

Trading portfolios
Back-testing

Structural foreign exchange exposures

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

Exchange differences on structural exposures are recognised in 'Other comprehensive income'. 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. Our consolidated balance sheet is, therefore, affected by

Interest rate risk in the banking book
Overview

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 that are held in order to hedge positions held with trading intent. This risk is monitored and controlled by the ALCM function. Interest rate risk in the banking book is transferred to and managed by Balance Sheet Management ('BSM'), and also monitored by Wholesale Market Risk, Product Control and ALCM functions with reference to established risk appetites.

Governance and structure

The ALCM function monitors and controls non-traded interest rate risk. This includes reviewing and challenging the business prior to the release of new

Measurement of interest rate risk in the banking book

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

· non-traded VaR;

· net interest income sensitivity; and

· economic value of equity ('EVE').
Non-traded VaR

Non-traded VaR uses the same models as those used in the trading book and excludes both HSBC Holdings and the elements of risk that are not transferred to BSM.

NII sensitivity

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

Projected net interest income 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 BSM or in the business units to mitigate the effect of interest rate movements.

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

We would expect, on average, to see two or three profits and two or three losses in excess of VaR at the 99% confidence level over a one-year period. The actual number of profits or losses in excess of VaR over this period can therefore be used to gauge how well the models are performing.

We back-test our VaR at various levels of our Group entity hierarchy. exchange differences between the US dollar and all the non-US dollar functional currencies of underlying subsidiaries.

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

For further details of our structural foreign exchange exposures, please see page 139.

products and in respect of proposed behavioural assumptions used for hedging activities. The ALCM function is also responsible for maintaining and updating the transfer pricing framework, informing the ALCO of the Group's overall banking book interest rate risk exposure and managing the balance sheet in conjunction with BSM.

BSM manages the banking book interest rate positions transferred to it within the market risk limits approved by RMM. Effective governance of BSM is supported by the dual reporting lines it has to the Chief Executive Officer of GB&M and to the Group Treasurer, with Risk acting as a second line of defence. The global businesses can only transfer non-trading assets and liabilities to BSM provided BSM can economically hedge the risk it receives. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that BSM cannot economically hedge is not transferred and will remain within the global business where the risks originate.

result in non-parallel shock. In addition, the net interest income sensitivity calculations take account of the effect of anticipated differences in changes between interbank and internally determined interest rates, where the entity has discretion in terms of the timing and extent of rate changes.

Tables showing our calculations of net interest income sensitivity can be found on page 139.

Economic value of equity

Economic value of equity ('EVE') represents the present value of the future banking book cash flows that could be distributed to equity providers under a managed run-off scenario. This equates to the current book value of equity plus the present value of future net interest income in this scenario. EVE can be used to assess the economic capital required to support interest rate risk in the banking book ('IRRBB'). An EVE sensitivity is the extent to which

the EVE value will change due to a pre-specified movements in interest rates, where all other economic variables are held constant. Operating

HSBC Holdings

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

Operational risk management

Details of our operational risk profile in 2018 can be found on page 142, in 'Operational risk exposures in 2018'.

Overview

The objective of our operational risk management is to manage and control operational risk in a cost-effective manner within targeted levels of operational risk consistent with our risk appetite, as defined by the GMB.

Key developments in 2018

During 2018, we continued to strengthen our approach to managing operational risk, as set out in the operational risk management framework ('ORMF'). The approach sets out the governance, appetite and provides a single view of non-financial risks that matter the most and associated controls. It incorporates a risk management system to help active risk management. The enhancement and embedding of the risk appetite framework for non-financial risk and the improvement of the consistency of the adoption of the end-to-end risk and control assessment processes were a particular focus in 2018. While there remains more to do, we made progress in strengthening the control environment and the management of non-financial risk.

Activity to strengthen the three lines of defence model continued to be a key focus in 2018. It sets our roles and responsibilities for managing operational risk on a daily basis.

Further information on the three lines of defence model can be found in the 'Our risk management framework' section on page 73.

Governance and structure

The ORMF defines minimum standards and processes, and the governance structure for the management of operational risk and internal control in our geographical regions, global businesses and global functions. The ORMF has been codified in a high-level standards manual, supplemented with detailed policies, which describes our approach to identifying, assessing, monitoring and controlling operational risk and gives guidance on mitigating action to be taken when weaknesses are identified.

We have a dedicated Global Operational Risk sub-function within our Global Risk function. It is responsible for establishing and maintaining the ORMF, monitoring the level of operational losses and the internal control

Regulatory compliance risk management
Overview

The Regulatory Compliance sub-function provides independent, objective oversight and challenge, and promotes a compliance-orientated culture that supports the business in delivering fair outcomes for customers, maintaining the integrity of financial markets and achieving HSBC's strategic objectives.

Key developments in 2018

There were no material changes to the policies and practices for the management of regulatory compliance risk in 2018, except for the following:

· The Board oversight of conduct matters was transitioned to the Group Risk Committee following the demise of the Conduct & Values Committee during the first half of 2018.

· We implemented a number of initiatives to raise our standards in relation to the conduct of our business, as described below under 'Conduct of business'.

entities are required to monitor EVE sensitivity as a percentage of capital resources.

from short-term cash balances, funding positions held, loans to subsidiaries, investments in long-term financial assets and financial liabilities including debt capital issued. The objective of HSBC Holdings' market risk management strategy is to reduce exposure to these risks and minimise volatility in capital resources, cash flows and distributable reserves. 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.

environment supported by their second line of defence functions. It supports the Group Chief Risk Officer and the Global Operational Risk Committee, which meets at least quarterly to discuss key risk issues and review implementation of the ORMF. The sub-function is also responsible for preparation of operational risk reporting at Group level, including reports for consideration by the RMM and Group Risk Committee. A formal governance structure provides oversight of the sub-function's management.

Key risk management processes

Business managers throughout the Group are responsible for maintaining an acceptable level of internal control commensurate with the scale and nature of operations, and for identifying and assessing risks, designing controls and monitoring the effectiveness of these controls. The ORMF helps managers to fulfil these responsibilities by defining a standard risk assessment methodology and providing a tool for the systematic reporting of operational loss data.

A Group-wide risk management system is used to record the results of the operational risk management process. Operational risk and control self-assessments, along with issue and action plans, are entered and maintained by business units. Business and functional management monitor the progress of documented action plans to address shortcomings. To help ensure that operational risk losses are consistently reported and monitored at Group level, all Group companies are required to report individual losses when the net loss is expected to exceed $10,000, and to aggregate all other operational risk losses under $10,000. Losses are entered into the Group-wide risk management system and reported to governance on a monthly basis.

Continuity of business operations

Every department within the organisation undertakes business continuity management, which incorporates the development of a plan including a business impact analysis assessing risk when business disruption occurs.

The Group maintains a number of dedicated work area recovery sites globally. Regular testing of these facilities is carried out with representation from each business and support function, to ensure business continuity plans remain accurate, relevant and fit for purpose. Where possible, the Group has ensured that its critical business systems are not co-located with business system users, thereby reducing concentration risk.

· The reporting line of the Global Head of Regulatory Compliance was changed from reporting to the Group Chief Risk Officer to reporting to the Group Chief Compliance Officer from 1 November.

Governance and structure

Regulatory Compliance and Financial Crime Risk were integrated into a new Compliance function from 1 November, which is headed by the Group Chief Compliance Officer. Regulatory Compliance continues to be structured as a global function with regional and country Regulatory Compliance teams, which

support and advise each global business and global function. Key risk management processes

We regularly review our policies and procedures. Global policies and procedures require the prompt identification and escalation of any actual or potential regulatory breach to Regulatory Compliance. Reportable events are escalated to the RMM and the Group Risk Committee, as appropriate. Matters relating to the Group's regulatory conduct of business are reported to the Group Risk Committee.

Conduct of business

In 2018, we continued to highlight conduct requirements as a global principle and elsewhere within the risk management framework, reflecting the individual responsibility and accountability we have for the delivery of fair conduct outcomes for customers and market integrity. Other key activities in 2018 included:

· the inclusion of an annual conduct objective in performance management scorecards for executive Directors, Group Managing Directors, Group general managers and country CEOs across all regions, business lines, global functions and HSBC Operations Services and Technology. Executive Directors are also now subject to a new separate conduct-focused long-term incentive measure;

Financial crime risk management
Overview

HSBC continued to embed a sustainable financial crime risk management capability across the Group. We are making good progress with enhancing our financial crime control framework, with the three-year programme that began in 2017 to further strengthen the management of anti-bribery and corruption risk. We continue to take further steps to refine and strengthen our defences against financial crime by applying advanced analytics and artificial intelligence.

Key developments in 2018

During 2018, HSBC continued to increase its efforts to strengthen its ability to combat financial crime. We integrated into our day-to-day operations the majority of the financial crime risk core capabilities delivered through the Global Standards programme, which we set up in 2013 to enhance our risk management policies, processes and systems. The programme infrastructure is expected to close in 2019.

We began several initiatives to define the next phase of financial crime risk management. We invested in the use of artificial intelligence and advanced analytics techniques to develop an intelligence-led financial crime risk management framework for the future.

Working in partnership with the public and private sector is vital to managing financial crime risk. HSBC is a strong proponent of public-private partnerships and information-sharing initiatives. During 2018, we created new alliances in Hong Kong and Singapore and continued to develop existing partnerships, which include UK Joint Money Laundering Intelligence Task Force, US AML Consortium, and partnerships in Australia and Canada in order to bring further benefit to the Group by enhancing the understanding of financial crime risks.

·
further development of digital products and supporting processes to ensure our digital offerings deliver fair outcomes for customers. Governance and controls continue to be strengthened to ensure they remain fit for purpose as new technology is introduced;

· enhanced global policy requirements helping customers who are, or may become, vulnerable. Business line-led initiatives in specific markets have addressed support for appointed representatives of vulnerable customers, customers in financial distress, financial inclusion, and a pilot programme of training to help customers with or affected by cancer or dementia; and

· the delivery of our fourth annual global mandatory training course on conduct for all employees. This is complemented by an ongoing programme of newsletter, intranet and live-streamed communications, internal surveys of staff sentiment regarding progress in delivering good conduct, and conduct awareness campaigns.

The Board maintains oversight of conduct matters through the Group Risk Committee.

Further details can be found under the 'Our conduct' section of www.hsbc.com/our-approach/risk-and-responsibility. For conduct-related costs relating to significant items, see page 66.

Following expiration in December 2017 of the anti-money laundering deferred prosecution agreement entered into with the with the DoJ, the then Monitor has continued to work in his capacity as a Skilled Person under Section 166 of the Financial Services and Markets Act under the Direction issued by the UK Financial Conduct Authority ('FCA') in 2012. He has also continued to work in his capacity as an Independent Consultant under the 2012 Cease and Desist Order issued by the US Federal Reserve Board ('FRB'). The Skilled Person and the Independent Consultant will continue working for a period of time at the FCA's and FRB's discretion.

The Skilled Person has assessed HSBC's progress towards being able to effectively manage its financial risk on a business-as-usual basis. The Skilled Person issued five country reports and two quarterly reports in 2018. The Skilled Person has noted that HSBC continues to make material progress towards its financial crime risk target end state in terms of key systems, processes and people. Nonetheless, the Skilled Person has identified some areas that require further work before HSBC reaches a business-as-usual state.

The Independent Consultant completed his fifth annual assessment. The Independent Consultant concluded that HSBC continues to make significant strides toward establishing an effective sanctions compliance programme, commending HSBC on a largely successful affiliates remediation exercise. He has, however, determined that certain areas within HSBC's sanctions compliance programme require further work. The Independent Consultant has commenced his sixth annual assessment, which is due to conclude in March 2019.

Throughout 2018, the FSVC received regular reports on HSBC's relationship with the Skilled Person and Independent Consultant. The FSVC received regular updates on the Skilled Person's and Independent Consultant's reviews and has received the Skilled Person's country and quarterly reports and the Independent Consultant's fifth annual assessment report.

Insurance manufacturing operations risk management

Details of changes in our insurance manufacturing operations risk profile in 2018 can be found on page 143, under 'Insurance manufacturing operations risk profile'.

There were no material changes to our policies and practices for the management of risks arising in our insurance manufacturing operations in 2018.

Governance
(Audited)

Insurance risks are managed to a defined risk appetite, which is aligned to the Group's risk appetite and risk management framework, including its three lines of defence model. For details of the Group's governance framework, see page 73. The Global Insurance Risk Management Meeting oversees the control framework globally and is accountable to the RBWM Risk Management Meeting on risk matters relating to the insurance business.

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

Stress and scenario testing
(Audited)

Stress testing forms a key part of the risk management framework for the insurance business. We participate in local and Group-wide regulatory stress tests, including the Bank of England stress test of the banking system, the Hong Kong Monetary Authority stress test, the European Insurance and Occupational Pensions Authority stress test, and individual country insurance regulatory stress tests.

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

Management and mitigation of key risk types

Market risk

(Audited)

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

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

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

Reputational risk management
Overview

Reputational risk is the risk of failing to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by HSBC, our employees or those with whom we are associated. Any material lapse in standards of integrity, compliance, customer service or operating efficiency may represent a potential reputational risk. Stakeholder expectations constantly evolve, and so reputational risk is dynamic and varies between geographical regions, groups and individuals. We have an unwavering commitment to operate at the high standards we set for ourselves in every jurisdiction.

associated liabilities, and ALCOs employ the outcomes in determining how best to structure asset holdings to support liabilities.

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

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

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

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

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

· We reprice premiums charged to policyholders.

Credit risk

(Audited)

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

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

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

Liquidity risk
(Audited)

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

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

Insurance risk

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

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

· underwriting policy;

· claims management processes; and

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

Key developments in 2018

In the second half of 2018, as part of a revised enterprise risk management framework, it was agreed that reputational risk would be considered as a single risk type that spans both financial and non-financial risk categories. The oversight of reputational risk as a single risk type was transitioned to the Group Chief Risk Officer. He is supported by the Group Reputational Risk

Committee and a new reputational risk framework, which will be embedded during 2019. The governance structure, however, remains unchanged.

Governance and structure

The development of policies and an effective control environment for the identification, assessment, management and mitigation of reputational risk,

are considered by the Group Reputational Risk Committee, which is chaired by the Group Chief Risk Officer. The focus of the Group Reputational Risk Committee is to consider matters arising from clients or transactions that either present a serious potential reputational risk to the Group or merit a Group-led decision to ensure a consistent risk management approach across the regions, global businesses and global functions. The committee is responsible for keeping the RMM apprised of areas and activities presenting significant reputational risk and, where appropriate, for making recommendations to the RMM to mitigate such risk.

Key risk management processes

Our Reputational Risk and Client Selection team oversees the identification, management and control of significant reputational risks across the Group. It is responsible for setting policies to guide the Group's reputational risk management, devising strategies to protect against reputational risk, and advising the global businesses and global functions to help them identify,

Sustainability risk management
Overview

Assessing the environmental and social impacts of providing finance to our customers is integral to our overall risk management processes.

Key developments in 2018

We periodically review our Sustainability Risk policies. In 2018, we issued a revised energy policy to further support the transition to a low-carbon economy in line with the global ambition of the 2015 Paris Agreement of limiting climate change. We seek to ensure that our customers continue to have access to the capital required to develop their businesses, invest in more efficient technology and reduce their greenhouse gas emissions, although there are certain specific long-term assets that HSBC may choose not to finance.

Pension risk management

There were no material changes to our policies and practices for the management of pension risk in 2018.

Governance and structure

A global pension risk framework and accompanying global policies on the management of risks related to defined benefit and defined contribution

Key risk management processes

Our global pensions strategy is to move from defined benefit to defined contribution plans, where local law allows and it is considered competitive to do so.

In 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:

assess and mitigate such risks, where possible. It is led by a central team supported by teams in each of the global businesses and regions. Each global business has an established reputational risk management governance process. The global functions manage and escalate reputational risks within established operational risk frameworks.

Our policies set out our risk appetite and operational procedures for all areas of reputational risk, including financial crime prevention, regulatory compliance, conduct-related concerns, environmental impacts, human rights matters and employee relations.

For further details of our financial crime risk management and regulatory compliance risk management, see 'Financial crime risk management' on page 85 and 'Regulatory compliance risk management' on page 84 respectively.

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

Governance and structure

The Global Risk function is mandated to manage sustainability risk globally, working with the global businesses, global functions and local offices as appropriate. Sustainability risk managers have regional or national responsibilities for advising on and managing environmental and social risks.

Key risk management processes

The Global Risk function's responsibilities in relation to sustainability risk include:

· formulating sustainability risk policies. This includes work in several key areas: overseeing our sustainability risk standards; overseeing our application of the Equator Principles, which provide a framework for banks to assess and manage the social and environmental impact of large projects to which they provide financing; overseeing our application of our sustainability policies, covering agricultural commodities, chemicals, defence, energy, forestry, mining and metals, UNESCO World Heritage Sites and the Ramsar Convention on Wetlands; undertaking reviews of transactions where sustainability risks are assessed to be high; and supporting our operating companies to assess similar risks of a lesser magnitude;

· building and implementing systems-based processes to help ensure consistent application of policies, and improving the efficiency of the sustainability risk review process. We also aim to capture management information to measure and report on the effect of our lending and investment activities on sustainable development; and

· providing training and capacity building within our operating companies to ensure sustainability risks are identified and mitigated consistently to appropriate standards.

plans are in place. Pension risk is managed by a network of local and regional pension risk forums. The Global Pensions Oversight Forum is responsible for the governance and oversight of all pension plans sponsored by HSBC around the world.

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

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

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

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

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

To fund the benefits associated with defined benefit plans, sponsoring Group companies, and in some instances employees, make regular contributions in accordance with advice from actuaries and in consultation with the plan's trustees where relevant. These contributions are normally set to ensure that there are sufficient funds to meet the cost of the accruing benefits for the future service of active members. However, higher contributions are required when plan assets are considered insufficient to cover the existing pension liabilities. Contribution rates are typically revised annually or once every three years, depending on the plan.

Key developments and risk profile in 2018
Key developments in 2018

In 2018, HSBC undertook a number of initiatives to enhance its approach to the management of risk. These included:

· We continued to strengthen the controls that manage our operational risks, as described on page 72 under 'Operational risk profile'.

· The Board oversight of conduct matters and whistleblowing arrangements were transitioned from the Conduct & Values Committee following its demise in the first half of 2018. The Group Risk Committee was given responsibility for the oversight of conduct matters and the Group Audit Committee has the overall responsibility for the Group's whistleblowing arrangements. For information on initiatives implemented in 2018 to raise our standards in relation to the conduct of our business, see page 84 under 'Conduct of business'. For further details on whistleblowing, see page 25.

Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. Credit risk arises principally from direct lending, trade finance and leasing business, but also from other products such as guarantees and credit derivatives.

Comparative credit tables at 1 January 2018 reflecting the adoption of IFRS 9 as published in our Report on transition to IFRS 9 'Financial Instruments' 1 January 2018 have been included where available. Comparative credit tables at 31 December 2017 from our Annual Report and Accounts 2017, which do not reflect the adoption of IFRS 9, have been disclosed separately on pages 122 to 132 as they are not directly comparable.

Refer to 'Standards adopted during the year ended 31 December 2018' on page 224 and Note 37 'Effect of reclassification upon adoption of IFRS 9' for further details.

There were no material changes to the policies and practices for the management of credit risk. A summary of our current policies and practices for the management of credit risk is set out in 'Credit risk management' on page 79 of the Annual Report and Accounts 2018.

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 of the defined benefit plan assets between asset classes is established. In addition, each permitted asset class has its own benchmarks, such as stock-market or property valuation indices. 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.

· We integrated into our day-to-day operations the majority of the financial crime risk core capabilities delivered through the Global Standards programme, and expect to complete the transition to business and function management in the first half of 2019. We continue to take further steps to refine and strengthen our defences against financial crime by applying advanced analytics and artificial intelligence.

· We adopted IFRS 9, including the accounting for expected credit losses, which introduced new concepts and measures such as significant increase in credit risk and lifetime expected credit losses. Existing stress testing and regulatory models, skills and expertise were adapted in order to meet IFRS 9 requirements. Data from various client, finance and risk systems were integrated and validated. As a result of IFRS 9 adoption, management has additional insight and measures not previously utilised, which over time may influence our risk appetite and risk management processes.

Credit risk profile

Credit risk in 2018	Page 89
Summary of credit risk	89
Credit exposure	94
Measurement uncertainty and sensitivity analysis of ECL estimates	95
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees	101
Credit quality	102
Wholesale lending	106
Personal lending	116
Supplementary information	121
HSBC Holdings	123
Securitisation exposures and other structured products	123
Selected 2017 credit risk disclosures	124

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied
(Audited)

31 Dec 2018

At 1 Jan 2018

Footnotes			Gross Allowance for Gross carrying/nominal carrying/nominal ECL⁵ amount Allowance for ECL⁵ $m $m $m $m
Loans and advances to customers at amortised cost			990,321 (8,625)			959,080 (9,343)
- personal			394,337	(2,947)		375,069	(3,047)
- corporate and commercial			534,577	(5,552)		520,137	(6,053)
- non-bank financial institutions			61,407	(126)		63,874	(243)
Loans and advances to banks at amortised cost			72,180 (13)			82,582 (23)
Other financial assets measured at amortised cost		582,917 (55)			557,864 (114)
- cash and balances at central banks		162,845 5,787 35,859 242,804 62,684 72,938		(2) - - - (18) (35)	180,624 6,628 34,186 201,553 59,539 75,334		(3) - - - (16) (95)
- items in the course of collection from other banks
- Hong Kong Government certificates of indebtedness
- reverse repurchase agreements - non-trading
- financial investments
- prepayments, accrued income and other assets 6
Total gross carrying amount on-balance sheet		1,645,418 (8,693)			1,599,526 (9,480)
Loans and other credit-related commitments		592,008		(325)	545,258		(376)
- personal		207,351		(13)	196,093		(14)
- corporate and commercial		271,022		(305)	262,391		(355)
- non-bank financial institutions	7	113,635		(7)	86,774		(7)
Financial guarantees	8	23,518		(93)	25,849		(97)
- personal		927		(1)	718		(4)
- corporate and commercial		17,355		(85)	19,965		(89)
- non-bank financial institutions		5,236		(7)	5,166		(4)
Total nominal amount off-balance sheet	9	615,526		(418)	571,107		(473)
		2,260,944		(9,111)	2,170,633		(9,953)

				Memorandum			Memorandum allowance for
		Fair value		allowance for ECL¹⁰	Fair value		ECL¹⁰
		$m		$m	$m		$m
Debt instruments measured at fair value through other comprehensive income ('FVOCI')
		343,110		(84)	322,163		(184)
For footnotes, see page 147.

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 1 January 2018 (continued)

Gross carrying/nominal amount⁹ Allowance for ECL ECL coverage %

Stage 1 Stage 2 Stage 3 POCI¹¹ Total Stage 1 Stage 2 Stage 3 POCI¹¹ Total Stage 1 Stage 2 Stage 3 _POCI11 Total

$m $m $m $m $m $m $m $m $m $m % % % % %

Loans and advances to

customers at amortised

cost 871,566 72,658 13,882 974 959,080 (1,309) (2,201) (5,591) (242) (9,343) 0.2 3.0 40.3 24.8 1.0

- personal	354,305	16,354	4,410	-	375,069	(581)	(1,156)	(1,310)	-	(3,047)	0.2	7.1	29.7	-	0.8
- corporate and	354,305	16,354	4,410	-	375,069	(581)	(1,156)	(1,310)	-	(3,047)	0.2	7.1	29.7	-	0.8
commercial	456,837	53,262	9,064	974	520,137	(701)	(1,037)	(4,073)	(242)	(6,053)	0.2	1.9	44.9	24.8	1.2
- non-bank financial
institutions	60,424	3,042	408	-	63,874	(27)	(8)	(208)	-	(243)	-	0.3	51.0	-	0.4

Loans and advances to

banks at amortised cost 81,027 1,540 15 - 82,582 (17) (4) (2) - (23) - 0.3 13.3 - -

Other financial assets
measured at amortised

cost 556,185 1,517 155 7 557,864 (28) (4) (82) - (114) - 0.3 52.9 - -

Loan and other credit-

related commitments 519,883 24,330 999 46 545,258 (126) (183) (67) - (376) - 0.8 6.7 - 0.1

- personal	194,320	1,314	459	-	196,093	(13)	(1)	-	- (14) -	0.1	-	- -
- corporate and
commercial	240,854	20,951	540	46	262,391	(108)	(180)	(67)	- (355) -	0.9	12.4	- 0.1
- financial⁷	84,709	2,065	-	-	86,774	(5)	(2)	-	- (7) -	0.1	-	- -

Financial guarantees⁸ 22,021 3,619 187 22 25,849 (17) (18) (62) - (97) 0.1 0.5 33.2 - 0.4

- personal	703	10	5	-	718	(2)	-	(2) -	(4)	0.3	-	40.0	- 0.6
- corporate and
commercial	16,597	3,164	182	22	19,965	(14)	(17)	(58) -	(89)	0.1	0.5	31.9	- 0.4
- financial	4,721	445	-	-	5,166	(1)	(1)	(2) -	(4)	-	0.2	-	- 0.1

At 1 Jan 2018 2,050,682 103,664 15,238 1,049 2,170,633 (1,497) (2,410) (5,804) (242) (9,953) 0.1 2.3 38.1 23.1 0.5

For footnotes, see page 147.

HSBC Holdings plc Annual Report and Accounts 2018 91

Maximum exposure to credit risk
(Audited)

2018

Maximum exposure Offset Net $m $m $m
Loans and advances to customers held at amortised cost		981,696 (29,534) 952,162
- personal		391,390 529,025 61,281	(3,679) (23,421) (2,434)	387,711 505,604 58,847
- corporate and commercial
- non-bank financial institutions
Loans and advances to banks at amortised cost		72,167 - 72,167
Other financial assets held at amortised cost		585,600 (21,788) 563,812
- cash and balances at central banks		162,843 5,787 35,859 242,804 62,666 75,641	- - - (21,788) - -	162,843 5,787 35,859 221,016 62,666 75,641
- items in the course of collection from other banks
- Hong Kong Government certificates of indebtedness
- reverse repurchase agreements - non-trading
- financial investments
- prepayments, accrued income and other assets
Derivatives		207,825 (194,306) 13,519
Total on-balance sheet exposure to credit risk	1,847,288		(245,628)	1,601,660
Total off-balance sheet	874,751		-	874,751
- financial and other guarantees	94,810		-	94,810
- loan and other credit-related commitments	779,941		-	779,941
At 31 Dec 2018	2,722,039		(245,628)	2,476,411

Concentration of exposure

The geographical diversification of our lending portfolio, and our broad range of global businesses and products, ensured that we did not overly depend on a few markets or businesses to generate growth in 2018.

For an analysis of:

· financial investments, see Note 16 on the Financial Statements;

· trading assets, see Note 11 on the Financial Statements;

· derivatives, see page 113 and Note 15 on the Financial Statements; and

Measurement uncertainty and sensitivity
analysis of ECL estimates

(Audited)

Expected credit loss impairment allowances recognised in the financial statements reflect the effect of a range of possible economic outcomes, calculated on a probability-weighted basis, based on the economic scenarios described below. The recognition and measurement of expected credit losses ('ECL') involves the use of significant judgement and estimation. It is necessary to formulate multiple forward-looking economic forecasts and incorporate them into the ECL estimates. HSBC uses a standard framework to form economic scenarios to reflect assumptions about future economic conditions, supplemented with the use of management judgement, which may result in using alternative or additional economic scenarios and/or management adjustments.

·
loans and advances by industry sector and by the location of the principal operations of the lending subsidiary (or, in the case of the operations of The Hongkong and Shanghai Banking Corporation, HSBC Bank plc, HSBC Bank Middle East Limited and HSBC Bank USA, by the location of the lending branch), see page 104 for wholesale lending and page 114 for personal lending.

Credit deterioration of financial instruments
(Audited)

A summary of our current policies and practices regarding the identification, treatment and measurement of stage 1, stage 2, stage 3 (credit impaired) and POCI financial instruments can be found in Note 1.2 on the Financial Statements.

Methodology

HSBC has adopted the use of three scenarios, representative of our view of forecast economic conditions, sufficient to calculate unbiased expected loss in most economic environments. They represent a 'most likely outcome' (the Central scenario), and two, less likely 'outer' scenarios, referred to as the Upside and Downside scenarios. Each outer scenario is consistent with a probability of 10%, while the Central scenario is assigned the remaining 80%, according to the decision of HSBC's senior management. This weighting scheme is deemed appropriate for the unbiased estimation of ECL in most circumstances. Key scenario assumptions are set using the average of forecasts of external economists, helping to ensure that the IFRS 9 scenarios are unbiased and maximise the use of independent information. The Central, Upside and Downside scenarios selected with reference to external forecast distributions using the above approach are termed the 'consensus economic scenarios'.

For the Central scenario, HSBC sets key assumptions such as GDP growth, inflation, unemployment and policy interest rates, using either the average of external forecasts (commonly referred to as consensus forecasts) for most economies, or market prices. An external provider's global macro model, conditioned to follow the consensus forecasts, projects the other paths required as inputs to credit models. This external provider is subject to HSBC's risk governance framework, with oversight by a specialist internal unit.

The Upside and Downside scenarios are designed to be cyclical, in that GDP growth, inflation and unemployment usually revert back to the Central

scenario after the first three years for major economies. We determine the maximum divergence of GDP growth from the Central scenario using the 10th and the 90th percentile of the entire distribution of forecast outcomes for major economies. While key economic variables are set with reference to external distributional forecasts, we also align the overall narrative of the scenarios to the macroeconomic risks described in HSBC's 'Top and emerging risks' on page 69. This ensures that scenarios remain consistent with the more qualitative assessment of these risks. We project additional variable paths using the external provider's global macro model.

We apply the following to generate the three economic scenarios:

· Economic risk assessment: We develop a shortlist of the upside and downside economic and political risks, most relevant to HSBC and the IFRS 9 measurement objective. These include local and global economic and political risks, which together affect economies that have a material effect on credit risk for HSBC, namely the UK, countries in the eurozone, Hong Kong,

mainland China and the US. We compile this shortlist by monitoring developments in the global economy, by reference to our top and emerging risks, and by consulting external and internal subject matter experts.

· Scenario generation: For the Central scenario, we obtain a pre-defined set of economic paths from the average taken from the consensus survey of professional forecasters. Paths for the two outer scenarios are benchmarked to the Central scenario and reflect the economic risk assessment. We select scenarios that in management's judgement are representative of the probability weighting scheme, informed by the current economic outlook, data analysis of past recessions, and transitions in and out of recession. The key assumptions made, and the accompanying paths, represent our 'best estimate' of a scenario at a specified probability. Suitable narratives are developed for the Central scenario and the paths of the two outer scenarios.

· Variable enrichment: We expand each scenario through enrichment of variables. This includes the production of more than 400 variables that are required to calculate ECL. The external provider expands these scenarios by using as inputs the agreed scenario narratives and the variables aligned to these narratives. Scenarios, once expanded, continue to be benchmarked to latest events and information. Late breaking events could lead to revision of scenarios to reflect management judgement.

The Upside and Downside scenarios are generated at the year-end and are only updated during the year if economic conditions change significantly. The Central scenario is generated every quarter. In quarters where only the Central scenario is updated, outer scenarios for use in wholesale are adjusted such that the relationship between the Central scenario and outer scenarios in the quarter is consistent with that observed at the last full scenario generation. In retail, three scenarios are run annually to establish the effect of multiple scenarios for each portfolio. This effect is then applied in each quarter with the understanding that the non-linearity of response to economic conditions should not change, unless a significant change in economic conditions occurs.

HSBC recognises that the consensus economic scenario approach, using three scenarios, will be insufficient in certain economic environments. Additional analysis may be requested at management's discretion. This may result in a change in the weighting scheme assigned to the three scenarios or the inclusion of extra scenarios. We anticipate that there will be only limited instances when the standard approach will not apply. We invoked this additional step on 1 January 2018, due to the specific

Description of consensus economic scenarios

The economic assumptions presented in this section have been formed internally by HSBC specifically for the purpose of calculating expected credit loss.

The consensus Central scenario

Consensus forecasts were stable over the course of 2018 and HSBC's Central scenario is one of moderate growth over the projection period 2019-2023. Global GDP growth is expected to be 2.9% on average over the period, which is marginally higher than the average growth rate over the period 2013- 2017. Across the key markets, we note:

· Expected average rates of GDP growth over the 2019-2023 period are lower than average growth rates achieved over the 2013-2017 period for

uncertainties facing the UK economy at that time, resulting in the recognition of additional ECL through a management adjustment for economic uncertainty (termed a 'management overlay' in the transitional disclosures). During 2018, we maintained additional ECL impairment allowances for the UK and made a further adjustment in respect of trade and tariff-related tensions. See 'Impact of UK economic uncertainty on ECL' below.

the US, UK, mainland China, Hong Kong, Canada, Mexico and the UAE. For the UK, this reflects expectations that the long-term impact of current economic uncertainty will be moderately adverse, while for China, it is consistent with the theme of ongoing rebalancing from an export-oriented economy to deeper domestic consumption.

· The average unemployment rate over the projection horizon is expected to remain at or below the averages observed in the 2013-2017 period across all of our major markets.

· Inflation is expected to be stable despite steady GDP growth and strong labour markets and will remain close to central bank targets in our core markets over the forecast period.

· Major central banks are expected to gradually raise their main policy interest rate. The US Federal Reserve Board ('FRB') will continue to

Note: N/A - not required in credit models.

Alternative Downside scenarios for the UK

A number of events occurred over the course of 2018 that led management to re-evaluate the shape of the consensus distribution for the UK. Given the challenges facing economic forecasters in this environment, management was concerned that this distribution did not adequately represent downside risks for the UK. The high level of economic uncertainty that prevailed at the end of 2018, including the lack of progress in agreeing a clear plan for an exit from the EU and the uncertain performance of the UK economy after an exit, was a key factor in this consideration. In management's view, the extent of this uncertainty justifies the use of the following Alternative Downside scenarios, used in place of the consensus Downside, with the assigned probabilities:

Alternative Downside scenario 1 ('AD1'): Economic uncertainty could have a large impact on the UK economy resulting in a long lasting recession with a weak recovery. This scenario reflects the consequences of such a recession with an initial risk-premium shock and weaker long-run productivity growth. This scenario has been used with a 30% weighting.

Alternative Downside scenario 2 ('AD2'): This scenario reflects the possibility that economic uncertainty could result in a deep cyclical shock triggering a steep depreciation in sterling, a sharp increase in inflation and an associated monetary policy response. This represents a tail risk and has been assigned a 5% weighting.

Alternative Downside scenario 3 ('AD3'): This scenario reflects the possibility that the adverse impact associated with economic uncertainty currently in the UK could manifest over a far longer period of time with the worst effects occurring later than in the above two scenarios. This scenario is also considered a tail risk and has been assigned a 5% weighting.

The table below describes key macroeconomic variables and the probabilities for each of the Alternative Downside scenarios:

Average 2019-2023

Global trade Downside scenario

Continued escalation of trade- and tariff-related tensions throughout 2018 resulted in management modelling an additional Downside scenario for key Asia-Pacific economies. This additional scenario models the effects of a significant escalation in global tensions, stemming from trade disputes but going beyond increases in tariffs to affect non-tariff barriers, cross-border investment flows and threats to the international trade architecture. This scenario assumes actions that lie beyond currently enacted and proposed tariffs and has been modelled as an addition to the three consensus-driven scenarios for these economies. This scenario has been assigned a 5% weight, leaving 5% assigned to the consensus Downside scenario, and has been used in addition to the consensus economic scenarios for eight Asia-Pacific markets, including HSBC's major markets of Hong Kong and mainland China. In management's judgement, the

Impact of UK economic uncertainty on ECL

On initial adoption of IFRS 9 on 1 January 2018, additional ECL impairment allowances of $245m were recognised compared with those implied by consensus forecasts, due to the specific uncertainties facing the UK economy at that time. This adjustment was described as a 'management overlay for economic uncertainty' in the transitional disclosures. While consensus forecasts for the UK remained broadly stable during 2018, management remained concerned that the consensus distribution did not adequately reflect downside risks, particularly towards the end of 2018 as the level of risk increased. At 31 December 2018, management determined that its view of the distribution of possible economic outcomes in the UK was better

Economic scenarios sensitivity analysis of ECL estimates

The ECL outcome is sensitive to judgement and estimations made with regards to the formulation and incorporation of multiple forward-looking economic conditions described above. As a result, management assessed and considered the sensitivity of the ECL outcome against the forward-looking economic conditions as part of the ECL governance process by recalculating the ECL under each scenario described above for selected portfolios, applying a 100% weighting to each scenario in turn. The weighting is reflected in both the determination of significant increase in credit risk as well as the measurement of the resulting ECL. For wholesale credit risk exposures, the sensitivity analysis excludes ECL and financial instruments related to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios.

The economic scenarios are generated to capture HSBC's view of a range of possible forecast economic conditions that is sufficient for the calculation of

reflected by using three additional Downside scenarios in place of the UK consensus Downside scenarios. This resulted in the recognition of additional impairment allowances of $410m compared with those implied by consensus forecasts, an increase of $165m in the adjustment to the consensus position compared with

1 January 2018, to reflect the increased level of economic uncertainty in the UK.

We also considered developments after the balance sheet date and concluded that they did not necessitate any adjustment to the approach or judgements taken on 31 December 2018.

unbiased and probability-weighted ECL. Therefore, the ECL calculated for each of the scenarios represent a range of possible outcomes that have been evaluated to estimate ECL. As a result, the ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and lower limits of possible actual ECL outcomes. There is a high degree of estimation uncertainty in numbers representing tail risk scenarios when assigned a 100% weighting, and an indicative range is provided for the UK tail risk sensitivity analysis. A wider range of possible ECL outcomes reflects uncertainty about the distribution of economic conditions and does not necessarily mean that credit risk on the associated loans is higher than for loans where the distribution of possible future economic conditions is narrower. The recalculated ECL for each of the scenarios should be read in the context of the sensitivity analysis as a whole and in conjunction with the narrative disclosures provided below.

ECL under each scenario is given in dollar terms and as a percentage of the the gross carrying amount (and, for wholesale lending, the nominal amount for related-loan commitments and financial guarantees).

Report of the Directors | Risk

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees⁸

(Audited)

Gross carrying/			Gross carrying/		Gross carrying/		Gross carrying/		Gross carrying/
nominal		Allow-ance	nominal	Allow-ance	nominal	Allow-ance	nominal	Allow-ance	nominal		Allow-ance
amount		for ECL	amount	for ECL	amount	for ECL	amount	for ECL	amount		for ECL
$m		$m	$m	$m	$m	$m	$m	$m	$m		$m
At 1 Jan 2018	1,446,857 (1,469) 102,032 (2,406) 15,083 (5,722) 1,042 (242) 1,565,014 (9,839)
Transfers of financial instruments:	(8,747) (685) 3,582 1,185 5,165 (500) - - - -
- transfers from stage 1 to stage 2	(84,181)	319	84,181	(319)	-	-	-	-		-	-
- transfers from stage 2 to stage 1	77,325	(999)	(77,325)	999	-	-	-	-		-	-
- transfers to stage 3	(2,250)	35	(4,439)	607	6,689	(642)	-	-		-	-
- transfers from stage 3	359	(40)	1,165	(102)	(1,524)	142	-	-		-	-
Net remeasurement of ECL arising from transfer of stage	- 620 - (605) - (103) - - - (88)

102 HSBC Holdings plc Annual Report and Accounts 2018

Distribution of financial instruments by credit quality
(Audited)

Loans and advances to banks held at amortised cost	60,249		7,371		4,549		11		-		72,180		(13)		72,167
Cash and balances at central banks	160,995		1,508		324		18		-		162,845		(2)		162,843
Items in the course of collection from other banks	5,765		21		1		-		-		5,787		-		5,787
Hong Kong Government certificates of indebtedness	35,859		-		-		-		-		35,859		-		35,859
Reverse repurchase agreements - non-trading	200,774		29,423		12,607		-		-		242,804		-		242,804
Financial investments	56,031		5,703		949		1		-		62,684		(18)		62,666
Prepayments, accrued income and other assets	55,424		8,069		9,138		181		126		72,938		(35)		72,903
Debt instruments measured at fair value through other comprehensive income¹⁸	319,632	12,454		7,210		2,558		12		341,866		(84)		341,782
Out-of-scope for IFRS 9
Trading assets	139,484	18,888		16,991		1,871		-		177,234		-		177,234
Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss	6,079	2,163		6,683		9		-		14,934		-		14,934
Derivatives	169,121	31,225		6,813		625		41		207,825		-		207,825
Assets held for sale	-	-		-		-		-		-		-		-
Total gross carrying amount on balance sheet	1,694,864	361,024		295,622		22,267		13,500		2,387,277		(8,777)		2,378,500
Percentage of total credit quality	71.0%	15.1%		12.4%		0.9%		0.6%		100%
Loan and other credit-related commitments	373,302	137,076		75,478		5,233		919		592,008		(325)		591,683
Financial guarantees	9,716	7,400		5,505		597		300		23,518		(93)		23,425
In-scope: Irrevocable loan commitments and financial guarantees	383,018	144,476		80,983		5,830		1,219		615,526		(418)		615,108
Loan and other credit-related commitments¹⁹	188,258	-		-		-		-		188,258		-		188,258
Performance and other guarantees	26,679	25,743		16,790		1,869		403		71,484		(99)		71,385
Out-of-scope: Revocable loan commitments and non-financial guarantees	214,937	25,743		16,790		1,869		403		259,742		(99)		259,643
For footnotes, see page 147.

Loans and advances to customers at amortised cost	485,451 244,199 230,357 16,993 13,321 990,321 (8,625) 981,696
- stage 1	483,907 1,544 - -	233,843 10,356 - -	191,851 38,506 - -	5,587 11,380 - 26	- - 13,023 298	915,188 61,786 13,023 324	(1,276) (2,108) (5,047) (194)	913,912 59,678 7,976 130
- stage 2
- stage 3
- POdI
Loans and advances to banks at amortised cost 60,249 7,371 4,549 11 - 72,180 (13) 72,167
- stage 1	60,199 50 - -	7,250 121 - -	4,413 136 - -	11 - - -	- - - -	71,873 307 - -	(11) (2) - -	71,862 305 - -
- stage 2
- stage 3
- POdI
Other financial assets measured at amortised cost	514,848 44,724 23,019 200 126 582,917 (55) 582,862
- stage 1	514,525 323 - -	44,339 385 - -	22,184 835 - -	70 130 - -	- - 126 -	581,118 1,673 126 -	(27) (6) (22) -	581,091 1,667 104 -
- stage 2
- stage 3
- POdI
Loan and other credit-related commitments	373,302 137,076 75,478 5,233 919 592,008 (325) 591,683
- stage 1	372,597 705 - -	132,220 4,856 - -	63,457 12,021 - -	976 4,257 - -	- - 912 7	569,250 21,839 912 7	(143) (139) (43) -	569,107 21,700 869 7
- stage 2
- stage 3
- POdI
Financial guarantees 8	9,716 7,400 5,505 597 300 23,518 (93) 23,425
- stage 1	9,582 134 - -	6,879 521 - -	4,264 1,241 - -	159 438 - -	- - 297 3	20,884 2,334 297 3	(19) (29) (45) -	20,865 2,305 252 3
- stage 2
- stage 3
- POdI
At 31 Dec 2018	1,443,566 440,770 338,908 23,034 14,666 2,260,944 (9,111) 2,251,833

For footnotes, see page 147.

104 HSBC Holdings plc Annual Report and Accounts 2018

Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation (continued)

Gross carrying/notional amount

Strong Good Satisfactory Sub-standard Credit impaired Total

Allowance for

ECL Net

Footnotes $m $m $m $m $m $m $m $m

Loans and advances to customers at

amortised cost 479,067 227,146 220,089 17,922 14,856 959,080 (9,343) 949,737

- stage 1	475,881	211,084	180,002	4,599	-	871,566	(1,309)	870,257
- stage 2	3,186	16,062	40,087	13,323	-	72,658	(2,201)	70,457
- stage 3	-	-	-	-	13,882	13,882	(5,591)	8,291
- POCI	-	-	-	-	974	974	(242)	732

Loans and advances to banks at amortised

cost 70,959 7,692 3,890 26 15 82,582 (23) 82,559

- stage 1	70,024 935 - -	7,351 341 - -	3,642 248 - -	10 16 - -	- - 15 -	81,027 1,540 15 -	(17) (4) (2) -	81,010 1,536 13 -
- stage 2
- stage 3
- POCI

Other financial assets measured at

amortised cost 469,898 47,347 39,595 862 162 557,864 (114) 557,750

- stage 1	469,691	47,019	38,929	546	-	556,185	(28)	556,157
- stage 2	207	328	666	316	-	1,517	(4)	1,513
- stage 3	-	-	-	-	155	155	(82)	73
- POCI	-	-	-	-	7	7	-	7

Loan and other credit-related

commitments 7 341,580 121,508 74,694 6,431 1,045 545,258 (376) 544,882

- stage 1	338,855	115,008	64,429	1,591	-	519,883	(126)	519,757
- stage 2	2,725	6,500	10,265	4,840	-	24,330	(183)	24,147
- stage 3	-	-	-	-	999	999	(67)	932
- POCI	-	-	-	-	46	46	-	46

Financial guarantees 8 10,339 7,086 7,408 807 209 25,849 (97) 25,752

- stage 1	9,608	6,590	5,500	323	-	22,021	(17)	22,004
- stage 2	731	496	1,908	484	-	3,619	(18)	3,601
- stage 3	-	-	-	-	187	187	(62)	125
- POCI	-	-	-	-	22	22	-	22
At 1 Jan 2018		1,371,843	410,779	345,676	26,048	16,287	2,170,633	(9,953)	2,160,680
Debt instruments at FVOCI	18
- stage 1		297,753	6,678	12,941	2,450	-	319,822	(28)	319,794
- stage 2		208	108	147	1,826	-	2,289	(142)	2,147
- stage 3		-	-	-	-	584	584	(14)	570
- POCI		-	-	-	-	-	-	-	-
At 1 Jan 2018		297,961	6,786	13,088	4,276	584	322,695	(184)	322,511
For footnotes, see page 147.

Report of the Directors | Risk

Renegotiated loans and advances to customers at amortised cost by stage allocation

		Stage 1 $m	Stage 2 Stage 3 $m $m		POCI $m	Total $m
Gross carrying amount
Personal		-	- 2,248		-	2,248
- first lien residential mortgages		- -	- -	1,641 607	- -	1,641 607
- other personal lending
Wholesale		1,532	1,193 3,845		270	6,840
- corporate and commercial		1,517 15	1,193 -	3,789 56	270 -	6,769 71
- non-bank financial institutions
At 31 Dec 2018		1,532	1,193 6,093		270	9,088
Allowance for ECL
Personal		-	- (381)		-	(381)
- first lien residential mortgages		- -	- -	(186) (195)	- -	(186) (195)
- other personal lending
Wholesale		(29)	(49) (1,461)		(146)	(1,685)
- corporate and commercial		(29) -	(49) -	(1,438) (23)	(146) -	(1,662) (23)
- non-bank financial institutions
At 31 Dec 2018		(29)	(49) (1,842)		(146)	(2,066)

Renegotiated loans and advances to customers by geographical	region
	Europe Asia MENA $m $m $m		North Latin America America Total $m $m $m		UK $m	Hong Kong $m
At 31 Dec 2018	4,533 864 1,973		1,352 366 9,088		3,609	305

Wholesale lending - credit risk profile by obligor grade for loans and advances at amortised cost

Corporate & commercial

481,262 44,779 8,212 324 534,577 (698) (812) (3,848) (194) (5,552) 1.0

- CRR 1

0.000 to 0.053

45,401 94,002 174,260 114,007 48,258 3,787 1,235 312 -

67 917 7,723 12,294 14,799 4,419 2,875 1,685

- - - - - - - -

8,212

- - - - - 22 4 -

298

45,468 94,919 181,983 126,301 63,057 8,228 4,114 1,997

8,510

(4) (17) (162) (231) (209) (41) (22) (12)

(2)

(4) (85) (114) (252) (103) (147) (105)

- - - - - - - -

(3,848)

- - - - - - - -

(194)

(6)

(21) (247) (345) (461) (144) (169) (117) (4,042)

- AA- and above

- CRR 2

0.054 to 0.169

- A+ to A-

- CRR 3

0.170 to 0.740

0.1 BBB+ to BBB-

- CRR 4

0.741 to 1.927

0.3 BB+ to BB-

- CRR 5

1.928 to 4.914

0.7 BB- to B

- CRR 6

4.915 to 8.860

1.8 B-

- CRR 7

8.861 to 15.000

4.1 CCC+

- CRR 8

15.001 to 99.999

5.9 CCC to C

- CRR 9/10

100.000

47.5 D

Non-bank
financial
institutions

59,245 1,932 230 - 61,407 (44) (31) (51) - (126) 0.2

- CRR 1

0.000 to 0.053

13,256 15,172 18,024 7,530 5,032 61 169 1 -

- 20 427 789 456 133 23 84

- - - - - - - -

230

- - - - - - - -

13,256 15,192 18,451 8,319 5,488 194 192 85 230

(1)

(2)

(13) (10)

(14) -

(4)

(1)

(2)

(5) (2) (1) (20)

- - - - - - - -

(51)

- - - - - - - -

(1)

(2)

(14)

(12)

(19)

(2)

(5)

(20)

(51)

- AA- and above

- CRR 2

0.054 to 0.169

- A+ to A-

- CRR 3

0.170 to 0.740

0.1 BBB+ to BBB-

- CRR 4

0.741 to 1.927

0.1 BB+ to BB-

- CRR 5

1.928 to 4.914

0.3 BB- to B

- CRR 6

4.915 to 8.860

1.0 B-

- CRR 7

8.861 to 15.000

2.6 CCC+

- CRR 8

15.001 to 99.999

23.5 CCC to C

- CRR 9/10

100.000

22.2 D

Banks

71,873 307 - - 72,180 (11) (2) - - (13) -

- CRR 1

0.000 to 0.053

47,680 12,519 7,250 4,032 381 8

32 18 121 118 18 - - - -

- - - - - - - -

47,712 12,537 7,371 4,150 399 8

(3)

(2)

(3)

(3) - - - -

- - (1) (1) - - - -

- - - - - - - -

(3)

(2)

(4)

(4) - - - - -

- AA- and above

- CRR 2

0.054 to 0.169

- A+ to A-

- CRR 3

0.170 to 0.740

0.1 BBB+ to BBB-

- CRR 4

0.741 to 1.927

0.1 BB+ to BB-

- CRR 5

1.928 to 4.914

- BB- to B

- CRR 6

4.915 to 8.860

- B-

- CRR 7

8.861 to 15.000

- CCC+

- CRR 8

15.001 to 99.999

- CCC to C

- CRR 9/10

100.000

- D

At 31 Dec 2018

612,380 47,018 8,442 324 668,164 (753) (845) (3,899) (194) (5,691) 0.9

Report of the Directors | Risk

Wholesale lending - credit risk profile by obligor grade for loans and advances at amortised cost (continued)

Gross carrying amount Allowance for ECL

Basel one-year PD Mapped external

range Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total ECL coverage rating

% $m $m $m $m $m $m $m $m $m $m %

Corporate and commercial	456,837			53,262 9,064 974 520,137					(701) (1,037) (4,073) (242)					(6,053) 1.2
- CRR 1 0.000 to 0.053		43,578 96,876 163,453 107,755 41,042 2,641 881 611 -	440 1,016 10,373 16,368 14,337 6,363 2,528 1,837 -		- - - - - - - - 9,064	- - - 20 - 27 - - 927	44,018 97,892 173,826 124,143 55,379 9,031 3,409 2,448 9,991	(7) (25) (173) (256) (190) (35) (6) (9) -		(3) (1) (86) (232) (192) (272) (107) (144) -	- - - - - - - - (4,073)	- - - - - (1) - - (241)	(10) (26) (259) (488) (382) (308) (113) (153) (4,314)		- AA- and above
- CRR 2 0.054 to 0.169															- A+ to A-
- CRR 3 0.170 to 0.740															0.1 BBB+ to BBB-
- CRR 4 0.741 to 1.927															0.4 BB+ to BB-
- CRR 5 1.928 to 4.914															0.7 BB- to B
- CRR 6 4.915 to 8.860															3.4 B-
- CRR 7 8.861 to 15.000															3.3 CCC+
- CRR 8 15.001 to 99.999															6.3 CCC to C
- CRR 9/10 100.000															43.2 D

Non-bank financial
institutions

- CRR 1 0.000 to 0.053	1 144 1,057 1,102 373 345 8 12 -	- - - - - - - - 408	- - - - - - - - -	14,211 17,975 18,401 7,269 4,824 762 12 12 408	(1) (2) (7) (4) (4) (9) - - -	- - - (2) (3) (2) - (1) -	- - - - - - - - (208)	- - - - - - - - -	(1) (2) (7) (6) (7) (11) - (1) (208)	- AA- and above
- CRR 2 0.054 to 0.169										- A+ to A-
- CRR 3 0.170 to 0.740										- BBB+ to BBB-
- CRR 4 0.741 to 1.927										0.1 BB+ to BB-
- CRR 5 1.928 to 4.914										0.1 BB- to B
- CRR 6 4.915 to 8.860										1.4 B-
- CRR 7 8.861 to 15.000										- CCC+
- CRR 8 15.001 to 99.999										8.3 CCC to C
- CRR 9/10 100.000										51.0 D

Banks

- CRR 1 0.000 to 0.053	529 406 341 47 201 13 1 2 -	- - - - - - - - 15	- - - - - - - - -	55,872 15,087 7,692 3,119 771 17 3 6 15	(4) (5) (5) (3) - - - - -	- (2) (1) - (1) - - - -	- - - - - - - - (2)	- - - - - - - - -	(4) (7) (6) (3) (1) - - - (2)	- AA- and above
- CRR 2 0.054 to 0.169										- A+ to A-
- CRR 3 0.170 to 0.740										0.1 BBB+ to BBB-
- CRR 4 0.741 to 1.927										0.1 BB+ to BB-
- CRR 5 1.928 to 4.914										0.1 BB- to B
- CRR 6 4.915 to 8.860										- B-
- CRR 7 8.861 to 15.000										- CCC+
- CRR 8 15.001 to 99.999										- CCC to C
- CRR 9/10 100.000										13.3 D

At 1 Jan 2018

Commercial real estate

Commercial real estate lending

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 27,084 70,769 1,607 9,129 1,796 110,385 20,443 55,872

Stage 2 1,587 3,176 120 677 13 5,573 990 2,032

Stage 3 1,022 16 209 43 118 1,408 673 12

POCI - - - - 14 14 - -

At 31 Dec 2018 29,693 73,961 1,936 9,849 1,941 117,380 22,106 57,916

- of which: renegotiated loans 944 1 186 1 - 1,132 816 -

Allowance for ECL (364) (59) (171) (9) (52) (655) (282) (33)

capitalised developers involved in residential construction or assets

Commercial real estate lending includes the financing of corporate,

supporting economic expansion.

institutional and high net worth customers who are investing primarily in

income-producing assets and, to a lesser extent, in their construction and Commercial real estate lending grew $17.7bn, including foreign exchange

development. The portfolio is globally diversified with larger concentrations movements, mainly in Hong Kong and, to a lesser extent, within the UK and

in Hong Kong, the UK and the US. The Group has aligned the definition of Canada.

commercial real estate to reflect the internal risk management view, and the Refinance risk in commercial real estate comparatives on pages 122 to 132 have been

re-presented. Commercial real estate lending tends to require the repayment of a

significant proportion of the principal at maturity. Typically, a customer will

Our global exposure is centred largely on cities with economic, political or arrange repayment through the acquisition of a new loan to settle the

cultural significance. In more developed markets, our exposure mainly existing debt. Refinance risk is the risk that a customer, being unable to

comprises the financing of investment assets, the redevelopment of existing repay the debt on maturity, fails to refinance it at commercial rates. We

stock and the augmentation of both commercial and residential markets to monitor our commercial real estate portfolio closely, assessing indicators

support economic and population growth. In less-developed commercial for signs of potential issues with refinancing.

real estate markets, our exposures comprise lending for development assets

on relatively short tenors with a particular focus on supporting larger, better

Commercial real estate gross loans and advances maturity analysis

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 ('ECAs'). Corporates would normally provide guarantees as part of a parent/subsidiary relationship and span a number of credit grades. The ECAs 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 our exposure to CDS protection providers is diversified among mainly banking counterparties with strong credit ratings.

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

Collateral on loans and advances

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

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

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

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

For credit-impaired loans, the collateral values cannot be directly compared with impairment allowances recognised. The LTV figures use open market values with no adjustments. Impairment allowances are calculated on a different basis, by considering other cash flows and adjusting collateral values for costs of realising collateral as explained further on page 228.

Commercial real estate loans and advances

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

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

Fully collateralised	4,739 1.3 782 4.5 1,576 0.4 439 0.5
LTV ratio:	2,039 1,430 363 907		394 330 34 24		795 505 29 247		303 7 129 -
- less than 50%		1.1		3.6		0.4		0.7
- 51% to 75%		0.7		1.2		0.4		-
- 76% to 90%		5.0		44.1		-		-
- 91% to 100%		1.0		8.3		-		-
Partially collateralised (B):	261 1.5 24 12.5 15 - - -

Fully collateralised	606 12.7 433 9.2 12 - - -
LTV ratio:	412 88 38 68		304 58 35 36		2 10 - -		- - - -
- less than 50%		10.0		9.2		-		-
- 51% to 75%		27.3		6.9		-		-
- 76% to 90%		2.6		5.7		-		-
- 91% to 100%		16.2		16.7		-		-
Partially collateralised (C):	474 56.5 261 42.9 - - - -

Report of the Directors \| Risk
Loans and advances to customers loan impairment charges by industry in 2017 ($bn)
Personal allowance for ECL/loan impairment allowance over five years ($bn)		IAS 39 IFRS 9

ECL coverage of loans and advances to customers at 31 December 2018¹⁷	$m $m $m $m $m $m $m $m $m $m