VideoOver the course of the last 17 to 18 months, we've curtailed our appetite principally by managing down the size of the branch network in consumer lending. We closed off the mortgage services broker correspondent channel originations in first quarter of 2007, recognizing that it was an underwriting model that was very difficult to exercise real control over.
Although we've prefunded much of our obligations looking out through and into 2009, [consumer lending] is a business in which it's just really really difficult to make money in the current environment. As you see property values declining, as you see unemployment increasing, the equity that people can leverage in their properties to refi out and debt-consolidate or build improvements into their homes is just becoming more and more limited. And the risk appetite that we have traditionally had within HSBC doesn't really put us in the position where we'd like to double down in this market.
What's your biggest worry now?
Increasing losses in this environment. My main focus as CFO is making sure that we have resources in terms of capital to support the increasing delinquencies and charge-offs within those consumer-finance books of business. When I think of my day-to-day responsibilities, making sure we work with our parents, HSBC Holdings plc in the U.K., to make sure we have strong enough liquidity and capital to work through this economic cycle and put our consumer finance portfolios back on their feet.
Have you found the hesitancy many banks have recently shown in lending to other banks— and the corresponding difficulty of bank borrowers— terribly troublesome?
Systemically yes, but individually no. One of the boons in my job is that I've got a great brand name behind me from a banking perspective. You know, I've been able to go out and turn my commercial paper every day without difficulty, without exception, for as long as this downturn and funding crisis has existed.
In terms of issuing term debt from the finance company, we haven't this year because we haven't needed to. We're running down the portfolio, and the portfolio is paying off in a manner that helps us to meet any of our debt obligations. So in the context of the finance company, no real issue.
In the context of lending to other banks, we're in the market and we intend to stay in the market and play a responsible role. The challenge there of course is getting other people to play.
Under current conditions in North America, how do you maintain enough capital to fund your risk?
Well, we keep making money. On a group consolidated basis, on June 30 we generated $10 billion dollars worth of profit before tax. Now, clearly, there's an element of that profit which goes to supporting our capital base in the U.S., which through the elevated loan impairment charges we're taking, has the effect of consuming some of that capital that our colleagues around the group are generating on our behalf.
When we incur elevated levels of loan-impairment, our parent, HSBC Holdings plc, has stepped in each and every occasion and contributed the capital necessary to maintain our targets. And that comes from group resources, and by that I mean the profitability that our colleagues in Asia, Europe Latin America and the Middle East. Basically, the rest of the world generates it and every other region within the world of HSBC continues to be strongly profitable.
So part of our responsibility going forward is to manage the portfolio within our risk appetite, run down the subprime book, and try to release some of that capital back to group.
As CFO, what skills and resources have helped you weather the current storm?
Large quantities of espresso coffee and chocolate chip cookies. One element is patience and perspective. You can be very tempted to sit and stare at your Bloomberg screen every day and worry about what has been happening in the marketplace. But from my standpoint, when I walk in every morning, the view is really on what's within my control. I can manage my liquidity position within reasonable bounds through managing the commercial paper programs that we operate, through managing the attrition within our portfolios in terms where do we extend credit and where do we pull back on credit.
What I really draw on on a daily basis is a very strong team of finance and credit professionals. They work around me to help manage a strong treasury position, the accounting interpretations, and a prudent and conservative approach to reserving within our various portfolios. We also have a very strong collaboration with our credit and compliance teams around how we manage our appetite for risk within the various asset categories. Obviously I draw on more than 20 years of experience as a finance professional. I draw on a fair amount of other experience of other financial crises, though not one of this depth and probable duration.
As a finance executive in an industry which has opposed fair-value accounting, where do you stand on the current controversy concerning the marking to market of illiquid assets?
Fair-value accounting hasn't put us as an industry in the position in which we find ourselves today. If you look at extent of leverage within investment banks and certain commercial banks within the U.S. household, there's not a cause-effect relationship [between fair-value accounting and the current financial crisis]. I think fair value appropriately applied is an appropriate accounting model. If we've learned anything from this, it's that we need to stay grounded in the economic raison d’être for financial institutions, which is to provide credit in a responsible matter.
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