Company: HBCYF
Filing Date: 2025-07-30
Form Type: 6-K
Source: 0001089113-25-000052
Chunk: 56

Company: HSBC HOLDINGS PLC
Filing Date: 2025-07-30
Form: 6-K
Chunk 56
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Measurement uncertainty and sensitivity analysis of ECL estimates The recognition and measurement of ECL involves the use of significant judgement and estimation. We form multiple scenarios based on economic forecasts and distributional estimates and apply these to credit risk models to estimate future credit losses. The results are then probability-weighted to determine an unbiased ECL estimate. Management assessed the current economic environment, reviewed the latest economic forecasts and discussed key risks before selecting the economic scenarios and their weightings. Management judgemental adjustments are used where modelled allowance for ECL does not fully reflect the identified risks and related uncertainty, or to capture significant late-breaking events . Methodology At 30 June 2025, four scenarios were used to capture the latest economic expectations and to articulate management’s view of the range of risks and potential outcomes. Scenarios are updated with the latest economic forecasts and distributional estimates in each quarter. Three scenarios, the Upside, Central and Downside, are drawn from external consensus forecasts, market data and distributional estimates of the entire range of economic outcomes. Consensus estimates are deployed as conditioning variables in a proprietary expansion of the scenario variables. The fourth scenario, the Downside 2, represents management’s view of severe downside risks. The consensus Central scenario is deemed the ‘most likely’ scenario, and usually attracts the largest probability weighting. The consensus outer scenarios represent short-term cyclical deviations from the Central scenario, where variable paths converge back to long-term trend expectations. They are calibrated to a 10% probability. The Downside 2 scenario is narrative-driven and explores a more extreme economic outcome than those captured by the consensus scenarios. In this scenario variables do not, by design, revert to long- term trend expectations and may instead explore alternative states of equilibrium, where economic variables move permanently away from past trends. It is calibrated to a 5% probability. This weighting scheme is deemed appropriate for the unbiased estimation of ECL in most circumstances. However, management may depart from this probability-based scenario weighting approach when the economic outlook and forecasts are determined to be particularly uncertain and risks are elevated. Management assessed that risk and uncertainty around the Central scenario projection remained elevated in the second quarter of 2025 and scenario weights were adjusted. Weight was reassigned from the Central scenario to the consensus Downside scenario. In the second quarter of 2025, outer scenarios for most markets have been configured as demand shocks. To the downside, the crystallisation of economic risks causes consumption and investment