HSBC said yesterday that it will be forced to stump up $35 billion (£17 billion) to finance its two structured investment vehicles (SIVs) as the bank disclosed it was pulling the two vehicles on to its own balance sheet to stave off a forced liquidation of the assets.

HSBC said that investors in Cullinan Finance Ltd and Asscher Finance Ltd – which are both managed by HSBC – would now be given the option to exchange their existing notes for paper issued by one or more new vehicles set up and funded by the bank’s own balance sheet.

SIVs are investment vehicles which raise money in the short-term commercial paper market and use it to invest in longer-term assets, such as mortgages.

They have been hit hard by the credit crunch as investors who typically roll over their short-term paper have refused to play ball and demanded their money back.

It has obliged many of the SIVs to make a forced sale of their assets at a time when the assets themselves are losing their value.

Many of the SIVs were set up by banks and then given to other asset managers, such as hedge funds, to manage. But in HSBC’s case, the SIVs were set up and managed by the bank itself.

US banks led by Citigroup, JPMor-gan and Bank of America have proposed a super-SIV fund that would buy assets from struggling SIVs, but the US Treasury-backed plan has yet to get off the ground.

Standard & Poor’s, the rating agency, said last week that the SIV sector was in “wind-down” mode with over $100 billion of assets sold by the end of October.

Stuart Gulliver, the chief executive of HSBC’s corporate, investment banking and markets division, said: “We believe that HSBC’s actions will set a benchmark and restore a degree of confidence to the SIV sector, while providing a specific solution to address the challenges faced by investors in Cullinan and Asscher, the two SIVs managed by HSBC.”

The news comes as HSBC, and Mr Gulliver in particular, face mounting pressure from Knight Vinke, the activist shareholder, to reform strategy and boardroom arrangements.

HSBC said that both its SIVs were funded beyond the end of the year, with Asscher funded to April.

It said that the assets inside both SIVs had an average credit rating of Aa1/AA+ and that there had been no downgrades of any asset-backed securities or structured finance securities to date.

But it gave warning: “HSBC believes there is not likely to be a near-term resolution of the funding problems faced by the SIV sector.”

As a result of bringing the two SIVs on to its balance sheet, HSBC said its assets would rise by about $45 billion, although the bank said that the actual amount of liquidity and funding required to keep the vehicles afloat was about $35 billion.

The bank said that existing investors would continue to bear all the economic risk from any actual losses up to the full amount of their investment, while HSBC expects no material impact on its earnings.

Feeling the squeeze

What is a Structured investment vehicle (SIV)?
Typically they are put together by commercial banks on behalf of clients such as hedge funds. Banks can also manage their own SIVs

What do they invest in?
They are usually opaque, investing in complex securities and often do not need to be displayed on a bank’s balance sheet. SIVs are designed to make money out of the difference between short-term borrowing rates and longer-term returns from structured product investments or asset-backed securities, such as mortgages

Has the US sub-prime mortgage collapse had an impact?
Yes, a huge impact. The SIVs themselves have little exposure to the sub-prime market. There is no liquidity in the commercial paper market, which means that the SIVs can no longer borrow short-term cash and have been forced to sell off their longer-term assets

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive