HSBC 2010 Annual Report Download - page 93

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Overview Operating & Financial Review Governance Financial Statements Shareholder Information
• Quality of capital: there is renewed emphasis on
common equity as the principal component of
tier 1 capital, with increased deductions from
shareholders’ equity (calculated on an
accounting basis) to determine the level of
regulatory capital. The phasing-in periods for
these new deductions will start in 2014, to be
fully implemented by 2018.
• Minimum ratios: a new minimum common
equity requirement of 4.5% is to be
implemented in full by 1 January 2015. An
additional capital conservation buffer of 2.5% in
common equity effectively acts as a trigger for
restrictions on management actions (such as the
payment of dividends or bonuses) so that the
capital structure can be rebuilt. This will be
phased in between 1 January 2016 and
1 January 2019. In addition to these core
tier 1 levels, additional requirements from the
Basel Committee for tier 1 capital of 1.5% and
tier 2 capital of 2.0%, by 2019, will lift the
minimum total capital requirement for banks to
around 10.5%.
• Countercyclical capital buffer: the Basel
Committee has finalised its proposals for a
countercyclical capital buffer of 2.5% in
common equity, to be built up in periods of
excess credit growth compared with GDP
growth. It is not clear how these may operate in
practice and there is doubt that either
supervisors or the market would support release
of a buffer again as the economic cycle turned.
• Total leverage: the Committee has proposed a
leverage ratio of 3% of total assets to constrain
aggregate size relative to the capital base. It is
intended that an observation period of parallel
running from 2013 to 2017 should enable a
minimum standard to become mandatory in
2018.
• Liquidity and funding: a new minimum
standard, the Liquidity Coverage Ratio, has
been developed to promote the short-term
resilience of a bank’s liquidity risk profile.
A Net Stable Funding Ratio has also been
introduced to provide a sustainable maturity
structure of assets and liabilities. As it is not
yet clear what unintended consequences these
measures may have, they will be phased in after
observation periods in 2015 and 2018,
respectively.
• The Basel Committee is also developing an
approach, due by the end of 2011, to defining
Global Systemically Important Financial
Institutions (‘G-SIFI’s) to introduce more
rigorous oversight and co-ordinated assessment
of their risks through international supervisory
colleges, provide for higher levels of capital and
liquidity resilience, and require mandatory
recovery and resolution plans with institution-
specific crisis cooperation agreements between
cross-border crisis management groups.
A strong capital position has long been, and will
remain, a key priority for HSBC. We are equipped
to respond to the capital requirement standards of
Basel III, as discussed further on pages 181 and 182,
and to sustain future growth.
Other measures
• Remuneration: the FSB has issued principles on
remuneration designed to guide regional and
national authorities in establishing appropriate
regimes to align remuneration in a risk-based
manner with the long-term interests of
stakeholders. The EU has implemented rule
changes in the Capital Requirements Directive
which impact the balance between fixed and
variable remuneration, establishing limits on the
percentage of bonus which can be paid in cash.
Approaches to the issue remain divergent
globally, however.
• Bank levies: a number of levies are being raised
on banks, notably by the UK, Germany and
France. There is a renewed US proposal to raise
a financial crisis responsibility fee on certain
financial companies with assets over US$50bn.
The European levies are calculated with
reference to measures of stability of funding, in
order to encourage more stable structures. In the
UK, for example, the levy is to be charged at a
rate of 0.075% on all liabilities excluding
insured deposits and certain other elements, but
with a lower rate for longer-term liabilities and
uninsured deposits. Germany will hypothecate
levy income to create resolution funds to
support failing banks, while in other
jurisdictions it will accrue to general tax
revenues. Under the draft legislation, the UK
levy is not tax deductible and does not meet the
definition of an income tax for income statement
purposes. For indicative purposes only, the UK
levy that would be payable based on the closing
2010 balance sheet, after taking into account
announced changes to deposit protection
schemes in 2011, is estimated at US$0.6bn.
• Other taxes: other areas of financial sector
taxation being considered by the authorities
are a Financial Activities Tax (‘FAT’), a tax
on profit and remuneration, and a Financial