HSBC 2011 Annual Report Download - page 103

101
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
ratio after an observation and review period
in 2018.
In addition, the Basel Committee on
Banking Supervision will monitor a
leverage ratio based on a minimum 3%
tier 1 capital ratio over the period beginning
in 2013.
UK Independent Commission on Banking: the
forthcoming legislation in relation to the report of
the Independent Commission on Banking (‘ICB’) is
likely to require us to make major changes to our
corporate structure and the business activities we
conduct in the UK through our major banking
subsidiary, HSBC Bank, arising from:
– the likelihood that the retail banking activities
currently carried out within that entity may have
to be spun-off into a ring-fenced retail bank.
These changes would take an extended period to
implement with a significant effect on costs to
both implement the changes and run the ongoing
operations as restructured;
– the call for banks to hold a specified level of
primary loss-absorbing capital (‘PLAC’) up to
20% of their respective risk-weighted loans and
investment assets. Many of the areas which
could affect our business are precisely those
areas where changes to the proposals appear
likely or where consultation is being undertaken
by the UK government. The government
has indicated that it may modify the
recommendations in the report and is proposing
to undertake extensive consultation in two
stages during 2012;
– introduction of a non-risk based leverage ratio,
not as a binding prudential requirement but as
an instrument for supervisory review (pillar 2).
Bank levy: legislation in respect of the UK bank
levy was enacted on 19 July 2011. A charge of
US$570m for the UK bank levy has been recognised
in operating expenses in 2011. The UK levy is based
on the consolidated balance sheet at the year-end.
Bank levies have also been introduced, most notably
in France, Germany and South Korea. The overall
cost in 2011 was US$587m.
The ‘Volcker Rule’: while we do not have
segregated proprietary trading desks, the so called
Volcker Rule proposed under the Dodd-Frank Wall
Street Reform & Consumer Protection Act (the
‘Dodd-Frank Act’) could affect HSBC in North
America and across the Group. On 11 October 2011,
a proposed rule was published which generated
extensive public comment. A number of foreign
governments and other bodies have made public
submissions to the US authorities on, inter alia, the
overall scope and extra-territorial effects of the
proposed rule. However, rulemaking to implement
the provisions of the Volcker Rule has not been
completed.
G-SIBs: the capital impact of being designated a
Global systemically important bank (‘G-SIB’) is
discussed on page 213.
Potential impact on HSBC
• The proposals relating to capital and liquidity
will affect the capital adequacy and liquidity
frameworks under which financial institutions
operate and result in increased capital and
liquidity requirements, although the nature,
timing and effect of many of the changes remain
unclear. Increases in capital and liquidity
requirements could have a material effect on our
future financial condition or the results of our
operations. There is also the risk of second and
third order impacts of regulation which could
constrain the flow of credit within the economy.
• The proposed leverage ratio could cause HSBC,
as an institution with a relatively low-risk
portfolio overall, to constrain business activity
in areas which are well collateralised or possess
sufficient risk mitigants.
• For a further description of the possible effects
of the new Basel III/CRD IV rules on HSBC see
page 213. If either the quality or amount of the
Group’s capital were to fall outside the proposed
regulations, we could be required to raise more
capital or reduce our level of RWAs to meet the
requirements. Such actions and any resulting
transactions may not be within our operating
plans and may not be conducted on the most
favourable terms. This could lead to lower
returns on equity and cause some business
activities and products to be less profitable and,
in some instances, to fail to cover their cost of
equity.
• The proposed changes relating to remuneration,
bank levies and other taxes could increase the
Group’s cost of doing business in the regulatory
regimes in which these changes are
implemented, reducing future profitability.
Proposed changes in regulations such as the
rules relating to derivatives and central
counterparties regulation, the UK ICB ring-
fencing proposals, recovery and resolution plans
and the Volcker Rule may affect the manner in
which we conduct our activities and structure
ourselves, with the potential to both increase the
costs of doing business and curtail the types of