HSBC 2012 Annual Report Download - page 294

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Capital > Future developments // Appendix to Capital > Capital management
292
banks aim to reach a 9% EBA defined core tier 1
ratio by the end of June 2012. In October 2012 the
EBA announced that they would no longer monitor
the core tier 1 ratio but instead expect banks to hold
an equivalent nominal amount of capital. This new
EBA recommendation on capital conservation will
require banks to maintain a nominal amount of
core tier 1 capital corresponding to the level of
9% of RWAs at the end of June 2012. This equates
to US$104bn for HSBC. We will continue to review
our internal target CETI ratio of 9.5% to 10.5% as
the applicable regulatory capital requirements evolve
during the period until 1 January 2019.
We also hold additional capital in respect of
Pillar 2, the process of internal capital adequacy
assessment and supervisory review which leads to a
final determination by the FSA of individual capital
guidance and any capital planning buffer that may
be required.
Complementing the above, and also within the
Pillar 2 process, the FSA first advised the Group in
2012 of a capital resources floor. This is expressed
as a minimum target CET1 ratio calculated on a
Basel III end point basis, to be achieved by
December 2013.
In 2013 the FSA will introduce new industry-
wide capital measures. They will floor all sovereign
loss given defaults (‘LGD’s) at 45% and we estimate
the effect of this to be an increase of US$19bn
RWAs. Additionally, a stringent supervisory
slotting approach for our UK commercial real estate
portfolio will be introduced. For HSBC, this will roll
out across the relevant business during 2013.
Furthermore, the FSA have informed HSBC of a
framework which will be used when assessing
wholesale portfolios with a low number of defaults.
This framework will impose LGD and exposure at
default (‘EAD’) floors based on the foundation
approach for portfolios with less than 20 events of
default per country.
Structural banking reform
(Unaudited)
In September 2011, the Independent Commission on
Banking (‘ICB’) recommended heightened capital
requirements for UK banking groups. In June 2012,
the UK Government published its consultation,
‘Banking reform: delivering stability and supporting
a sustainable economy’, which set out its detailed
proposals for implementing the ICB’s
recommendations, such as ring-fencing and bail-in
debt. In October 2012, the UK Government
published draft primary legislation. This legislation
was presented for pre-legislative scrutiny to the
UK’s Parliamentary Commission on Banking
Standards who presented their initial findings in
December 2012. In February 2013, the UK
Government responded to these findings and issued
a revised Bill. The Government intends to enact the
legislation by the end of this parliament in 2015
and to have reforms in place by 2019.
In October 2012, the Liikanen Report delivered
its recommendations to the EC to reform the
structure of the European banking sector. This also
recommends ring-fencing, focused on isolating
trading activities (rather than deposits as in the ICB
recommendations) and, in principle, additional bail-
in debt. We continue to monitor these developments.
Footnotes to Capital
1 The value represents marked-to-market method only.
2 Operational risk RWAs, under the standardised approach, are calculated using an average of the last three years’ revenues. For
business disposals, the operational risk RWAs are not released immediately on disposal, but diminish over a period of time. The RWAs
for the Card and Retail Services business at 31 December 2012 represent the remaining operational risk RWAs for the business.
3 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
4 Includes externally verified profits for the year ended 31 December 2012.
5 Mainly comprises unrealised gains/losses on available-for-sale debt securities related to SPEs.
6 Under FSA rules, unrealised gains/losses on debt securities net of tax must be excluded from capital resources.
7 Under FSA rules, any defined benefit asset is derecognised and a defined benefit liability may be substituted with the additional funding
that will be paid into the relevant schemes over the following five-year period.
8 Mainly comprise investments in insurance entities and the AFS investment in Ping An. Due to the expiry of the transitional provision,
with effect from 1 January 2013, material insurance holding companies acquired prior to 20 July 2006, will be deducted 50% from tier
1 and 50% from total capital.
9 This management action potentially arises only under rules on a CRD IV basis and has therefore not been included in the composition
of regulatory capital table, which is drawn up on the basis of the current rules.