HSBC 2012 Annual Report Download - page 295

293
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Appendix to Capital
Capital management, capital measurement and RWA movement
Capital management
(Audited)
Approach and policy
Our approach to capital management is driven by our strategic and organisational requirements, taking into account
the regulatory, economic and commercial environment in which we operate. Pre-tax return on risk-weighted assets
(‘RoRWA’) is an operational metric by which the global businesses are managed on a day-to-day basis. The metric
combines return on equity and regulatory capital efficiency objectives. It is our objective to maintain a strong capital
base to support the risks inherent in our business and invest in accordance with our six filters framework, exceeding
both consolidated and local regulatory capital requirements at all times.
Our policy on capital management is underpinned by a capital management framework which enables us to
manage our capital in a consistent manner. The framework, which is approved by the GMB annually, incorporates
a number of different capital measures including market capitalisation, invested capital, economic capital and
regulatory capital. Following the FSA setting of a capital resources floor as a Basel III ratio, whilst also monitoring
capital at a Group level on a Basel II basis, we set our internal target on an end point Basel III CET1 basis.
Capital measures
• market capitalisation is the stock market value of HSBC;
• invested capital is the equity capital invested in HSBC by our shareholders, adjusted for certain reserves and goodwill previously
amortised or written off;
• economic capital is the internally calculated capital requirement which we deem necessary to support the risks to which we are exposed;
and
• regulatory capital is the capital which we are required to hold in accordance with the rules established by the FSA for the consolidated
Group and by our local regulators for individual Group companies.
Our assessment of capital adequacy is aligned to our assessment of risks, including: credit, market, operational,
interest rate risk in the banking book, pension fund, insurance, structural foreign exchange risk and residual risks.
Stress testing
We incorporate stress testing in capital plans because it helps us to understand how sensitive the core assumptions
in our capital plans are to the adverse effect of extreme but plausible events. Stress testing allows us to formulate
our response and mitigate risk in advance of conditions exhibiting the identified stress scenarios. The actual market
stresses which occurred throughout the financial system in recent years have been used to inform our capital planning
process and enhance the stress scenarios we employ. In addition to our internal stress tests, others are undertaken,
both at the request of regulators and by the regulators themselves using their prescribed assumptions. We take into
account the results of all such regulatory stress testing when assessing our internal capital requirements.
Risks to capital
Outside the stress-testing framework, a list of top and emerging risks is regularly evaluated for their effect on the core
tier 1 capital ratio. In addition, there are risks identified that are technically not within the scope of this list, but which
still have the potential to affect our RWAs and/or capital position. These risks are also included in the evaluation
of risks to capital. The downside or upside scenarios are assessed against our capital management objectives and
mitigating actions are assigned as necessary. The responsibility for global capital allocation principles and decisions
rests with the GMB. Through our internal governance processes, we seek to maintain discipline over our investment
and capital allocation decisions and seek to ensure that returns on investment are adequate after taking into account
capital costs. Our strategy is to allocate capital to businesses and entities on the basis of their ability to achieve
established RoRWA objectives and their regulatory and economic capital requirements.