HSBC 2012 Annual Report Download - page 296

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Capital > Appendix to Capital > Capital measurement and allocation
294
Risk-weighted asset targets
Top-down RWA targets are established for the global business lines, in accordance with the Group’s strategic
direction and risk appetite. As these targets are deployed to lower levels of management, action plans for
implementation are developed. These may include growth strategies; active portfolio management; restructuring;
business and/or customer-level reviews; RWA efficiency and optimisation initiatives and risk-mitigation. Our capital
management process is articulated in the annual Group capital plan which is approved by the Board.
RWA targets are approved by the GMB on an annual basis and business performance against them is monitored
through regular reporting to the Group ALCO. The management of capital deductions is also addressed in the RWA
monitoring framework through additional notional charges for these items.
A range of analysis is employed in the RWA monitoring framework to identify the key drivers of movements in
the position, such as book size and book quality. Particular attention is paid to identifying and segmenting items
within the day-to-day control of the business and those items that are driven by changes in risk models or regulatory
methodology.
Capital generation
HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity
capital where necessary. These investments are substantially funded by HSBC Holdings’ own capital issuance and
profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a prudent balance
between the composition of its capital and its investment in subsidiaries.
Capital measurement and allocation
(Unaudited)
The FSA supervises HSBC on a consolidated basis and therefore receives information on the capital adequacy of,
and sets capital requirements for, the Group as a whole. Individual banking subsidiaries are directly regulated by their
local banking supervisors, who set and monitor their capital adequacy requirements. In 2012, we calculated capital at
a Group level using the Basel II framework as amended for CRD III, commonly known as Basel 2.5.
Our policy and practice in capital measurement and allocation at Group level is underpinned by the Basel II rules and
Basel III proposals. However, local regulators are at different stages of implementation and some local reporting,
notably in the US, is still on a Basel I basis. In most jurisdictions, non-banking financial subsidiaries are also subject
to the supervision and capital requirements of local regulatory authorities.
Basel II is structured around three ‘pillars’: minimum capital requirements, supervisory review process and market
discipline. The CRD implemented Basel II in the EU and the FSA then gave effect to the CRD by including the
latter’s requirements in its own rulebooks.
Regulatory capital
For regulatory purposes, our capital base is divided into three main categories, namely core tier 1, other tier 1 and tier
2, depending on the degree of permanency and loss absorbency exhibited.
• core tier 1 capital comprises shareholders’ equity and related non-controlling interests. The book values of
goodwill and intangible assets are deducted from core tier 1 capital and other regulatory adjustments are made
for items reflected in shareholders’ equity which are treated differently for the purposes of capital adequacy;
• qualifying capital instruments such as non-cumulative perpetual preference shares and hybrid capital securities
are included in other tier 1 capital; and
• tier 2 capital comprises qualifying subordinated loan capital, related non-controlling interests, allowable
collective impairment allowances and unrealised gains arising on the fair valuation of equity instruments held as
available for sale. Tier 2 capital also includes reserves arising from the revaluation of properties.
To ensure the overall quality of the capital base, the FSA’s rules set restrictions on the amount of hybrid capital
instruments that can be included in tier 1 capital relative to core tier 1 capital, and limits overall tier 2 capital to no
more than tier 1 capital.