HSBC 2015 Annual Report Download - page 244

Report of the Directors: Capital (continued)
Regulatory developments / Appendix to Capital
HSBC HOLDINGS PLC
242
It is anticipated that a minimum leverage ratio
requirement, including potential buffers for G-SIBs, will
be consulted upon by the Basel Committee in 2016 and a
formal Pillar 1 measure finalised by 1 January 2018.
Total loss absorbing capacity proposals
As part of Recovery and Resolution frameworks both in
the EU and internationally, there have been various
developments in relation to TLAC. In the EU, the Bank
Recovery and Resolution Directive introduces an MREL.
In July 2015, the EBA published a final draft Regulatory
Technical Standard (‘RTS’) for MREL which seeks to provide
additional clarity on the criteria that resolution authorities
should take into account when setting a firm specific MREL
requirement. The EBA notes that it aims to implement the
MREL in a way which is consistent with the finalised
international standard on TLAC.
In November 2015, the FSB published finalised proposals
on TLAC for G-SIBs to be applied in accordance with
individual bank resolution strategies. This set out a
requirement of 16% of RWAs and a TLAC leverage ratio
of 6% to be met from 1 January 2019, increasing to 18%
and 6.75% respectively, from 1 January 2022. Existing
regulatory capital buffers will need to be met in addition to
the minimum TLAC requirement. A breach of TLAC will be
treated as severely as a breach of minimum capital
requirements.
In November 2015, the Basel Committee also published a
consultation on the treatment of banks’ holdings of TLAC
instruments issued by a G-SIB, which proposed new
deductions from regulatory capital. Once finalised, any
additional requirements in relation to TLAC are expected to
be reflected in MREL and to be implemented in the UK.
In December 2015, the Bank of England published a
consultation paper on the UK’s implementation of MREL.
The Bank of England stated that it intends to set MREL
consistent with both TLAC and the final EBA RTS expected
to be published later this year. The MREL is expected to
comprise a loss absorption amount which reflects existing
regulatory capital requirements and a recapitalisation
amount which reflects the capital that a firm is likely to
need post resolution. The latter can be met with both
regulatory capital and eligible liabilities.
While MREL is to be set on an individual basis, the Bank
of England generally expects MREL for banks whose
appropriate resolution strategy is bail-in, to be equivalent
to twice the current minimum capital requirements. A
finalised Statement of Policy is expected by mid-2016. The
Bank of England is also expected to provide firms with an
indication of their prospective 2020 MREL during 2016, and
will set MREL on a transitional basis until then. For G-SIBs,
MREL is proposed to apply from 2019, consistent with FSB
timelines.
In parallel to the above, the PRA separately published a
consultation paper on the interaction between MREL and
capital buffers and how it would treat a breach of MREL
requirements. This proposed that banks should not be able
to meet MREL requirements with CET1 used to meet
existing capital and leverage ratio buffers.
Structural reform and recovery and
resolution planning
Globally there have been a number of developments relating
to banking structural reform and the introduction of
recovery and resolution regimes. As part of recovery and
resolution planning, some regulators and national authorities
have also required changes to the corporate structures of
banks. These include requiring the local incorporation of
banks or ring-fencing of certain businesses.
In 2013 and 2014, UK legislation was enacted requiring large
banking groups to ring-fence UK retail and SME banking
activity in a separately incorporated banking subsidiary
(a ‘ring-fenced bank’) that is prohibited from engaging in
significant trading activity. Ring-fencing is to be completed by
1 January 2019. The legislation also detailed the applicable
individual customers to be transferred to the ring-fenced
bank. In addition, the legislation places restrictions on the
activities and geographical scope of ring-fenced banks.
Throughout 2015 the PRA published a number of
consultations on the implementation of ring-fencing
requirements and the finalisation of rules is expected to
continue in 2016.
The key proposals included near final rules published in
May 2015 on legal structure, corporate governance, and
continuity of services and facilities.
Additionally, in October 2015, the PRA issued a consultation
on the application of capital and liquidity rules for ring-
fenced banks, management of intra-group exposures, and
use of financial market infrastructures. The PRA intends to
undertake a further consultation in 2016 in respect of
reporting and disclosure, and publish finalised rules and
supervisory statements thereafter, with implementation by
1 January 2019.
We are working with our primary regulators to develop and
agree a resolution strategy for HSBC. It is our view that a
strategy by which the Group breaks up at a subsidiary bank
level at the point of resolution (referred to as a Multiple
Point of Entry) is the optimal approach, as it is aligned to
our existing legal and business structure. Similarly to all
G-SIBs, we are working with our regulators to mitigate
or remove critical inter-dependencies between our
subsidiaries to further facilitate the resolution of the
Group. In particular, in order to remove operational
dependencies (where one subsidiary bank provides critical
services to another), we are in the process of transferring
critical services from our subsidiary banks to a separate
internal group of service companies (‘ServCo group’).
During 2015, more than 18,000 employees performing
shared services in the UK were transferred to the ServCo
group. Further transfers of employees, critical shared
services and assets in the UK, Hong Kong and other
jurisdictions will occur in due course.