HSBC 2015 Annual Report Download - page 249

HSBC HOLDINGS PLC
247
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
RWA movement by key driver – basis of preparation and supporting notes
Credit risk drivers – definitions and quantification
The causal analysis of RWA movements splits the total movement in IRB RWAs into six drivers, described below. The first four
relate to specific, identifiable and measurable changes. The remaining two, book size and book quality, are derived after
accounting for movements in the first four specific drivers.
1. Foreign exchange movements
This is the movement in RWAs as a result of changes in the exchange rate between the functional currency of the HSBC
company owning each portfolio and US dollars, being our presentation currency for consolidated reporting. Our structural
foreign exchange exposures are managed with the primary objective of ensuring, where practical, that our consolidated capital
ratios and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange
rates. This is usually achieved by ensuring that, for each subsidiary bank, the ratio of structural exposures in a given currency to
risk-weighted assets denominated in that currency is broadly equal to the capital ratio of the subsidiary in question. We hedge
structural foreign exchange exposures only in limited circumstances.
2. Acquisitions and disposals
This is the movement in RWAs as a result of the disposal or acquisition of business operations. This can be whole businesses
or parts of a business. The movement in RWAs is quantified based on the credit risk exposures as at the end of the month
preceding a disposal or following an acquisition.
3. Model updates
RWA movements arising from the implementation of new models and from changes to existing parameter models are
allocated to this driver. This figure will also include changes which arise following review of modelling assumptions. Where a
model recalibration reflects an update to more recent performance data, the resulting RWA changes are not assigned here,
but instead reported under book quality.
RWA changes are estimated based on the impact assessments made in the testing phase prior to implementation. These
values are used to simulate the effect of new or updated models on the portfolio at the point of implementation, assuming
there were no major changes in the portfolio from the testing phase to implementation phase.
RWA movement arising from portfolios moving from the standardised approach to the IRB approach are also allocated to this
driver. The RWA movement by key driver statement shows the increase in IRB RWAs, but does not show the corresponding
reduction in standardised approach RWAs as its scope is limited to IRB only.
The movement in RWAs is quantified at the date at which the IRB approach is applied, and not during the testing phase as with
a new/updated model.
4. Methodology and policy
Internal updates
This captures the effect on RWAs of changing the internal treatment of exposures. This may include, but is not limited to, a
portfolio or a part of one moving from an existing IRB model onto a standardised model, identification of netting and credit
risk mitigation.
External updates – regulatory
This specifies the effect of additional or changing regulatory requirements. This includes, but is not limited to, regulatory-
prescribed changes to the RWA calculation. The movement in RWAs is quantified by comparing the RWAs calculated for that
portfolio under the old and the new requirements.
5. Book size
RWA movements attributed to this driver are those we would expect to experience for the given movement in exposure,
as measured by EAD, assuming a stable risk profile. These RWA movements arise in the normal course of business, such as
growth in credit exposures or reduction in book size from run-offs and write-offs.
The RWA movement is quantified as follows:
• RWA and EAD changes captured in the four drivers above are excluded from the total movements to create an adjusted
movement in EAD and RWA for the period.
• The average RWA to EAD percentage is calculated for the opening position and is applied to the adjusted movement in
EAD. This results in an estimated book size RWA movement based on the assumption that the EAD to RWA percentage is
constant throughout the period.
As the calculation relies on averaging, the output is dependent upon the degree of portfolio aggregation and the number of
discrete time periods for which the calculation is undertaken. For each quarter of 2015 this calculation was performed for each