HSBC 2010 Annual Report Download - page 179

177
Overview Operating & Financial Review Governance Financial Statements Shareholder Information
Capital
Capital management
(Audited)
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.
It is our objective to maintain a strong capital
base to support the development of our business and
to meet regulatory capital requirements at all times.
To achieve this, our policy is to hold capital in a
range of different forms and from diverse sources,
and all capital raising is agreed with major
subsidiaries as part of their individual and the
Group’s overall capital management processes.
Our policy is underpinned by a capital
management framework, which enables us to
manage our capital in a consistent and aligned
manner. The framework, which is approved by the
GMB, incorporates a number of different capital
measures including market capitalisation, invested
capital, economic capital and regulatory capital.
Capital measures
• market capitalisation is the stock market value of the
company;
• invested capital is the equity capital invested in HSBC by
our shareholders;
• economic capital is the internally calculated capital
requirement which we deem necessary to support the risks
to which we are exposed at a confidence level consistent
with a target credit rating of AA; 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.
The following risks managed through the capital
management framework have been identified as
material: credit, market, operational, interest rate risk
in the banking book, pension fund, insurance and
residual risks.
We incorporate stress testing in the capital
management framework, and it is important in
understanding the sensitivities of the core
assumptions in our capital plans to the adverse effect
of extreme, but plausible, events. Stress testing
allows us to formulate our response, including risk
mitigation actions, in advance of conditions starting
to exhibit the stress scenarios identified. The actual
market stresses which occurred throughout the
financial system during recent years have been used
to inform our capital planning process and further
develop the stress scenarios we employ.
In addition to our internal stress tests, others are
carried out, 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 undertaking our
internal capital management assessment.
The responsibility for global capital allocation
principles and decisions rests with the GMB.
Through our structured internal governance
processes, we maintain discipline over our
investment and capital allocation decisions and seek
to ensure that returns on investment are adequate
after taking account of capital costs. Our strategy is
to allocate capital to businesses on the basis of their
economic profit generation, regulatory and economic
capital requirements and cost of capital.
Our capital management process is articulated in
the annual Group capital plan which is approved by
the Board. The plan is drawn up with the objective
of maintaining both an appropriate amount of capital
and an optimal mix between the different
components of capital. HSBC Holdings and its major
subsidiaries raise non-equity tier 1 capital and
subordinated debt in accordance with our guidelines
on market and investor concentration, cost, market
conditions, timing, effect on composition and
maturity profile. Each of the subsidiaries manages its
own capital to support its planned business growth
and meet its local regulatory requirements within the
context of the approved annual Group capital plan.
In accordance with our capital management
framework, capital generated by subsidiaries in
excess of planned requirements is returned to HSBC
Holdings, normally by way of dividends.
HSBC Holdings is the primary provider of
capital to its subsidiaries and 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 that of its investment in
subsidiaries.
The tier 1 ratio (unaudited) increased to 12.1%
at 31 December 2010 (2009: 10.8%). It is our belief
that this enhanced ratio is appropriate in light of our
current evolution of the regulatory framework.