HSBC 2011 Annual Report Download - page 215

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Regulation, removing national discretion, with the
exception of countercyclical and capital conservation
buffers which are in the Directive.
The Regulation additionally sets out provisions
to harmonise regulatory and financial reporting in
the EU. In December 2011, the EBA published a
consultative document proposing measures to
specify uniform formats, frequencies and dates
of prudential reporting to the regulator. The new
requirements are due to take effect as of 1 January
2013.
The CRD IV measures are subject to agreement
by the European Parliament, the Council and EU
member states.
In parallel with the Basel III proposals, the
Basel Committee issued a consultative document in
July 2011, Global systemically important banks:
assessment methodology and the additional loss
absorbency requirement. In November 2011, they
published their rules and the Financial Stability
Board (‘FSB’) issued the initial list of global
systematically important banks (‘G-SIBs’). This
list, which includes HSBC alongside twenty-eight
other major banks globally, will be re-assessed
periodically through annual re-scoring of the
individual banks and triennial review of the
methodology.
The rules set out an indicator-based approach to
G-SIBs assessment employing five broad categories:
size, interconnectedness, lack of substitutability,
cross-jurisdictional activity and complexity. The
designated G-SIBs will be required to hold minimum
additional common equity tier 1 capital of between
1% and 2.5%, depending on their relative systemic
importance indicated by their assessed score. A
further 1% charge may be applied to any bank
which fails to make progress, or even regresses, in
performance within the assessment categories. The
requirements, initially for those banks identified
in November 2014 as G-SIBs, will be phased in
from 1 January 2016, becoming fully effective on
1 January 2019. National regulators have discretion
to introduce higher thresholds than these minima.
The above forms part of a broad mandate of the
FSB to reduce the moral hazard of G-SIBs. A further
exercise of this mandate was the FSB’s own direct
consultation of October 2011. This proposed
introducing, over 2012-14, enhanced reporting
by G-SIBs to the Basel Committee centrally.
In September 2011, the ICB recommended
measures on capital requirements for UK banking
groups. For further details on these proposals see
page 101. The requirements as set out above indicate
the required regulatory common equity tier 1 ratio
for a G-SIB may ultimately lie in the range of 8% to
12%.
Potential common equity tier 1 requirements from
1 January 2019
(Unaudited)
Minimum common equity tier 1 4.5%
Capital conservation buffer 2.5%
Countercyclical capital buffer 0 – 2.5%
G-SIB buffer 1 – 2.5%
Against the backdrop of eurozone instability, on
a temporary basis, the EBA recommends banks aim
to reach a 9% core tier 1 ratio by the end of June
2012. We will continue to review our target core tier
1 ratio of 9.5% to 10.5% as the applicable regulatory
capital requirements evolve over the period to
1 January 2019.
Impact of Basel III
(Unaudited)
In order to provide some insight into the possible
effects of the Basel III rules on HSBC, we have
estimated the Group’s pro forma common equity
tier 1 ratio on the basis of our interpretation of those
rules applied to our position at 31 December 2011.
The Basel III changes will be progressively
phased in. The increased capital requirements which
come into effect on 1 January 2013 are estimated to
result in a common equity tier 1 ratio which is
100bps lower than the current core tier 1 ratio.
Management actions, primarily the run-off of legacy
positions including the US CML portfolio and the
sale of the US Card and Retail Services portfolio,
coupled with active management of the correlation
trading portfolio, the market risk capital requirement
and the counterparty capital risk requirement, will
mitigate this by 110bps, more than offsetting the
effect of these Basel III changes before taking
account of any future retained earnings.
In addition to the impact on common equity
tier 1 capital, tier 1 capital and tier 2 capital will also
be affected by the derecognition of non-qualifying
capital instruments. These changes will be phased in
over 10 years from 1 January 2013, and will further
reduce the tier 1 ratio by an estimated 10bps, and the
total capital ratio by an estimated 50bps in 2013,
excluding new issues of qualifying capital
instruments.
The changes to capital deductions and regulatory
adjustments including deferred tax assets, material
holdings, excess expected losses and unrealised
losses on available-for-sale portfolios will be phased
in over a five-year period starting on 1 January 2014.