HSBC 2015 Annual Report Download - page 242

Report of the Directors: Capital (continued)
Regulatory developments
HSBC HOLDINGS PLC
240
Capital requirements framework (end point)
CRD IV capital buffers
CRD IV established a number of capital buffers, to be
met with CET1 capital, broadly aligned with the Basel III
framework. In the UK, with the exception of the CCyB
which applied with immediate effect, CRD IV capital buffers
are being phased in from 1 January 2016.
Automatic restrictions on capital distributions apply if
a bank’s CET1 capital falls below the level of its CRD IV
combined buffer. The CRD IV combined buffer is defined
as the total of the CCB, the CCyB, the global systemically
important institutions (‘G-SII’s) buffer and the systemic risk
buffer (‘SRB’), as these become applicable.
At 31 December 2015, the applicable CCyB rates in force
were 1% set by Norway and Sweden. Relevant credit
exposures located in Norway and Sweden were $2.4bn and
$1.5bn respectively. At 31 December 2015, this resulted in
an immaterial Group institution-specific CCyB requirement.
The Hong Kong Monetary Authority (‘HKMA’) CCyB rate of
0.625% was implemented on 27 January 2016 in respect of
Hong Kong exposures, following communication from the
FPC. The impact of the HKMA CCyB rate on our Group
institution-specific CCyB rate is expected to be 7bps (based
on RWAs at 31 December 2015).
The CCyB rates introduced by Norway and Sweden will
increase to 1.5% from June 2016. In January 2016, the
HKMA also announced that the CCyB rate applied to
exposures in Hong Kong will be increased to 1.25% from
1 January 2017.
In December 2015, the FPC maintained a 0% CCyB rate for
UK exposures. At the same time, the FPC published the
final calibration of the capital framework for UK banks.
Within this, the FPC indicated that going forward it would
apply a more active use of the CCyB and stated that it
intends to publish a revised policy statement on the use of
the CCyB in March 2016. The FPC also noted that it expects
to set a countercyclical buffer rate for UK exposures, in the
region of 1% when risks are judged to be neither subdued
nor elevated. The CCyB rate will be informed by the annual
UK concurrent stress test of major UK banks. If a rate
change is introduced it is expected to come into effect
12 months later.
In December 2015, the PRA confirmed our applicable G-SII
buffer as 2.5%. The G-SII buffer together with the CCB of
2.5%, came into effect on 1 January 2016. These are being
phased in until 2019 in increments of 25% of the end point
buffer requirement. Therefore, as of 1 January 2016, the
requirement for each buffer is 0.625% of RWAs.
Alongside CRD IV requirements, since 2014, the PRA has
expected major UK banks and building societies to meet a
7% CET1 ratio using the CRD IV end point definition. At
1 January 2016, with the introduction of the G-SII buffer
and the CCB, our minimum CET1 capital requirements and
combined buffer requirement taken together amount to
7.1% (based on RWAs at 31 December 2015), effectively
superseding the previous PRA guidance on the CET1 ratio.
In January 2016, the FPC published a consultation on its
proposed framework for the SRB. It is proposed that it will
apply to ring-fenced banks and large building societies and
will be implemented from 1 January 2019. The buffer to be
applied to HSBC's ring-fenced bank has yet to be
determined.
Further details of the aforementioned CRD IV buffers are
set out in the Appendix to Capital on page 246.
Pillar 2 and the ‘PRA buffer’
The Pillar 2 framework requires banks to hold capital in
respect of risks not captured in the Pillar 1 framework and
to assess risks which banks may become exposed to over a
forward-looking planning horizon. The PRA’s assessment
results in the determination of ICG/Pillar 2A and Pillar 2B,
respectively.
Pillar 2A was previously required to be met by total capital
but, since 1 January 2015, must be met with at least 56%
CET1. Furthermore, the PRA expects firms not to meet the
CRD IV buffers with any CET1 required to meet its ICG.
The Pillar 2A requirement is a point in time assessment
of the amount of capital the PRA considers that a bank
should hold to meet the overall financial adequacy rule.
It is therefore subject to change as part of the PRA’s
supervisory review process. In November 2015, our
Pillar 2A requirement was set at 2.3% of RWAs, of which
1.3% is met by CET1.
In July 2015, the PRA published a final policy statement
PS17/15, setting out amendments to the PRA Rulebook
and Supervisory Statements in relation to the Pillar 2
framework. The revised framework became effective on
1 January 2016. The PRA’s Statement of Policy sets out the
methodologies that it will use to inform its setting of firms’
Pillar 2 capital requirements, including new approaches
for determining Pillar 2 requirements for credit risk,
operational risk, credit concentration risk and pension
obligation risk.
In parallel, in July 2015, the PRA also issued its supervisory
statement SS31/15 in which it introduced a PRA buffer to
replace the capital planning buffer determined under
PRA buffer (illustrative)
Capital
conservation
buffer
Systemic
buffers
(SRB/G-SII)
Macro-prudential tools
(CCyB/sectoral capital
requirements
)
Pillar 2A/ICG
Pillar 1
(
CET1
)(
CET1
)(
CET1
)(
CET1
)(
CET1, AT1
and T2
)
(
CET1,
AT1
and
T2
)
2.5%
2.5%
2.3%
(of which 1.3% CET1)
8%
(of which 4.5% CET1)
0.2%