TIDMHSBA
RNS Number : 4165Q
HSBC Holdings PLC
19 February 2019
HSBC Holdings plc
Pillar 3 Disclosures at 31 December 2018
Contents
Page
Introduction 3
---------------------------------------
Key metrics 3
----
Regulatory framework for disclosures 4
Pillar 3 disclosures 4
Regulatory developments 4
Accounting developments 5
--------------------------------------- ----
Risk management 5
Linkage to the Annual Report
and Accounts 2018 7
Capital and RWAs 14
Capital management 14
Own funds 14
Leverage ratio 15
--------------------------------------- ----
Pillar 1 capital requirements
and RWA flow 17
Pillar 2 and ICAAP 20
Credit risk 21
Overview and responsibilities 21
Credit risk management 21
Credit risk models governance 21
Credit quality of assets 21
----
Risk mitigation 35
Global risk 40
Wholesale risk 42
Retail risk 48
Model performance 54
--------------------------------------- ----
Counterparty credit risk 58
Counterparty credit risk management 58
Securitisation 61
HSBC securitisation strategy 61
HSBC securitisation activity 61
Monitoring of securitisation
positions 61
Securitisation accounting treatment 62
Securitisation regulatory treatment 62
Analysis of securitisation exposures 62
Market risk 64
Overview of market risk in global
businesses 64
Market risk governance 66
Market risk measures 66
Market risk capital models 68
Prudent valuation adjustment 70
Structural foreign exchange exposures 71
Interest rate risk in the banking
book 71
Operational risk 72
Overview and objectives 72
Organisation and responsibilities 72
---------------------------------------
Developments during 2018 72
----
Measurement and monitoring 73
Other risks 74
Pension risk 74
Non-trading book exposures in
equities 74
Risk management of insurance
operations 74
Liquidity and funding risk 74
Reputational risk 80
Sustainability risk 80
Business risk 80
Dilution risk 80
Remuneration 80
--------------------------------------- ----
Appendices
Page
I Additional tables 81
----
II Asset encumbrance 107
----
III Summary of disclosures withheld 107
----- ----------------------------------- ----
Other Information
Abbreviations 108
-------------------------------- ---
Cautionary statement regarding
forward-looking statements 110
Contacts 111
-------------------------------- ---
Certain defined terms
Unless the context requires otherwise, 'HSBC Holdings' means
HSBC Holdings plc and 'HSBC', the 'Group', 'we', 'us' and 'our'
refer to HSBC Holdings together with its subsidiaries. Within this
document the Hong Kong Special Administrative Region of the
People's Republic of China is referred to as 'Hong Kong'. When used
in the terms 'shareholders' equity' and 'total shareholders'
equity', 'shareholders' means holders of HSBC Holdings ordinary
shares and those preference shares and capital securities issued by
HSBC Holdings classified as equity. The abbreviations '$m' and
'$bn' represent millions and billions (thousands of millions) of US
dollars respectively.
Tables
Ref Page
1 Key metrics (KM1/IFRS9-FL) a 3
--- -------------------------------------- ---- ----
Reconciliation of capital
with and without IFRS 9 transitional
2 arrangements applied 3
-------------------------------------- ---- ----
Reconciliation of balance
sheets - financial accounting
3 to regulatory scope of consolidation 8
---- ----
Principal entities with a
different regulatory and
accounting scope of consolidation
4 (LI3) 10
---- ----
Differences between accounting
and regulatory scopes of
consolidation and mapping
of financial statement categories
with regulatory risk categories
5 (LI1) 11
---- ----
Main sources of differences
between regulatory exposure
amounts and carrying values
6 in financial statements (LI2) a 13
---- ----
7 Own funds disclosure b 14
---- ----
Summary reconciliation of
accounting assets and leverage
8 ratio exposures (LRSum) b 16
---- ----
Leverage ratio common disclosure
9 (LRCom) a 16
---- ----
Leverage ratio - Split of
on-balance sheet exposures
(excluding derivatives, SFTs
10 and exempted exposures) (LRSpl) a 17
---- ----
11 Overview of RWAs (OV1) b 18
---- ----
RWA flow statements of credit
risk exposures under the
12 IRB approach (CR8) 18
-------------------------------------- ---- ----
RWA flow statements of CCR
13 exposures under IMM (CCR7) 19
--- -------------------------------------- ---- ----
RWA flow statements of market
risk exposures under IMA
14 (MR2-B) 19
--- -------------------------------------- ---- ----
Credit quality of exposures
by exposure classes and instruments
15 (CR1-A) 21
-------------------------------------- ---- ----
Credit quality of exposures
by industry or counterparty
16 types (CR1-B) 23
--- -------------------------------------- ---- ----
Credit quality of exposures
17 by geography (CR1-C) 24
--- -------------------------------------- ---- ----
Ageing of past-due unimpaired
18 and impaired exposures (CR1-D) 25
--- -------------------------------------- ---- ----
Non-performing and forborne
19 exposures (CR1-E) 25
--- -------------------------------------- ---- ----
Credit risk exposure - summary
20 (CRB-B) a 26
--- -------------------------------------- ---- ----
Geographical breakdown of
21 exposures (CRB-C) 27
---- ----
Concentration of exposures
by industry or counterparty
22 types (CRB-D) 29
---- ----
Maturity of on-balance sheet
23 exposures (CRB-E) 33
--- -------------------------------------- ---- ----
Amount of past due unimpaired
and credit-impaired exposures
24 by geographical region 34
---- ----
Credit risk mitigation techniques
25 - overview (CR3) 35
-------------------------------------- ---- ----
Standardised approach - credit
conversion factor ('CCF')
and credit risk mitigation
26 ('CRM') effects (CR4) b 36
---- ----
Standardised approach - exposures
by asset class and risk weight
27 (CR5) b 37
---- ----
IRB - Effect on RWA of credit
derivatives used as CRM techniques
28 (CR7) 37
--- ---- ----
Credit derivatives exposures
29 (CCR6) 38
--- -------------------------------------- ---- ----
Wholesale IRB credit risk
30 models 41
---- ----
IRB models - estimated and
31 actual values (wholesale) 42
-------------------------------------- ---- ----
IRB models - corporate PD
models - performance by CRR
32 grade 42
--- -------------------------------------- ---- ----
Material retail IRB risk
33 rating systems 46
--- -------------------------------------- ---- ----
IRB models - estimated and
34 actual values (retail) 49
-------------------------------------- ---- ----
Wholesale IRB exposure -
back-testing of probability
of default (PD) per portfolio
35 (CR9) 51
--- -------------------------------------- ---- ----
Ref Page
Retail IRB exposure - back-testing
of probability of default
36 (PD) per portfolio (CR9) 53
--- -------------------------------------- ---- ----
Counterparty credit risk
exposure - by exposure class,
product and geographical
37 region 56
---- ----
Counterparty credit risk
- RWAs by exposure class,
product and geographical
38 region 57
--- -------------------------------------- ---- ----
Securitisation exposure -
39 movement in the year 60
---- ----
Securitisation - asset values
40 and impairments 60
---- ----
Market risk under standardised
41 approach (MR1) 61
--- -------------------------------------- ---- ----
42 Market risk under IMA (MR2-A) 61
--- -------------------------------------- ---- ----
IMA values for trading portfolios
43 (MR3) 64
--- --------------------------------------
Prudential valuation adjustments
44 (PV1) 66
--- -------------------------------------- ---- ----
45 Operational risk RWAs 67
46 Non-trading book equity investments 69
--- -------------------------------------- ---- ----
Level and components of HSBC
Group consolidated liquidity
47 coverage ratio (LIQ1) 72
--- -------------------------------------- ---- ----
Analysis of on-balance sheet
encumbered and unencumbered
48 assets 73
--- -------------------------------------- ---- ----
Wholesale IRB exposure -
49 by obligor grade 76
--- -------------------------------------- ---- ----
PD, LGD, RWA and exposure
50 by country/territory 77
Retail IRB exposure - by
51 internal PD band 84
---- ----
IRB expected loss and CRAs
52 - by exposure class b 85
--- -------------------------------------- ---- ----
Credit risk RWAs - by geographical
53 region b 86
--- -------------------------------------- ---- ----
IRB exposure - credit risk
54 mitigation 87
Standardised exposure - credit
55 risk mitigation 87
Standardised exposure - by
56 credit quality step a 88
Changes in stock of general
and specific credit risk
57 adjustments (CR2-A) 88
---- ----
Changes in stock of defaulted
loans and debt securities
58 (CR2-B) 88
IRB - Credit risk exposures
by portfolio and PD range
59 (CR6) a 89
---
Specialised lending on slotting
60 approach (CR10) 94
--------------------------------------
Analysis of counterparty
credit risk exposure by approach
(excluding centrally cleared
61 exposures) (CCR1) 95
Credit valuation adjustment
62 (CVA) capital charge (CCR2) 95
Standardised approach - CCR
exposures by regulatory portfolio
63 and risk weights (CCR3) 95
IRB - CCR exposures by portfolio
64 and PD scale (CCR4) 96
Impact of netting and collateral
65 held on exposure values (CCR5-A) 98
--- -------------------------------------- ----
Composition of collateral
66 for CCR exposure (CCR5-B) 98
--- --------------------------------------
Exposures to central counterparties
67 (CCR8) 98
Securitisation exposures
68 in the non-trading book (SEC1) 99
Securitisation exposures
69 in the trading book (SEC2) 99
Securitisation exposures
in the non-trading book and
associated capital requirements
- bank acting as originator
70 or sponsor (SEC3) 100
Securitisation exposures
in the non-trading book and
associated capital requirements
- bank acting as investor
71 (SEC4) 101
--- --------------------------------------
72 Asset encumbrance 102
--- -------------------------------------- ---- ----
The Group has adopted the EU's regulatory transitional
arrangements for International Financial Reporting Standard
('IFRS') 9 Financial instruments. A number of tables in this
document report under this arrangement as follows:
a. Some figures for 2018 (indicated with ^) within this table
have been prepared on an IFRS 9 transitional basis.
b. All figures within this table have been prepared on an IFRS 9
transitional basis.
All other tables report numbers on the basis of full adoption of
IFRS 9.
Introduction
Table 1: Key metrics (KM1/IFRS9-FL)
At
31 Dec 30 Sep 30 Jun 31 Mar 1 Jan 31 Dec(1)
Ref* Footnotes 2018 2018 2018 2018 2018 2017
----- ------------------------------- ---------- --------- --------- --------- --------- --------- -----------
Available capital ($bn) 2
Common equity tier 1 ('CET1')
1 capital ^ 121.0 123.1 122.8 129.6 127.3 126.1
CET1 capital as if IFRS 9
transitional
arrangements had not been
2 applied 120.0 122.1 121.8 128.6 126.3 N/A
-------
3 Tier 1 capital ^ 147.1 149.3 147.1 157.1 152.1 151.0
4 Tier 1 capital as if IFRS 9 146.1 148.3 146.1 156.1 151.1 N/A
transitional
arrangements had not been
applied
5 Total regulatory capital ^ 173.2 178.1 176.6 185.2 183.1 182.4
----- ------------------------------- ---------- ------- ------- ------- ------- ------- ---------
Total capital as if IFRS 9
transitional
arrangements had not been
6 applied 172.2 177.1 175.6 184.2 182.1 N/A
----- ------------------------------- ---------- ------- ------- ------- ------- ------- -----------
Risk-weighted assets ('RWAs')
($bn)
7 Total RWAs 865.3 862.7 865.5 894.4 872.1 871.3
----- ------------------------------- ---------- ------- ------- ------- ------- ------- ---------
Total RWAs as if IFRS 9
transitional
arrangements had not been
8 applied 864.7 862.1 864.9 893.8 871.6 N/A
----- ------------------------------- ---------- ------- ------- ------- ------- ------- -----------
Capital ratios (%) 2
9 CET1 ^ 14.0 14.3 14.2 14.5 14.6 14.5
CET1 as if IFRS 9 transitional
arrangements had not been
10 applied 13.9 14.2 14.1 14.4 14.5 N/A
11 Total tier 1 ^ 17.0 17.3 17.0 17.6 17.4 17.3
Tier 1 as if IFRS 9
transitional
arrangements had not been
12 applied 16.9 17.2 16.9 17.5 17.3 N/A
----- ------------------------------- ---------- ------- ------- ------- ------- ------- -----------
13 Total capital ^ 20.0 20.7 20.4 20.7 21.0 20.9
----- ------------------------------- ---------- ------- ------- ------- ------- ------- ---------
Total capital as if IFRS 9
transitional
arrangements had not been
14 applied 19.9 20.6 20.3 20.6 20.9 N/A
----- ------------------------------- ---------- ------- ------- ------- ------- ------- -----------
Additional CET1 buffer
requirements
as a percentage of RWA (%)
Capital conservation buffer
requirement 1.88 1.88 1.88 1.88 N/A 1.25
Countercyclical buffer
requirement 0.56 0.45 0.46 0.34 N/A 0.22
Bank G-SIB and/or D-SIB
additional
requirements 1.50 1.50 1.50 1.50 N/A 1.25
Total of bank CET1 specific
buffer
requirements 3.94 3.83 3.84 3.72 N/A 2.72
----- ------------------------------- ---------- ------- ------- ------- ------- --------- ---------
Total capital requirement (%)
----- ------------------------------- ---------- --------- --------- --------- --------- --------- -----------
Total capital requirement 3 10.9 11.5 11.5 11.5 N/A N/A
CET1 available after meeting
the
bank's minimum capital
requirements 4 7.9 7.8 7.7 8.0 N/A 8.0
----- ------------------------------- ---------- ------- ------- ------- ------- --------- ---------
Leverage ratio 5
----- ------------------------------- ---------- --------- --------- --------- --------- --------- -----------
Total leverage ratio exposure
measure
15 ($bn) ^ 2,614.9 2,676.4 2,664.1 2,707.9 2,556.4 2,557.1
16 Leverage ratio (%) ^ 5.5 5.4 5.4 5.6 5.6 5.6
----- ------------------------------- ---------- ------- ------- ------- ------- ------- ---------
17 Leverage ratio as if IFRS 9 5.5 5.4 5.3 5.5 5.6 N/A
transitional
arrangements had not been
applied
(%)
----- ------------------------------- ---------- ------- ------- ------- ------- ------- -----------
Liquidity Coverage Ratio
('LCR') 6
Total high-quality liquid
assets
($bn) 567.2 533.2 540.2 533.1 N/A 512.6
Total net cash outflow ($bn) 368.7 334.1 341.7 338.5 N/A 359.9
LCR ratio (%) 7 153.8 159.6 158.1 157.5 N/A 142.2
----- ------------------------------- ---------- ------- ------- ------- ------- --------- ---------
* The references in this, and subsequent tables, identify the
lines prescribed in the relevant European Banking Authority ('EBA')
template where applicable and where there is a value.
1 Figures presented as reported under IAS 39 'Financial
instruments: recognition & measurement' at 31 December
2017.
2 Capital figures and ratios are reported on the CRD IV
transitional basis for additional tier 1 and tier 2 capital in
accordance with articles 484-92 of the Capital Requirements
Regulation.
3 Total capital requirement is defined as the sum of Pillar 1
and Pillar 2A capital requirements set by the Prudential Regulation
Authority ('PRA'). Our Pillar 2A requirement at 31 December 2018,
as per the PRA's Individual Capital Guidance based on a point in
time assessment, was 2.9% of RWAs, of which 1.6% was met by CET1.
On 1 January 2019, our Pillar 2A requirement increased to 3.0% of
RWAs, of which 1.7% must be met by CET1.
4 The minimum requirements represent the total capital requirement to be met by CET1.
5 Leverage ratio is calculated using the CRD IV end point basis for additional tier 1 capital.
6 The EU's regulatory transitional arrangements for IFRS 9
'Financial instruments' in article 473a of the Capital Requirements
Regulation do not apply to liquidity coverage measures.
7 LCR is calculated as at the end of each period rather than
using average values. Refer to page 132 of the Annual Report and
Accounts 2018 for further detail.
Table 2: Reconciliation of capital with and without IFRS 9 transitional
arrangements applied
At 31 Dec 2018
Total own
CET1 Tier 1 funds
$bn $bn $bn
------------------------------------------------------ ------ -----------
Reported balance using IFRS 9 transitional
arrangements 121.0 147.1 173.2
----- --------
Expected credit losses ('ECL') reversed under
transitional arrangements for IFRS 9 (1.2) (1.2) (1.2)
------ ----- --------
- Standardised ('STD') approach (1.2) (1.2) (1.2)
- Internal ratings based ('IRB') approach - - -
------ ----- --------
Tax impacts 0.3 0.3 0.3
----- --------
Changes in amounts deducted from CET1 for
deferred tax assets and significant investments (0.1) (0.1) (0.1)
------ ----- --------
- amounts deducted from CET1 for deferred - -
tax assets -
- amounts deducted from CET1 for significant
investments (0.1) (0.1) (0.1)
------ ----- --------
Reported balance excluding IFRS 9 transitional
arrangements 120.0 146.1 172.2
------------------------------------------------------ ------ ----- --------
Regulatory framework for disclosures
HSBC is supervised on a consolidated basis in the United Kingdom
('UK') by the Prudential Regulation Authority ('PRA'), which
receives information on the capital adequacy of, and sets capital
requirements for, the Group as a whole. Individual banking
subsidiaries are directly regulated by their local banking
supervisors, who set and monitor their local capital adequacy
requirements. In most jurisdictions, non-banking financial
subsidiaries are also subject to the supervision and capital
requirements of local regulatory authorities.
At a consolidated group level, we calculated capital for
prudential regulatory reporting purposes throughout 2018 using the
Basel III framework of the Basel Committee ('Basel') as implemented
by the European Union ('EU') in the amended Capital Requirements
Directive and Regulation ('CRD IV'), and in the PRA's Rulebook for
the UK banking industry. The regulators of Group banking entities
outside the EU are at varying stages of implementation of the Basel
Committee's framework, so local regulation in 2018 may have been on
the basis of Basel I, II or III.
The Basel Committee's framework is structured around three
'pillars': the Pillar 1 minimum capital requirements and Pillar 2
supervisory review process are complemented by Pillar 3 market
discipline. The aim of Pillar 3 is to produce disclosures that
allow market participants to assess the scope of application by
banks of the Basel Committee's framework and the rules in their
jurisdiction, their capital condition, risk exposures and risk
management processes, and hence their capital adequacy.
Pillar 3 requires all material risks to be disclosed to provide
a comprehensive view of a bank's risk profile.
The PRA's final rules adopted national discretions in order to
accelerate significantly the transition timetable to full 'end
point' CRD IV compliance.
Pillar 3 disclosures
HSBC's Pillar 3 Disclosures at 31 December
2018
comprise information required under Pillar 3, both quantitative
and qualitative. They are made in accordance with Part 8 of the
Capital Requirements Regulation within CRD IV and the European
Banking Authority's ('EBA') final standards on revised Pillar 3
disclosures issued in December 2016. These disclosures are
supplemented by specific additional requirements of the PRA and
discretionary disclosures on our part.
The Pillar 3 disclosures are governed by the Group's disclosure
policy framework as approved by the Group Audit Committee ('GAC').
Information relating to the rationale for withholding certain
disclosures is provided in Appendix III.
In our disclosures, to give insight into movements during the
year, we provide comparative figures for the previous year or
period, analytical review of variances and 'flow' tables for
capital requirements.
Where disclosures have been enhanced, or are new, we do not
generally restate or provide prior year comparatives. Wherever
specific rows and columns in the tables prescribed by the EBA or
Basel are not applicable or immaterial to HSBC's activities, we
omit them and follow the same approach for comparative
disclosures.
We publish comprehensive Pillar 3 disclosures annually on the
HSBC website www.hsbc.com, concurrently with the release of our
Annual Report and Accounts 2018. Similarly, a separate Pillar 3
document is also published at half-year concurrently with the
release of our Interim Report disclosure. Quarterly earnings
releases also include regulatory information in line with the
guidelines on the frequency of regulatory disclosures.
Pillar 3 requirements may be met by inclusion in other
disclosure media. Where we adopt this approach, references are
provided to the relevant pages of the Annual Report and Accounts
2018 or other locations.
We continue to engage in the work of the UK authorities and
industry associations to improve the transparency and comparability
of UK banks' Pillar 3 disclosures.
Regulatory developments
The UK's withdrawal from the EU
In August 2018, Her Majesty's Treasury ('HMT') commenced the
process of 'onshoring' the current EU legislation to ensure that
there is legal continuity in the event of the UK leaving the EU.
This involved the publication of draft Statutory Instruments across
a wide range of financial services legislation; this included the
key prudential legislation for banking groups: the Capital
Requirements Regulation and Capital Requirements Directive.
One of the key effects of onshoring will be to treat the EU in
the same manner as the EU currently treats non-European Economic
Area countries. Under the draft provisions published by HMT, the
PRA will be given the power to grant transitional provisions to
delay the implementation of these changes for up to two years,
should the UK leave the EU without an agreement on 29 March
2019.
The Bank of England ('BoE') and the PRA published a package of
consultations in October and December 2018, setting out the changes
required to the PRA's rules and technical standards as a result of
the UK's withdrawal. It also included proposals on the exercise of
the transitional powers; however the precise scope of these remains
uncertain.
There are certain pieces of EU legislation that are in progress,
but are not yet live, that will not enter automatically into UK law
if it withdraws from the EU without an agreement. The Financial
Services (Implementation of Legislation) Bill is currently
progressing through the UK Parliament to empower HMT to make
regulations in the UK to bring into force certain specified EU
legislation that remains in progress on 29 March 2019.
RWAs and leverage ratio
Basel Committee
In December 2017, Basel published revisions to the Basel III
framework. The final package includes:
-- widespread changes to the risk weights under the standardised approach to credit risk;
-- a change in the scope of application of the internal ratings
based ('IRB') approach to credit risk, together with changes to the
IRB methodology;
-- the replacement of the operational risk approaches with a single methodology;
-- an amended set of rules for the credit valuation adjustment ('CVA') capital framework;
-- an aggregate output capital floor that ensures that banks'
total RWAs are no lower than 72.5% of those generated by the
standardised approaches; and
-- changes to the exposure measure for the leverage ratio,
together with the imposition of a leverage ratio buffer for global
systemically important banks ('G-SIB'). This will take the form of
a tier 1 capital buffer set at 50% of the G-SIB's RWAs capital
buffer.
Further refinements to the leverage ratio exposure measure for
centrally cleared derivatives and disclosure of daily-average
exposure measures are also under consideration.
Following a recalibration, Basel published the final changes to
the market risk RWA regime, the Fundamental Review of the Trading
book ('FRTB'), in January 2019. The new regime contains a more
clearly defined trading book boundary, the introduction of an
internal models approach based upon expected shortfall models,
capital requirements for non-modellable risk factors, and a more
risk-sensitive standardised approach that can serve as a fall-back
for the internal models method.
Basel has announced that the package will be implemented on
1 January 2022, with a five-year transitional provision for the
output floor, commencing at a rate of 50%. The final standards will
need to be transposed into the relevant local law before coming
into effect.
HSBC continues to evaluate the final package. Given that the
package contains a significant number of national discretions, the
possible outcome is uncertain.
European Union
In the EU, Basel's reforms are being implemented through
revisions to the Capital Requirements Regulation and the Capital
Requirements Directive. The first tranche of Basel's reforms,
collectively referred to as CRR2, is expected to follow a phased
implementation commencing in 2019; however, it has yet to enter
into law. It includes the changes to the market risk rules under
the FRTB, revisions to the counterparty credit risk framework and
the new leverage ratio rules.
The CRR2 is included within the scope of the Financial Services
(Implementation of Legislation) Bill. If passed by the UK
Parliament, this would empower HMT to bring CRR2 into UK law even
if it is not in force in the EU on exit day.
In May 2018, the European Commission commenced the process of
implementing the second tranche of Basel's reforms, collectively
known as CRR3, by requesting that the EBA report on the adoption of
the remaining reforms on the EU's banking sector and the wider
economy. This tranche will include Basel's reforms in relation to
credit risk, operational risk and CVA, together with the output
floor. The EBA's final report on the details of the EU's adoption
of the reforms is not due to be published until the end of June
2019.
Separately, in January 2019, the EU published final proposals
for a prudential backstop for non-performing loans, which will
result in a deduction from CET1 capital when a minimum impairment
coverage requirement is not met. This regime is expected to be
implemented in the first half of 2019.
The EU continues to work on its 'IRB Repair' programme, issuing
in November 2018 near final guidance on the specification of
economic downturn for the purposes of the loss given default
modelling and the final rules on the specification of the
definition of default.
In January 2019, the new securitisation framework came into
force in the EU for new transactions. Existing transactions will be
subject to the framework on 1 January 2020. This regime introduces
changes to the methodology for determining RWAs for securitisation
positions, with beneficial treatments for simple, transparent and
standardised securitisation transactions.
Bank of England
In October 2018, the PRA published a consultation on its
supervisory expectations and approach to the financial risks from
climate change. This focused on its expectations of firms on the
incorporation of the risk from climate change into risk management
practices and stress testing, as well as firms' climate change
disclosures and internal governance. The PRA has indicated that it
expects that the material financial risks from climate change
should be included within Pillar 2.
Capital resources, macroprudential, recovery & resolution
and total loss absorbing capacity
Financial Stability Board
In June 2018, the Financial Stability Board ('FSB') published a
call for feedback on the technical implementation of its standard
on total loss absorbing capacity ('TLAC') for G-SIBs in resolution
('the TLAC standard'). This will assess whether the implementation
of the TLAC standard is proceeding as envisaged and may be used as
a basis to develop further implementation guidance.
Also in June 2018, the FSB published two sets of final
guidelines. The first sets out principles to assist authorities as
they operationalise resolution strategies and the second covers the
development of resolution funding plans for G-SIBs.
Basel Committee
In July 2018, Basel published a revised assessment methodology,
updating its 2013 rules, for the G-SIB capital buffer. The revised
methodology will take effect in 2021 and the resulting capital
buffer will be applied in January 2023.
European Union
In addition to the changes to RWAs, CRR2 will implement the EU's
version of the FSB's TLAC standard for G-SIBs, which is in the form
of minimum requirements for own funds and eligible liabilities
('MREL'). Several changes are also introduced in the own funds
calculation and eligibility criteria. Similar applicability issues
will arise in relation to the UK's withdrawal from the EU.
Bank of England
In June 2018, the BoE published its approach to setting MREL
within groups, known as internal MREL, and its final policy on
selected outstanding MREL policy matters. These requirements came
into effect on 1 January 2019. The PRA also published its
expectations for MREL reporting, which are also now in force.
In December 2018, the BoE published a consultation on its
approach to assessing resolvability. This outlines how it assesses
resolvability through its established policies and further proposes
new principles on funding and operational continuity in resolution
and firms' restructuring capabilities, as well as management,
governance and communication capabilities. Simultaneously, the PRA
published a consultation on resolution assessments and public
disclosure by firms. Together, these publications contain proposals
to form a Resolvability Assessment Framework, presented as the
final element in the UK's resolution regime.
In addition, a number of changes have come into effect since
late 2018:
-- The legislative framework for UK ring-fencing took effect on
1 January 2019. HSBC completed the process to set up its
ring-fenced bank, HSBC UK Bank plc ('HBUK'), in July 2018, six
months ahead of the legal deadline.
-- The PRA's final rules on group risk and double leverage came
into effect on 1 January 2019. Firms are required to consider both
elements as part of the Pillar 2 process. In June 2018, the PRA
also published modifications to its intra-group large exposures
framework, which came into force with immediate effect.
-- In November 2018, the UK Countercyclical Capital Buffer rate
increased from 0.5% to 1%. The Hong Kong rate increased from 1.875%
to 2.5% with effect from 1 January 2019.
Accounting developments
IFRS 9 Financial instruments
HSBC adopted the requirements of IFRS 9 Financial Instruments on
1 January 2018, with the exception of the provisions relating to
the presentation of gains and losses on financial liabilities
designated at fair value, which were adopted from 1 January
2017.
The IFRS 9 classification and measurement of financial assets
and the recognition and measurement of expected credit losses
('ECL') differ from the previous approach under IAS 39 'Financial
Instruments: Recognition and Measurement' and IAS 37 'Provisions,
Contingent Liabilities and Contingent Assets'.
As prior periods have not been restated, comparative periods
remain in accordance with the legacy accounting standards and are
therefore not necessarily comparable to the IFRS 9 amounts recorded
for 2018.
The adoption of IFRS 9 has not resulted in any significant
change to HSBC's business model or that of our four global
businesses. This includes our strategy, country presence, product
offerings and target customer segments.
Existing stress testing and regulatory models, skills and
expertise were adapted in order to meet IFRS 9 requirements. Data
from various client, finance and risk systems have been integrated
and validated. As a result of IFRS 9 adoption, management has
additional insight and measures not previously utilised, which over
time, may influence our risk appetite and risk management
processes.
For regulatory reporting, the Group has adopted the transitional
arrangements (including paragraph 4 of CRR article 473a) published
by the EU on 27 December 2017 for IFRS 9 Financial Instruments.
These permit banks to add back to their capital base a proportion
of the impact that IFRS 9 has upon their loan loss allowances
during the first five years of use. The proportion that banks may
add back starts at 95% in 2018, and reduces to 25% by 2022.
The impact of IFRS 9 on loan loss allowances is defined as:
-- the increase in loan loss allowances on day one of IFRS 9 adoption; and
-- any subsequent increase in ECL in the non credit-impaired book thereafter.
The impact is calculated separately for portfolios using the STD
and IRB approaches. For IRB portfolios, there is no add-back to
capital unless loan loss allowances exceed regulatory 12-month
expected losses. Any add-back must be tax effected and accompanied
by a recalculation of capital deduction thresholds, exposure and
risk-weighted assets ('RWAs').
Additional details on IFRS 9 are disclosed on page 224]of the
Annual Report and Accounts 2018.
IFRS 16 Leases
From 1 January 2019, IFRS 16 Leases will replace IAS 17 Leases.
IFRS 16 requires lessees to capitalise most leases within the scope
of the standard, similar to how finance leases were accounted for
under IAS 17. Lessees will recognise a right-of-use ('ROU') asset
and a corresponding financial liability on the balance sheet. The
asset will be amortised over the length of the lease, and the
financial liability measured at amortised cost. Lessor accounting
remains substantially the same as under IAS 17.
HSBC expects to adopt IFRS 16 using a modified retrospective
approach where the cumulative effect of applying the standard is
recognised in the opening balance of retained earnings.
For regulatory reporting, the ROU assets will not be deducted
from regulatory capital; instead they will be risk-weighted at
100%.
For further information about the Group's implementation of IFRS
16, refer to Note 1 of the Annual Report and Accounts 2018.
Risk management
Our risk management framework
We use an enterprise-wide risk management framework across the
organisation and across all risk types. It is underpinned by our
risk culture and is reinforced by the HSBC Values and our Global
Standards programme.
The framework fosters continuous monitoring of the risk
environment, and promotes risk awareness and sound operational and
strategic decision making. It also ensures we have a consistent
approach to monitoring, managing and mitigating the risks we accept
and incur in our activities.
Further information on our risk management framework is set out
on page 73 of the Annual Report and Accounts 2018. The management
and mitigation of principal risks facing the Group is described in
our top and emerging risks on page 69 of the Annual Report and
Accounts 2018.
Commentary on hedging strategies and associated processes can be
found in the Market risk and Securitisation sections of this
document. Additionally, a comprehensive overview of this topic can
be found in Note 1.2(h) on page 229 of the Annual Report and
Accounts 2018.
Risk culture
HSBC has long recognised the importance of a strong risk
culture, the fostering of which is a key responsibility of senior
executives. Our risk culture is reinforced by the HSBC Values and
our Global Standards programme. It is instrumental in aligning the
behaviours of individuals with our attitude to assuming and
managing risk, which helps to ensure that our risk profile remains
in line with our risk appetite.
Our risk culture is further reinforced by our approach to
remuneration. Individual awards, including those for senior
executives, are based on compliance with the HSBC Values and the
achievement of financial and non-financial objectives that are
aligned to our risk appetite and strategy.
Further information on risk and remuneration is set out on pages
69 and 199 of the Annual Report and Accounts 2018.
Risk governance
The Board has ultimate responsibility for the effective
management of risk and approves HSBC's risk appetite. It is advised
on risk-related matters by the Group Risk Committee ('GRC') and the
Financial System Vulnerabilities Committee ('FSVC').
The activities of the GRC and the FSVC are set out on pages 161
to 163 of the Annual Report and Accounts 2018.
Executive accountability for the ongoing monitoring, assessment
and management of the risk environment, and the effectiveness of
the risk management framework resides with the Group Chief Risk
Officer. He is supported by the Risk Management Meeting ('RMM') of
the Group Management Board.
The management of financial crime risk resides with the Group
Chief Compliance Officer. He is supported by the Financial Crime
Risk Management Meeting.
Further information is available on page 85 of the Annual Report
and Accounts 2018.
Day-to-day responsibility for risk management is delegated to
senior managers with individual accountability for decision making.
These senior managers are supported by global functions. All
employees have a role to play in risk management. These roles are
defined using the three lines of defence model, which takes into
account the Group's business and functional structures.
Our executive risk governance structures ensure appropriate
oversight and accountability for risk, which facilitates the
reporting and escalation to the RMM.
Further information about the Group's three lines of defence
model and executive risk governance structures is available on page
75 of the Annual Report and Accounts 2018.
Risk appetite
Risk appetite is a key component of our management of risk. It
describes the type and quantum of risk that the Group is willing to
accept in achieving its medium- and long-term strategic goals. In
HSBC, risk appetite is managed through a global risk appetite
framework and articulated in a risk appetite statement ('RAS'),
which is approved biannually by the Board on the advice of the
GRC.
The Group's risk appetite informs our strategic and financial
planning process, defining the desired forward-looking risk profile
of the Group. It is also integrated within other risk management
tools, such as the top and emerging risks report and stress
testing, to ensure consistency in risk management.
Information about our risk management tools is set out on page
74 of the Annual Report and Accounts 2018. Details of the Group's
overarching risk appetite are set out on page 69 of the Annual
Report and Accounts 2018.
Stress testing
HSBC operates a wide-ranging stress testing programme that
supports our risk management and capital planning. It includes
execution of stress tests mandated by our regulators. Our stress
testing is supported by dedicated teams and infrastructure.
Our testing programme assesses our capital strength and enhances
our resilience to external shocks. It also helps us understand and
mitigate risks, and informs our decision about capital levels. As
well as taking part in regulatory driven stress tests, we conduct
our own internal stress tests.
The Group stress testing programme is overseen by the GRC, and
results are reported, where appropriate, to the RMM and GRC.
Further information about stress testing and details of the
Group's regulatory stress test results are set out on page 76 of
the Annual Report and Accounts 2018.
Global Risk function
We have a dedicated Global Risk function, headed by the Group
Chief Risk Officer, which is responsible for the Group's risk
management framework. This includes establishing global policy,
monitoring risk profiles, and forward-looking risk identification
and management. Global Risk is made up of sub-functions covering
all risks to our operations. It is independent from the global
businesses, including sales and trading functions, helping to
ensure balance in risk/return decisions. The Global Risk function
operates in line with the three lines of defence model.
For further information see page 74 of the Annual Report and
Accounts 2018.
Risk management and internal control systems
The Directors are responsible for maintaining and reviewing the
effectiveness of risk management and internal control systems, and
for determining the aggregate level and risk types they are willing
to accept in achieving the Group's business objectives. On behalf
of the Board, the GAC has responsibility for oversight of risk
management and internal controls over financial reporting, and the
GRC has responsibility for oversight of risk management and
internal controls other than for financial reporting.
The Directors, through the GRC and the GAC, conduct an annual
review of the effectiveness of our system of risk management and
internal control. The GRC and the GAC received confirmation that
executive management has taken or is taking the necessary actions
to remedy any failings or weaknesses identified through the
operation of our framework of controls.
HSBC's key risk management and internal control procedures are
described on page 164 of the Annual Report and Accounts 2018, where
the Report of the Directors on the effectiveness of internal
controls can also be found.
Risk measurement and reporting systems
Our risk measurement and reporting systems are designed to help
ensure that risks are comprehensively captured with all the
attributes necessary to support well-founded decisions, that those
attributes are accurately assessed, and that information is
delivered in a timely manner for those risks to be successfully
managed and mitigated.
Risk measurement and reporting systems are also subject to a
governance framework designed to ensure that their build and
implementation are fit for purpose and functioning appropriately.
Risk information systems development is a key responsibility of the
Global Risk function, while the development and operation of risk
rating and management systems and processes are ultimately subject
to the oversight of the Board.
We continue to invest significant resources in IT systems and
processes in order to maintain and improve our risk management
capabilities. A number of key initiatives and projects to enhance
consistent data aggregation, reporting and management, and work
towards meeting our Basel Committee data obligations are in
progress. Group standards govern the procurement and operation of
systems used in our subsidiaries to process risk information within
business lines and risk functions.
Risk measurement and reporting structures deployed at Group
level are applied throughout global businesses and major operating
subsidiaries through a common operating model for integrated risk
management and control. This model sets out the respective
responsibilities of Group, global business, region and country
level risk functions in respect of risk governance and oversight,
compliance risks, approval authorities and lending guidelines,
global and local scorecards, management information and reporting,
and relations with third parties such as regulators, rating
agencies and auditors.
Risk analytics and model governance
The Global Risk function manages a number of analytics
disciplines supporting the development and management of models,
including those for risk rating, scoring, economic capital and
stress testing covering different risk types and business segments.
The analytics functions formulate technical responses to industry
developments and regulatory policy in the field of risk analytics,
develops HSBC's global risk models, and oversees local model
development and use around the Group toward our implementation
targets for IRB approaches.
The Global Model Oversight Committee ('Global MOC') is the
primary committee responsible for the oversight of Model Risk
globally within HSBC. It serves an important role in providing
strategic direction on the management of models and their
associated risks to HSBC's businesses globally and is an essential
element of the governance structure for model risk management.
Global MOC is supported by Functional MOCs at the Global and
Regional levels which are responsible for model risk management
within their functional areas, including wholesale credit risk,
market risk, retail risk, and finance.
The Global MOC meets regularly and reports to RMM. It is chaired
by the Group CRO and membership includes the CEOs of the Global
Businesses, and senior executives from Risk, Finance and global
businesses. Through its oversight of the functional MOCs, it
identifies emerging risks for all aspects of the risk rating
system, ensuring that model risk is managed within our risk
appetite statement, and formally advises RMM on any material
model-related issues.
Models are also subject to an independent validation process and
governance oversight by the Model Risk Management team within
Global Risk. The team provides robust challenge to the modelling
approaches used across the Group. It also ensures that the
performance of those models is transparent and that their
limitations are visible to key stakeholders.
The development and use of data and models to meet local
requirements are the responsibility of global businesses or
functions, as well as regional and/or local entities under the
governance of their own management, subject to overall Group policy
and oversight.
Linkage to the Annual Report and
Accounts
2018
Structure of the regulatory group
Subsidiaries engaged in insurance activities are excluded from
the regulatory consolidation by excluding assets, liabilities and
post-acquisition reserves. The Group's investments in these
insurance subsidiaries are recorded at cost and deducted from CET1
capital (subject to thresholds).
The regulatory consolidation also excludes special purpose
entities ('SPEs') where significant risk has been transferred to
third parties. Exposures to these SPEs are risk-weighted as
securitisation positions for regulatory purposes.
Participating interests in banking associates are proportionally
consolidated for regulatory purposes by including our share of
assets, liabilities, profit and loss, and risk-weighted assets in
accordance with the PRA's application of EU legislation.
Non-participating significant investments, along with non-financial
associates, are deducted from capital (subject to thresholds).
Table 3: Reconciliation of balance sheets - financial accounting to
regulatory scope of consolidation
Accounting Deconsolidation Consolidation Regulatory
balance of insurance/ of banking balance
sheet other entities associates sheet
Ref $m $m $m $m
Assets
----------------------------------------------------------- ----- ---------- ----------------- --------------- ------------
Cash and balances at central banks 162,843 (39) 191 162,995
Items in the course of collection
from other banks 5,787 - - 5,787
Hong Kong Government certificates
of indebtedness 35,859 - - 35,859
Trading assets 238,130 (1,244) - 236,886
Financial assets designated and
otherwise mandatorily measured
at fair value 41,111 (28,166) 502 13,447
* of which: debt securities eligible as Tier 2 issued
by Group FSEs that are outside the regulatory scope
of consolidation r 424 (424) - -
----------------------------------------------------------- ----- --------- ----------- --- --------- ---- ---------
Derivatives 207,825 (70) 102 207,857
Loans and advances to banks 72,167 (1,264) 1,462 72,365
- of which: lending to FSEs eligible
as Tier 2 r 52 - - 52
-----------------------------------------------------------
Loans and advances to customers 981,696 (1,530) 12,692 992,858
------------------------------------------------------------------ --------- ----------- --- --------- ---- ---------
- of which:
lending eligible as Tier 2 to Group
FSEs outside the regulatory scope
of consolidation r 117 (117) - -
----------------------------------------------------------- ----- --------- ----------- --- --------- ---- ---------
expected credit losses on IRB portfolios h (6,405) - - (6,405)
----------------------------------------------------------- ----- --------- ----------- ---- --------- ---- ---------
Reverse repurchase agreements -
non-trading 242,804 (3) 542 243,343
Financial investments 407,433 (61,228) 3,578 349,783
------------------------------------------------------------------ --------- ----------- --- --------- ---- ---------
Capital invested in insurance and
other entities - 2,306 - 2,306
Prepayments, accrued income and
other assets 110,571 (5,968) 247 104,850
------------------------------------------------------------------ --------- ----------- --- --------- ---- ---------
- of which: retirement benefit
assets j 7,934 - - 7,934
----------------------------------------------------------- --------- ----------- ---- --------- ---- ---------
Current tax assets 684 (23) 26 687
------------------------------------------------------------------ --------- ----------- --- --------- ---- ---------
Interests in associates and joint
ventures 22,407 (398) (4,144) 17,865
------------------------------------------------------------------ --------- ----------- --- --------- --- ---------
- of which: positive goodwill on
acquisition e 492 (13) - 479
----------------------------------------------------------- --------- ----------- --- --------- ---- ---------
Goodwill and intangible assets e 24,357 (7,281) - 17,076
Deferred tax assets f 4,450 161 1 4,612
Total assets at 31 Dec 2018 2,558,124 (104,747) 15,199 2,468,576
------------------------------------------------------------------ --------- ----------- --- --------- ---- ---------
Liabilities and equity
------------------------------------------------------------ ----- --------- --------- ------ -----------
Liabilities
------------------------------------------------------------ ----- --------- --------- ------ -----------
Hong Kong currency notes in circulation 35,859 - - 35,859
Deposits by banks 56,331 1 229 56,561
Customer accounts 1,362,643 2,586 13,790 1,379,019
Repurchase agreements - non-trading 165,884 - - 165,884
Items in course of transmission
to other banks 5,641 - - 5,641
Trading liabilities 84,431 - - 84,431
Financial liabilities designated
at fair value 148,505 (4,347) 36 144,194
- of which:
included in tier 1 n 411 - - 411
o,
q,
included in tier 2 i 12,499 - - 12,499
------------------------------------------------------------ ----- --------- -------- ------ ---------
Derivatives 205,835 116 81 206,032
- of which: debit valuation adjustment i 152 - - 152
------------------------------------------------------------ ----- --------- -------- ------ ---------
Debt securities in issue 85,342 (1,448) - 83,894
Accruals, deferred income and other
liabilities 97,380 (2,830) 691 95,241
--------- -------- ------ ---------
Current tax liabilities 718 (22) 4 700
Liabilities under insurance contracts 87,330 (87,330) - -
--------- -------- ------ ---------
Provisions 2,920 (9) 44 2,955
* of which: credit-related contingent liabilities and
contractual commitments on IRB portfolios h 395 - - 395
------------------------------------------------------------ ----- --------- -------- ------ ---------
Deferred tax liabilities 2,619 (1,144) 1 1,476
Subordinated liabilities 22,437 2 323 22,762
- of which:
l,
included in tier 1 n 1,786 - - 1,786
o,
included in tier 2 q 20,584 - - 20,584
------------------------------------------------------------ ----- --------- -------- ------ ---------
Total liabilities at 31 Dec 2018 2,363,875 (94,425) 15,199 2,284,649
------------------------------------------------------------------- --------- -------- ------ ---------
Equity
------------------------------------------------------------ ----- --------- --------- ------ -----------
Called up share capital a 10,180 - - 10,180
a,
Share premium account l 13,609 - - 13,609
k,
Other equity instruments l 22,367 - - 22,367
c,
Other reserves g 1,906 1,996 - 3,902
b,
Retained earnings c 138,191 (11,387) - 126,804
-----
Total shareholders' equity 186,253 (9,391) - 176,862
------------------------------------------------------------------- --------- -------- ------ ---------
d,
m,
n,
Non-controlling interests p 7,996 (931) - 7,065
Total equity at 31 Dec 2018 194,249 (10,322) - 183,927
------------------------------------------------------------------- --------- -------- ------ ---------
Total liabilities and equity at
31 Dec 2018 2,558,124 (104,747) 15,199 2,468,576
------------------------------------------------------------------- --------- -------- ------ ---------
The references (a) - (r) identify balance sheet components that
are used in the calculation of regulatory capital in Table 7: Own
funds disclosure on page 14.
Table 3: Reconciliation of balance sheets - financial accounting to
regulatory scope of consolidation (continued)
Accounting Deconsolidation Consolidation Regulatory
balance of insurance/ of banking balance
sheet other entities associates sheet
Ref $m $m $m $m
Assets
----------------------------------------------------------- ----- ---------- ----------------- --------------- ------------
Cash and balances at central banks 180,624 (38) 1,174 181,760
Items in the course of collection
from other banks 6,628 - 2 6,630
Hong Kong Government certificates
of indebtedness 34,186 - - 34,186
Trading assets 287,995 (359) 1 287,637
Financial assets designated at
fair value 29,464 (28,674) - 790
* of which: debt securities eligible as Tier 2 issued
by Group FSEs that are outside the regulatory scope
of consolidation r 324 (324) - -
----------------------------------------------------------- ----- --------- ----------- --- --------- ---- ---------
Derivatives 219,818 (128) 57 219,747
Loans and advances to banks 90,393 (2,024) 1,421 89,790
- of which: lending to FSEs eligible
as Tier 2 r 74 - - 74
----------------------------------------------------------- ----- --------- ----------- ---- --------- ---- ---------
Loans and advances to customers 962,964 (3,633) 12,835 972,166
------------------------------------------------------------------ --------- ----------- --- --------- ---- ---------
- of which:
lending eligible as Tier 2 to Group
FSEs outside the regulatory scope
of consolidation r 117 (117) - -
----------------------------------------------------------- ----- --------- ----------- --- --------- ---- ---------
impairment allowances on IRB portfolios h (5,004) - - (5,004)
----------------------------------------------------------- ----- --------- ----------- ---- --------- ---- ---------
Reverse repurchase agreements -
non-trading 201,553 - 1,854 203,407
Financial investments 389,076 (61,480) 3,325 330,921
------------------------------------------------------------------ --------- ----------- --- --------- ---- ---------
Capital invested in insurance and
other entities - 2,430 - 2,430
Prepayments, accrued income and
other assets 67,191 (4,202) 267 63,256
--------- ----------- --- --------- ---- ---------
- of which: retirement benefit
assets j 8,752 - - 8,752
--------- ----------- ---- --------- ---- ---------
Current tax assets 1,006 (5) - 1,001
--------- ----------- --- --------- ---- ---------
Interests in associates and joint
ventures 22,744 (370) (4,064) 18,310
--------- ----------- --- --------- --- ---------
- of which: positive goodwill on
acquisition e 521 (14) (1) 506
--------- ----------- --- --------- --- ---------
Goodwill and intangible assets e 23,453 (6,937) - 16,516
Deferred tax assets f 4,676 170 - 4,846
Total assets at 31 Dec 2017 2,521,771 (105,250) 16,872 2,433,393
------------------------------------------------------------------ --------- ----------- --- --------- ---- ---------
Liabilities and equity
------------------------------------------------------------ ----- --------- --------- ------ -----------
Liabilities
------------------------------------------------------------ ----- --------- --------- ------ -----------
Hong Kong currency notes in circulation 34,186 - - 34,186
Deposits by banks 69,922 (86) 695 70,531
Customer accounts 1,364,462 (64) 14,961 1,379,359
Repurchase agreements - non-trading 130,002 - - 130,002
Items in course of transmission
to other banks 6,850 - - 6,850
Trading liabilities 184,361 867 - 185,228
Financial liabilities designated
at fair value 94,429 (5,622) - 88,807
- of which:
included in tier 1 n 459 - - 459
o,
q,
included in tier 2 i 23,831 - - 23,831
------------------------------------------------------------ ----- --------- -------- ------ ---------
Derivatives 216,821 69 51 216,941
- of which: debit valuation adjustment i 59 - - 59
------------------------------------------------------------ ----- --------- -------- ------ ---------
Debt securities in issue 64,546 (2,974) 320 61,892
Accruals, deferred income and other
liabilities 45,907 (211) 622 46,318
------------------------------------------------------------------- --------- -------- ------ ---------
Current tax liabilities 928 (81) - 847
Liabilities under insurance contracts 85,667 (85,667) - -
Provisions 4,011 (17) 223 4,217
------------------------------------------------------------------- --------- -------- ------ ---------
* of which: credit-related contingent liabilities and
contractual commitments on IRB portfolios h 220 - - 220
------------------------------------------------------------ ----- --------- -------- ------ ---------
Deferred tax liabilities 1,982 (1,085) - 897
Subordinated liabilities 19,826 1 - 19,827
- of which:
l,
included in tier 1 n 1,838 - - 1,838
--------- -------- ------ ---------
o,
included in tier 2 q 17,561 - - 17,561
------------------------------------------------------------ ----- --------- -------- ------ ---------
Total liabilities at 31 Dec 2017 2,323,900 (94,870) 16,872 2,245,902
------------------------------------------------------------------- --------- -------- ------ ---------
Equity
------------------------------------------------------------ ----- --------- --------- ------ -----------
Called up share capital a 10,160 - - 10,160
a,
Share premium account l 10,177 - - 10,177
k,
Other equity instruments l 22,250 - - 22,250
c,
Other reserves g 7,664 1,236 - 8,900
b,
Retained earnings c 139,999 (10,824) - 129,175
Total shareholders' equity 190,250 (9,588) - 180,662
------------------------------------------------------------------- --------- -------- ------ ---------
d,
m,
n,
Non-controlling interests p 7,621 (792) - 6,829
------------------------------------------------------------ ----- --------- -------- ------ ---------
Total equity at 31 Dec 2017 197,871 (10,380) - 187,491
------------------------------------------------------------------- --------- -------- ------ ---------
Total liabilities and equity at
31 Dec 2017 2,521,771 (105,250) 16,872 2,433,393
------------------------------------------------------------------- --------- -------- ------ ---------
The references (a) - (r) identify balance sheet components that
are used in the calculation of regulatory capital in Table 7: Own
funds disclosure on page 14.
Table 4: Principal entities with a different regulatory and accounting
scope of consolidation (LI3)
At 31 Dec At 31 Dec
2018 2017
Total Total Total Total
assets equity assets equity
Method Method
Principal of accounting of regulatory
activities consolidation consolidation Footnotes $m $m $m $m
Principal
associates
----------------- ---------------- --------------- --------------- ---------- ------ ------ ------ --------
The Saudi
British Banking Proportional
Bank services Equity consolidation 1 46,634 8,757 50,417 8,752
--------------- ---------------
Principal
insurance
entities
excluded
from the
regulatory
consolidation
----------------- ---------------- --------------- --------------- ---------- ------ ------ ------ --------
HSBC Life
(International) Life insurance Fully
Ltd manufacturing consolidated N/A 48,144 3,321 45,083 3,679
--------------- --------------- ------ ------ ------
HSBC Assurances Life insurance Fully
Vie (France) manufacturing consolidated N/A 26,066 808 27,713 843
Hang Seng
Insurance Life insurance Fully
Company Ltd manufacturing consolidated N/A 17,356 1,642 16,411 1,403
HSBC Insurance
(Singapore) Life insurance Fully
Pte Ltd manufacturing consolidated N/A 4,335 493 4,425 706
----------------- ---------------- --------------- --------------- ---------- ------ -----
HSBC Life (UK) Life insurance Fully
Ltd manufacturing consolidated N/A 2,026 157 2,115 196
HSBC Life
Insurance Life insurance Fully
Company Ltd manufacturing consolidated N/A 1,208 70 1,113 87
----------------- ---------------- --------------- --------------- ---------- ------ ----- ------ ------
HSBC Life
Assurance Life insurance Fully
(Malta) Ltd manufacturing consolidated N/A 976 58 1,681 61
---------------- --------------- ---------------
HSBC Seguros
S.A. Life insurance Fully
(Mexico) manufacturing consolidated N/A 796 121 785 120
----------------- ---------------- --------------- --------------- ------ -----
Principal SPEs excluded
from the regulatory
consolidation 2
--------------------------------------------------------------------- ---------- ------ ------ ------ --------
Regency Assets Fully
Ltd Securitisation consolidated N/A 6,548 - 7,466 -
---------------
Mazarin Funding Fully
Ltd Securitisation consolidated N/A 476 (21) 852 48
Metrix Portfolio
Distribution Fully
Plc Securitisation consolidated N/A 296 - 326 -
Barion Funding Fully
Ltd Securitisation consolidated N/A 2 - 424 78
----------------- ---------------- --------------- --------------- ---------- ------ ----- ------ ------
1 Total assets and total equity for 2018 are as at 30 September 2018.
2 These SPEs issued no or de minimis share capital.
Group entities that have different regulatory and accounting
scope of consolidation are provided in table 4 with their total
assets and total equity, on a stand-alone IFRS basis. The figures
shown therefore include intra-Group balances. For associates, table
4 shows the total assets and total equity of the entity as a whole
rather than HSBC's share in the entities' balance sheets.
For insurance entities, the present value of the in-force
long-term insurance business asset of $7.1bn and the related
deferred tax liability are only recognised on consolidation in
financial reporting, and are therefore not included in the asset or
equity positions for the stand-alone entities presented in table 4.
In addition, these figures exclude any deferred acquisition cost
assets that may be recognised in the entities' stand-alone
financial reporting.
Measurement of regulatory exposures
This section sets out the main reasons why the measurement of
regulatory exposures is not directly comparable with the financial
information presented in the Annual Report and Accounts 2018.
The Pillar 3 Disclosures at 31 December 2018 are prepared in
accordance with regulatory capital adequacy concepts and rules,
while the Annual Report and Accounts 2018 are prepared in
accordance with IFRSs. The purpose of the regulatory balance sheet
is to provide a point-in-time ('PIT') value of all on-balance sheet
assets.
The regulatory exposure value includes an estimation of risk,
and is expressed as the amount expected to be outstanding if and
when the counterparty defaults.
Moreover, regulatory exposure classes are based on different
criteria from accounting asset types and are therefore not
comparable on a line by line basis.
The following tables show in two steps how the accounting values
in the regulatory balance sheet link to regulatory exposure at
default ('EAD').
In a first step, table 5 shows the difference between the
accounting and regulatory scope of consolidation, and a breakdown
of the accounting balances into the risk types that form the basis
for regulatory capital requirements. Table 6 then shows the main
differences between the accounting balances and regulatory
exposures by regulatory risk type.
Table 5: Differences between accounting and regulatory scopes of consolidation
and mapping of financial statement categories with
regulatory risk categories (LI1)
Carrying value of items
Subject
Carrying to deduction
values Carrying Subject from capital
as reported values Subject to the Subject or not
in under to the counter-party Subject to the subject
published scope credit credit to the market to regulatory
financial of regulatory risk risk securitisation risk capital
statements consolidation(1) framework framework(2) framework(3) framework requirements
$bn $bn $bn $bn $bn $bn $bn
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- --------------
Assets
Cash and
balances at
central
banks 162.8 163.0 163.0 - - - -
Items in the
course of
collection
from other
banks 5.8 5.8 5.8 - - - -
Hong Kong
Government
certificates
of
indebtedness 35.9 35.9 35.9 - - - -
Trading
assets 238.1 236.9 - 18.3 - 236.9 -
Financial
assets
designated
and
otherwise
mandatorily
measured at
fair value 41.1 13.4 10.9 1.9 0.6 - -
-----------
Derivatives 207.9 207.9 - 207.1 0.8 207.9 -
Loans and
advances to
banks 72.2 72.4 71.4 - 1.0 - -
Loans and
advances to
customers 981.7 992.9 969.6 5.6 18.5 - -
Reverse
repurchase
agreements
-
non-trading 242.8 243.3 - 243.3 - - -
---------- --------------
Financial
investments 407.4 349.8 347.8 - 2.0 - -
-----------
Capital
invested in
insurance
and other
entities - 2.3 1.5 - - - 0.8
----------
Prepayments,
accrued
income
and other
assets 110.5 104.7 40.0 39.5 - 47.0 17.7
Current tax
assets 0.7 0.7 0.7 - - - -
Interests in
associates
and joint
ventures 22.4 17.9 11.4 - - - 6.5
Goodwill and
intangible
assets 24.4 17.1 - - - - 16.9
Deferred tax
assets 4.5 4.6 6.8 - - - (2.2)
-----------
Total assets
at 31 Dec
2018 2,558.2 2,468.6 1,664.8 515.7 22.9 491.8 39.7
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Liabilities
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- --------------
Hong Kong
currency
notes
in
circulation 35.9 35.9 - - - - 35.9
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Deposits by
banks 56.4 56.6 - - - - 56.6
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Customer
accounts 1,362.6 1,379.0 - - - - 1,379.0
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Repurchase
agreements
-
non-trading 165.9 165.9 - 165.9 - - -
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Items in
course of
transmission
to other
banks 5.6 5.6 - - - - 5.6
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Trading
liabilities 84.4 84.4 - 11.8 - 84.4 -
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Financial
liabilities
designated
at FV 148.6 144.2 - - - 58.0 86.2
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Derivatives 205.9 206.0 - 206.0 - 206.0 -
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Debt
securities
in issue 85.3 83.9 - - - - 83.9
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Accruals,
deferred
income,
and other
liabilities 97.4 95.2 - 41.0 - 41.0 54.2
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Current tax
liabilities 0.7 0.7 - - - - 0.7
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Liabilities
under
insurance
contract 87.3 - - - - - -
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Provisions 2.9 3.0 0.6 - - - 2.4
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Deferred tax
liabilities 2.6 1.5 1.3 - - - 2.3
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Subordinated
liabilities 22.4 22.8 - - - - 22.8
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Total
liabilities
at 31
Dec 2018 2,363.9 2,284.7 1.9 424.7 - 389.4 1,729.6
-------------- ----------- ---------------- ---------- ------------- -------------- ---------- -----------
Table 5: Differences between accounting and regulatory scopes of consolidation
and mapping of financial statement categories with
regulatory risk categories (LI1) (continued)
Carrying value of items
Subject
Carrying Subject to deduction
values Carrying to the from capital
as reported values Subject counter Subject or not
in under to the party Subject to the subject
published scope credit credit to the market to regulatory
financial of regulatory risk risk securitisation risk capital
statements consolidation(1) framework framework(2) framework(3) framework requirements
$bn $bn $bn $bn $bn $bn $bn
--------------
Assets
--------------
Cash and
balances at
central
banks 180.6 181.8 164.7 - - - -
-------------- ----------- ----------------
Items in the
course of
collection
from other
banks 6.6 6.6 6.6 - - - -
Hong Kong
Government
certificates
of
indebtedness 34.2 34.2 34.2 - - - -
Trading
assets 288.0 287.6 2.0 17.1 - 270.4 15.2
Financial
assets
designated
at fair
value 29.5 0.8 0.8 - - - -
Derivatives 219.8 219.7 - 218.5 1.2 219.7 -
Loans and
advances to
banks 90.4 89.8 98.6 6.6 0.6 - 1.1
Loans and
advances to
customers 963.0 972.2 943.7 10.4 13.1 - 5.0
Reverse
repurchase
agreements
-
non-trading 201.6 203.4 - 203.4 - - -
----------
Financial
investments 389.1 330.9 324.1 - 6.5 - 0.3
Capital
invested in
insurance
and other
entities - 2.4 1.6 - - - 0.8
-----------
Current tax
assets 1.0 1.0 1.0 - - - -
--------------
Prepayments,
accrued
income
and other
assets 67.1 63.4 42.0 3.8 0.1 13.3 6.0
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Interests in
associates
and joint
ventures 22.7 18.3 12.9 - - - 5.4
Goodwill and
intangible
assets 23.5 16.5 - - - - 16.4
Deferred tax
assets 4.7 4.8 6.3 - - - (1.5)
Total assets
at 31 Dec
2017 2,521.8 2,433.4 1,638.5 459.8 21.5 503.4 48.7
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Liabilities
Hong Kong
currency
notes
in
circulation 34.2 34.2 - - - - 34.2
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Deposits by
banks 69.9 70.5 - - - - 70.5
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Customer
accounts 1,364.5 1,379.4 - - - - 1,379.4
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Repurchase
agreements -
non-trading 130.0 130.0 - 130.0 - - -
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Items in
course of
transmission
to other
banks 6.9 6.9 - - - - 6.9
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Trading
liabilities 184.4 185.2 - 10.6 - 172.2 13.0
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Financial
liabilities
designated
at FV 94.4 88.8 - - - - 88.8
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Derivatives 216.8 216.9 - 216.9 - 216.9 -
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Debt
securities
in issue 64.5 61.9 - - - - 61.9
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Current tax
liabilities 0.9 0.8 - - - - 0.8
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Liabilities
under
insurance
contract 85.7 - - - - - -
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Accruals,
deferred
income,
and other
liabilities 45.9 46.3 - - - - 46.3
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Provisions 4.0 4.2 0.3 - - - 3.9
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Deferred tax
liabilities 2.0 0.9 1.3 - - - 1.7
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Subordinated
liabilities 19.8 19.9 - - - - 19.9
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
Total
liabilities
at 31
Dec 2017 2,323.9 2,245.9 1.6 357.5 - 389.1 1,727.3
-------------- ----------- ---------------- ---------- ------------ -------------- ---------- -----------
1 The amounts shown in the column 'Carrying values under scope
of regulatory consolidation' do not equal the sum of the amounts
shown in the remaining columns of this table for line items
'Derivatives', 'Trading assets' and 'Prepayments, accrued income
and other assets' as some of the assets included in these items are
subject to regulatory capital charges for both CCR and market
risk.
2 The amounts shown in the column 'Subject to the counterparty
credit risk framework' include both non-trading book and trading
book.
3 The amounts shown in the column 'Subject to the securitisation
framework' only include non-trading book. Trading book
securitisation positions are included in the market risk
column.
Table 6: Main sources of differences between regulatory exposure amounts
and carrying values in financial statements (LI2)
Items subject
to:
----------------
Credit Securitisation
Total risk framework CCR framework framework
Footnotes $bn $bn $bn $bn
Carrying value of assets within scope
of regulatory consolidation 1 2,428.9 1,664.8 515.7 22.9
Carrying value of liabilities within
scope of regulatory consolidation 1 555.1 1.9 424.7 -
Net carrying value within scope of
regulatory consolidation 1,873.8 1,662.9 91.0 22.9
---------------------------------------- ---------- ------- -------------- ----------- ------------
Off-balance sheet amounts and potential
future exposure for counterparty risk 829.8 277.2 64.0 10.9
Differences in netting rules 10.5 12.5 (2.0) -
Differences due to financial collateral
on standardised approach (15.6) (15.6) - -
Differences due to expected credit
losses on IRB approach 6.2 6.2 - -
Differences due to EAD modelling and
other differences 2.9 4.3 - (1.4)
------- -------------- ----------- ------------
Differences due to credit risk
mitigation 7.3 - 7.3 -
------- -------------- ----------- ------------
Exposure values considered for
regulatory
purposes at 31 Dec 2018 2,714.9 1,947.5 160.3 32.4
---------------------------------------- ---------- ------- -------------- ----------- ------------
Carrying value of assets within scope
of regulatory consolidation 1 2,384.7 1,638.5 459.8 21.5
Carrying value of liabilities within
scope of regulatory consolidation 1 520.7 1.6 357.5 -
Net carrying value within scope of
regulatory consolidation 1,864.0 1,636.9 102.3 21.5
---------------------------------------- ---------- ------- -------------- ----------- ------------
Off-balance sheet amounts and potential
future exposure for counterparty risk 801.7 271.0 135.2 15.3
Differences in netting rules 10.4 9.3 1.1 -
Differences due to financial collateral
on standardised approach (14.7) (14.7) - -
Differences due to expected credit
losses on IRB approach 4.7 4.7 - -
Differences due to EAD modelling and
other differences 3.3 5.0 - (1.7)
-----------
Differences due to credit risk
mitigation (71.1) - (71.1) -
Exposure values considered for
regulatory
purposes at 31 Dec 2017 2,598.3 1,912.2 167.5 35.1
---------------------------------------- ---------- ------- -------------- ----------- ------------
1 Excludes amounts subject to deduction from capital or not
subject to regulatory capital requirements.
Explanations of differences between accounting and regulatory
exposure amounts
Off-balance sheet amounts and potential future exposure for
counterparty risk
Off-balance sheet amounts subject to credit risk and
securitisation regulatory frameworks include undrawn portions of
committed facilities, various trade finance commitments and
guarantees. We apply a credit conversion factor ('CCF') to these
items and add potential future exposures ('PFE') for counterparty
credit risk.
Differences in netting rules
The increase from carrying value due to differences in netting
rules is the reversal of amounts deducted from gross loans and
advances to customers in the published financial statements in
accordance with the offsetting criteria of IAS 32 'Financial
instruments: presentation'.
Differences due to financial collateral
Exposure value under the standardised approach is calculated
after deducting credit risk mitigation whereas accounting value is
before such deductions.
Differences due to expected credit losses
The carrying value of assets is net of credit risk adjustments.
The regulatory exposure value under IRB approaches is before
deducting credit risk adjustments.
Differences due to EAD modelling
The carrying value of assets is usually measured at amortised
cost or fair value as at the balance sheet date. For certain IRB
models, the exposure value used as EAD is the projected value over
the next year.
Differences due to credit risk mitigation
In counterparty credit risk ('CCR'), differences arise between
accounting carrying values and regulatory exposure as a result of
the application of credit risk mitigation and the use of modelled
exposures.
Explanation of differences between accounting fair value and
regulatory prudent valuation
Fair value is defined as the best estimate of the price that
would be received to sell an asset or be paid to transfer a
liability in an orderly transaction between market participants at
the measurement date.
Some fair value adjustments already reflect valuation
uncertainty to some degree. These are market data uncertainty,
model uncertainty and concentration adjustments.
However, it is recognised that a variety of valuation techniques
using stressed assumptions and combined with the range of plausible
market parameters at a given point in time may still generate
unexpected uncertainty beyond fair value.
A series of additional valuation adjustments ('AVAs') are
therefore required to reach a specified degree of confidence (the
'prudent value') set by regulators that differs both in terms of
scope and measurement from HSBC's own quantification for disclosure
purposes.
AVAs should consider at the minimum: market price uncertainty,
bid/offer (close out) uncertainty, model risk, concentration,
administrative cost, unearned credit spreads and investing and
funding costs.
AVAs are not limited to level 3 exposures, for which a 95%
uncertainty range is already computed and disclosed, but must also
be calculated for any exposure for which the exit price cannot be
determined with a high degree of certainty.
Capital and RWAs
Capital management
Approach and policy
Our approach to capital management is driven by our strategic
and organisational requirements, taking into account the
regulatory, economic and commercial environment. We aim to maintain
a strong capital base to support the risks inherent in our business
and invest in accordance with our strategy, meeting both
consolidated and local regulatory capital requirements at all
times.
Our capital management process culminates in the annual Group
capital plan, which is approved by the Board. HSBC Holdings is the
primary provider of equity capital to its subsidiaries and also
provides them with non-equity capital where necessary. These
investments are substantially funded by HSBC Holdings' issuance of
equity and non-equity capital and by profit retention. As part of
its capital management process, HSBC Holdings seeks to maintain a
balance between the composition of its capital and its investment
in subsidiaries. Subject to the above, there is no current or
foreseen impediment to HSBC Holdings' ability to provide such
investments.
Each subsidiary manages its own capital to support its planned
business growth and meet its local regulatory requirements within
the context of the Group capital plan. Capital generated by
subsidiaries in excess of planned requirements is returned to HSBC
Holdings, normally by way of dividends, in accordance with the
Group's capital plan.
During 2018, consistent with the Group's capital plan, the
Group's subsidiaries did not experience any significant
restrictions on
paying dividends or repaying loans and advances, and none are
envisaged with regard to planned dividends or payments. However,
the ability of subsidiaries to pay dividends or advance monies to
HSBC Holdings depends on, among other things, their respective
local regulatory capital and banking requirements, exchange
controls, statutory reserves, and financial and operating
performance. None of our subsidiaries that are excluded from the
regulatory consolidation have capital resources below their minimum
regulatory requirement. HSBC Holdings has not entered into any
Group Financial Support Agreements pursuant to the application of
early intervention measures under the Bank Recovery and Resolution
Directive.
All capital securities included in the capital base of HSBC have
either been issued as fully compliant CRD IV securities (on an end
point basis) or in accordance with the rules and guidance in the
PRA's previous General Prudential Sourcebook, which are included in
the capital base by virtue of application of the CRD IV
grandfathering provisions. The main features of capital securities
issued by the Group, categorised as tier 1 ('T1') capital and tier
2 ('T2') capital, are set out on the HSBC website,
www.hsbc.com.
The values disclosed are the IFRS balance sheet carrying
amounts, not the amounts that these securities contribute to
regulatory capital. For example, the IFRS accounting and the
regulatory treatments differ in their approaches to issuance costs,
regulatory amortisation and regulatory eligibility limits
prescribed under CRD IV.
A list of the main features of our capital instruments in
accordance with Annex III of Commission Implementing Regulation
1423/2013 is also published on our website with reference to our
balance sheet on 31 December 2018. This is in addition to the full
terms and conditions of our securities, also available on our
website.
For further details of our approach to capital management,
please see page 148 of the Annual Report and Accounts 2018.
Own funds
Table 7: Own funds disclosure
CRD IV
At prescribed Final
31 Dec residual CRD IV
2018 amount text
Ref(*) Ref $m $m $m
---------- ------------- ----------
Common equity tier 1 ('CET1') capital:
instruments and reserves
------- ----------------------------------------------------------- ---- ---------- ------------- ----------
Capital instruments and the related share
1 premium accounts 22,384 22,384
- ordinary shares a 22,384 22,384
----
2 Retained earnings b 121,180 121,180
----
Accumulated other comprehensive income
3 (and other reserves) c 3,368 3,368
----
5 Minority interests (amount allowed in consolidated
CET1) d 4,854 4,854
----
5a Independently reviewed interim net profits
net of any foreseeable charge or dividend b 3,697 3,697
----
6 Common equity tier 1 capital before regulatory
adjustments 155,483 155,483
------- ----------------------------------------------------------- ---- ------- ------------- -------
Common equity tier 1 capital: regulatory
adjustments
------- ----------------------------------------------------------- ---- ---------- ------------- ----------
7 Additional value adjustments(1) (1,180) (1,180)
----
8 Intangible assets (net of related deferred
tax liability) e (17,323) (17,323)
----
10 Deferred tax assets that rely on future
profitability excluding those arising from
temporary differences (net of related tax
liability) f (1,042) (1,042)
----
Fair value reserves related to gains or
11 losses on cash flow hedges g 135 135
----
12 Negative amounts resulting from the calculation
of expected loss amounts h (1,750) (1,750)
----
14 Gains or losses on liabilities valued at
fair value resulting from changes in own
credit standing i 298 298
----
15 Defined benefit pension fund assets j (6,070) (6,070)
----
16 Direct and indirect holdings of own CET1
instruments(2) (40) (40)
------- ----------------------------------------------------------- ---- ------- ------------- -------
19 Direct, indirect and synthetic holdings
by the institution of the CET1 instruments
of financial sector entities where the
institution has a significant investment
in those entities (amount above 10% threshold
and net of eligible short positions)(3) (7,489) (7,489)
------- ----------------------------------------------------------- ---- ------- -------
Total regulatory adjustments to common
28 equity tier 1 (34,461) - (34,461)
------- ----------------------------------------------------------- ---- ------- ---------- -------
29 Common equity tier 1 capital 121,022 - 121,022
------- ----------------------------------------------------------- ---- ------- ---------- -------
Additional tier 1 ('AT1') capital: instruments
------- ----------------------------------------------------------- ---- ---------- ------------- ----------
30 Capital instruments and the related share
premium accounts 22,367 - 22,367
31 - classified as equity under IFRSs k 22,367 - 22,367
----
33 Amount of qualifying items and the related
share premium accounts subject to phase
out
from AT1 l 2,297 (2,297) -
------- ----------------------------------------------------------- ---- ------- ---------- -------
Table 7: Own funds disclosure (continued)
CRD IV
At prescribed Final
31 Dec residual CRD IV
2018 amount text
Ref(*) Ref $m $m $m
------- ----------------------------------------------------------- ---- ---------- ------------- ----------
34 Qualifying tier 1 capital included in consolidated
AT1 capital (including minority interests
not included in CET1) issued by subsidiaries m,
and held by third parties n 1,516 (1,298) 218
------- ----------------------------------------------------------- ---- ------- ---------- -------
35 - of which: instruments issued by subsidiaries
subject to phase out n 1,298 (1,298) -
------- ----------------------------------------------------------- ---- ------- ---------- -------
36 Additional tier 1 capital before regulatory
adjustments 26,180 (3,595) 22,585
------- ----------------------------------------------------------- ---- ------- ---------- -------
Additional tier 1 capital: regulatory adjustments
------- ----------------------------------------------------------- ---- ---------- ------------- ----------
Direct and indirect holdings of own AT1
37 instruments(2) (60) (60)
------- ----------------------------------------------------------- ---- ------- ------------- -------
43 Total regulatory adjustments to additional
tier 1 capital (60) - (60)
------- ----------------------------------------------------------- ---- ------- ---------- -------
44 Additional tier 1 capital 26,120 (3,595) 22,525
45 Tier 1 capital (T1 = CET1 + AT1) 147,142 (3,595) 143,547
------- ----------------------------------------------------------- ---- ------- ---------- -------
Tier 2 capital: instruments and provisions
------- ----------------------------------------------------------- ---- ---------- ------------- ----------
46 Capital instruments and the related share
premium accounts o 25,056 25,056
----
48 Qualifying own funds instruments included
in consolidated T2 capital (including minority
interests and AT1 instruments not included
in CET1 or AT1) issued by subsidiaries p,
and held by third parties q 1,673 (1,585) 88
----
49 - of which: instruments issued by subsidiaries
subject to phase out q 1,585 (1,585) -
----
51 Tier 2 capital before regulatory adjustments 26,729 (1,585) 25,144
------- ----------------------------------------------------------- ---- ------- ---------- -------
Tier 2 capital: regulatory adjustments
------- ----------------------------------------------------------- ---- ---------- ------------- ----------
Direct and indirect holdings of own T2
52 instruments(2) (40) (40)
55 Direct and indirect holdings by the institution
of the T2 instruments and subordinated
loans of financial sector entities where
the institution has a significant investment
in those entities (net of eligible short
positions) r (593) - (593)
----
Total regulatory adjustments to tier 2
57 capital (633) - (633)
------- ----------------------------------------------------------- ---- ------- ---------- -------
58 Tier 2 capital 26,096 (1,585) 24,511
59 Total capital (TC = T1 + T2) 173,238 (5,180) 168,058
------- ----------------------------------------------------------- ---- ------- ---------- -------
60 Total risk-weighted assets 865,318 - 865,318
------- ----------------------------------------------------------- ---- ------- ---------- -------
Capital ratios and buffers
------- ----------------------------------------------------------- ---- ---------- ------------- ----------
61 Common equity tier 1 14.0% 14.0%
----------
62 Tier 1 17.0% 16.6%
63 Total capital 20.0% 19.4%
----------
64 Institution specific buffer requirement 3.94% 5.19%
------- ----------------------------------------------------------- ---- -------------
65
* capital conservation buffer requirement 1.88% 2.50%
-------------
66
* counter-cyclical buffer requirement 0.56% 0.69%
-------------
67a
* Global Systemically Important Institution ('G-SII')
buffer 1.50% 2.00%
-------------
Common equity tier 1 available to meet
68 buffers 7.9% 7.9%
---------- ----------
Amounts below the threshold for deduction
(before risk weighting)
------- ----------------------------------------------------------- ---- ---------- ------------- ----------
72 Direct and indirect holdings of the capital
of financial sector entities where the
institution does not have a significant
investment in those entities (amount below
10% threshold and net of eligible short
positions) 2,534
73 Direct and indirect holdings by the institution
of the CET1 instruments of financial sector
entities where the institution has a significant
investment in those entities (amount below
10% threshold and net of eligible short
positions) 12,851
75 Deferred tax assets arising from temporary
differences (amount below 10% threshold,
net of related tax liability) 4,956
Applicable caps on the inclusion of provisions
in tier 2
------- ----------------------------------------------------------- ---- ---------- ------------- ----------
77 Cap on inclusion of credit risk adjustments
in T2 under standardised approach 2,200
79 Cap for inclusion of credit risk adjustments
in T2 under internal ratings-based approach 3,221
Capital instruments subject to phase-out
arrangements (only applicable between
1 Jan 2013 and 1 Jan 2022)
------- ----------------------------------------------------------- ---- ---------- ------------- ----------
Current cap on AT1 instruments subject
82 to phase out arrangements 6,921
84 Current cap on T2 instruments subject to
phase out arrangements 5,131
* The references identify the lines prescribed in the EBA
template. Lines represented in this table are those lines which are
applicable and where there is a value.
The references (a) - (r) identify balance sheet components in
Table 3: Reconciliation of balance sheets - financial accounting to
regulatory scope of consolidation on page 8 which are used in the
calculation of regulatory capital.
1 Additional value adjustments are deducted from CET1. These are
calculated on all assets measured at fair value.
2 The deduction for holdings of own CET1, T1 and T2 instruments is set by the PRA.
3 Threshold deduction for significant investments relates to
balances recorded on numerous lines on the balance sheet and
includes: investments in insurance subsidiaries and
non-consolidated associates, other CET1 equity held in financial
institutions, and connected funding of a capital nature.
At 31 December 2018, our CET1 ratio decreased to 14.0% from
14.5% at 31 December 2017.
CET1 capital decreased during the year by $5.1bn, mainly as a
result of:
-- unfavourable foreign currency translation differences of $5.5bn;
-- the $2.0bn share buy-back;
-- a $1.2bn increase in threshold deductions as a result of an
increase in the value of our material holdings; and
-- an increase in the deduction for intangible assets of $1.1bn.
These decreases were partly offset by:
-- capital generation through profits, net of dividends and scrip of $3.1bn; and
-- a $1.2bn day one impact from transition to IFRS 9, mainly due
to classification and measurement changes.
RWAs reduced by $6.0bn during the year, primarily due to foreign
currency translation differences of $23.4bn. Excluding foreign
currency translation differences, the remaining increase of $17.4bn
was primarily driven by lending growth.
Leverage ratio
Our leverage ratio calculated in accordance with CRD IV was 5.5%
at 31 December 2018, down from 5.6% at 31 December 2017. The
increase in exposure was primarily due to growth in customer
lending and financial investments.
The Group's UK leverage ratio at 31 December 2018 was 6.0%. This
measure excludes qualifying central bank balances from the
calculation of exposure.
At 31 December 2018, our UK minimum leverage ratio requirement
of 3.25% was supplemented by an additional leverage ratio buffer of
0.5% and a countercyclical leverage ratio buffer of 0.2%. These
additional buffers translated into capital values of $12.7bn and
$4.7bn respectively. We exceeded these leverage requirements.
For further details of the UK leverage ratio, please see page
151 of the Annual Report and Accounts 2018.
The risk of excessive leverage is managed as part of HSBC's
global risk appetite framework and monitored using a leverage ratio
metric within our risk appetite statement ('RAS'). The RAS
articulates the aggregate level and types of risk that HSBC is
willing to accept in its business activities in order to achieve
its strategic business objectives. The RAS is monitored via the
risk appetite profile report, which includes comparisons of actual
performance against the risk appetite and tolerance thresholds
assigned to each metric, to ensure that any excessive risk is
highlighted, assessed and mitigated appropriately. The risk
appetite profile report is presented monthly to the RMM and the
GRC.
Our approach to risk appetite is described on page 69 of the
Annual Report and Accounts 2018.
Table 8: Summary reconciliation of accounting assets and leverage ratio
exposures (LRSum)
At 31 Dec
2018 2017
Ref* $bn $bn
1 Total assets as per published financial statements 2,558.1 2,521.8
----- ---------------------------------------------------------- ------- -------
Adjustments for:
- entities which are consolidated for accounting
purposes but are outside the scope of regulatory
2 consolidation (89.5) (88.4)
4 * derivative financial instruments (55.6) (91.0)
5 * securities financing transactions ('SFT') (5.1) 12.2
* off-balance sheet items (i.e. conversion to credit
6 equivalent amounts of off-balance sheet exposures) 227.4 227.4
7 * other (20.4) (24.9)
----- ---------------------------------------------------------- ------- -------
8 Total leverage ratio exposure 2,614.9 2,557.1
----- ---------------------------------------------------------- ------- -------
* The references identify the lines prescribed in the EBA
template. Lines represented in this table are those lines which are
applicable and where there is a value.
Table 9: Leverage ratio common disclosure (LRCom)
At 31 Dec
2018(^) 2017
Ref* $bn $bn
------ -------------------------------------------------------------- ----------------- -----------------
On-balance sheet exposures (excluding derivatives
and SFT)
------ -------------------------------------------------------------- ----------------- -----------------
On-balance sheet items (excluding derivatives, SFTs
1 and fiduciary assets, but including collateral) 2,012.5 1,998.7
2 (Asset amounts deducted in determining tier 1 capital) (33.8) (35.3)
3 Total on-balance sheet exposures (excluding derivatives,
SFTs and fiduciary assets) 1,978.7 1,963.4
------ -------------------------------------------------------------- -------------- --------------
Derivative exposures
------ -------------------------------------------------------------- ----------------- -----------------
4 Replacement cost associated with all derivatives
transactions (i.e. net of eligible cash variation
margin) 44.2 29.0
5 Add-on amounts for potential future exposure ('PFE')
associated with all derivatives transactions (mark-to-market
method) 154.1 125.5
6 Gross-up for derivatives collateral provided where
deducted from the balance sheet assets pursuant
to IFRSs 5.9 5.2
7 (Deductions of receivables assets for cash variation
margin provided in derivatives transactions) (21.5) (23.6)
8 (Exempted central counterparty ('CCP') leg of client-cleared
trade exposures) (38.0) (14.0)
9 Adjusted effective notional amount of written credit
derivatives 160.9 188.2
10 (Adjusted effective notional offsets and add-on
deductions for written credit derivatives) (153.4) (181.6)
11 Total derivative exposures 152.2 128.7
------ -------------------------------------------------------------- -------------- --------------
Securities financing transaction exposures
------ -------------------------------------------------------------- ----------------- -----------------
12 Gross SFT assets (with no recognition of netting),
after adjusting for sales accounting transactions 248.9 331.2
13 (Netted amounts of cash payables and cash receivables
of gross SFT assets) (3.6) (105.8)
14 Counterparty credit risk exposure for SFT assets 11.3 12.2
16 Total securities financing transaction exposures 256.6 237.6
------ -------------------------------------------------------------- -------------- --------------
Other off-balance sheet exposures
------ -------------------------------------------------------------- ----------------- -----------------
17 Off-balance sheet exposures at gross notional amount 829.8 801.7
18 (Adjustments for conversion to credit equivalent
amounts) (602.4) (574.3)
19 Total off-balance sheet exposures 227.4 227.4
------ -------------------------------------------------------------- -------------- --------------
Capital and total exposures
------ -------------------------------------------------------------- ----------------- -----------------
20 Tier 1 capital 143.5 142.7
21 Total leverage ratio exposure 2,614.9 2,557.1
------ -------------------------------------------------------------- -------------- --------------
22 Leverage ratio (%) 5.5 5.6
------ -------------------------------------------------------------- -------------- --------------
EU-23 Choice of transitional arrangements for the definition
of the capital measure Fully phased-in Fully phased-in
------ -------------------------------------------------------------- ----------------- -----------------
* The references identify the lines prescribed in the EBA
template. Lines represented in this table are those lines which are
applicable and where there is a value.
Table 10: Leverage ratio - Split of on-balance sheet exposures (excluding
derivatives, SFTs and exempted exposures) (LRSpl)
At 31 Dec
2018(^) 2017
Ref(*) $bn $bn
Total on-balance sheet exposures (excluding derivatives,
EU-1 SFTs and exempted exposures) 1,991.0 1,998.7
EU-2 - trading book exposures 218.5 268.6
EU-3 - banking book exposures 1,772.5 1,730.1
-------
'banking book exposures' comprises:
EU-4 covered bonds 1.6 1.3
------- -------
EU-5 exposures treated as sovereigns 507.3 504.8
------- -------
exposures to regional governments, multilateral
development banks ('MDB'), international organisations
EU-6 and public sector entities not treated as sovereigns 9.3 9.8
------- -------
EU-7 institutions 66.8 77.0
------- -------
EU-8 secured by mortgage of immovable property 300.0 283.4
------- -------
EU-9 retail exposures 82.8 89.3
------- -------
EU-10 corporate 614.3 586.0
------- -------
EU-11 exposures in default 9.1 9.7
------- -------
other exposures (e.g. equity, securitisations and
EU-12 other non-credit obligation assets) 181.3 168.8
-------- ----------------------------------------------------------- ------- -------
* The references identify the lines prescribed in the EBA
template. Lines represented in this table are those lines which are
applicable and where there is a value.
Capital buffers
Our geographical breakdown and institution specific CCyB
disclosure and our G-SIB Indicator disclosure are published
annually on the HSBC website, www.hsbc.com.
Pillar 1 minimum capital requirements and RWA flow
Pillar 1 covers the minimum capital resource requirements for
credit risk, counterparty credit risk, equity, securitisation,
market risk and operational risk. These requirements are expressed
in terms of RWAs.
Credit The Basel Committee's framework For consolidated Group reporting,
risk applies three approaches of we have adopted the advanced IRB
increasing sophistication to approach for the majority of our
the calculation of Pillar 1 business.
credit risk capital requirements. Some portfolios remain on the standardised
The most basic level, the standardised or foundation IRB approaches:
approach, requires banks to * pending the issuance of local regulations or model
use external credit ratings approval;
to determine the risk weightings
applied to rated counterparties.
Other counterparties are grouped * following supervisory prescription of a non-advanced
into broad categories and standardised approach; or
risk weightings are applied
to these categories. The next
level, the foundation IRB ('FIRB') * under exemptions from IRB treatment.
approach, allows banks to calculate
their credit risk capital requirements
on the basis of their internal
assessment of a counterparty's
probability of default ('PD'),
but subjects their quantified
estimates of EAD and loss given
default ('LGD') to standard
supervisory parameters. Finally,
the advanced IRB ('AIRB') approach
allows banks to use their own
internal assessment in determining
PD and in quantifying EAD and
LGD.
--------------- ---------------------------------------- -----------------------------------------------------------
Counterparty Four approaches to calculating We use the mark-to-market and IMM
credit CCR and determining exposure approaches for CCR. Details of
risk values are defined by the Basel the IMM permission we have received
Committee: mark-to-market, original from the PRA can be found in the
exposure, standardised and Internal Financial Services Register on
Model Method ('IMM'). These the PRA website. Our aim is to
exposure values are used to increase the proportion of positions
determine capital requirements on IMM over time.
under one of the three approaches
to credit risk: standardised,
foundation IRB or advanced IRB.
--------------- ---------------------------------------- -----------------------------------------------------------
Equity For the non-trading book, equity For Group reporting purposes, all
exposures can be assessed under non-trading book equity exposures
standardised or IRB approaches. are treated under the standardised
approach.
--------------- ---------------------------------------- -----------------------------------------------------------
Securitisation Basel specifies two approaches For the majority of the non-trading
for calculating credit risk book securitisation positions we
requirements for securitisation use the IRB approach and, within
positions in non-trading books: this, RBM and IAA with an immaterial
the standardised approach and amount using the SFM. We also use
the IRB approach, which incorporates the standardised approach on the
the Ratings Based Method ('RBM'), non-trading book positions securitisations.
the Internal Assessment Approach Securitisation positions in the
('IAA') and the Supervisory trading book are overseen within
Formula Method ('SFM'). Securitisation Market Risk under the Standardised
positions in the trading book Approach.
are treated within the market
risk framework per the Capital
Requirements Regulation.
--------------- ---------------------------------------- -----------------------------------------------------------
Market Market risk capital requirements The market risk capital requirement
risk can be determined under either is measured using internal market
the standard rules or the Internal risk models, where approved by
Models Approach ('IMA'). The the PRA, or under the standard
latter involves the use of internal rules. Our internal market risk
value at risk ('VaR') models models comprise VaR, stressed VaR
to measure market risks and and IRC. Non-proprietary details
determine the appropriate capital of the scope of our IMA permission
requirement. are available in the Financial
In addition to the VaR models, Services Register on the PRA website.
other internal models include We are in compliance with the requirements
stressed VaR ('SVaR'), Incremental set out in Articles 104 and 105
Risk Charge ('IRC') and Comprehensive of the Capital Requirements Regulation.
Risk Measure.
--------------- ---------------------------------------- -----------------------------------------------------------
Operational The Basel Committee allows firms We currently use the standardised
risk to calculate their operational approach in determining our operational
risk capital requirement under risk capital requirement. We have
the basic indicator approach, in place an operational risk model
the standardised approach or that is used for economic capital
the advanced measurement approach. calculation purposes.
--------------- ---------------------------------------- -----------------------------------------------------------
Table 11: Overview of RWAs (OV1)
At
31 Dec 30 Sep 31 Dec
2018 2018 2018
-------- -------- ------------
Capital(1)
RWAs RWAs required
$bn $bn $bn
-------- ------------
Credit risk (excluding counterparty credit
1 risk) 638.1 632.6 51.0
--- -------------------------------------------- ----------
2 - standardised approach 128.6 127.4 10.3
3 - foundation IRB approach 30.5 29.9 2.4
---
4 - advanced IRB approach 479.0 475.3 38.3
--- --------------------------------------------
6 Counterparty credit risk 47.2 47.6 3.8
--- -------------------------------------------- ----------
7 - mark-to-market 24.7 25.0 2.0
--- --------------------------------------------
10 - internal model method 16.2 16.2 1.3
--- --------------------------------------------
- risk exposure amount for contributions to
11 the default fund of a central counterparty 0.4 0.6 -
--- --------------------------------------------
12 - credit valuation adjustment 5.9 5.8 0.5
--- -------------------------------------------- ------ ------ ----------
13 Settlement risk 0.1 0.2 -
--- -------------------------------------------- ------ ------ ----------
Securitisation exposures in the non-trading
14 book 8.4 9.0 0.7
--- -------------------------------------------- ------ ------
15 - IRB ratings based method 4.6 5.1 0.4
--- --------------------------------------------
16 - IRB supervisory formula method - - -
--- --------------------------------------------
17 - IRB internal assessment approach 1.7 1.6 0.1
--- --------------------------------------------
18 - standardised approach 2.1 2.3 0.2
--- -------------------------------------------- ------ ------ ----------
19 Market risk 35.8 34.9 2.8
--- -------------------------------------------- ----------
20 - standardised approach 5.7 5.1 0.4
--- --------------------------------------------
21 - internal models approach 30.1 29.8 2.4
--- --------------------------------------------
23 Operational risk 91.1 92.7 7.3
--- -------------------------------------------- ------ ------ ----------
25 - standardised approach 91.1 92.7 7.3
--- --------------------------------------------
Amounts below the thresholds for deduction
27 (subject to 250% risk weight) 44.6 45.7 3.6
--- -------------------------------------------- ------ ------ ----------
29 Total 865.3 862.7 69.2
--- -------------------------------------------- ------ ------ ----------
1 'Capital requirement' represents the minimum total capital
charge set at 8% of RWAs by article 92 of the Capital Requirements
Regulation.
Credit risk (including amounts below the thresholds for
deduction)
RWAs increased by $4.4bn in the fourth quarter of the year
including a decrease of $4.6bn due to foreign currency translation
differences. Excluding foreign currency translation differences,
the remaining increase of $9.0bn was primarily driven by lending
growth in CMB across Europe and Asia. A further $2.0bn of RWAs
arose in RBWM in Asia, largely due to mortgage growth.
Counterparty credit risk (including settlement risk)
Counterparty credit risk RWAs decreased by $0.4bn primarily due
to improvements in collateral recognition and customer risk
ratings.
Securitisation
The $0.6bn RWA decrease arose predominantly from the sale of
legacy positions.
Market risk
RWAs increased by $0.9bn mainly due to an increase in Hong Kong
dollar denominated exposure.
Operational risk
RWAs decreased by $1.6bn primarily due to reduced contributions
from the retail banking and payment and settlement business lines,
partly offset by growth in commercial banking.
Table 12: RWA flow statements of credit risk exposures under the IRB
approach(1) (CR8)
Capital
RWAs required
$bn $bn
---- ----------------------------------------------- ------------- -----------
1 At 1 Oct 2018 505.2 40.4
-----------------------------------------------
2 Asset size 8.8 0.6
3 Asset quality 0.7 0.1
4 Model updates 1.5 0.1
-----------------------------------------------
5 Methodology and policy (2.7) (0.2)
-----------------------------------------------
7 Foreign exchange movements (4.0) (0.3)
---- --------- --------
9 At 31 Dec 2018 509.5 40.7
---- ----------------------------------------------- --------- --------
1 Securitisation positions are not included in this table.
RWAs under the IRB approach increased by $4.3bn in the fourth
quarter of the year, including a decrease of $4.0bn due to foreign
currency translation differences. The remaining increase of $8.3bn
(excluding foreign currency translation differences) was
principally due to:
-- an $8.8bn asset size growth, predominantly in corporate and
mortgage portfolios in Europe and Asia;
-- $0.7bn movement in asset quality due to changes in portfolio mix, mainly in GB&M; and
-- $1.5bn increase under model updates mainly due to a new
receivables finance model in Germany.
This was partly offset by $2.7bn changes in methodology and
policy, mainly taking the form of CMB management initiatives across
Europe and Asia.
Table 13: RWA flow statements of CCR exposures under IMM (CCR7)
Capital
RWAs required
$bn $bn
------------ -----------
1 At 1 Oct 2018 20.5 1.7
---------------------------------------------
2 Asset size 0.8 0.1
3 Asset quality 0.1 -
5 Methodology and policy (0.3) -
---- --------------------------------------------- -------- ---------
9 At 31 Dec 2018 21.1 1.8
---- --------------------------------------------- -------- ---------
RWAs under the IMM increased by $0.6bn mainly due to a $0.8bn
growth in asset size driven by mark-to-market movements. This was
partly offset by a $0.3bn decrease as a result of improvements in
collateral recognition in Europe.
Table 14: RWA flow statements of market risk exposures under IMA (MR2-B)
Total
Stressed Total capital
VaR VaR IRC Other RWAs required
$bn $bn $bn $bn $bn $bn
-----------
1 At 1 Oct 2018 6.9 10.7 8.6 3.6 29.8 2.4
-------------------------------------
2 Movement in risk levels 0.2 1.4 (2.2) 0.9 0.3 -
8 At 31 Dec 2018 7.1 12.1 6.4 4.5 30.1 2.4
---- ------------------------------------- ----- -------- ------ ----- ------ ---------
RWAs under the IMA increased by $0.3bn mainly due to higher
exposures in Europe and Asia that increased VaR, SVaR and other by
$2.5bn. This was partly offset by lower sovereign and corporate
exposure that reduced IRC by $2.2bn.
Pillar 2 and ICAAP
Pillar 2
We conduct an Internal Capital Adequacy Assessment Process
('ICAAP') to determine a forward-looking assessment of our capital
requirements given our business strategy, risk profile, risk
appetite and capital plan. This process incorporates the Group's
risk management processes and governance framework. Our base
capital plan undergoes stress testing. This, coupled with our
economic capital framework and other risk management practices, is
used to assess our internal capital adequacy requirements and
inform our view of our internal capital planning buffer. The ICAAP
is formally approved by the Board, which has the ultimate
responsibility for the effective management of risk and approval of
HSBC's risk appetite.
The ICAAP is reviewed by the PRA and by a college of European
Economic Area ('EEA') supervisors, as part of the joint risk
assessment and decision process, during the Supervisory Review and
Evaluation Process ('SREP'). This process occurs periodically to
enable the regulator to define the individual capital requirement
('ICR') (previously known as the individual capital guidance
('ICG')) or minimum capital requirements for HSBC and to define the
PRA buffer, where required. Under the revised Pillar 2 PRA regime,
which came into effect from 1 January 2017, the capital planning
buffer has been replaced with a 'PRA buffer'. This is not intended
to duplicate the CRD IV buffers and, where necessary, will be set
according to vulnerability in a stress scenario, as identified and
assessed through the annual PRA stress testing exercise.
The processes of internal capital adequacy assessment and
supervisory review lead to a final determination by the PRA of the
ICR and any PRA buffer that may be required.
Within Pillar 2, there are two components namely Pillar 2A and
Pillar 2B. Pillar 2A considers, in addition to the minimum capital
requirements for Pillar 1 risks described above, any supplementary
requirements for those risks and any requirements for other risk
categories not captured by Pillar 1. The risk categories to be
covered under Pillar 2A depend on the specific circumstances of a
firm and the nature and scale of its business.
Pillar 2B consists of guidance from the PRA on the capital
buffer a firm would require in order to remain above its ICR in
adverse circumstances that may be largely outside the firm's normal
and direct control; for example, during a period of severe but
plausible downturn stress, when asset values and the firm's capital
surplus may become strained. This is quantified via any PRA buffer
requirement the PRA may consider necessary. The assessment of this
is informed by stress tests and a rounded judgement of a firm's
business model, also taking into account the PRA's view of a firm's
options and capacity to protect its capital position under stress;
for instance, through capital generation. Where the PRA assesses
that a firm's risk management and governance are significantly
weak, it may also increase the PRA buffer to cover the risks posed
by those weaknesses until they are addressed. The PRA buffer is
intended to be drawn upon in times of stress, and its use is not of
itself a breach of capital requirements that would trigger
automatic restrictions on distributions. In specific circumstances,
the PRA should agree a plan with a firm for its restoration over an
agreed timescale.
Internal capital adequacy assessment
The Board manages the Group ICAAP, and together with RMM and
GRC, it examines the Group's risk profile from both a regulatory
and economic capital viewpoint. They aim to ensure that capital
resources:
-- remain sufficient to support our risk profile and outstanding commitments;
-- meet current regulatory requirements, and that HSBC is well
placed to meet those expected in the future;
-- allow the bank to remain adequately capitalised in the event
of a severe economic downturn stress scenario; and
-- remain consistent with our strategic and operational goals, and our shareholder and investor expectations.
The minimum regulatory capital that we are required to hold is
determined by the rules and guidance established by the PRA for the
consolidated Group and by local regulators for individual Group
companies. These capital requirements are a primary factor in
influencing and shaping the business planning process, in which RWA
targets are established for our global businesses in accordance
with the Group's strategic direction and risk appetite.
Economic capital is the internally calculated capital
requirement that we deem necessary to support the risks to which we
are exposed. The economic capital assessment is a more
risk-sensitive measure than the regulatory minimum, and takes
account of the substantial diversification of risk accruing from
our operations. Both the regulatory and the economic capital
assessments rely upon the use of models that are integrated into
our risk management processes. Our economic capital models are
calibrated to quantify the level of capital that is sufficient to
absorb potential losses over a one-year time horizon to a 99.95%
level of confidence for our banking and trading activities, to a
99.5% level of confidence for our insurance activities and pension
risks, and to a 99.9% level of confidence for our operational
risks.
The ICAAP and its constituent economic capital calculations are
examined by the PRA as part of its SREP. This examination informs
the regulator's view of our Pillar 2 capital requirements.
Preserving our strong capital position remains a priority, and
the level of integration of our risk and capital management helps
to optimise our response to business demand for regulatory and
economic capital. Risks that are explicitly assessed through
economic capital are credit risk (including CCR), market risk,
operational risk, interest rate risk in the banking book ('IRRBB'),
insurance risk, pension risk and structural foreign exchange
risk.
Credit risk
Overview and responsibilities
Credit risk represents our largest regulatory capital
requirement.
The principal objectives of our
credit risk management function
are:
* to maintain across HSBC a strong culture of
responsible lending and a robust credit risk policy
and control framework;
* to both partner and challenge our businesses in
defining, implementing and continually re-evaluating
our credit risk appetite under actual and stress
scenario conditions; and
* to ensure there is independent, expert scrutiny of
credit risks, their costs and their mitigation.
============================================================
The credit risk functions within Wholesale Credit and Market
Risk and RBWM are the constituent parts of Global Risk that support
the Group Chief Risk Officer in overseeing credit risks. Their
major duties comprise undertaking independent reviews of large and
high-risk credit proposals, overseeing large exposure policy and
reporting on our wholesale and retail credit risk management
disciplines. They also own our credit policy and credit systems
programmes, oversee portfolio management and report on risk matters
to senior executive management and regulators.
These credit risk functions work closely with other parts of
Global Risk; for example, with Operational Risk on the internal
control framework and with Risk Strategy on the risk appetite
process. In addition, they work jointly with Risk Strategy and
Global Finance on stress testing.
The credit responsibilities of Global Risk are described on page
75 of the Annual Report and Accounts 2018.
Group-wide, the credit risk functions comprise a network of
credit risk management offices reporting within regional risk
functions. They fulfil an essential role as independent risk
control units distinct from business line management in providing
objective scrutiny of risk rating assessments, credit proposals for
approval and other risk matters.
Our credit risk procedures operate through a hierarchy of
personal credit limit approval authorities. Operating company chief
executives, acting under authorities delegated by their boards and
Group standards, are accountable for credit risk and other risks in
their business. In turn, chief executives delegate authority to
operating company chief risk officers and management teams on an
individual basis. Each operating company is responsible for the
quality and performance of its credit portfolios in accordance with
Group standards. Above these thresholds of delegated personal
credit limited approval authorities, approval must be sought from
the regional and, as appropriate, global credit risk function.
Credit risk management
Our exposure to credit risk arises from a wide range of customer
and products, and the risk rating systems in place to measure and
monitor these risks are correspondingly diverse. Senior management
receives a variety of reports on our credit risk exposures,
including expected credit losses, total exposures and RWAs, as well
as updates on specific portfolios that are considered to have
heightened credit risk.
Credit risk exposures are generally measured and managed in
portfolios of either customer types or product categories. Risk
rating systems are designed to assess the default propensity of,
and loss severity associated with, distinct customers who are
typically managed as individual relationships or, in the case of
retail business exposures, on a product portfolio basis.
Risk rating systems for retail exposures are generally
quantitative in nature, applying techniques such as behavioural
analysis across product portfolios comprising large numbers of
homogeneous transactions. Rating systems for individually managed
relationships typically use customer financial statements and
market data analysis, but also qualitative elements and a final
subjective overlay to better reflect any idiosyncratic elements of
the customer's risk profile.
See 'Application of the IRB Approach' on page 38.
A fundamental principle of our policy and approach is that
analytical risk rating systems and scorecards are all valuable
tools at the disposal of management.
The credit process provides for at least an annual review of
facility limits granted. Review may be more frequent, as required
by circumstances such as the emergence of adverse risk factors.
We constantly seek to improve the quality of our risk
management. Group IT systems that process credit risk data continue
to be enhanced in order to deliver both comprehensive management
information in support of business strategy and solutions to
evolving regulatory reporting requirements.
Group standards govern the process through which risk rating
systems are initially developed, judged fit for purpose, approved
and implemented. They also govern the conditions under which
analytical risk model outcomes can be overridden by decision takers
and the process of model performance monitoring and reporting. The
emphasis is on an effective dialogue between business line and risk
management, suitable independence of decision takers, and a good
understanding and robust challenge on the part of senior
management.
Like other facets of risk management, analytical risk rating
systems are not static. They are subject to review and modification
in light of the changing environment, the greater availability and
quality of data, and any deficiencies identified through internal
and external regulatory review. Structured processes and metrics
are in place to capture relevant data and feed this into continuous
model improvement.
See also the comments on 'Model performance' on page 51.
Credit risk models governance
All new or materially changed IRB capital models require the
PRA's approval, as set out in more detail on page 38. Throughout
HSBC, such models fall directly under the remit of the global
functional MOCs, operating in line with HSBC's model risk policy,
and under the oversight of the Global MOC.
Both the Wholesale and RBWM MOCs require all credit risk models
for which they are responsible to be approved by delegated senior
managers with notification to the committees that retain the
responsibility for oversight.
Global Risk sets internal standards for the development,
validation, independent review, approval, implementation and
performance monitoring of credit risk rating models. Independent
reviews of our models are performed by our Independent Model Review
('IMR') function which is separate from our Risk Analytics
functions that are responsible for the development of models.
Compliance with Group standards is subject to examination by
Risk oversight and review from within the Risk function itself, and
by Internal Audit.
Credit quality of assets
We are a universal bank with a conservative approach to credit
risk. This is reflected in our credit risk profile being
diversified across a number of asset classes and geographies with a
credit quality profile mainly concentrated in the higher quality
bands.
Table 15: Credit quality of exposures by exposure classes and instruments(1)
(CR1-A)
Gross carrying
values of
Credit
risk
Specific adjustment
credit Write-offs charges
Defaulted Non-defaulted risk in the of the Net carrying
exposures exposures adjustments year(2) period(2) values
Footnotes $bn $bn $bn $bn $bn $bn
------------ --------------- ------------- ------------ ------------- -------------
Central
governments
and
1 central banks - 331.8 0.1 - - 331.7
2 Institutions - 81.1 - - - 81.1
3 Corporates 6.9 1,024.0 4.1 0.8 0.5 1,026.8
---- -------------- ---------- ---------- ------------- ----------- ---------- ----------- -----------
- of which:
specialised
4 lending 0.8 49.3 0.4 - 0.1 49.7
-------------- ----------
6 Retail 3.3 481.8 1.8 0.7 0.9 483.3
- Secured by
real estate
7 property 2.5 287.3 0.4 - 0.1 289.4
--------------
8 SMEs 0.1 3.5 0.1 - 0.1 3.5
--------------
9 Non-SMEs 2.4 283.8 0.3 - - 285.9
--------------
- Qualifying
revolving
10 retail 0.1 132.7 0.7 0.3 0.4 132.1
--------------
- Other
11 retail 0.7 61.8 0.7 0.4 0.4 61.8
--------------
12 SMEs 0.3 7.5 0.3 0.2 0.2 7.5
--------------
13 Non-SMEs 0.4 54.3 0.4 0.2 0.2 54.3
---- -------------- ----------
Total IRB
15 approach 10.2 1,918.7 6.0 1.5 1.4 1,922.9
---- -------------- ---------- ---------- ------------- ----------- ---------- ----------- -----------
Central
governments
and
16 central banks 3 - 163.9 - - - 163.9
Regional
governments
or
local
17 authorities 3 - 7.3 - - - 7.3
Public sector
18 entities 3 - 12.2 - - - 12.2
Multilateral
development
19 banks - 0.2 - - - 0.2
International
20 organisations - 1.6 - - - 1.6
21 Institutions - 3.4 - - - 3.4
22 Corporates 3.3 180.0 2.1 0.3 0.4 181.2
24 Retail 1.1 64.9 1.5 0.7 0.5 64.5
- of which:
25 SMEs - 1.2 - - - 1.2
Secured by
mortgages on
immovable
26 property 0.6 32.1 0.2 - - 32.5
- of which:
27 SMEs - 0.1 - - - 0.1
Exposures in
28 default 4 5.1 - 2.1 1.0 0.8 3.0
Items
associated
with
particularly
29 high risk 0.1 4.7 - - - 4.8
Collective
investment
undertakings
32 ('CIU') - 0.6 - - - 0.6
Equity
33 exposures - 15.6 - - - 15.6
Other
34 exposures - 11.3 - - - 11.3
Total
standardised
35 approach 5.1 497.8 3.8 1.0 0.9 499.1
---- -------------- ---------- ---------- ------------- ----------- ---------- ----------- -----------
Total at 31
36 Dec 2018 15.3 2,416.5 9.8 2.5 2.3 2,422.0
---- -------------- ---------- ---------- ------------- ----------- ---------- ----------- -----------
- of which:
loans 13.7 1,233.4 9.1 2.5 2.3 1,238.0
- of which:
debt
securities - 348.5 - - - 348.5
- of which:
off-balance
sheet
exposures 1.6 798.7 0.6 - - 799.7
---- -------------- ---------- ---------- ------------- ----------- ---------- ----------- -----------
Table 15: Credit quality of exposures by exposure classes and instruments(1)
(CR1-A) (continued)
Gross carrying
values of
Credit
risk
Specific adjustment
credit Write-offs charges
Defaulted Non-defaulted risk in the of the Net carrying
exposures exposures adjustments year(2) period(2) values
Footnotes $bn $bn $bn $bn $bn $bn
---------- ------------ --------------- ------------- ------------ ------------- -------------
Central
governments
and
1 central banks - 308.1 - - - 308.1
-----------
2 Institutions - 94.5 - - - 94.5
3 Corporates 8.1 987.5 4.2 1.0 0.7 991.4
---- -------------- ---------- ---------- ------------- ----------- ---------- ----------- -----------
- of which:
specialised
4 lending 1.2 47.5 0.3 - - 48.4
6 Retail 3.6 465.0 1.0 0.7 0.3 467.6
- Secured by
real estate
7 property 2.5 274.3 0.3 - - 276.5
--------------
8 SMEs - 1.5 - - - 1.5
--------------
9 Non-SMEs 2.5 272.8 0.3 - - 275.0
--------------
- Qualifying
revolving
10 retail 0.1 125.4 0.2 0.3 0.2 125.3
--------------
- Other
11 retail 1.0 65.3 0.5 0.4 0.1 65.8
--------------
12 SMEs 0.6 10.6 0.3 - - 10.9
--------------
13 Non-SMEs 0.4 54.7 0.2 0.4 0.1 54.9
---- -------------- ----------
Total IRB
15 approach 11.7 1,855.1 5.2 1.7 1.0 1,861.6
---- -------------- ---------- ---------- ------------- ----------- ---------- ----------- -----------
Central
governments
and
16 central banks 3 - 198.1 - - - 198.1
Regional
governments
or
local
17 authorities 3 - 3.8 - - - 3.8
Public sector
18 entities 3 - 0.4 - - - 0.4
Multilateral
development
19 banks - 0.3 - - - 0.3
International
20 organisations - 2.2 - - - 2.2
21 Institutions - 3.5 - - - 3.5
22 Corporates - 172.8 0.5 - 0.1 172.3
24 Retail - 71.0 0.4 - 0.2 70.6
- of which:
25 SMEs - 1.7 - - - 1.7
Secured by
mortgages on
immovable
26 property - 29.0 - - - 29.0
- of which:
27 SMEs - 0.1 - - - 0.1
Exposures in
28 default 4 5.4 - 2.0 1.5 0.7 3.4
Items
associated
with
particularly
29 high risk - 3.9 - - - 3.9
Collective
investment
undertakings
32 ('CIU') - 0.6 - - - 0.6
Equity
33 exposures - 16.0 - - - 16.0
Other
34 exposures - 11.9 - - - 11.9
Total
standardised
35 approach 5.4 513.5 2.9 1.5 1.0 516.0
---- -------------- ---------- ---------- ------------- ----------- ---------- ----------- -----------
Total at 31
36 Dec 2017 17.1 2,368.6 8.1 3.2 2.0 2,377.6
---- -------------- ---------- ---------- ------------- ----------- ---------- ----------- -----------
- of which:
loans 15.1 1,225.2 7.8 3.2 2.0 1,232.5
- of which:
debt
securities - 325.1 - - - 325.1
- of which:
off-balance
sheet
exposures 2.0 782.4 0.2 - - 784.2
---- -------------- ---------- ---------- ------------- ----------- ---------- ----------- -----------
1 Securitisation positions and non-credit obligation assets are not included in this table.
2 Presented on a year-to-date basis.
3 Standardised exposures to EEA 'regional governments and local
authorities' and 'public sector entities' are reported separately
in 2018. In previous years, these exposures were grouped with
'central governments and central banks'.
4 From 1 January 2018, standardised exposures that are in
default are reported within individual exposure classes and
totalled in 'Exposures in default'. The reported amounts at 31
December 2017 have not been restated; 'Exposures in default' at
that date principally comprised defaulted exposure to corporates of
$3.3bn, retail clients of $1.1bn and exposure secured on immovable
property of $1.0bn.
Table 16: Credit quality of exposures by industry or counterparty types(1)
(CR1-B)
Gross carrying
values of
Credit
risk
Specific adjustment
credit Write-offs charges
Defaulted Non-defaulted risk in the of the Net carrying
exposures exposures adjustments year(2) period(2) values
Footnote $bn $bn $bn $bn $bn $bn
1 Agriculture 0.3 8.7 0.1 - - 8.9
Mining & oil
2 extraction 0.5 41.5 0.3 0.1 (0.1) 41.7
3 Manufacturing 2.0 259.5 1.4 0.4 0.3 260.1
4 Utilities 0.1 33.3 0.2 - - 33.2
5 Water supply - 2.4 - - - 2.4
6 Construction 1.4 41.1 0.6 - 0.2 41.9
Wholesale &
7 retail trade 2.2 208.2 1.3 0.3 0.4 209.1
Transportation &
8 storage 0.4 54.0 0.2 - 0.1 54.2
Accommodation &
9 food services 0.4 28.3 0.2 - - 28.5
Information &
10 communication - 11.2 0.1 - 0.1 11.1
Financial &
11 insurance 3 0.3 540.3 0.2 0.1 (0.1) 540.4
----------------- ---------- ---------- ------------- ----------- ----------- --------- ----------
12 Real estate 1.2 235.1 0.7 - 0.2 235.6
Professional
13 activities 0.2 19.1 0.1 - 0.1 19.2
Administrative
14 service 0.9 87.8 0.8 0.1 0.1 87.9
Public admin &
15 defence 0.4 193.4 0.4 - - 193.4
16 Education - 3.6 - - - 3.6
Human health &
17 social work 0.2 7.2 0.1 - - 7.3
Arts &
18 entertainment - 6.2 - - - 6.2
19 Other services 0.2 15.7 0.1 - - 15.8
20 Personal 4.6 572.9 3.0 1.5 1.0 574.5
Extraterritorial
21 bodies - 47.0 - - - 47.0
----------------- ---------- ---------- ------------- ----------- ----------- --------- ----------
Total at 31 Dec
22 2018 15.3 2,416.5 9.8 2.5 2.3 2,422.0
---- ----------------- ---------- ---------- ------------- ----------- ----------- --------- ----------
1 Agriculture 0.4 9.5 0.1 - - 9.8
Mining & oil
2 extraction 1.4 42.2 0.5 0.2 (0.1) 43.1
3 Manufacturing 2.3 254.2 1.2 0.3 0.2 255.3
4 Utilities 0.3 33.9 0.1 0.1 - 34.1
5 Water supply - 3.0 - - - 3.0
6 Construction 1.0 39.2 0.3 0.1 - 39.9
Wholesale &
7 retail trade 2.4 203.5 1.4 0.4 0.5 204.5
Transportation &
8 storage 0.5 52.1 0.1 - - 52.5
Accommodation &
9 food services 0.3 24.9 0.1 - - 25.1
---- ----------------- ----------
Information &
10 communication 0.1 10.0 - 0.1 - 10.1
---- ----------------- ----------
Financial &
11 insurance 3 0.4 576.8 0.8 0.1 0.1 576.4
---- ----------------- ---------- ---------- ------------- ----------- ----------- --------- ----------
12 Real estate 1.2 220.9 0.9 0.1 0.2 221.2
---- ----------------- ----------
Professional
13 activities 0.2 19.2 - - - 19.4
---- ----------------- ----------
Administrative
14 service 0.9 81.6 0.7 0.1 0.1 81.8
Public admin &
15 defence 0.3 172.8 - - - 173.1
16 Education - 3.7 - - - 3.7
Human health &
17 social work 0.2 7.6 - - - 7.8
Arts &
18 entertainment 0.1 8.9 - - - 9.0
19 Other services 0.1 10.4 - - - 10.5
20 Personal 5.0 554.7 1.9 1.7 1.0 557.8
Extraterritorial
21 bodies - 39.5 - - - 39.5
---- ----------------- ---------- ---------- ------------- ----------- ----------- --------- ----------
Total at 31 Dec
22 2017 17.1 2,368.6 8.1 3.2 2.0 2,377.6
---- ----------------- ---------- ---------- ------------- ----------- ----------- --------- ----------
1 Securitisation positions and non-credit obligation assets are not included in this table.
2 Presented on a year-to-date basis.
3 We have restated the comparative period to include within the
Financial and Insurance sector $23.8bn exposure in the form of
non-customer assets that are neither securitisation nor non-credit
obligation assets.
Table 17: Credit quality of exposures by geography(1, 2) (CR1-C)
Gross carrying
values of
Credit
risk
Specific adjustment
credit Write-offs charges
Defaulted Non-defaulted risk in the of the Net carrying
exposures exposures adjustments year(3) period(3) values
$bn $bn $bn $bn $bn $bn
1 Europe 6.7 780.1 3.8 0.9 1.0 783.0
2 - United Kingdom 4.1 474.2 2.4 0.8 0.9 475.9
3 - France 1.0 127.2 0.6 0.1 - 127.6
4 - Other countries 1.6 178.7 0.8 - 0.1 179.5
---------- ------------- ------------ ------------ --------- ------------
5 Asia 2.8 1,001.7 2.1 0.6 0.8 1,002.4
6 - Hong Kong 0.9 497.5 0.7 0.3 0.1 497.7
7 - China 0.3 157.3 0.3 0.1 0.2 157.3
8 - Singapore 0.2 71.9 0.2 - 0.1 71.9
9 - Other countries 1.4 275.0 0.9 0.2 0.4 275.5
---------- ------------- ------------ ------------ --------- ------------
10 MENA 2.9 137.3 2.3 0.3 0.3 137.9
11 North America 2.0 419.4 0.6 0.2 (0.1) 420.8
---------
- United States
12 of America 1.3 295.1 0.3 0.1 - 296.1
13 - Canada 0.2 107.5 0.2 0.1 - 107.5
14 - Other countries 0.5 16.8 0.1 - (0.1) 17.2
---------- ------------- ------------ ------------ --------- ------------
15 Latin America 0.9 62.9 1.0 0.5 0.3 62.8
Other
geographical
16 areas - 15.1 - - - 15.1
Total at 31 Dec
17 2018 15.3 2,416.5 9.8 2.5 2.3 2,422.0
---- ------------------ ---------- ------------- ------------ ------------ --------- ------------
1 Europe 8.1 795.6 3.0 1.2 0.8 800.7
2 - United Kingdom 4.1 465.3 1.8 0.7 0.7 467.6
3 - France 1.2 121.5 0.6 0.1 - 122.1
4 - Other countries 2.8 208.8 0.6 0.4 0.1 211.0
---------- ------------- ------------ ------------ --------- ------------
5 Asia 2.5 970.7 1.7 0.6 0.6 971.5
6 - Hong Kong 0.9 465.5 0.5 0.3 0.4 465.9
7 - China 0.3 167.2 0.3 0.1 0.1 167.2
8 - Singapore 0.1 70.2 0.1 - - 70.2
9 - Other countries 1.2 267.8 0.8 0.2 0.1 268.2
---------- ------------- ------------ ------------ --------- ------------
10 MENA 2.9 134.1 1.8 0.4 0.2 135.2
11 North America 2.6 387.6 1.0 0.3 (0.1) 389.2
---------
- United States
12 of America 1.5 268.9 0.4 0.1 - 270.0
13 - Canada 0.4 100.9 0.3 0.1 (0.1) 101.0
14 - Other countries 0.7 17.8 0.3 0.1 - 18.2
---------- ------------- ------------ ------------ --------- ------------
15 Latin America 1.0 62.3 0.6 0.7 0.5 62.7
Other
geographical
16 areas - 18.3 - - - 18.3
Total at 31 Dec
17 2017 17.1 2,368.6 8.1 3.2 2.0 2,377.6
---- ------------------ ---------- ------------- ------------ ------------ --------- ------------
1 Amounts shown by geographical region and country/territory in this table are based on the country/territory of residence of the counterparty.
2 Securitisation positions and non-credit obligation assets are not included in this table.
3 Presented on a year-to-date basis.
Table 18: Ageing of past-due unimpaired and impaired exposures (CR1-D)
Gross carrying values
Between
Between Between Between 180 days Greater
Less than 30 and 60 and 90 and and than
30 days 60 days 90 days 180 days 1 year 1 year
$bn $bn $bn $bn $bn $bn
-----------
1 Loans 8.5 1.7 0.8 1.7 1.0 3.4
--------- -------- -------- --------- --------- -------
2 Debt securities - - - - - -
---- -------------------------------------- --------- -------- -------- --------- --------- -------
Total exposures at 31
3 Dec 2018 8.5 1.7 0.8 1.7 1.0 3.4
---- -------------------------------------- --------- -------- -------- --------- --------- -------
1 Loans 7.6 1.5 0.8 2.0 0.9 4.1
2 Debt securities - - - - - -
---- -------------------------------------- --------- -------- -------- --------- --------- -------
Total exposures at 31 Dec
3 2017 7.6 1.5 0.8 2.0 0.9 4.1
---- -------------------------------------- --------- -------- -------- --------- --------- -------
Table 19: Non-performing and forborne exposures (CR1-E)
Accumulated impairment
and provisions
and negative fair Collateral
value adjustments and financial
Gross carrying values of performing due to credit guarantees
and non-performing exposures risk received
----------------------------
On performing On non-performing
of which: non-performing exposures exposures
of which:
performing
but past
due between of which: On
30 and performing of which: of which: of which: of which: of which: non-performing of which:
90 days forborne defaulted impaired forborne forborne forborne exposures forborne
$bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn
At 31
Dec 2018
Debt
1 securities 348.5 - - - - - - - - - - - -
2 Loans 1,247.1 2.1 2.0 13.7 13.7 13.7 6.2 (3.6) (0.1) (5.5) (1.8) 4.0 3.8
-------
Off-balance
sheet
3 exposures 800.3 - 0.5 1.6 1.6 1.6 0.1 (0.4) - (0.1) - 0.2 0.1
------------ ------- ---------- ---------- ---- --------- -------- -------- ----- ----- --- ----- ----- --- -------------- --------
At 31
Dec 2017
------------
Debt
1 securities 325.1 - - - - - - - - - - - -
2 Loans 1,240.3 1.7 2.5 15.8 15.1 15.8 6.7 (2.4) (0.1) (5.5) (1.9) 6.2 4.3
-------
Off-balance
sheet
3 exposures 784.4 - 0.3 2.0 2.0 2.0 - (0.2) - - - 0.2 -
------------ ------- ---------- ---------- ---- --------- -------- -------- ----- ----- --- ----- ----- --- -------------- --------
Table 19 is presented based on the EBA definitions of
'non-performing' and 'forborne' exposures. Forborne exposures are
referred to as renegotiated loans in the Annual Report and Accounts
2018. In the Annual Report and Accounts 2018, we classify and
report loans on which concessions have been granted under
conditions of credit distress as 'renegotiated loans' when their
contractual payment terms have been modified because we have
significant concerns about the borrowers' ability to meet
contractual payments when due. This is aligned with the EBA
definitions of forborne exposures. The EBA and Annual Report and
Accounts 2018 differ in the treatment of cures from the
forborne/renegotiated status. Under the EBA definition, exposures
are no longer considered forborne once the exposures have complied
with the revised contractual obligations for a period of at least
three years and the exposures are no longer considered impaired or
have any elements that are more than 30 days past due. In the
Annual Report and Accounts 2018, renegotiated loans retain this
classification until maturity or derecognition. The EBA definition
of non-performing captures those debtors that have material
exposures, which are more than 90 days past due or where the debtor
is assessed as unlikely to pay its credit obligations in full
without the realisation of collateral, regardless of the existence
of any past due amounts. Any debtors that are in default for
regulatory purposes or impaired under the applicable accounting
framework are considered to be unlikely to pay. The Annual Report
and Accounts 2018 does not report non-performing exposure, however,
the definition of impaired loans is aligned to the EBA
non-performing definitions.
Table 20: Credit risk exposure - summary (CRB-B)
-------- --------- ----- ----------
At 31 Dec 2018 At 31 Dec 2017
Average Average
Net net Net net
carrying carrying Capital carrying carrying Capital
values values(4) RWAs^ required^ values values(4) RWAs required
Footnotes $bn $bn $bn $bn $bn $bn $bn $bn
IRB advanced
approach 1,844.5 1,812.1 468.2 37.4 1,788.2 1,729.1 455.4 36.4
- central
governments
and
central banks 331.7 315.4 36.9 3.0 308.1 320.9 33.9 2.7
- institutions 80.6 88.0 14.2 1.1 94.3 92.1 17.6 1.4
- corporates 1 948.9 932.0 345.1 27.5 918.2 870.6 338.2 27.0
- total retail 483.3 476.7 72.0 5.8 467.6 445.5 65.7 5.3
Secured by
mortgages on
immovable
property SME 3.5 3.2 1.8 0.1 1.5 1.5 0.5 -
Secured by
mortgages on
immovable
property
non-SME 285.9 280.9 37.2 3.0 275.0 260.5 33.2 2.7
Qualifying
revolving
retail 132.1 129.1 17.3 1.4 125.3 120.2 16.0 1.3
Other SME 7.5 8.7 4.8 0.4 10.9 10.2 5.9 0.5
Other non-SME 54.3 54.8 10.9 0.9 54.9 53.1 10.1 0.8
IRB
securitisation
positions 29.7 31.0 6.3 0.5 32.8 33.9 13.7 1.1
IRB non-credit
obligation
assets 56.9 59.2 10.8 0.9 56.1 55.2 13.2 1.1
----------
IRB foundation
approach 78.4 76.5 30.5 2.4 73.4 71.2 28.4 2.3
- central
governments and
central banks - - - - - - - -
- institutions 0.5 0.3 0.2 - 0.2 0.2 0.1 -
- corporates 77.9 76.2 30.3 2.4 73.2 71.0 28.3 2.3
Standardised
approach 501.8 501.9 175.3 14.1 518.0 483.1 174.5 13.9
- central
governments and
central banks 3 163.9 182.5 12.5 1.0 198.1 173.1 12.7 1.0
- institutions 3.4 3.0 1.2 0.1 3.5 2.9 1.2 0.1
- corporates 179.4 168.4 79.2 6.3 172.3 167.8 78.3 6.3
- retail 63.8 66.2 14.8 1.2 70.6 68.9 16.5 1.3
- secured by
mortgages on
immovable
property 32.0 30.3 11.3 0.9 29.0 27.6 10.4 0.8
- exposures in
default 3.0 3.0 3.8 0.3 3.4 3.6 3.9 0.3
- regional
governments or
local
authorities 3 7.3 5.7 1.3 0.1 3.8 3.2 1.0 0.1
- public sector
entities 3 12.2 7.6 - - 0.4 0.2 0.1 -
- equity 2 15.6 13.2 35.0 2.8 16.0 15.9 36.1 2.9
- items
associated
with
particularly
high risk 4.8 4.2 6.9 0.6 3.9 3.9 5.7 0.5
-
securitisation
positions 2.7 2.5 2.1 0.2 2.0 1.3 1.6 0.1
- claims in the
form of
collective
investment
undertakings
('CIU') 0.6 0.6 0.6 0.1 0.6 0.5 0.6 -
- international
organisations 1.6 2.0 - - 2.2 2.5 - -
- multilateral
development
banks 0.2 0.2 - - 0.3 0.3 - -
----------
- other items 11.3 12.5 6.6 0.5 11.9 11.4 6.4 0.5
----------
Total 2,511.3 2,480.7 691.1 55.3 2,468.5 2,372.5 685.2 54.8
----------
1 Corporates includes specialised lending exposures which are
reported in more detail in Table 60: Specialised lending on
slotting approach (CR10).
2 This includes investments that are risk weighted at 250%.
3 Standardised exposures to EEA 'regional governments and local
authorities' and 'public sector entities' are reported separately
in 2018. In previous years, these exposures were grouped with
'central governments or central banks'.
4 Average net carrying values are calculated by aggregating net
carrying values of the last five quarters and dividing by five.
Table 21: Geographical breakdown of exposures (CRB-C)
Net carrying values(1,2)
Of which: Of which:
United Other Hong Other
Europe Kingdom France countries Asia Kong China Singapore countries
$bn $bn $bn $bn $bn $bn $bn $bn $bn
IRB approach
exposure
classes
---
Central
governments
and central
1 banks 4.3 0.4 0.1 3.8 172.4 52.9 29.7 15.4 74.4
2 Institutions 23.1 8.7 1.8 12.6 40.8 7.0 13.9 2.6 17.3
3 Corporates 307.9 171.7 47.2 89.0 440.9 207.9 79.8 32.2 121.0
4 Retail 228.1 201.0 25.1 2.0 199.9 161.5 5.4 6.8 26.2
Total IRB
6 approach 563.4 381.8 74.2 107.4 854.0 429.3 128.8 57.0 238.9
---
Standardised
approach
exposure
classes
---
Central
governments
and central
7 banks(3) 158.6 82.7 45.3 30.6 0.8 0.5 - - 0.3
Regional
governments
or local
8 authorities(3) 2.7 - - 2.7 - - - - -
Public sector
9 entities(3) 12.1 - 0.2 11.9 - - - - -
Multilateral
development
10 banks - - - - - - - - -
International
11 organisations - - - - - - - - -
12 Institutions 1.0 - 0.9 0.1 0.2 0.1 - - 0.1
13 Corporates 27.3 2.9 4.2 20.2 69.3 45.3 5.5 7.8 10.7
14 Retail 3.0 1.2 0.4 1.4 40.2 10.5 3.8 6.6 19.3
Secured by
mortgages
on immovable
15 property 5.5 1.4 0.8 3.3 18.8 6.2 7.5 0.4 4.7
Exposures in
16 default 0.6 0.1 - 0.5 0.4 0.1 - - 0.3
Items
associated
with
particularly
17 high risk 2.9 1.3 0.5 1.1 - - - - -
Collective
investment
undertakings
20 ('CIU') 0.6 0.6 - - - - - - -
Equity
21 exposures 1.5 0.9 0.5 0.1 12.5 1.5 10.8 0.1 0.1
Other
22 exposures 3.8 3.0 0.6 0.2 6.2 4.2 0.9 - 1.1
Total
standardised
23 approach 219.6 94.1 53.4 72.1 148.4 68.4 28.5 14.9 36.6
---
Total at 31
24 Dec 2018 783.0 475.9 127.6 179.5 1,002.4 497.7 157.3 71.9 275.5
---
Table 21: Geographical breakdown of exposures (CRB-C) (continued)
Net carrying values(1,2)
Of which:
United
North States Other Latin
MENA America of America Canada countries America Other Total
$bn $bn $bn $bn $bn $bn $bn $bn
IRB approach exposure
classes
---
Central governments
and
1 central banks 17.1 111.9 89.2 22.7 - 12.8 13.2 331.7
2 Institutions 6.3 10.2 1.9 8.0 0.3 0.6 0.1 81.1
3 Corporates 45.8 223.2 162.8 51.8 8.6 9.0 - 1,026.8
4 Retail 2.4 52.6 27.8 22.3 2.5 0.3 - 483.3
6 Total IRB approach 71.6 397.9 281.7 104.8 11.4 22.7 13.3 1,922.9
---
Standardised approach
exposure
classes
---
Central governments
and
7 central banks(3) 1.7 2.2 2.1 0.1 - 0.6 - 163.9
Regional governments
or
8 local authorities(3) 3.7 - - - - 0.9 - 7.3
Public sector
9 entities(3) - - - - - 0.1 - 12.2
Multilateral
development
10 banks - - - - - - 0.2 0.2
International
11 organisations - - - - - - 1.6 1.6
12 Institutions 2.1 - - - - 0.1 - 3.4
13 Corporates 44.7 12.3 8.4 0.8 3.1 25.8 - 179.4
14 Retail 8.7 2.9 0.7 1.7 0.5 9.0 - 63.8
Secured by mortgages
on
15 immovable property 3.4 1.7 0.6 0.1 1.0 2.6 - 32.0
16 Exposures in default 1.1 0.4 0.1 - 0.3 0.5 - 3.0
Items associated with
particularly
17 high risk 0.2 1.6 0.8 - 0.8 0.1 - 4.8
Collective investment
undertakings
20 ('CIU') - - - - - - - 0.6
21 Equity exposures 0.2 1.2 1.1 - 0.1 0.2 - 15.6
22 Other exposures 0.5 0.6 0.6 - - 0.2 - 11.3
Total standardised
23 approach 66.3 22.9 14.4 2.7 5.8 40.1 1.8 499.1
---
24 Total at 31 Dec 2018 137.9 420.8 296.1 107.5 17.2 62.8 15.1 2,422.0
---
Table 21: Geographical breakdown of exposures (CRB-C) (continued)
Net carrying values(1,2)
Of which: Of which:
United Other Hong Other
Europe Kingdom France countries Asia Kong China Singapore countries
$bn $bn $bn $bn $bn $bn $bn $bn $bn
IRB approach
exposure
classes
---
Central
governments
and central
1 banks 6.8 - - 6.8 171.8 55.9 30.8 13.1 72.0
2 Institutions 23.9 11.1 1.8 11.0 48.0 9.0 18.6 3.7 16.7
3 Corporates 299.5 170.2 47.5 81.8 427.2 194.1 83.2 31.6 118.3
4 Retail 226.5 198.3 26.2 2.0 185.5 148.3 6.0 6.3 24.9
Total IRB
6 approach 556.7 379.6 75.5 101.6 832.5 407.3 138.6 54.7 231.9
---
Standardised
approach
exposure
classes
---
Central
governments
and central
7 banks(3) 193.1 75.8 39.4 77.9 0.9 0.3 0.1 - 0.5
Regional
governments
or local
8 authorities(3) - - - - - - - - -
Public sector
9 entities(3) 0.3 - - 0.3 - - - - -
Multilateral
development
10 banks - - - - - - - - -
International
11 organisations - - - - - - - - -
12 Institutions 1.1 - 0.8 0.3 0.1 0.1 - - -
13 Corporates 30.2 3.0 2.7 24.5 60.0 37.7 5.3 6.7 10.3
14 Retail 4.2 1.2 1.8 1.2 41.7 11.4 3.1 8.2 19.0
Secured by
mortgages
on immovable
15 property 5.6 1.2 0.8 3.6 16.5 3.4 7.8 0.4 4.9
Exposures in
16 default 1.0 0.1 0.1 0.8 0.5 0.1 - - 0.4
Items
associated
with
particularly
17 high risk 2.4 1.3 0.4 0.7 - - - - -
Collective
investment
undertakings
20 ('CIU') 0.6 0.6 - - - - - - -
Equity
21 exposures 1.2 1.1 0.1 - 13.3 1.6 11.4 0.2 0.1
Other
22 exposures 4.3 3.7 0.5 0.1 6.0 4.0 0.9 - 1.1
Total
standardised
23 approach 244.0 88.0 46.6 109.4 139.0 58.6 28.6 15.5 36.3
---
Total at 31
24 Dec 2017 800.7 467.6 122.1 211.0 971.5 465.9 167.2 70.2 268.2
---
Table 21: Geographical breakdown of exposures (CRB-C) (continued)
Net carrying values(1,2)
Of which:
United
North States Other Latin
MENA America of America Canada countries America Other Total
$bn $bn $bn $bn $bn $bn $bn $bn
-------- ------------ ---------- -------
IRB approach exposure
classes
--- -------- ------------ ---------- -------
Central governments
1 and central banks 16.8 87.2 69.6 17.5 0.1 10.2 15.3 308.1
2 Institutions 5.5 15.2 7.9 7.3 - 1.4 0.5 94.5
3 Corporates 42.6 210.7 149.4 50.8 10.5 11.4 - 991.4
4 Retail 2.4 53.1 27.1 22.9 3.1 0.1 - 467.6
6 Total IRB approach 67.3 366.2 254.0 98.5 13.7 23.1 15.8 1,861.6
---
Standardised approach
exposure classes
--- -------- ------------ ---------- -------
Central governments
7 and central banks(3) 1.1 2.4 2.3 0.1 - 0.6 - 198.1
Regional governments
or local
8 authorities(3) 3.1 - - - - 0.7 - 3.8
Public sector
9 entities(3) - - - - - 0.1 - 0.4
Multilateral
development
10 banks - - - - - - 0.3 0.3
International
11 organisations - - - - - - 2.2 2.2
12 Institutions 2.2 - - - - 0.1 - 3.5
13 Corporates 45.8 11.9 9.7 0.3 1.9 24.4 - 172.3
14 Retail 10.3 3.9 1.8 1.6 0.5 10.5 - 70.6
Secured by mortgages
15 on immovable property 3.2 1.5 0.2 0.1 1.2 2.2 - 29.0
16 Exposures in default 1.3 0.2 - - 0.2 0.4 - 3.4
Items associated with
particularly high
17 risk 0.2 1.2 0.5 - 0.7 0.1 - 3.9
Collective investment
20 undertakings ('CIU') - - - - - - - 0.6
21 Equity exposures 0.2 1.0 1.0 - - 0.3 - 16.0
22 Other exposures 0.5 0.9 0.5 0.4 - 0.2 - 11.9
Total standardised
23 approach 67.9 23.0 16.0 2.5 4.5 39.6 2.5 516.0
---
24 Total at 31 Dec 2017 135.2 389.2 270.0 101.0 18.2 62.7 18.3 2,377.6
---
1 Amounts shown by geographical region and country/territory in this table are based on the country/territory of residence of the counterparty.
2 Securitisation positions and non-credit obligation assets are not included in this table.
3 Standardised exposures to EEA 'regional governments and local
authorities' and 'public sector entities' are reported separately
in 2018. In previous years, these exposures were grouped with
'central governments or central banks'.
Table 22: Concentration of exposures by industry or counterparty types
(CRB-D)
Mining
& oil Wholesale Accom-modation
extrac Water & retail Transpor-tation & food Infor-mation Financial
Agriculture -tion Manufac-turing Utilities supply Construction trade & storage services & commun-ication & insurance(2)
Net carrying
values(1) $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn
IRB approach
exposure
classes
Central
governments
and central
1 banks - - - 0.4 - - - - - - 141.2
2 Institutions - 0.2 - 0.4 - - - - - - 80.1
3 Corporates 6.9 35.9 231.8 28.4 2.3 33.6 181.8 48.5 24.3 9.2 122.2
4 Retail 1.0 - 0.9 - - 0.2 1.6 0.3 0.4 - 0.2
Total IRB
6 approach 7.9 36.1 232.7 29.2 2.3 33.8 183.4 48.8 24.7 9.2 343.7
--- ----------- -------------- ------------
Standardised
approach
exposure
classes
Central
governments
and central
7 banks(3) - - - - - - - - - - 129.3
Regional
governments
or local
8 authorities(3) - - - - - - - - - - 0.3
Public sector
9 entities(3) - - - 0.1 - - - - - - 7.7
Multilateral
development
10 banks - - - - - - - - - - 0.2
International
11 organisations - - - - - - - - - - -
12 Institutions - - - - - - - - - - 3.4
13 Corporates 0.9 5.6 26.7 3.9 0.1 7.7 25.2 5.2 3.7 1.7 24.2
14 Retail 0.1 - 0.2 - - - 0.2 0.1 - - 0.2
Secured by
mortgages
on immovable
15 property - - - - - 0.1 - - - - 0.1
Exposures
16 in default - - 0.5 - - 0.2 0.3 0.1 0.1 - 0.1
Items
associated
with
particularly
17 high risk - - - - - 0.1 - - - - 4.2
Collective
investment
undertakings
20 ('CIU') - - - - - - - - - - 0.6
Equity
21 exposures - - - - - - - - - 0.2 15.4
Other
22 exposures - - - - - - - - - - 11.0
Total
standardised
23 approach 1.0 5.6 27.4 4.0 0.1 8.1 25.7 5.4 3.8 1.9 196.7
Total at 31
24 Dec 2018 8.9 41.7 260.1 33.2 2.4 41.9 209.1 54.2 28.5 11.1 540.4
--- ----------- -------------- ------------
Table 22: Concentration of exposures by industry or counterparty types
(CRB-D) (continued)
Human
Public health
Real Professional Administ-rative admin & social Arts Other Extra-territorial
estate activities service & defence Education work & entertain-ment services Personal bodies Total
Net carrying
values(1) $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn
IRB approach
exposure
classes
Central
governments
and central
1 banks - - - 153.4 - 0.3 - 0.2 - 36.2 331.7
2 Institutions - - - 0.2 0.1 - - - - 0.1 81.1
3 Corporates 196.6 17.4 56.8 2.6 3.0 5.6 5.4 13.9 0.6 - 1,026.8
4 Retail 1.0 - 0.4 - 0.1 0.2 0.2 0.1 476.7 - 483.3
Total IRB
6 approach 197.6 17.4 57.2 156.2 3.2 6.1 5.6 14.2 477.3 36.3 1,922.9
---- ------------ ---------------
Standardised
approach
exposure
classes
Central
governments
and central
7 banks(3) - - - 25.5 - - - - - 9.1 163.9
Regional
governments
or local
8 authorities(3) - - - 7.0 - - - - - - 7.3
Public sector
9 entities(3) - - - 4.3 0.1 - - - - - 12.2
Multilateral
development
10 banks - - - - - - - - - - 0.2
International
11 organisations - - - - - - - - - 1.6 1.6
12 Institutions - - - - - - - - - - 3.4
13 Corporates 37.0 1.8 29.7 0.4 0.3 1.2 0.6 1.4 2.1 - 179.4
14 Retail 0.1 - 0.2 - - - - 0.1 62.6 - 63.8
Secured by
mortgages
on immovable
15 property 0.5 - - - - - - - 31.3 - 32.0
Exposures
16 in default 0.1 - 0.3 - - - - 0.1 1.2 - 3.0
Items
associated
with
particularly
17 high risk 0.3 - 0.2 - - - - - - - 4.8
Collective
investment
undertakings
20 ('CIU') - - - - - - - - - - 0.6
Equity
21 exposures - - - - - - - - - - 15.6
Other
22 exposures - - 0.3 - - - - - - - 11.3
Total
standardised
23 approach 38.0 1.8 30.7 37.2 0.4 1.2 0.6 1.6 97.2 10.7 499.1
Total at
24 31 Dec 2018 235.6 19.2 87.9 193.4 3.6 7.3 6.2 15.8 574.5 47.0 2,422.0
---- ------------
Table 22: Concentration of exposures by industry or counterparty types
(CRB-D) (continued)
Mining
& oil Wholesale Accom-modation Financial
extrac Water & retail Transpor-tation & food Infor-mation & insurance
Agriculture -tion Manufac-turing Utilities supply Construction trade & storage services & commun-ication (2)
Net carrying
values(1) $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn
IRB approach
exposure
classes
Central
governments
and central
1 banks - - - - - - - - - - 141.0
2 Institutions - 0.3 - - - - - - - - 94.1
3 Corporates 7.3 38.9 226.8 29.3 2.8 31.8 174.0 47.9 21.0 7.7 126.0
4 Retail 1.0 - 0.7 - - 0.3 1.7 0.3 0.4 - 0.1
Total IRB
6 approach 8.3 39.2 227.5 29.3 2.8 32.1 175.7 48.2 21.4 7.7 361.2
--- ----------- --------------
Standardised
approach
exposure
classes
Central
governments
and central
7 banks(3) - - - - - - - - - - 158.6
Regional
governments
or local
8 authorities(3) - - - - - - - - - - 1.5
Public sector
9 entities(3) - - - - - - - - - - -
Multilateral
development
10 banks - - - - - - - - - - 0.3
International
11 organisations - - - - - - - - - - -
12 Institutions - - - - - - - - - - 3.5
13 Corporates 1.3 3.8 26.6 4.8 0.2 7.4 28.0 4.3 3.6 1.9 18.8
14 Retail 0.1 - 0.2 - - - 0.5 - - - 1.6
Secured by
mortgages
on immovable
15 property - - - - - 0.1 - - - - -
Exposures
16 in default 0.1 0.1 0.7 - - 0.2 0.3 - 0.1 - 0.1
Items
associated
with
particularly
17 high risk - - - - - 0.1 - - - - 3.4
Collective
investment
undertakings
20 ('CIU') - - - - - - - - - - 0.6
Equity
21 exposures - - 0.1 - - - - - - 0.5 15.2
Other
22 exposures - - 0.2 - - - - - - - 11.6
Total
standardised
23 approach 1.5 3.9 27.8 4.8 0.2 7.8 28.8 4.3 3.7 2.4 215.2
Total at 31
24 Dec 2017 9.8 43.1 255.3 34.1 3.0 39.9 204.5 52.5 25.1 10.1 576.4
--- ----------- --------------
Table 22: Concentration of exposures by industry or counterparty types
(CRB-D) (continued)
Human
Public health
Real Professional Administ-rative admin & social Arts Other Extra-territorial
estate activities service & defence Education work & entertain-ment services Personal bodies Total
Net carrying
values(1) $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn
IRB approach
exposure
classes
Central
governments
and central
1 banks - - - 139.6 - 0.1 0.1 - - 27.3 308.1
2 Institutions - - - 0.1 - - - - - - 94.5
3 Corporates 180.0 18.0 53.0 0.8 3.2 6.1 8.3 8.5 - - 991.4
4 Retail 0.7 - 0.7 - 0.1 0.3 0.1 0.4 460.8 - 467.6
Total IRB
6 approach 180.7 18.0 53.7 140.5 3.3 6.5 8.5 8.9 460.8 27.3 1,861.6
---- ---------------
Standardised
approach
exposure
classes
Central
governments
and central
7 banks(3) - - - 29.2 - - - - - 10.3 198.1
Regional
governments
or local
8 authorities(3) - - - 2.3 - - - - - - 3.8
Public sector
9 entities(3) - - - 0.4 - - - - - - 0.4
Multilateral
development
10 banks - - - - - - - - - - 0.3
International
11 organisations - - - 0.3 - - - - - 1.9 2.2
12 Institutions - - - - - - - - - - 3.5
13 Corporates 38.7 1.3 27.0 0.4 0.4 1.3 0.5 1.4 0.6 - 172.3
14 Retail 0.6 0.1 0.4 - - - - 0.1 67.0 - 70.6
Secured by
mortgages
on immovable
15 property 0.8 - - - - - - - 28.1 - 29.0
Exposures
16 in default 0.2 - 0.3 - - - - - 1.3 - 3.4
Items
associated
with
particularly
17 high risk 0.2 - 0.2 - - - - - - - 3.9
Collective
investment
undertakings
20 ('CIU') - - - - - - - - - - 0.6
Equity
21 exposures - - 0.1 - - - - 0.1 - - 16.0
Other
22 exposures - - 0.1 - - - - - - - 11.9
Total
standardised
23 approach 40.5 1.4 28.1 32.6 0.4 1.3 0.5 1.6 97.0 12.2 516.0
Total at 31
24 Dec 2017 221.2 19.4 81.8 173.1 3.7 7.8 9.0 10.5 557.8 39.5 2,377.6
----
1 Securitisation positions and non-credit obligation assets are not included in this table.
2 We have restated the comparative period to include within the
Financial and Insurance sector $23.8bn exposure in the form of
non-customer assets that are neither securitisation nor non-credit
obligation assets.
3 Standardised exposures to EEA 'regional governments and local
authorities' and 'public sector entities' are reported separately
in 2018. In previous years, these exposures were grouped with
'central governments and central banks'.
Table 23: Maturity of on-balance sheet exposures (CRB-E)
Net carrying values(1)
Between
Less than 1 and More than
On demand 1 year 5 years 5 years Undated Total
$bn $bn $bn $bn $bn $bn
IRB approach exposure classes
Central governments and
1 central banks 38.0 149.5 93.8 47.3 - 328.6
2 Institutions 10.1 35.1 23.4 0.9 - 69.5
3 Corporates 59.1 183.7 221.0 62.5 - 526.3
4 Retail 21.5 7.3 38.0 267.3 - 334.1
6 Total IRB approach 128.7 375.6 376.2 378.0 - 1,258.5
--- --------- --------- -------- --------- ------- -------
Standardised approach exposure
classes
---
Central governments and
7 central banks(2) 75.5 50.5 22.9 8.8 5.2 162.9
Regional governments or
8 local authorities(2) 0.8 0.9 3.9 1.4 - 7.0
9 Public sector entities(2) - 2.6 7.3 2.2 - 12.1
---------
Multilateral development
10 banks - - 0.2 - - 0.2
11 International organisations - 0.8 0.3 0.5 - 1.6
12 Institutions 0.1 0.3 2.9 - - 3.3
13 Corporates 3.9 44.0 36.5 6.6 - 91.0
14 Retail 6.8 2.0 7.0 4.5 - 20.3
Secured by mortgages on
15 immovable property - 1.9 5.0 23.7 - 30.6
16 Exposures in default 0.3 0.9 1.1 0.5 - 2.8
Items associated with particularly
17 high risk - 0.1 0.7 0.1 1.6 2.5
Collective investment undertakings
20 ('CIU') - - - - 0.6 0.6
21 Equity exposures - - - - 15.6 15.6
22 Other exposures - 2.7 - 0.2 7.6 10.5
23 Total standardised approach 87.4 106.7 87.8 48.5 30.6 361.0
--- --------- --------- -------- --------- ------- -------
24 Total at 31 Dec 2018 216.1 482.3 464.0 426.5 30.6 1,619.5
--- --------- --------- -------- --------- ------- -------
IRB approach exposure classes
Central governments and
1 central banks 38.8 139.9 82.2 44.9 - 305.8
2 Institutions 6.5 51.5 22.1 0.8 - 80.9
3 Corporates 60.6 163.7 214.3 62.6 - 501.2
4 Retail 21.1 10.0 38.8 254.1 - 324.0
6 Total IRB approach 127.0 365.1 357.4 362.4 - 1,211.9
--- --------- --------- -------- --------- ------- -------
Standardised approach exposure
classes
---
Central governments and
7 central banks(2) 41.7 99.2 40.1 10.9 5.0 196.9
Regional governments or
8 local authorities(2) 0.8 0.4 0.2 1.9 - 3.3
9 Public sector entities(2) - 0.1 - 0.1 - 0.2
---------
Multilateral development
10 banks - 0.1 - 0.2 - 0.3
11 International organisations - 0.4 1.3 0.5 - 2.2
12 Institutions 0.1 1.5 1.5 0.3 - 3.4
13 Corporates 3.8 53.3 23.6 7.9 - 88.6
14 Retail 7.7 3.5 9.5 3.1 - 23.8
Secured by mortgages on
15 immovable property - 2.0 4.9 20.9 - 27.8
16 Exposures in default 0.3 1.1 1.0 0.7 - 3.1
Items associated with particularly
17 high risk - 0.1 0.7 0.4 0.9 2.1
Collective investment undertakings
20 ('CIU') - - - 0.1 0.5 0.6
21 Equity exposures - - - - 16.0 16.0
22 Other exposures - 0.1 - 0.2 10.8 11.1
23 Total standardised approach 54.4 161.8 82.8 47.2 33.2 379.4
--- --------- --------- -------- --------- ------- -------
24 Total at 31 Dec 2017 181.4 526.9 440.2 409.6 33.2 1,591.3
--- --------- --------- -------- --------- ------- -------
1 Securitisation positions and non-credit obligation assets are not included in this table.
2 Standardised exposures to EEA 'regional governments and local
authorities' and 'public sector entities' are reported separately
in 2018. In previous years, these exposures were grouped with
'central governments and central banks'.
Past due unimpaired and credit-impaired exposures
Table 24 analyses past due unimpaired and credit-impaired
exposures on a regulatory consolidation basis using accounting
values. There are no material differences between the regulatory
and accounting scope of consolidation.
Credit-impaired (stage 3) exposures are disclosed on page 101 of
the Annual Report and Accounts 2018.
The Group's definitions for accounting purposes of 'past due'
and 'credit impaired' are set out on pages 90, 103 and in Note
1.2(i) of the Annual Report and Accounts 2018.
All amounts past due more than 90 days are considered credit
impaired even where regulatory rules deem default as 180 days past
due.
Table 24: Amount of past due unimpaired and credit-impaired exposures
by geographical region
North Latin
Europe Asia MENA America America Total
At 31 Dec 2018 $bn $bn $bn $bn $bn $bn
------ ----- ----- -------- -------- --------
Past due 5.0 5.2 3.3 2.3 1.3 17.1
- personal 2.1 2.6 0.8 1.5 0.6 7.6
- corporate and commercial 2.9 2.4 2.3 0.8 0.7 9.1
- financial - 0.2 0.2 - - 0.4
------ ----- ----- -------- -------- ------
Risk mitigation
Our approach when granting credit facilities is to do so on the
basis of capacity to repay, rather than placing primary reliance on
credit risk mitigants. Depending on a customer's standing and the
type of product, facilities may be provided unsecured.
Mitigation of credit risk is a key aspect of effective risk
management and takes many forms. Our general policy is to promote
the use of credit risk mitigation, justified by commercial prudence
and capital efficiency. Detailed policies cover the acceptability,
structuring and terms with regard to the availability of credit
risk mitigation such as in the form of collateral security. These
policies, together with the setting of suitable valuation
parameters, are subject to regular review to ensure that they are
supported by empirical evidence and continue to fulfil their
intended purpose.
Collateral
The most common method of mitigating credit risk is to take
collateral. In our retail residential and commercial real estate
('CRE') businesses, a mortgage over the property is usually taken
to help secure claims. Physical collateral is also taken in various
forms of specialised lending and leasing transactions where income
from the physical assets that are financed is also the principal
source of facility repayment. In the commercial and industrial
sectors, charges are created over business assets such as premises,
stock and debtors. Loans to private banking clients may be made
against a pledge of eligible marketable securities, cash or real
estate. Facilities to small- and medium-sized enterprises ('SMEs')
are commonly granted against guarantees given by their owners
and/or directors.
For credit risk mitigants comprising immovable property, the key
determinant of concentration at Group level is geographic. Use of
immovable property mitigants for risk management purposes is
predominantly in Asia and Europe.
Further information regarding collateral held over CRE and
residential property is provided on pages 109 and 117,
respectively, of the Annual Report and Accounts 2018.
Financial collateral
In the institutional sector, trading facilities are supported by
charges over financial instruments, such as cash, debt securities
and equities. Financial collateral in the form of marketable
securities is used in much of the Group's derivatives activities
and in securities financing transactions, such as repos, reverse
repos, securities lending and borrowing. Netting is used
extensively and is a prominent feature of market standard
documentation.
Further information regarding collateral held for trading
exposures is on page 81.
In the non-trading book, we provide customers with working
capital management products. Some of these products have loans and
advances to customers, and customer accounts where we have rights
of offset and comply with the regulatory requirements for
on-balance sheet netting. Under on-balance sheet netting, the
customer accounts are treated as cash collateral and the effects of
this collateral are incorporated in our LGD estimates. For risk
management purposes, the net amounts of such exposures are subject
to limits and the relevant customer agreements are subject to
review to ensure the legal right of offset remains appropriate. At
31 December 2018, $35bn of customer accounts were treated as cash
collateral, mainly in the UK.
Other forms of credit risk mitigation
Our Global Banking and Markets ('GB&M') business utilises
credit risk mitigation to manage the credit risk of its portfolios,
with the goal of reducing concentrations in individual names,
sectors or portfolios. The techniques in use include credit default
swap ('CDS') purchases, structured credit notes and securitisation
structures. Buying credit protection creates credit exposure
against the protection provider, which is monitored as part of the
overall credit exposure to them. Where applicable, the transaction
is entered into directly with a central clearing house
counterparty; otherwise our exposure to CDS protection providers is
diversified among mainly banking counterparties with strong credit
ratings. In our corporate lending, we also take guarantees from
corporates and export credit agencies ('ECA'). Corporates would
normally provide guarantees as part of a parent/subsidiary or
common parent relationship and would span a number of credit
grades. The ECAs will normally be investment grade.
Policy and procedures
Policies and procedures govern the protection of our position
from the outset of a customer relationship; for instance, in
requiring standard terms and conditions or specifically agreed
documentation permitting the offset of credit balances against debt
obligations, and through controls over the integrity, current
valuation and, if necessary, realisation of collateral
security.
Valuing collateral
Valuation strategies are established to monitor collateral
mitigants to ensure that they will continue to provide the
anticipated secure secondary repayment source. Where collateral is
subject to high volatility, valuation is frequent; where stable,
less so. For market trading activities such as collateralised
over-the-counter ('OTC') derivatives and securities financing
transactions ('SFTs'), we typically carry out daily valuations. In
the residential mortgage business, Group policy prescribes
revaluation at intervals of up to three years, or more frequently
as the need arises; for example, where market conditions are
subject to significant change. Residential property collateral
values are determined through a combination of professional
appraisals, house price indices or statistical analysis.
Local market conditions determine the frequency of valuation for
CRE. Revaluations are sought where, for example, material concerns
arise in relation to the performance of the collateral. CRE
revaluation also occurs commonly in circumstances where an
obligor's credit quality has declined sufficiently to cause concern
that the principal payment source may not fully meet the
obligation.
Recognition of risk mitigation under the IRB approach
Within an IRB approach, risk mitigants are considered in two
broad categories:
-- those which reduce the intrinsic PD of an obligor and
therefore operate as determinants of PD; and
-- those which affect the estimated recoverability of
obligations and require adjustment of LGD or, in certain limited
circumstances, EAD.
The first category typically includes full parental guarantees -
where one obligor within a group guarantees another. It is assumed
that the guarantor's performance materially informs the PD of the
guaranteed entity. PD estimates are also subject to a 'sovereign
ceiling', constraining the risk ratings assigned to obligors in
countries of higher risk, and where only partial parental support
exists. In certain jurisdictions, certain types of third-party
guarantee are recognised by substituting the obligor's PD with that
of the guarantor.
In the second category, LGD estimates are affected by a wider
range of collateral, including cash, charges over real estate
property, fixed assets, trade goods, receivables and floating
charges such as mortgage debentures. Unfunded mitigants, such as
third-party guarantees, are also considered in LGD estimates where
there is evidence that they reduce loss expectation.
The main types of provider of guarantees are banks, other
financial institutions and corporates. The creditworthiness of
providers of unfunded credit risk mitigation is taken into
consideration as part of the guarantor's risk profile. Internal
limits for such contingent exposure are approved in the same way as
direct exposures.
EAD and LGD values, in the case of individually assessed
exposures, are determined by reference to regionally approved
internal risk parameters based on the nature of the exposure. For
retail portfolios, credit risk mitigation data is incorporated into
the internal risk parameters for exposures and feeds into the
calculation of the expected loss ('EL') band value summarising both
customer delinquency and product or facility risk. Credit and
credit risk mitigation data form inputs submitted by all Group
offices to centralised databases. A range of collateral recognition
approaches are applied to IRB capital treatments:
-- Unfunded protection, which includes credit derivatives and
guarantees, is reflected through adjustment or determination of PD
or LGD. Under the IRB advanced approach, recognition may be through
PD or LGD.
-- Eligible financial collateral under the IRB advanced approach
is recognised in LGD models. Under the IRB foundation approach,
regulatory LGD values are adjusted. The adjustment to LGD is based
on the degree to which the exposure value would be adjusted
notionally if the financial collateral comprehensive method were
applied.
-- For all other types of collateral, including real estate, the
LGD for exposures under the IRB advanced approach is calculated by
models. For IRB foundation, base regulatory LGDs are adjusted
depending on the value and type of the asset taken as collateral
relative to the exposure. The types of eligible mitigant recognised
under the IRB foundation approach are more limited.
Table 54 in Appendix I sets out, for IRB exposures, the exposure
value and the effective value of credit risk mitigation expressed
as the exposure value covered by the credit risk mitigant. IRB
credit risk mitigation reductions of EAD were immaterial at 31
December 2018.
Recognition of risk mitigation under the standardised
approach
Where credit risk mitigation is available in the form of an
eligible guarantee, non-financial collateral or a credit
derivative, the exposure is divided into covered and uncovered
portions. The covered portion is determined after applying an
appropriate 'haircut' for currency and maturity mismatches (and for
omission of restructuring clauses in credit derivatives, where
appropriate) to the amount of the protection provided and attracts
the risk weight of the protection provider. The uncovered portion
attracts the risk weight of the obligor.
The value of exposure fully or partially covered by eligible
financial collateral is adjusted under the financial collateral
comprehensive method using supervisory volatility adjustments
(including those for currency mismatch) which are determined by the
specific type of collateral (and its credit quality, in the case of
eligible debt securities) and its liquidation period. The adjusted
exposure value is subject to the risk weight of the obligor.
Table 25: Credit risk mitigation techniques - overview (CR3)
Exposures Exposures Exposures Exposures
unsecured: secured: Exposures secured secured
carrying carrying secured by financial by credit
amount amount by collateral guarantees derivatives
$bn $bn $bn $bn $bn
------------- ----------- ---------------- --------------- --------------
1 Loans 641.2 596.8 494.0 102.1 0.7
2 Debt securities 316.1 32.4 27.2 5.2 -
3 Total at 31 Dec 2018 957.3 629.2 521.2 107.3 0.7
--- ----------- --------- -------------- ------------- ------------
4 Of which: defaulted 6.3 4.6 4.1 0.4 -
1 Loans 657.7 574.8 478.9 93.8 2.1
---
2 Debt securities 301.0 24.1 18.7 5.4 -
---
3 Total at 31 Dec 2017 958.7 598.9 497.6 99.2 2.1
---
4 Of which: defaulted 6.5 5.1 4.8 0.3 -
---
Table 26: Standardised approach - credit conversion factor ('CCF')
and credit risk mitigation ('CRM') effects (CR4)
Exposures before
CCF Exposures post-CCF RWAs and RWA
and CRM and CRM density
On-balance Off-balance On-balance Off-balance
sheet sheet sheet sheet
amount amount amount amount RWAs RWA density
$bn $bn $bn $bn $bn %
----
Asset classes(1)
----
Central governments or
1 central banks(2) 162.7 1.0 170.8 1.1 12.5 7
Regional governments
2 or local authorities(2) 7.0 0.3 7.0 0.1 1.3 19
3 Public sector entities(2) 12.1 0.1 12.0 - - -
Multilateral development
4 banks 0.2 - 0.2 - - 2
International
5 organisations 1.6 - 1.6 - - -
6 Institutions 3.3 0.1 2.3 - 1.2 52
7 Corporates 91.2 88.3 72.0 12.2 79.2 94
8 Retail 20.5 43.5 19.7 0.2 14.8 74
Secured by mortgage on
9 immovable property 30.6 1.4 30.6 0.3 11.3 37
10 Exposures in default 3.3 0.2 3.3 - 3.8 117
11 Higher-risk categories 2.5 2.3 2.4 2.2 6.9 150
-----------
Collective investment
14 undertakings 0.6 - 0.6 - 0.6 100
15 Equity 15.7 - 15.7 - 35.0 223
16 Other items 10.5 0.8 10.5 0.8 6.6 58
17 Total at 31 Dec 2018 361.8 138.0 348.7 16.9 173.2 47
---- ---------- ----------- ------------ ----------- -------- -----------
Central governments or
1 central banks(2) 196.9 1.2 203.4 0.8 12.7 6
Regional governments
2 or local authorities(2) 3.3 0.5 3.3 0.2 1.0 29
3 Public sector entities(2) 0.2 0.2 0.1 - 0.1 79
Multilateral development
4 banks 0.3 - 0.3 - - 5
----
International
5 organisations 2.2 - 2.2 - - -
6 Institutions 3.4 0.1 2.5 - 1.2 50
7 Corporates 88.6 83.7 71.8 11.8 78.3 94
8 Retail 23.8 46.8 21.9 0.3 16.5 74
Secured by mortgage on
9 immovable property 27.8 1.2 27.9 0.2 10.4 37
10 Exposures in default 3.1 0.3 3.0 0.1 3.9 127
11 Higher-risk categories 2.1 1.8 2.0 1.8 5.7 150
Collective investment
14 undertakings 0.6 - 0.5 - 0.6 100
15 Equity 16.0 - 16.0 - 36.1 225
16 Other items 11.1 0.8 11.2 0.8 6.4 54
17 Total at 31 Dec 2017 379.4 136.6 366.1 16.0 172.9 45
----
1 Securitisation positions are not included in this table.
2 Standardised exposures to EEA 'regional governments and local
authorities' and 'public sector entities' are reported separately
in 2018. In previous years, these exposures were grouped with
'central governments or central banks'.
Table 27: Standardised approach - exposures by asset class and risk
weight (CR5)
Total
credit
exposure
amount
(post-CCF
Risk weight and Of which
('RW%') 0% 2% 20% 35% 50% 70% 75% 100% 150% 250% Deducted CRM) unrated
$bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn
---
Asset
classes(1)
Central
governments
or central
1 banks(2) 166.5 - 0.2 - 0.1 - - 0.1 - 5.0 - 171.9 5.0
Regional
governments
or local
2 authorities(2) 2.8 - 3.5 - 0.5 - - 0.3 - - - 7.1 0.5
Public sector
3 entities(2) 12.0 - - - - - - - - - - 12.0 -
Multilateral
development
4 banks 0.2 - - - - - - - - - - 0.2 -
International
5 organisations 1.6 - - - - - - - - - - 1.6 -
6 Institutions - 0.1 0.4 - 1.4 - - 0.4 - - - 2.3 0.2
7 Corporates - - 3.6 0.3 3.4 0.5 - 75.6 0.8 - - 84.2 59.1
8 Retail - - - - - - 19.9 - - - - 19.9 19.9
Secured by
mortgage
on immovable
9 property - - - 30.2 - - - 0.7 - - - 30.9 30.9
Exposures in
10 default - - - - - - - 2.2 1.1 - - 3.3 3.3
Higher-risk
11 categories - - - - - - - - 4.6 - - 4.6 4.6
Collective
investment
14 undertakings - - - - - - - 0.6 - - - 0.6 0.6
15 Equity - - - - - - - 2.8 - 12.9 - 15.7 15.7
16 Other items - - 5.9 - - - - 5.4 - - - 11.3 11.3
Total at 31
Dec
17 2018 183.1 0.1 13.6 30.5 5.4 0.5 19.9 88.1 6.5 17.9 - 365.6 151.1
--- -------
Central
governments
or central
1 banks(2) 198.9 - 0.1 - 0.2 - - - - 5.0 - 204.2 5.0
Regional
governments
or local
2 authorities(2) - - 2.6 - 0.7 - - 0.2 - - - 3.5 0.6
Public sector
3 entities(2) - - - - - - - 0.1 - - - 0.1 0.1
Multilateral
development
4 banks 0.2 - 0.1 - - - - - - - - 0.3 0.3
International
5 organisations 2.2 - - - - - - - - - - 2.2 -
6 Institutions - 0.1 0.4 - 1.7 - - 0.3 - - - 2.5 0.3
7 Corporates - - 3.8 0.2 3.9 0.5 - 74.5 0.7 - - 83.6 72.4
8 Retail - - - - - - 22.2 - - - - 22.2 22.2
Secured by
mortgage
on immovable
9 property - - - 27.3 - - - 0.8 - - - 28.1 28.1
Exposures in
10 default - - - - - - - 1.5 1.6 - - 3.1 3.1
Higher-risk
11 categories - - - - - - - - 3.8 - - 3.8 3.8
Collective
investment
14 undertakings - - - - - - - 0.5 - - - 0.5 0.5
15 Equity - - - - - - - 2.6 - 13.4 - 16.0 16.0
16 Other items 0.2 - 6.7 - - - - 5.1 - - - 12.0 12.0
Total at 31
Dec
17 2017 201.5 0.1 13.7 27.5 6.5 0.5 22.2 85.6 6.1 18.4 - 382.1 164.4
--- -------
1 Securitisation positions are not included in this table.
2 Standardised exposures to EEA 'regional governments and local
authorities' and 'public sector entities' are reported separately
in 2018. In previous years, these exposures were grouped with
'central governments or central banks'.
Table 28: IRB - Effect on RWA of credit derivatives used as CRM techniques
(CR7)
At 31 Dec(1)
2018 2017
Pre-credit Pre-credit
derivatives Actual derivatives Actual
RWAs RWAs RWAs RWAs
Footnotes $bn $bn $bn $bn
1 Exposures under FIRB 30.5 30.5 28.4 28.4
---- ----------
3 Institutions 0.2 0.2 0.1 0.1
6 Corporates - other 30.3 30.3 28.3 28.3
----------
7 Exposures under AIRB 2 480.0 479.0 469.8 468.6
---- ----------
8 Central governments and central banks 36.9 36.9 33.9 33.9
9 Institutions 14.2 14.2 17.6 17.6
11 Corporates - specialised lending 27.0 27.0 28.7 28.7
12 Corporates - other 319.1 318.1 310.7 309.5
13 Retail - Secured by real estate SMEs 1.8 1.8 0.5 0.5
14 Retail - Secured by real estate non-SMEs 37.2 37.2 33.2 33.2
15 Retail - Qualifying revolving 17.3 17.3 16.0 16.0
16 Retail - Other SMEs 4.8 4.8 5.9 5.9
17 Retail - Other non-SMEs 10.9 10.9 10.1 10.1
---- ----------
19 Other non-credit obligation assets 10.8 10.8 13.2 13.2
20 Total 510.5 509.5 498.2 497.0
---- ---------- ------------ ------
1 From 31 Dec 2018, we report all IRB exposures in the above
table, instead of only those entities that have credit derivatives.
Prior year has been restated for comparability.
2 Securitisation positions are not included in this table.
Table 29: Credit derivatives exposures (CCR6)
At 31 Dec
2018 2017
Protection Protection Protection Protection
bought sold bought sold
Footnote $bn $bn $bn $bn
Notionals
Credit derivative products used
for own credit portfolio
--------- ---------- ---------- ------------
- Index credit default swaps 2.3 - 6.3 3.7
Total notionals used for own credit
portfolio 2.3 - 6.3 3.7
--------- --------- --------- --------- ---------
Credit derivative products used
for intermediation 1
- Index credit default swaps 168.6 154.0 195.5 176.0
--------- ---------
- Total return swaps 14.6 6.9 7.8 12.2
---------
Total notionals used for intermediation 183.2 160.9 203.3 188.2
--------- --------- ---------
Total credit derivative notionals 185.5 160.9 209.6 191.9
--------- --------- ---------
Fair values
- Positive fair value (asset) 2.6 1.2 0.8 4.3
- Negative fair value (liability) (1.4) (2.4) (4.4) (1.0)
--------- --------- --------- ---------
1 This is where we act as an intermediary for our clients,
enabling them to take a position in the underlying securities. This
does not increase risk for HSBC.
Table 29 shows the credit derivative exposures that HSBC holds,
split between those amounts due to client intermediation and those
amounts booked as part of HSBC's own credit portfolio. Where the
credit derivative is used to hedge our own portfolio, no
counterparty credit risk capital requirement arises.
For a discussion on hedging risk and monitoring the continuing
effectiveness of hedges, refer to Note 1.2(h) of the Annual Report
and Accounts 2018.
Global risk
Application of the IRB approach
Our Group IRB credit risk rating framework incorporates obligor
propensity to default expressed in PD, and loss severity in the
event of default expressed in EAD and LGD. These measures are used
to calculate regulatory EL and capital requirements. They are also
used with other inputs to inform rating assessments for the
purposes of credit approval and many other purposes, for
example:
-- credit approval and monitoring: IRB models are used in the
assessment of customer and portfolio risk in lending decisions;
-- risk appetite: IRB measures are an important element in
identifying risk exposure at customer, sector and portfolio
level;
-- pricing: IRB parameters are used in pricing tools for new transactions and reviews; and
-- economic capital and portfolio management: IRB parameters are
used in the economic capital model that has been implemented across
HSBC.
Roll-out of the IRB approach
With the PRA's permission, we have adopted the advanced IRB
approach for the majority of our business. At the end of 2018,
portfolios in much of Europe, Asia and North America were on
advanced IRB approaches. Others remain on the standardised or
foundation approaches pending the development of models for the
PRA's approval in line with our IRB roll-out plans where the
primary focus is on corporate and retail exposures.
At 31 December 2018, 77% of the exposures were treated under
AIRB, 3% under FIRB and 20% under the standardised approach.
EL and credit risk adjustments
We analyse credit loss experience in order to assess the
performance of our risk measurement and control processes, and to
inform our understanding of the implications for risk and capital
management of dynamic changes occurring in the risk profile of our
exposures.
When comparing regulatory EL with measures of ECL under IFRS 9,
differences in the definition and scope of each should be
considered. These differences can give rise to material differences
in the way economic, business and methodological drivers are
reflected quantitatively in the accounting and regulatory measures
of loss.
In general, HSBC calculates ECL using three main components
namely a probability of default, a loss given default, and the
exposure at default.
ECLs include impairment allowances (or provisions, in the case
of commitments and guarantees) for the 12-month period ('12-month
ECL'), for the lifetime ('lifetime ECL') and on financial assets
that are considered to be in default or otherwise credit
impaired.
ECLs resulting from default events that are possible:
-- within the next 12 months are recognised for financial instruments in stage 1; and
-- beyond 12 months ('lifetime ECL') are recognised for financial instruments in stages 2 & 3.
An assessment of whether credit risk has increased significantly
since initial recognition is performed at each reporting period by
considering the change in the risk of default occurring over the
remaining life of the financial instrument.
Unless identified at an earlier stage, all financial assets are
deemed to have suffered a significant increase in credit risk when
30 days past due.
Change in ECL and other credit impairment charges represents the
movement in the ECL during the year including write-offs,
recoveries and foreign exchange. EL represents the one-year
regulatory expected loss accumulated in the book at the balance
sheet date.
Credit risk adjustments ('CRAs') encompass the impairment
allowances or provisions balances, and changes in ECL and other
credit impairment charges.
Table 52 in Appendix I sets out for IRB credit exposures the EL,
CRA balances and actual loss experience reflected in the charges
for CRAs.
HSBC leverages the Basel IRB framework where possible, with
recalibration to meet the differing IFRS 9 requirements as
follows:
PD
* Through the cycle (represents long-run average PD * Point in time (based on current conditions, adjusted
throughout a full economic cycle) to take into account estimates of future conditions
that will impact PD)
* The definition of default includes a backstop of 90+
days past due, although this has been modified to * Default backstop of 90+ days past due for all
180+ days past due for some portfolios, particularly portfolios
UK and US mortgages
EAD
* Cannot be lower than current balance * Amortisation captured for term products
LGD
* Downturn LGD (consistent losses expected to be * Expected LGD (based on estimate of loss given default
suffered during a severe but plausible economic including the expected impact of future economic
downturn) conditions such as changes in value of collateral)
* Regulatory floors may apply to mitigate risk of * No floors
underestimating downturn LGD due to lack of
historical data
* Discounted using the original effective interest rate
of the loan
* Discounted using cost of capital
* Only costs associated with obtaining/selling
* All collection costs included collateral included
Other
* Discounted back from point of default to balance
sheet date
Qualitative disclosures on banks' use of external credit ratings
under the standardised approach for credit risk
The standardised approach is applied where exposures do not
qualify for use of an IRB approach and/or where an exemption from
IRB has been granted. The standardised approach requires banks to
use risk assessments prepared by external credit assessment
institutions ('ECAIs') or ECAs to determine the risk weightings
applied to rated counterparties.
ECAI risk assessments are used within the Group as part of the
determination of risk weightings for the following classes of
exposure:
-- central governments and central banks;
-- regional governments and local authorities;
-- institutions;
-- corporates;
-- securitisation positions; and
-- short-term claims on institutions and corporates.
We have nominated three ECAIs for this purpose - Moody's
Investor Service ('Moody's'), Standard and Poor's rating agency
('S&P') and Fitch Ratings ('Fitch'). In addition to this, we
use DBRS ratings specifically for securitisation positions. We have
not nominated any ECAs.
Data files of external ratings from the nominated ECAIs are
matched with customer records in our centralised credit
database.
When calculating the risk-weighted value of an exposure using
ECAI risk assessments, risk systems identify the customer in
question and look up the available ratings in the central database
according to the rating selection rules. The systems then apply the
prescribed credit quality step mapping to derive from the rating
the relevant risk weight.
All other exposure classes are assigned risk weightings as
prescribed in the PRA's Rulebook.
Credit
quality Moody's S&P's Fitch's
step assessment assessment assessment DBRS assessment
1 Aaa to AAA to AAA to AAA to
Aa3 AA- AA- AAL
2 A1 to A+ to A+ to AH to
A3 A- A- AL
3 Baa1 to BBB+ to BBB+ to BBBH to
Baa3 BBB- BBB- BBBL
4 Ba1 to BB+ to BB+ to BBH to
Ba3 BB- BB- BBL
5 B1 to B+ to B+ to BH to
B3 B- B- BL
6 Caa1 and CCC+ and CCC+ and CCCH and
below below below below
Exposures to, or guaranteed by, central governments and central
banks of European Economic Area ('EEA') states and denominated in
local currency are risk-weighted at 0% using the standardised
approach, provided they would be eligible under that approach for a
0% risk weighting.
Wholesale risk
The wholesale risk rating system
This section describes how we operate our credit risk analytical
models and use IRB metrics in the wholesale customer business.
PDs for wholesale customer segments (that is central governments
and central banks, financial institutions and corporate customers)
and for certain individually assessed personal customers are
derived from a customer risk rating ('CRR') master scale of 23
grades. Of these, 21 are non-default grades representing varying
degrees of strength of financial condition, and two are default
grades. Each CRR has a PD range associated with it as well as a
mid-point PD.
The score generated by a credit risk rating model for the
obligor is mapped to a corresponding PD and master-scale CRR. The
CRR is then reviewed by a credit approver who, taking into account
information such as the most recent events and market data, makes
the final decision on the rating. The rating assigned reflects the
approver's overall view of the obligor's credit standing.
The mid-point PD associated with the finally assigned CRR is
then used in the regulatory capital calculation.
Relationship managers may propose a different CRR from that
indicated through an override process which must be approved by the
Credit function. Overrides for each model are recorded and
monitored as part of the model management process.
The CRR is assigned at an obligor level, which means that
separate exposures to the same obligor are generally subject to a
single, consistent rating. Unfunded credit risk mitigants, such as
guarantees, may also influence the final assignment of a CRR to an
obligor. The effect of unfunded risk mitigants is considered for
IRB approaches in table 54 and for the standardised approach in
table 55.
If an obligor is in default on any material credit obligation to
the Group, all of the obligor's facilities from the Group are
considered to be in default.
Under the IRB approach, obligors are grouped into grades that
have similar PD or anticipated default frequency. The anticipated
default frequency may be estimated using all relevant information
at the relevant date (PIT rating system) or be free of the effects
of the credit cycle (TTC rating system).
We generally utilise a hybrid approach of PIT and through the
cycle ('TTC'). That is, while models are calibrated to long-run
default rates, obligor ratings are reviewed annually, or more
frequently if necessary, to reflect changes in their circumstances
and/or their economic operating environment.
Our policy requires approvers to downgrade ratings on
expectations, but to upgrade them only on performance. This leads
to expected defaults typically exceeding actual defaults.
For EAD and LGD estimation, operating entities are permitted,
subject to overview by Group Risk, to use their own modelling
approaches to suit conditions in their jurisdictions. Group Risk
provides co-ordination, benchmarks, and promotion of best practice
on EAD and LGD estimation.
EAD is estimated to a 12-month forward time horizon and
represents the current exposure, plus an estimate for future
increases in exposure and the realisation of contingent exposures
post-default.
LGD is based on the effects of facility and collateral structure
on outcomes post-default. This includes such factors as the type of
client, the facility seniority, the type and value of collateral,
past recovery experience and priority under law. It is expressed as
a percentage of EAD.
Wholesale models
To determine credit ratings for the different types of wholesale
obligor, multiple models and scorecards are used for PD, LGD,
and
EAD. These models may be differentiated by region, customer
segment and/or customer size. For example, PD models are
differentiated for all of our key customer segments, including
sovereigns, financial institutions, and large-, medium- and
small-sized corporates.
Global PD models have been developed for asset classes or
clearly identifiable segments of asset classes where the customer
relationship is managed globally; for example, sovereigns,
financial institutions and the largest corporate clients that
typically operate internationally.
Local PD models, specific to a particular country, region, or
sector, are developed for other obligors. These include corporate
clients when they show distinct characteristics in common in a
particular geography.
The two major drivers of model methodology are the nature of the
portfolio and the availability of internal or external data on
historical defaults and risk factors. For some historically
low-default portfolios, e.g. sovereign and financial institutions,
a model will rely more heavily on external data and/or the input of
an expert panel. Where sufficient data is available, models are
built on a statistical basis, although the input of expert
judgement may still form an important part of the overall model
development methodology.
Most LGD and EAD models are developed according to local
circumstances, considering legal and procedural differences in the
recovery and workout processes. Our approach to EAD and LGD also
encompasses global models for central governments and central
banks, and for institutions, as exposures to these customer types
are managed centrally by Global Risk. The PRA requires all firms to
apply an LGD floor of 45% for senior unsecured exposure to
sovereign entities. This floor was applied to reflect the
relatively few loss observations across all firms in relation to
these obligors. This floor is applied for the purposes of
regulatory capital reporting.
The PRA has published guidance on the appropriateness of LGD
models for low default portfolios. It states there should be at
least 20 defaults per country per collateral type for LGD models to
be approved. Where there are insufficient defaults, an LGD floor
will be applied. As a result, in 2018, we continued to apply LGD
floors for our banks portfolio and some Asian corporate portfolios
where there were insufficient loss observations.
In the same guidance, the PRA also indicated that it considered
income-producing real estate to be an asset class that would be
difficult to model. As a result, RWAs for our UK CRE portfolio and
US income-producing CRE portfolio are calculated using the
supervisory slotting approach. Under the supervisory slotting
approach the bank allocates exposures to one of five categories.
Each category then fixed pre-determined RWA and EL percentages.
Local models for the corporate exposure class are developed
using various data inputs, including collateral information and
geography (for LGD) and product type (for EAD). The most material
corporate models are the UK and Asia models, all of which are
developed using more than 10-years' worth of data. The LGD models
are calibrated to a period of credit stress or downturn in economic
conditions.
None of the EAD models is calibrated for a downturn, as analysis
shows that utilisation decreases during a downturn because credit
stress is accompanied by more intensive limit monitoring and
facility reduction.
Table 30 sets out the key characteristics of the significant
wholesale credit risk models that drive the capital calculation
split by regulatory wholesale asset class, with their associated
RWAs, including the number of models for each component, the model
method or approach and the number of years of loss data used.
Table 30: Wholesale IRB credit risk models
Central A shadow rating approach that
governments includes macroeconomic and
and central political factors, constrained
banks 36.9 PD 1 with expert judgement. >10 No
An unsecured model built on
assessment of structural factors
that influence the country's
long-term economic performance.
For unsecured LGD, a floor
LGD 1 of 45% is applied. 8 45%
EAD must
be at least
equal to
A cross-classification model the current
that uses both internal data utilisation
and expert judgement, as well of the balance
as information on similar exposure at account
EAD 1 types from other asset classes. 8 level
A statistical model that combines
quantitative analysis on financial
information with expert inputs
Institutions 14.4 PD 1 and macroeconomic factors. 10 PD >0.03%
A quantitative model that produces
both downturn and expected
LGD. Several securities types
are included in the model to
recognise collateral in the
LGD calculation. For unsecured
LGD 1 LGD, a floor of 45% is applied. 10 45%
EAD must
A quantitative model that assigns be at least
credit conversion factors ('CCF') equal to
taking into account product the current
types and committed/uncommitted utilisation
indicator to calculate EAD of the balance
using current utilisation and at account
EAD 1 available headroom. 10 level
Corporates(1) 353.3
A statistical model built on
15 years of data. The model
uses financial information,
macroeconomic information and
market-driven data, and is
Global complemented by a qualitative
large corporates PD 1 assessment. 15 PD >0.03%
Other regional PD 11 Corporates that fall below >10
/ local the global large corporate
corporates threshold are rated through
regional/local PD models, which
reflect regional/local circumstances.
These models use financial
information, behavioural data
and qualitative information
to derive a statistically built
PD.
Predominantly statistical models
Non-bank that combines quantitative
financial analysis on financial information
institutions PD 10 with expert inputs. 10 PD >0.03%
All corporates LGD 7 Regional/local statistical >7 UK 45%
models covering all corporates,
including global large corporates,
developed using historical
loss/recovery data and various
data inputs, including collateral
information, customer type
and geography.
EAD 5 Regional/local statistical >7 EAD must
models covering all corporates, be at least
including global large corporates, equal to
developed using historical the current
utilisation information and utilisation
various data inputs, including of the balance
product type and geography. at account
level
1 Excludes specialised lending exposures subject to supervisory
slotting approach (see table 60).
Table 31: IRB models - estimated and actual values (wholesale)(1)
PD(2) LGD(3) EAD(4)
Estimated Actuals Estimated(5) Actuals(5) Estimated Actuals
Footnotes % % % % % %
2018
------------
- Sovereigns model 6 2.37 - - - - -
- Banks model 1.31 - - - - -
- Corporates models 7 1.61 0.87 30.47 21.69 0.38 0.33
------------ --------- ------- ------------ ---------- --------- -------
2017
- Sovereigns model 6 2.24 - - - - -
- Banks model 1.72 - - - - -
- Corporates models 7 1.72 0.96 27.75 25.45 0.39 0.36
2016
- Sovereigns model 6 3.43 - - - - -
- Banks model 1.63 - - - - -
- Corporates models 7 1.79 1.23 37.71 29.43 0.91 0.76
2015
- Sovereigns model 6 1.72 1.12 45.00 - 0.07 -
- Banks model 2.22 - - - - -
- Corporates models 7 1.89 1.26 37.74 21.52 0.60 0.55
------------
2014
- Sovereigns model 6 2.27 - - - - -
- Banks model 3.28 - - - - -
- Corporates models 7 1.88 1.16 36.83 16.06 0.47 0.34
------------
2013
------------ --------- ------- ------------ ---------- --------- ---------
- Sovereigns model 6 4.14 - - - - -
------------
- Banks model 3.18 0.20 40.01 - 0.06 0.04
------------
- Corporates models 7 2.63 1.20 33.09 18.69 0.54 0.48
------------
1 Data represents an annual view, analysed at 30 September.
2 Estimated PD for all models is average PD calculated on the
number of obligors covered by the model(s).
3 Estimated and actual LGD represent defaulted populations.
Average LGD values are EAD-weighted.
4 Expressed as a percentage of total EAD, which includes all
defaulted and non-defaulted exposures for the relevant
population.
5 For sovereigns and banks models, estimated and actual LGD
represents the average LGD for customers that defaulted in the
year. For corporates models, they represent the average LGD for
customers that have defaulted and been resolved in the period.
6 The estimated PD excludes inactive sovereign obligors.
7 Covers the combined populations of the global large corporates
model, all regional IRB models for large, medium and small
corporates, and non-bank financial institutions. The estimated and
observed PDs were calculated only for unique obligors.
Table 32: IRB models - corporate PD models - performance by CRR grade
Corporates(1)
Estimated Diff. in
Facility(2) Defaulted(3) PD(4) Actual PD(5) PD
Actual PD(5) Footnotes % % % % %
2018
---------------
CRR 0.1 6 - - 0.01 - 0.00
CRR 1.1 2.32 - 0.02 - 0.02
CRR 1.2 6.60 - 0.04 - 0.04
CRR 2.1 16.09 0.04 0.07 0.10 (0.03)
CRR 2.2 15.67 - 0.13 0.04 0.09
CRR 3.1 12.26 0.11 0.22 0.03 0.19
CRR 3.2 11.07 0.01 0.37 0.07 0.30
CRR 3.3 9.39 0.31 0.63 0.23 0.40
CRR 4.1 8.01 0.36 0.87 0.47 0.40
CRR 4.2 4.96 0.29 1.20 0.59 0.61
CRR 4.3 4.58 0.54 1.65 0.73 0.92
CRR 5.1 3.40 0.68 2.25 0.98 1.27
CRR 5.2 2.11 1.06 3.05 1.17 1.88
CRR 5.3 1.50 0.97 4.20 1.73 2.47
CRR 6.1 1.08 3.31 5.75 3.31 2.44
CRR 6.2 0.35 5.33 7.85 9.11 (1.26)
CRR 7.1 0.19 15.57 10.00 9.10 0.90
CRR 7.2 0.11 2.99 13.00 15.34 (2.34)
CRR 8.1 0.21 2.48 19.00 9.32 9.68
CRR 8.2 0.09 23.20 36.00 27.97 8.03
CRR 8.3 0.01 17.11 75.00 21.98 53.02
Total 100.00
---------------
Table 32: IRB models - corporate PD models - performance by CRR grade
(continued)
Corporates(1)
Estimated Diff. in
Facility(2) Defaulted(3) PD(4) Actual PD(5) PD
Actual PD(5) Footnotes % % % % %
2017
---------------
CRR 0.1 6 - - 0.01 - 0.00
CRR 1.1 2.84 - 0.02 - 0.02
CRR 1.2 5.98 - 0.04 - 0.04
CRR 2.1 17.92 - 0.07 - 0.07
CRR 2.2 13.84 0.02 0.13 0.03 0.10
CRR 3.1 11.53 0.01 0.22 0.07 0.15
CRR 3.2 10.51 0.02 0.37 0.14 0.23
CRR 3.3 10.78 0.12 0.63 0.25 0.38
CRR 4.1 7.05 0.15 0.87 0.36 0.51
CRR 4.2 5.35 0.27 1.20 0.40 0.80
CRR 4.3 4.89 0.14 1.65 0.58 1.07
CRR 5.1 3.58 0.77 2.25 1.39 0.86
CRR 5.2 1.93 1.25 3.05 1.61 1.44
CRR 5.3 1.58 2.56 4.20 2.28 1.92
CRR 6.1 1.21 4.95 5.75 4.47 1.28
CRR 6.2 0.36 4.43 7.85 7.88 (0.03)
CRR 7.1 0.27 8.32 10.00 10.47 (0.47)
CRR 7.2 0.09 11.95 13.00 10.10 2.90
CRR 8.1 0.22 14.07 19.00 10.88 8.12
CRR 8.2 0.04 32.01 36.00 15.88 20.12
CRR 8.3 0.03 33.10 75.00 17.89 57.11
Total 100.00
---------------
2016
---------------
CRR 0.1 6 - - 0.01 - 0.01
CRR 1.1 3.88 - 0.02 - 0.02
CRR 1.2 6.05 - 0.04 - 0.04
CRR 2.1 17.51 - 0.07 - 0.07
CRR 2.2 15.05 0.01 0.13 0.03 0.10
CRR 3.1 11.22 1.03 0.22 0.25 (0.03)
CRR 3.2 10.67 0.26 0.37 0.36 0.01
CRR 3.3 9.21 0.26 0.63 0.49 0.14
CRR 4.1 6.46 0.78 0.87 0.79 0.08
CRR 4.2 5.49 0.47 1.20 0.64 0.56
CRR 4.3 4.59 1.18 1.65 1.46 0.19
CRR 5.1 4.08 1.31 2.25 1.41 0.84
CRR 5.2 2.11 1.40 3.05 1.89 1.16
CRR 5.3 1.76 1.96 4.20 2.27 1.93
CRR 6.1 0.98 10.15 5.75 5.57 0.18
CRR 6.2 0.38 15.38 7.85 4.68 3.17
CRR 7.1 0.27 14.29 10.00 9.46 0.54
CRR 7.2 0.09 12.38 13.00 6.63 6.37
CRR 8.1 0.10 48.22 19.00 13.11 5.89
CRR 8.2 0.07 47.10 36.00 20.29 15.71
CRR 8.3 0.03 36.10 75.00 17.83 57.17
Total 100.00
---------------
For footnotes, see page 48.
Table 32: IRB models - corporate PD models - performance by CRR grade
(continued)
Corporates(1)
Estimated Diff. in
Facility(2) Defaulted(3) PD(4) Actual PD(5) PD
Actual PD(5) Footnote % % % % %
2015
--------------
CRR 0.1 6 - - 0.01 - 0.01
CRR 1.1 5.72 - 0.02 - 0.02
CRR 1.2 5.25 - 0.04 - 0.04
CRR 2.1 16.48 - 0.07 - 0.07
CRR 2.2 14.17 - 0.13 0.01 0.12
CRR 3.1 11.92 0.17 0.22 0.15 0.07
CRR 3.2 11.00 0.10 0.37 0.30 0.07
CRR 3.3 9.35 0.14 0.63 0.47 0.16
CRR 4.1 6.52 0.64 0.87 0.97 (0.10)
CRR 4.2 5.07 0.45 1.20 1.06 0.14
CRR 4.3 4.38 0.62 1.65 1.55 0.10
CRR 5.1 3.52 0.99 2.25 1.24 1.01
CRR 5.2 2.19 0.61 3.05 1.44 1.61
CRR 5.3 2.24 1.74 4.20 1.89 2.31
CRR 6.1 0.89 4.66 5.75 5.05 0.70
CRR 6.2 0.66 3.58 7.85 6.46 1.39
CRR 7.1 0.31 10.79 10.00 7.13 2.87
CRR 7.2 0.09 7.27 13.00 9.48 3.52
CRR 8.1 0.14 11.33 19.00 11.11 7.89
CRR 8.2 0.07 16.97 36.00 23.61 12.39
CRR 8.3 0.03 16.66 75.00 17.10 57.90
Total 100.00
--------------
2014
--------------
CRR 0.1 6 0.01 - 0.01 - 0.01
CRR 1.1 6.32 - 0.02 - 0.02
CRR 1.2 6.68 - 0.04 - 0.04
CRR 2.1 16.71 0.01 0.07 0.04 0.03
CRR 2.2 13.07 - 0.13 - 0.13
CRR 3.1 10.38 0.06 0.22 0.10 0.12
CRR 3.2 12.50 0.11 0.37 0.23 0.14
CRR 3.3 6.62 0.25 0.63 0.54 0.09
CRR 4.1 10.41 0.28 0.87 0.54 0.33
CRR 4.2 4.12 0.79 1.20 0.81 0.39
CRR 4.3 3.49 0.83 1.65 0.91 0.74
CRR 5.1 2.50 0.53 2.25 0.97 1.28
CRR 5.2 2.09 0.54 3.05 1.24 1.81
CRR 5.3 1.47 1.74 4.20 2.70 1.50
CRR 6.1 0.59 3.02 5.75 4.11 1.64
CRR 6.2 0.30 1.12 7.85 4.27 3.58
CRR 7.1 0.29 14.59 10.00 11.35 (1.35)
CRR 7.2 0.08 2.78 13.00 10.11 2.89
CRR 8.1 2.31 1.17 19.00 13.77 5.23
CRR 8.2 0.04 32.32 36.00 22.33 13.67
CRR 8.3 0.02 4.85 75.00 14.89 60.11
Total 100.00
--------------
Table 32: IRB models - corporate PD models - performance by CRR grade
(continued)
Corporates(1)
Estimated Diff. in
Facility(2) Defaulted(3) PD(4) Actual PD(5) PD
Actual PD(5) % % % % %
--------------
2013
--------------
CRR 0.1 6 - - 0.01 - 0.01
--------------
CRR 1.1 4.83 - 0.02 - 0.02
CRR 1.2 7.47 - 0.04 - 0.04
CRR 2.1 20.85 - 0.07 - 0.07
CRR 2.2 10.38 0.01 0.13 0.03 0.10
CRR 3.1 10.79 0.07 0.22 0.16 0.06
CRR 3.2 9.49 0.13 0.37 0.22 0.15
CRR 3.3 8.33 0.15 0.63 0.27 0.36
CRR 4.1 6.40 0.35 0.87 0.48 0.39
CRR 4.2 5.84 0.93 1.20 0.80 0.40
CRR 4.3 4.22 0.47 1.65 0.67 0.98
CRR 5.1 4.18 0.72 2.25 0.76 1.49
CRR 5.2 3.07 0.97 3.05 1.03 2.02
CRR 5.3 1.85 2.77 4.20 1.89 2.31
CRR 6.1 0.98 4.37 5.75 3.28 2.47
CRR 6.2 0.46 5.74 7.85 3.77 4.08
CRR 7.1 0.44 12.69 10.00 7.95 2.05
CRR 7.2 0.15 7.84 13.00 8.68 4.32
CRR 8.1 0.15 9.48 19.00 11.44 7.56
CRR 8.2 0.07 14.94 36.00 13.70 22.30
CRR 8.3 0.05 13.12 75.00 13.64 61.36
Total 100.00
--------------
1 Covers the combined populations of the global large corporates
model and all regional IRB models for large, medium and small
corporates and non-bank financial institutions.
2 Total facility limits for each CRR grade, expressed as a percentage of total limits granted.
3 Defaulted facilities as a percentage of total facility limits at that grade.
4 The estimated PD is before application of the 0.03% regulatory floor.
5 Actual PD is based on the number of defaulted obligors covered
by the model(s), without taking into account the size of the
facility granted or the exposures to the obligor.
6 The top band of the wholesale CRR master scale is not
available to entities in the corporates exposure class. It is
restricted to the strongest central governments, central banks and
institutions.
Retail risk
Retail risk rating systems
Due to the different country-level portfolio performance
characteristics and loss history, there are no global models for
our retail portfolios. Across the Group, over 100 models are used
with the PRA's approval under our IRB permission.
The 10 most material risk rating systems for which we disclose
details of modelling methodology and performance data represent
RWAs of $41bn or 58% of the total retail IRB RWA.
PD models are developed using statistical estimation based on a
minimum of five years of historical data. The modelling approach is
typically inherently TTC. Where models are developed based on a PIT
approach (as in the UK), the model outputs become effectively TTC
through the application of buffer or model adjustments as agreed
with the PRA.
EAD models are also developed using at least five years of
historical observations and typically adopt one of two
approaches:
-- For closed-end products without the facility for additional
drawdowns, EAD is estimated as the outstanding balance of accounts
at the time of observation.
-- For products with the facility for additional drawdowns, EAD
is estimated as the outstanding balance of accounts at the time of
observation plus a credit conversion factor applied to the undrawn
portion of the facility.
LGD estimates have more variation, particularly in respect of
the time period that is used to quantify economic downturn
assumptions.
Table 33: Material retail IRB risk rating systems
Statistical model built
on internal behavioural
data and bureau information.
Underlying PIT model is
calibrated to the latest
Retail observed PD. An adjustment
- secured is then applied to generate
by mortgages the long-run PD based on
UK HSBC on immovable a combination of historical
residential property misalignment of the underlying PD floor
mortgages non-SME 4.74 PD 1 model and expert judgement. 7-10 of 0.03%
LGD 1Component based model incorporating, >10 LGD floor
'possession given default', of 10%
'predicted shortfall' and at portfolio
'time to possession'. A level
downturn adjustment is
applied to each component
including a 30% reduction
from peak house valuation
and a 10% adjustment to
forced sale haircut.
Logical model that uses EAD must
the sum of balance at observation at least
plus further unpaid interest be equal
that could accrue before to current
EAD 1 default. 7-10 balance
Underlying PIT PD model
Retail is a segmented scorecard.
- secured An adjustment is then applied
UK First by mortgages based on observed misalignment
Direct on immovable in the underlying model
residential property (with some additional conservatism PD floor
mortgages non-SME 0.85 PD 1 applied). 7-10 of 0.03%
LGD 1Component based model incorporating, >10 LGD floor
'possession given default', of 10%
'predicted shortfall' and at portfolio
'time to possession'. A level
downturn adjustment is
applied to each component
including a 30% reduction
from peak house valuation
and a 10% adjustment to
forced sale haircut.
There are two separate
EAD models - one for standard EAD must
capital repayment mortgages at least
and one for offset mortgages be equal
which offer a revolving to current
EAD 2 loan facility. 7-10 balance
Statistical model built
on internal behavioural
data and bureau information.
Underlying PIT model is
calibrated to the latest
observed PD. An adjustment
is then applied to generate
UK HSBC Retail the long-run PD based on
credit - qualifying historical observed misalignment PD floor
cards revolving 2.09 PD 1 of the underlying model. 7-10 of 0.03%
Statistical model based
on forecasting the amount
of expected future recoveries,
LGD 1 segmented by default status. 7-10
Statistical model that
directly estimates EAD EAD must
for different segments at least
of the portfolio using be equal
either balance or limit to current
EAD 1 as the key input. 7-10 balance
Statistical model built
on internal behavioural
data and bureau information.
Underlying PIT model is
calibrated to the latest
observed PD. An adjustment
is then applied to generate
UK HSBC Retail the long-run PD based on
personal - other historical observed misalignment PD floor
loans non-SME 3.96 PD 1 of the underlying model. 7-10 of 0.03%
Statistical model based
on forecasting the amount
of expected future recoveries,
LGD 1 segmented by default status. 7-10
EAD must
at least
EAD is equal to current be equal
balance as this provides to current
EAD 1 a conservative estimate. 7-10 balance
Table 33: Material retail IRB risk rating systems (continued)
Statistical model built
on internal behavioural
data and bureau information.
Underlying PIT model is
calibrated to the latest
observed PD. An adjustment
is then applied to generate
Retail the long run PD based on
UK business - other historical observed misalignment PD floor
banking SME 2.62 PD 1 of the underlying model. 7-10 of 0.03%
Two sets of models - one
for secured exposures and
another for unsecured exposures.
The secured model uses
the value to loan as a
key component for estimation
and the unsecured model
estimates the amount of
future recoveries and undrawn
LGD 2 portion. 7-10
Statistical model using EAD must
segmentation according at least
to limit and utilisation be equal
and estimation of the undrawn to current
EAD 1 exposure. 7-10 balance
Retail
Hong Kong - secured Statistical model built
HSBC by mortgages on internal behavioural
personal on immovable data and bureau information,
residential property and calibrated to a long-run PD floor
mortgages(2) non-SME 10.05 PD 2 default rate. >10 of 0.03%
LGD 2Statistical model based >10 LGD floor
on estimate of loss incurred of 10%
over a recovery period at portfolio
derived from historical level
data with downturn LGD
based on the worst observed
default rate.
EAD 2Rule-based calculation >10 EAD must
based on current balance, at least
which provides a conservative be equal
estimate of EAD. to current
balance
Retail
Hong Kong - secured
Hang by mortgages Statistical model built
Seng personal on immovable on internal behavioural
residential property data, and calibrated to PD floor
mortgages non-SME 6.25 PD 2 a long-run default rate. >10 of 0.03%
LGD 2Two statistical models >10 LGD floor
and one historical average of 10%
model based on estimates at portfolio
of loss incurred over a level
recovery period derived
from historical data with
a downturn adjustment.
EAD 2Rule-based calculation >10 EAD must
based on current balance, at least
which provides a conservative be equal
estimate of EAD. to current
balance
Statistical model built
Hong Kong on internal behavioural
HSBC Retail data and bureau information,
credit - qualifying and calibrated to a long-run PD floor
cards revolving 3.77 PD 1 default rate. >10 of 0.03%
LGD 1Statistical model based >10
on forecasting the amount
of expected losses. Downturn
LGD derived using data
from the period with the
highest default rate.
EAD 1Statistical model that >10 EAD must
derives a credit utilisation at least
which is used to estimate be equal
EAD. to current
balance
Hong Kong Statistical model built
HSBC on internal behavioural
personal Retail data and bureau information,
instalment - other and calibrated to a long-run PD floor
loans non-SME 1.70 PD 1 default rate. >10 of 0.03%
LGD 1Statistical model based >10
on forecasting the amount
of expected future losses.
Downturn LGD derived using
data from the period with
the highest default rate.
EAD 1Statistical model that >10 EAD must
derives a credit conversion at least
factor to determine the be equal
proportion of undrawn limit to current
to be added to the balance balance
at observation.
Retail
US HSBC - secured Statistical model built
personal by mortgages on internal behavioural
first on immovable data and bureau information,
lien residential property and calibrated to a long-run PD floor
mortgages(3) non-SME 5.38 PD 1 default rate. >10 of 0.03%
LGD 1Statistical model based >10 LGD floor
on identifying the main of 10%
risk drivers of loss and at portfolio
recovery and grouping them level
into homogeneous pools.
Downturn LGD is derived
based on the peak default
rate observed. Additional
assumptions and estimations
are made on incomplete
workouts.
EAD 1Rule-based calculation >10 EAD must
based on current balance at least
which provides a conservative be equal
estimate of EAD. to current
balance
1 Defined as the number of years of historical data used in model development and estimation.
2 The Hong Kong Monetary Authority ('HKMA') applies a risk
weight floor of 25% to all residential mortgages booked after 19
May 2017 (previously 15%).
3 In US mortgage business, first lien is a primary claim on a
property that takes precedence over all subsequent claims and will
be paid first from the proceeds in case of the property's
foreclosure sale.
Retail credit models
Given the large number of retail IRB models globally, we
disclose information on our most material local models.
The actual and estimated values are derived from the model
monitoring and calibration processes performed at a local level.
Within the discipline of our global modelling policies, our
analytics teams adopt back-testing criteria specific to local
conditions in order to assess the accuracy of their models.
Table 34 contains the estimated and actual values from the
back-testing of our material IRB models covering portfolios in the
UK, Hong Kong and the residential mortgage portfolio in the US. The
most recent five years have been included for comparative
purposes.
Within table 36, for back-testing purposes, a customer's PD is
observed at a PIT and their default or non-default status in the
following one-year period is recorded against that PD grade. The PD
presented here is expressed on an obligor count basis consisting of
non-defaulted obligors at the time of observation. The LGD and EAD
refer to observations for the defaulted population, being the
appropriate focus of an assessment of these models' performance.
The LGD values represent the amount of loss as a percentage of EAD,
and are calculated based on defaulted accounts that were fully
resolved or have completed the modelled recovery outcome period at
the reporting date. The EAD values of the defaulted exposures are
presented as a percentage of the total EAD, which includes all
defaulted and non-defaulted exposures for the relevant population.
The regulatory PD and LGD floors of 0.03% and 10%, respectively,
are applied during final capital calculation and are not reflected
in the estimates below.
For our UK residential mortgage portfolios, the estimates
include required regulatory downturn adjustments. In conducting the
back-testing, our UK residential mortgage LGD models consider
repossession rates over a 36 month period starting at the date of
default. For both our HSBC and First Direct branded residential
mortgages, LGD estimates and LGD actual values remained low and
stable in 2018.
The Hong Kong estimated LGD values in table 34 include required
stressed factors to reflect downturn conditions. The LGD models for
our Hong Kong HSBC and Hang Seng residential mortgage portfolios
use a recovery outcome period of 24 months starting at the date of
default. For both portfolios, LGD estimates remain higher than the
calculated actual values but below the 10% regulatory floor. The
Hong Kong credit card EAD model currently underestimates exposure
values at the point of default; however, this is mitigated by a
temporary adjustment to RWAs. An updated model has been submitted
to the PRA for approval following approval from the local regulator
and is expected to be implemented during 2019.
The US estimates in table 34 include downturn adjustments and
model overlays agreed with the PRA. The LGD models use a recovery
outcome period of 36 months, reflecting the recovery process due to
foreclosure moratoria. The LGD estimates and LGD actual values
remained stable in 2018.
Table 34: IRB models - estimated and actual values (retail)(1)
PD LGD EAD
Estimated Actuals Estimated Actuals Estimated Actuals
% % % % % %
--------- ------- --------- ------- --------- ---------
2018
--------- ------- --------- ------- --------- ---------
UK
- HSBC residential mortgage 0.40 0.27 9.60 0.38 0.27 0.25
- FD residential mortgages 0.45 0.38 8.19 2.07 1.05 0.86
--------- ------- --------- ------- --------- -------
- HSBC credit card 1.01 0.97 88.75 85.15 1.42 1.40
- HSBC personal loans 2.13 1.88 84.84 87.97 1.83 1.75
- Business Banking (Retail SME) 2.83 2.86 78.56 71.56 2.30 2.09
Hong Kong
- HSBC personal residential mortgage 0.70 0.02 2.87 1.70 0.02 0.02
- Hang Seng personal residential
mortgage 0.39 0.09 5.99 0.84 0.08 0.08
- HSBC credit card 0.57 0.24 87.92 75.98 0.40 0.42
- HSBC personal instalment loans 2.27 1.47 89.01 83.73 1.24 1.10
US
- US HSBC personal first lien residential
mortgage 1.71 0.69 52.06 21.69 0.43 0.42
--------- ------- --------- ------- --------- -------
2017
--------- ------- --------- ------- --------- ---------
UK
- HSBC residential mortgage 0.44 0.28 9.74 0.88 0.26 0.24
- FD residential mortgages 0.48 0.41 2.11 0.45 1.09 0.91
- HSBC credit card 0.92 0.77 90.86 85.68 1.10 1.07
- HSBC personal loans 1.94 1.62 87.77 79.90 1.58 1.50
- Business Banking (Retail SME) 2.57 2.64 73.87 70.25 1.90 1.51
Hong Kong
- HSBC personal residential mortgage 0.72 0.04 1.43 0.14 0.05 0.05
- Hang Seng personal residential
mortgage 0.42 0.14 5.18 0.59 0.14 0.14
- HSBC credit card 0.65 0.28 89.33 76.11 0.47 0.50
- HSBC personal instalment loans 2.34 1.51 89.07 80.05 1.25 1.14
US
- US HSBC personal first lien residential
mortgage 1.91 0.80 53.27 22.22 0.37 0.36
2016
--------- ------- --------- ------- --------- ---------
UK
- HSBC residential mortgage 0.50 0.35 10.53 1.09 0.34 0.31
- FD residential mortgages 0.49 0.43 3.06 0.55 0.95 0.80
- HSBC credit card 0.89 0.75 91.72 89.92 1.03 1.00
- HSBC personal loans 1.84 1.52 88.26 79.08 1.36 1.29
- Business Banking (Retail SME) 2.40 2.47 93.56 82.63 1.80 1.64
Hong Kong
- HSBC personal residential mortgage 0.79 0.04 4.52 0.97 0.04 0.03
- Hang Seng personal residential
mortgage 0.49 0.16 4.48 0.62 0.12 0.12
- HSBC credit card 0.69 0.30 88.97 82.48 0.52 0.56
- HSBC personal instalment loans 2.46 1.78 89.28 69.62 1.44 1.33
US
- Consumer Lending real estate
first lien 5.30 4.29 74.22 51.89 3.53 3.49
- Mortgage Services real estate
first lien 6.16 3.77 68.26 51.79 3.37 3.34
- US HSBC personal first lien residential
mortgage 2.20 1.27 41.18 29.25 0.50 0.50
--------- ------- --------- ------- --------- -------
Table 34: IRB models - estimated and actual values (retail)(1) (continued)
PD LGD EAD
Estimated Actuals Estimated Actuals Estimated Actuals
% % % % % %
2015
UK
- HSBC residential mortgage 0.45 0.22 16.43 3.54 0.17 0.17
- FD residential mortgages 0.40 0.11 12.13 10.89 0.22 0.20
--------- ------- --------- ------- --------- -------
- HSBC credit card 1.06 0.86 91.54 88.42 1.23 1.19
- HSBC personal loans 1.93 1.23 82.10 78.46 1.18 1.13
- Business Banking (Retail SME) 2.26 2.21 76.06 71.78 1.57 1.47
Hong Kong
- HSBC personal residential mortgage 0.79 0.03 1.90 0.03 0.04 0.03
- Hang Seng personal residential
mortgage 0.46 0.14 4.12 0.57 0.11 0.11
--------- ------- --------- ------- --------- -------
- HSBC credit card 0.67 0.32 90.40 81.75 0.52 0.58
- HSBC personal instalment loans 2.40 2.02 89.43 69.59 1.69 1.51
US
- Consumer Lending real estate
first lien 5.92 5.47 75.98 51.60 5.37 5.31
- Mortgage Services real estate
first lien 6.96 5.96 69.59 54.09 7.97 7.88
- US HSBC personal first lien residential
mortgage 4.66 2.08 29.63 37.19 0.70 0.69
--------- ------- --------- ------- --------- -------
2014
UK
- HSBC residential mortgage 0.50 0.31 15.82 4.68 0.24 0.23
- HSBC credit card 1.37 1.07 91.11 86.30 1.83 1.78
- HSBC personal loans 2.28 1.57 81.56 80.45 1.52 1.46
- Business Banking (Retail SME) 2.83 2.57 73.04 68.17 2.00 1.88
Hong Kong
- HSBC personal residential mortgage 0.72 0.04 1.26 0.35 0.03 0.03
- HSBC credit card 0.62 0.32 92.91 88.13 0.55 0.59
- HSBC personal instalment loans 2.37 2.04 89.69 87.66 1.77 1.63
US
- Consumer Lending real estate
first lien 7.31 7.72 77.16 60.29 7.83 7.72
- Mortgage Services real estate
first lien 9.43 8.12 71.40 60.17 7.51 7.43
- US HSBC personal first lien residential
mortgage 5.24 2.28 29.63 39.36 1.00 1.00
--------- ------- --------- ------- --------- -------
2013
--------- ------- --------- ------- --------- ---------
UK
--------- ------- --------- ------- --------- ---------
- HSBC residential mortgage 0.55 0.38 17.30 6.40 0.32 0.31
--------- ------- --------- ------- --------- -------
- HSBC credit card 1.54 1.27 88.10 84.10 1.70 1.67
--------- ------- --------- ------- --------- -------
- HSBC personal loans 3.57 2.35 85.40 73.00 2.19 2.11
--------- ------- --------- ------- --------- -------
- Business Banking (Retail SME) 2.39 2.61 78.00 70.00 2.03 1.99
--------- ------- --------- ------- --------- -------
Hong Kong
--------- ------- --------- ------- --------- ---------
- HSBC personal residential mortgage 0.71 0.03 1.84 0.43 0.03 0.03
--------- ------- --------- ------- --------- -------
- HSBC credit card 0.63 0.33 91.41 84.58 0.56 0.59
--------- ------- --------- ------- --------- -------
- HSBC personal instalment loans 2.20 1.99 90.07 96.16 1.69 1.55
--------- ------- --------- ------- --------- -------
US
--------- ------- --------- ------- --------- ---------
- Consumer Lending real estate
first lien 7.74 8.22 67.13 64.93 7.08 6.72
--------- ------- --------- ------- --------- -------
- Mortgage Services real estate
first lien 10.15 9.68 60.04 62.92 6.12 5.88
--------- ------- --------- ------- --------- -------
- US HSBC personal first lien residential
mortgage 4.64 4.43 49.85 37.17 2.40 2.40
--------- ------- --------- ------- --------- -------
1 Data represents an annual view, analysed at 30 September.
Model performance
Model validation is subject to global internal standards
designed to support a comprehensive quantitative and qualitative
process within a cycle of model monitoring and validation that
includes:
-- investigation of model stability;
-- model performance measured through testing the model's outputs against actual outcomes; and
-- model use within the business, e.g. user input data quality,
override activity and the assessment of results from key controls
around the usage of the rating system as a whole within the overall
credit process.
Models are validated against a series of metrics and triggers
approved by the appropriate governance committee. Model performance
metrics, and any remedial actions in the event of a trigger breach,
are reported at the Wholesale and RBWM MOCs. We also disclose model
performance reports for our IRB models to our lead regulator, the
PRA, quarterly.
A large number of models are used within the Group, and data at
individual model level is, in most cases, immaterial in the context
of the overall Group. We therefore disclose data covering most
wholesale models, including corporate models on an aggregated
basis, and on the most material retail models.
Tables 35 and 36 below validate the reliability of PD
calculations by comparing the PD used in IRB calculations with
actual default experience.
Table 35: Wholesale IRB exposure - back-testing of probability of default
(PD) per portfolio(1) (CR9)
Number of
obligors
of which: Average
Arithmetic new historical
External External External average End Defaulted defaulted annual
rating rating rating Weighted PD by of End obligors obligors default
equivalent equivalent equivalent average obligors previous of the in the in the rate
PD range (S&P) (Moody's) (Fitch) PD % % year(3) year year year %
2018
Sovereigns(2)
AAA to Aaa to AAA to
0.00 to <0.15 BBB Baa2 BBB 0.02 0.04 53 53 - - -
0.15 to <0.25 BBB- Baa3 BBB- 0.22 0.22 7 6 - - -
0.25 to <0.50 BBB- Baa3 BBB- 0.37 0.37 5 8 - - -
BB+ to Ba1 to BB+ to
0.50 to <0.75 BB Ba2 BB 0.63 0.63 7 7 - - -
BB- to Ba3 to BB- to
0.75 to <2.50 B- B2 B- 1.44 1.32 23 21 - - -
B to B2 to CCC+ to
2.5 to <10.00 B- Caa1 CCC 3.65 4.92 21 21 - - -
10.00 to B- to Caa1 CCC to
<100.00 C to C C 10.00 18.75 8 6 - - 1.79
-------- ---------- --------- --------- ----------
Banks
AAA to Aaa to AAA to
0.00 to <0.15 A- Baa1 BBB+ 0.05 0.08 258 268 - - -
0.15 to <0.25 BBB+ Baa2 BBB 0.22 0.22 62 62 - - -
0.25 to <0.50 BBB Baa3 BBB- 0.37 0.37 48 61 - - -
0.50 to <0.75 BBB- Baa3 BBB- 0.63 0.63 58 47 - - -
BB+ to Ba1 to BB+ to
0.75 to <2.50 BB- B1 B+ 1.15 1.36 119 102 - - -
B+ to B2 to
2.5 to <10.00 B- Caa1 B to CCC+ 4.10 4.54 75 54 - - 0.17
10.00 to CCC+ Caa1 CCC to
<100.00 to C to C C 15.62 13.61 18 17 - - 1.55
-------- ---------- --------- --------- ----------
Corporates
AAA to Aaa to AAA to
0.00 to <0.15 A- Baa1 BBB+ 0.09 0.10 12,935 13,750 6 - 0.02
0.15 to <0.25 BBB+ Baa2 BBB 0.22 0.22 12,344 12,741 4 - 0.11
0.25 to <0.50 BBB Baa3 BBB- 0.37 0.37 12,779 12,794 9 - 0.22
0.50 to <0.75 BBB- Baa3 BBB- 0.63 0.63 11,153 11,616 27 1 0.40
BB+ to Ba1 to BB+ to
0.75 to <2.50 BB- B1 B+ 1.35 1.44 36,542 35,581 275 27 0.88
B+ to B2 to
2.5 to <10.00 B- Caa1 B to CCC+ 4.23 4.32 13,712 14,023 379 42 2.93
10.00 to CCC+ Caa1 CCC to
<100.00 to C to C C 18.81 19.65 1,814 1,762 269 21 12.93
-------- ---------- --------- --------- ----------
Table 35: Wholesale IRB exposure - back-testing of probability of default
(PD) per portfolio(1) (CR9) (continued)
Number of
obligors
of which: Average
Arithmetic new historical
External External External average Defaulted defaulted annual
rating rating rating Weighted PD by End of End of obligors obligors default
equivalent equivalent equivalent average obligors previous the in the in the rate
PD range (S&P) (Moody's) (Fitch) PD % % year(3) year year year %
2017
Sovereigns
0.00 to AAA to Aaa to AAA to
<0.15 BBB Baa2 BBB 0.02 0.05 43 53 - - -
0.15 to
<0.25 BBB- Baa3 BBB- 0.22 0.22 7 7 - - -
0.25 to
<0.50 BBB- Baa3 BBB- 0.37 0.37 7 5 - - -
0.50 to BB+ to Ba1 to BB+ to
<0.75 BB Ba2 BB 0.63 0.63 6 7 - - -
0.75 to BB- to Ba3 to BB- to
<2.50 B- B2 B- 2.02 1.65 17 23 - - -
2.5 to B to B2 to CCC+ to
<10.00 B- Caa1 CCC 3.90 6.09 18 21 - - -
-------- ----------
10.00 to B- to Caa1 CCC to
<100.00 C to C C 12.89 12.57 7 8 - - 2.67
-------- ----------
Banks
0.00 to AAA to Aaa to AAA to
<0.15 A- Baa1 BBB+ 0.05 0.08 250 258 - - -
0.15 to
<0.25 BBB+ Baa2 BBB 0.22 0.22 72 62 - - -
0.25 to
<0.50 BBB Baa3 BBB- 0.37 0.37 59 48 - - -
0.50 to
<0.75 BBB- Baa3 BBB- 0.63 0.63 68 58 - - -
0.75 to BB+ to Ba1 to BB+ to
<2.50 BB- B1 B+ 1.20 1.40 122 119 - - -
2.5 to B+ to B2 to
<10.00 B- Caa1 B to CCC+ 4.63 4.71 100 75 - - 0.20
-------- ----------
10.00 to CCC+ Caa1 CCC to
<100.00 to C to C C 17.91 14.66 32 18 - - 4.68
-------- ----------
Corporates
0.00 to AAA to Aaa to AAA to
<0.15 A- Baa1 BBB+ 0.09 0.10 11,220 11,401 2 - 0.01
0.15 to
<0.25 BBB+ Baa2 BBB 0.22 0.22 10,899 11,453 10 2 0.12
0.25 to
<0.50 BBB Baa3 BBB- 0.37 0.37 12,161 11,675 20 3 0.25
0.50 to
<0.75 BBB- Baa3 BBB- 0.63 0.63 10,920 10,508 29 2 0.46
0.75 to BB+ to Ba1 to BB+ to
<2.50 BB- B1 B+ 1.37 1.45 35,150 34,911 244 12 0.91
2.5 to B+ to B2 to
<10.00 B- Caa1 B to CCC+ 4.34 4.38 12,978 13,183 418 30 2.87
-------- ----------
10.00 to CCC+ Caa1 CCC to
<100.00 to C to C C 18.42 19.33 2,119 1,785 266 20 12.54
-------- ----------
1 Data represents an annual view, analysed at 30 September.
2 The CRR to external ratings mapping has been updated for
Sovereign portfolios to reflect the current CRR master scale.
3 Back-testing is conducted on the basis of the opening count of
obligors not in default in each year. Obligors who default during
the year are excluded from the opening count for the following
year.
Table 36: Retail IRB exposure - back-testing of probability of default
(PD) per portfolio(1) (CR9)
Number of obligors
of which: Average
Arithmetic Defaulted new defaulted historical
Weighted average End of obligors obligors annual
average PD by previous End of in the in the default
PD range PD obligors year(2) the year year year rate
2018
Retail -
Secured
by real estate
non-SME
0.00 to <0.15 0.06 0.06 696,972 738,577 259 3 0.03
0.15 to <0.25 0.19 0.19 60,467 60,748 59 - 0.08
0.25 to <0.50 0.35 0.34 65,972 64,896 98 2 0.13
0.50 to <0.75 0.60 0.60 26,090 24,446 59 - 0.20
0.75 to <2.50 1.33 1.35 58,184 53,707 237 1 0.41
2.50 to <10.00 4.33 4.32 18,547 15,669 332 1 1.97
10.00 to
<100.00 26.08 23.26 7,612 4,883 1,254 9 18.79
Retail -
qualifying
revolving
0.00 to <0.15 0.06 0.06 3,142,314 3,246,838 1,492 72 0.05
0.15 to <0.25 0.19 0.19 727,005 756,129 747 18 0.10
0.25 to <0.50 0.36 0.36 660,076 690,157 1,277 38 0.20
0.50 to <0.75 0.61 0.62 310,930 334,756 1,120 23 0.35
0.75 to <2.50 1.35 1.32 661,414 723,761 5,871 97 0.81
2.50 to <10.00 4.60 4.41 205,789 224,910 7,319 78 3.11
10.00 to
<100.00 29.12 28.71 68,365 48,267 16,375 11 21.00
-------- ----------- -------------
Retail - other
non-SME
-------- -------------
0.00 to <0.15 0.09 0.08 124,924 146,849 267 7 0.15
0.15 to <0.25 0.19 0.19 79,492 89,056 145 5 0.14
0.25 to <0.50 0.36 0.36 114,634 127,085 395 23 0.27
0.50 to <0.75 0.61 0.62 39,397 40,862 213 13 0.52
0.75 to <2.50 1.35 1.40 97,623 96,793 1,345 45 1.23
2.50 to <10.00 4.52 4.82 53,464 47,449 2,108 48 3.51
10.00 to
<100.00 41.84 40.92 15,141 7,090 5,535 6 35.84
-------- ----------- -------------
Retail - other
SME
-------- -------------
0.00 to <0.15 0.10 0.10 61,271 59,701 18 - 0.06
0.15 to <0.25 0.20 0.19 51,337 50,498 78 1 0.18
0.25 to <0.50 0.38 0.36 114,069 113,307 382 3 0.38
0.50 to <0.75 0.61 0.61 120,311 121,038 687 4 0.69
0.75 to <2.50 1.54 1.37 292,313 289,602 4,083 86 1.55
2.50 to <10.00 4.86 4.80 155,113 145,309 7,558 117 4.21
10.00 to
<100.00 19.62 22.47 49,944 42,946 11,563 29 17.07
-------- ----------- -------------
Table 36: Retail IRB exposure - back-testing of probability of default
(PD) per portfolio(1) (CR9) (continued)
Number of obligors
of which: Average
Arithmetic Defaulted new defaulted historical
Weighted average End of obligors obligors annual
average PD by previous End of in the in the default
PD range PD obligors year(2) the year year year rate
2017
Retail -
Secured
by real estate
non-SME
0.00 to <0.15 0.06 0.06 662,941 700,284 238 4 0.03
0.15 to <0.25 0.19 0.19 62,640 59,539 69 - 0.08
0.25 to <0.50 0.36 0.35 63,554 64,051 97 - 0.13
0.50 to <0.75 0.60 0.60 26,579 27,095 63 - 0.21
0.75 to <2.50 1.33 1.34 61,808 59,299 277 1 0.43
2.50 to <10.00 4.63 4.56 18,796 17,156 379 1 1.94
10.00 to
<100.00 27.70 24.33 8,090 5,358 1,308 15 19.49
Retail -
qualifying
revolving
0.00 to <0.15 0.07 0.07 2,903,455 3,128,491 1,403 100 0.05
0.15 to <0.25 0.19 0.19 702,956 715,693 643 25 0.10
0.25 to <0.50 0.36 0.36 641,717 666,802 1,229 44 0.21
0.50 to <0.75 0.61 0.62 316,331 317,666 1,075 36 0.36
0.75 to <2.50 1.35 1.33 717,012 677,685 5,202 131 0.85
2.50 to <10.00 4.39 4.30 214,063 217,996 6,465 79 3.06
10.00 to
<100.00 26.42 26.77 66,144 52,014 14,140 10 19.19
---------
Retail - other
non-SME
0.00 to <0.15 0.08 0.08 123,797 143,758 216 5 0.15
0.15 to <0.25 0.19 0.19 75,671 84,219 112 6 0.13
0.25 to <0.50 0.36 0.36 109,873 118,254 327 18 0.25
0.50 to <0.75 0.61 0.62 37,381 39,622 208 8 0.48
0.75 to <2.50 1.36 1.41 94,398 93,147 1,261 61 1.05
2.50 to <10.00 4.63 4.88 49,426 39,977 1,811 55 3.03
10.00 to
<100.00 42.70 42.41 12,114 5,550 4,380 9 34.31
---------
Retail - other
SME
0.00 to <0.15 0.11 0.11 66,454 65,482 45 - 0.09
0.15 to <0.25 0.20 0.20 42,675 43,437 66 - 0.29
0.25 to <0.50 0.38 0.37 126,549 132,200 451 11 0.51
0.50 to <0.75 0.63 0.63 124,441 128,686 739 11 0.83
0.75 to <2.50 1.55 1.38 316,020 305,501 4,562 82 1.77
2.50 to <10.00 4.77 4.68 167,107 148,916 7,730 111 4.48
10.00 to
<100.00 17.47 19.38 48,949 39,032 10,329 48 17.57
---------
1 Data represents an annual view, analysed at 30 September.
2 Back-testing is conducted on the basis of the opening count of
obligors not in default in each year. Obligors who default during
the year are excluded from the opening count for the following
year.
Counterparty credit risk
Counterparty credit risk management
Counterparty credit risk ('CCR') arises for derivatives and
SFTs. It is calculated in both the trading and non-trading books,
and is the risk that a counterparty may default before settlement
of the transaction. CCR is generated primarily in our wholesale
global businesses.
Four approaches may be used under CRD IV to calculate exposure
values for CCR: mark-to-market, original exposure, standardised and
IMM. Exposure values calculated under these approaches are used to
determine RWAs. Across the Group, we use the mark-to-market and IMM
approaches.
Under the mark-to-market approach, the EAD is calculated as
current exposure plus regulatory add-ons. We use this approach for
all products not covered by our IMM permission. Under the IMM
approach, EAD is calculated by multiplying the effective expected
positive exposure with a multiplier called 'alpha'.
Alpha (set to a default value of 1.4) accounts for several
portfolio features that increase EL above that indicated by
effective expected positive exposure in the event of default, such
as:
-- co-variance of exposures;
-- correlation between exposures and default;
-- level of volatility/correlation that might coincide with a downturn;
-- concentration risk; and
-- model risk.
The effective expected positive exposure is derived from
simulation, pricing and aggregation internal models approved by
regulators. The IMM model is subject to ongoing model validation
including monthly model performance monitoring.
From a risk management perspective, including daily monitoring
of credit limit utilisation, products not covered by IMM are
subject to conservative asset class add-ons.
The potential future exposure ('PFE') measures used for CCR
management are calibrated to the 95th percentile. The measures
consider volatility, trade maturity and the counterparty legal
documentation covering netting and collateral.
Limits for CCR exposures are assigned within the overall credit
process. The credit risk function assigns a limit against each
counterparty to cover exposure which may arise as a result of a
counterparty default. The magnitude of this limit will depend on
the overall risk appetite and type of derivatives and SFT trading
undertaken with the counterparty.
The models and methodologies used in the calculation of CCR are
overseen and monitored by the Global Markets Risk Model Oversight
Committee. Models are subject to ongoing monitoring and validation.
Additionally, they are subject to independent review at inception
and annually thereafter.
Credit valuation adjustment
Credit valuation adjustment ('CVA') risk is the risk of adverse
moves in the CVAs taken for expected credit losses on derivative
transactions. Where we have both specific risk VaR approval and IMM
approval for a product, the CVA VaR approach has been used to
calculate the CVA capital charge. Where we do not hold both
approvals, the standardised approach has been applied. Certain
counterparty exposures are exempt from CVA, such as non-financial
counterparties and sovereigns.
Collateral arrangements
Our policy is to revalue all traded transactions and associated
collateral positions on a daily basis. An independent collateral
management function manages the collateral process, including
pledging and receiving collateral and investigating disputes and
non-receipts.
Eligible collateral types are controlled under a policy to
ensure price transparency, price stability, liquidity,
enforceability, independence, reusability and eligibility for
regulatory purposes. A valuation 'haircut' policy reflects the fact
that collateral may fall in value between the date the collateral
was called and the date of liquidation or enforcement.
Approximately 98% of collateral held as variation margin under CSAs
is either cash or liquid government securities.
Further information on gross fair value exposure and the offset
due to legally enforceable netting and collateral is set out on
page 284 of the Annual Report and Accounts 2018.
Credit rating downgrade
A credit rating downgrade clause in a Master Agreement or a
credit rating downgrade threshold clause in a credit support annex
('CSA') is designed to trigger an action if the credit rating of
the affected party falls below a specified level. These actions may
include the requirement to pay or increase collateral, the
termination of transactions by the non-affected party or the
assignment of transactions by the affected party.
At 31 December 2018, the potential value of the additional
collateral pertaining to International Swaps and Derivatives
Association CSA downgrade thresholds that we would need to post
with counterparties in the event of a one-notch downgrade of our
rating was $0.2bn (2017: $0.3bn) and for a two-notch downgrade was
$0.4bn (2017: $0.5bn).
Table 37: Counterparty credit risk exposure - by exposure class, product
and geographical region
Exposure value
North Latin
Europe Asia MENA America America Total
Footnotes $bn $bn $bn $bn $bn $bn
By exposure class
------------
IRB advanced approach 64.7 25.3 0.7 19.0 0.8 110.5
- central governments and
central banks 3.2 5.6 0.3 2.1 0.4 11.6
- institutions 32.5 10.7 0.1 3.7 0.3 47.3
- corporates 29.0 9.0 0.3 13.2 0.1 51.6
IRB foundation approach 3.8 - 0.3 - - 4.1
------------
- corporates 3.8 - 0.3 - - 4.1
Standardised approach 8.2 0.5 0.9 - 0.9 10.5
------------
- central governments and
central banks 7.8 - 0.6 - - 8.4
- institutions - - - - 0.1 0.1
- corporates 0.4 0.5 0.3 - 0.8 2.0
CVA advanced 2 - - - - - -
CVA standardised 2 - - - - - -
CCP standardised 21.2 5.8 - 7.8 0.4 35.2
At 31 Dec 2018 97.9 31.6 1.9 26.8 2.1 160.3
------------
By product
Derivatives (OTC and exchange
traded derivatives) 55.0 20.5 1.1 19.5 1.7 97.8
SFTs 40.2 6.2 0.8 7.2 0.4 54.8
Other 1 2.7 4.9 - 0.1 - 7.7
CVA advanced 2 - - - - - -
CVA standardised 2 - - - - - -
CCP default funds 3 - - - - - -
At 31 Dec 2018 97.9 31.6 1.9 26.8 2.1 160.3
------------
By exposure class
IRB advanced approach 63.0 33.0 0.7 20.4 1.2 118.3
- central governments and
central banks 4.6 4.8 0.3 2.2 0.6 12.5
- institutions 26.8 18.6 0.2 8.6 0.2 54.4
- corporates 31.6 9.6 0.2 9.6 0.4 51.4
IRB foundation approach 3.4 - 0.3 - - 3.7
- corporates 3.4 - 0.3 - - 3.7
Standardised approach 6.2 0.4 2.2 - 0.7 9.5
- central governments and
central banks 5.6 - 1.9 - - 7.5
- institutions 0.1 - - - - 0.1
- corporates 0.5 0.4 0.3 - 0.7 1.9
CVA advanced 2 - - - - - -
CVA standardised 2 - - - - - -
CCP standardised 16.5 8.0 - 11.1 0.4 36.0
At 31 Dec 2017 89.1 41.4 3.2 31.5 2.3 167.5
------------
By product
Derivatives (OTC and exchange
traded derivatives) 52.3 31.8 1.0 24.3 1.6 111.0
SFTs 34.1 5.8 2.2 7.2 0.7 50.0
Other 1 2.7 3.8 - - - 6.5
CVA advanced 2 - - - - - -
CVA standardised 2 - - - - - -
CCP default funds 3 - - - - - -
------------
At 31 Dec 2017 89.1 41.4 3.2 31.5 2.3 167.5
1 Includes free deliveries not deducted from regulatory capital.
2 The RWA impact due to the CVA capital charge is calculated
based on the same exposures as the IRB and standardised approaches.
The table above does not present any exposures for CVA to avoid
double counting.
3 Default fund contributions are cash balances posted to CCPs by
all members. These cash balances have nil impact on reported
exposure.
Table 38: Counterparty credit risk - RWAs by exposure class, product
and geographical region
RWAs
North Latin Capital
Europe Asia MENA America America Total required
Footnotes $bn $bn $bn $bn $bn $bn $bn
By exposure class
-----------
IRB advanced approach 21.7 7.2 0.4 6.7 0.4 36.4 3.0
- central governments and
central banks 0.5 0.1 0.3 0.8 0.2 1.9 0.2
- institutions 8.3 2.8 - 0.9 0.2 12.2 1.0
- corporates 12.9 4.3 0.1 5.0 - 22.3 1.8
------ ---- ---- -------- --------
IRB foundation approach 1.7 - 0.2 - - 1.9 0.1
- corporates 1.7 - 0.2 - - 1.9 0.1
---------
Standardised approach 0.4 0.5 0.3 - 0.8 2.0 0.1
- central governments and
central banks - - - - - - -
- institutions - - - - 0.1 0.1 -
- corporates 0.4 0.5 0.3 - 0.7 1.9 0.1
------ ---- ---- -------- -----
CVA advanced 2 2.8 1.1 - 1.0 - 4.9 0.4
CVA standardised 2 0.1 0.3 0.1 0.3 0.2 1.0 0.1
------ ---- ---- -------- -------- ----- ---------
CCP standardised 0.6 0.2 - 0.3 - 1.1 0.1
At 31 Dec 2018 27.3 9.3 1.0 8.3 1.4 47.3 3.8
-----------
By product
Derivatives (OTC and exchange
traded derivatives) 16.5 5.9 0.6 4.5 1.0 28.5 2.3
SFTs 6.8 0.6 0.3 2.4 0.2 10.3 0.8
Other 1 0.9 1.3 - - - 2.2 0.2
CVA advanced 2 2.8 1.1 - 1.0 - 4.9 0.4
CVA standardised 2 0.1 0.3 0.1 0.3 0.2 1.0 0.1
------ ---- ---- -------- -------- ----- ---------
CCP default funds 3 0.2 0.1 - 0.1 - 0.4 -
-----------
At 31 Dec 2018 27.3 9.3 1.0 8.3 1.4 47.3 3.8
By exposure class
IRB advanced approach 21.2 9.9 0.6 7.3 0.9 39.9 3.2
- central governments and
central banks 0.7 0.1 0.4 0.8 0.4 2.4 0.2
- institutions 7.1 5.0 0.1 2.1 0.2 14.5 1.2
- corporates 13.4 4.8 0.1 4.4 0.3 23.0 1.8
------ ---- ---- -------- -------- -----
IRB foundation approach 1.7 - 0.1 - - 1.8 0.1
- corporates 1.7 - 0.1 - - 1.8 0.1
---------
Standardised approach 0.6 0.4 0.3 - 0.6 1.9 0.2
- central governments and
central banks - - - - - - -
- institutions - - - - - - -
- corporates 0.6 0.4 0.3 - 0.6 1.9 0.2
------ ---- ---- -------- -------- -----
CVA advanced 2 2.8 - - - - 2.8 0.2
CVA standardised 2 0.8 2.4 0.1 3.2 0.2 6.7 0.6
------ ---- ---- -------- -------- ----- ---------
CCP standardised 0.7 0.3 - 0.4 - 1.4 0.1
At 31 Dec 2017 27.8 13.0 1.1 10.9 1.7 54.5 4.4
----------- ------ ---- ---- -------- -------- ----- ---------
By product -
Derivatives (OTC and exchange
traded derivatives) 17.3 8.6 0.6 5.4 0.9 32.8 2.6
SFTs 5.0 0.6 0.4 2.1 0.6 8.7 0.7
Other 1 1.5 1.3 - - - 2.8 0.2
CVA advanced 2 2.8 - - - - 2.8 0.2
CVA standardised 2 0.8 2.4 0.1 3.2 0.2 6.7 0.6
------ ---- ---- -------- -------- -----
CCP default funds 3 0.4 0.1 - 0.2 - 0.7 0.1
----------- ---------
At 31 Dec 2017 27.8 13.0 1.1 10.9 1.7 54.5 4.4
1 Includes free deliveries not deducted from regulatory capital.
2 The RWA impact due to the CVA capital charge is calculated
based on the exposures under the IRB and standardised approaches.
No additional exposures are taken into account.
3 Default fund contributions are cash balances posted to CCPs by
all members. These cash balances are not included in the total
reported exposure.
Wrong-way risk
Wrong-way risk occurs when a counterparty's exposures are
adversely correlated with its credit quality.
There are two types of wrong-way risk:
-- General wrong-way risk occurs when the probability of
counterparty default is positively correlated with general risk
factors, for example, where a counterparty is resident and/or
incorporated in a higher-risk country and seeks to sell a
non-domestic currency in exchange for its home currency.
-- Specific wrong-way risk occurs in self-referencing
transactions. These are transactions in which exposure is driven by
capital or financing instruments issued by the counterparty and
occurs where exposure from HSBC's perspective materially increases
as the value of the counterparty's capital or financing instruments
referenced in the contract decreases. It is HSBC policy that
specific wrong-way transactions are approved on a case-by-case
basis.
We use a range of tools to monitor and control wrong-way risk,
including requiring the business to obtain prior approval before
undertaking wrong-way risk transactions outside pre-agreed
guidelines. The regional Traded Risk functions are responsible for
the control and monitoring process within an overarching Group
framework and limit framework.
Central counterparties
While exchange traded derivatives have been cleared through
central counterparties ('CCPs') for many years, recent regulatory
initiatives designed to reduce systemic risk in the banking system
are directing increasing volumes of OTC derivatives to be cleared
through CCPs.
A dedicated CCP risk team has been established to manage the
interface with CCPs and undertake in-depth due diligence of the
unique risks associated with these organisations. This is to
address an implication of the regulations that the Group's risk
will be transferred from being distributed among individual,
bilateral counterparties to a significant level of risk
concentration on CCPs. We have developed a risk appetite framework
to manage risk accordingly, on an individual CCP and global
basis.
Securitisation
HSBC securitisation strategy
HSBC acts as originator, sponsor, liquidity provider and
derivative counterparty to our own originated and sponsored
securitisations, as well as those of third parties. Our strategy is
to use securitisation to meet our needs for aggregate funding or
capital management, to the extent that market, regulatory
treatments and other conditions are suitable, and for customer
facilitation. We do not provide support to any of our originated or
sponsored securitisations, and it is not our policy to do so.
We have senior and junior exposures to Mazarin Funding Limited,
which is a securities investment conduit ('SIC'). We also hold all
of the commercial paper issued by Solitaire Funding Limited. These
are considered legacy businesses, and exposures are being repaid as
the securities they hold amortise or are sold.
HSBC securitisation activity
Our roles in the securitisation process are as follows:
-- originator: where we originate the assets being securitised, either directly or indirectly;
-- sponsor: where we establish and manage a securitisation
programme that purchases exposures from third parties; and
-- investor: where we invest in a securitisation transaction
directly or provide derivatives or liquidity facilities to a
securitisation.
HSBC as originator
We use special purpose entities ('SPEs') to securitise customer
loans and advances and other debt that we have originated in order
to diversify our sources of funding for asset origination and for
capital efficiency purposes. In such cases, we transfer the loans
and advances to the SPEs for cash, and the SPEs issue debt
securities to investors to fund the cash purchases.
In addition, we use SPEs to mitigate the capital absorbed by
some of the customer loans and advances we have originated. Credit
derivatives are used to transfer the credit risk associated with
such customer loans and advances to an SPE, using an approach
commonly known as synthetic securitisation by which the SPE writes
CDS protection for HSBC.
HSBC as sponsor
We are sponsor to a number of types of securitisation entities,
details of which can be found in the table below.
During 2018, two securities investment conduits ('SICs')
sponsored by HSBC, Barion Funding Limited and Malachite Funding
Limited, redeemed all outstanding securitisation obligations. The
Group's exposure to these entities at 31 December 2018 is not
significant and limited to balances associated with the winding-up
of these entities.
Further details are available in Note 20 of the Financial
Statements in the Annual Report and Accounts 2018.
Solitaire Asset-backed commercial paper ('ABCP') P P Look through
conduit to which a first-loss letter to risk weights
of credit and transaction-specific of underlying
liquidity facilities are provided assets
Mazarin Vehicle to which senior term funding P O Exposures (including
is provided derivatives
and liquidity
facilities)
are risk-weighted
as securitisation
positions
Regency Multi-seller conduit to which senior P O
liquidity facilities and programme-wide
credit enhancement are provided
HSBC as investor
We have exposure to third-party securitisations across a wide
range of sectors in the form of investments, liquidity facilities
and as a derivative counterparty. These are primarily legacy
exposures.
Monitoring of securitisation positions
Securitisation positions are managed by a dedicated team that
uses a combination of market standard systems and third-party data
providers to monitor performance data and manage market and credit
risks.
In the case of re-securitisation positions, similar processes
are conducted in respect of the underlying securitisations.
Liquidity risk of securitised assets is consistently managed as
part of the Group's liquidity and funding risk management
framework.
Further details are provided on page 80 of the Annual Report and
Accounts 2018.
Valuation of securitisation positions
The process of valuing our investments in securitisation
exposures primarily focuses on quotations from third parties,
observed trade levels and calibrated valuations from market
standard models.
Our hedging and credit risk mitigation strategy, with regards to
retained securitisation and re-securitisation exposures, is to
continually review our positions.
Securitisation accounting treatment
For accounting purposes, we consolidate structured entities
(including SPEs) when the substance of the relationship indicates
that we control them; that is, we are exposed, or have rights, to
variable returns from our involvement with the structured entity
and have the ability to affect those returns through our power over
the entity.
Full details of these assessments and our accounting policy on
structured entities may be found in Note 1.2(a) and Note 20 on the
Financial Statements respectively of the Annual Report and Accounts
2018.
We reassess the need to consolidate whenever there is a change
in the substance of the relationship between HSBC and a structured
entity.
HSBC enters into transactions in the normal course of business
by which it transfers financial assets to structured entities.
Depending on the circumstances, these transfers may either result
in these financial assets being fully or partly derecognised, or
continuing to be recognised in their entirety.
Full derecognition occurs when we transfer our contractual right
to receive cash flows from the financial assets, or assume an
obligation to pass on the cash flows from the assets, and transfer
substantially all the risks and rewards of ownership. Only in the
event that derecognition is achieved are sales and any resultant
gains recognised in the financial statements.
Partial derecognition occurs when we sell or otherwise transfer
financial assets in such a way that some but not substantially all
of the risks and rewards of ownership are transferred and control
is retained. These financial assets are recognised on the balance
sheet to the extent of our continuing involvement and an associated
liability is also recognised. The net carrying amount of the
financial asset and associated liability will be based on either
the amortised cost or the fair value of the rights and obligations
retained by the entity, depending upon the measurement basis of the
financial asset.
Further disclosure of such transfers may be found in Note 17 on
the Financial Statements of the Annual Report and Accounts
2018.
Securitisation regulatory treatment
For regulatory purposes, any reduction in RWAs that would be
achieved by our own originated securitisations must receive the
PRA's permission and be justified by a commensurate transfer of
credit risk to third parties. If achieved, the associated SPEs and
underlying assets are not consolidated but exposures to them,
including derivatives or liquidity facilities, are risk-weighted as
securitisation positions.
For the majority of the non-trading book securitisation
positions we use the IRB approach and, within this, Ratings Based
Method ('RBM') and Internal Assessment Approach ('IAA') with lesser
amounts on the Supervisory Formula Method ('SFM'). We also use the
standardised approach on the non-trading book positions.
Securitisation positions in the trading book are overseen within
Market Risk under the standardised Approach.
Use of the IAA is limited to exposures arising from Regency
Assets Limited related to liquidity facilities. Eligible ECAI
rating methodology, which includes stress factors, is applied to
each asset class in order to derive the equivalent rating level for
each transaction. This methodology is verified by the internal
credit function as part of the approval process for each new
transaction. The performance of each underlying asset portfolio,
including residential and commercial mortgages and
re-securitisations, is monitored to confirm that the applicable
equivalent rating level still applies and is independently
verified. Our IAA approach is audited periodically by Internal
Audit and reviewed by the PRA.
At 31 December 2018, unrealised losses on asset-backed
securities ('ABS') in the year amounted to $0.2bn (2017: $0.5bn),
which relates to assets within SPEs that are consolidated for
regulatory purposes.
Also disclosed on page 121 of the Annual Report and Accounts
2018.
Analysis of securitisation exposures
HSBC's involvement in securitisation activities reflects the
following:
-- securitisation positions are not backed by revolving
exposures other than trade receivables in Regency Assets Limited,
which is unchanged from 2017;
-- facilities are not subject to early amortisation provisions;
-- $3.2bn positions held as synthetic transactions (2017: $4.7bn);
-- no assets awaiting securitisation and no material realised
losses on securitisation asset disposals during the year; and
-- total exposures include off-balance sheet exposure of $10.9bn
(2017: $15.3bn), mainly relating to contingent liquidity lines
provided to securitisation vehicles where we act as sponsor, with a
small amount from derivative exposures where we are an investor.
The off-balance sheet exposures are held in the non-trading book
and the exposure types are residential mortgages, commercial
mortgages, trade receivables and re-securitisations.
Further details of our securitisation exposures may be found on
page 121 of the Annual Report and Accounts 2018.
Table 39: Securitisation exposure - movement in the year
Movement in year
Total at Total at
1 Jan As originator As sponsor As investor 31 Dec
Footnotes $bn $bn $bn $bn $bn
Aggregate amount of securitisation
exposures
Residential mortgages 3.8 - 4.0 1.4 9.2
Commercial mortgages 2.7 - (0.1) (0.3) 2.3
Credit Cards 1.2 - 0.6 (0.4) 1.4
Leasing 1.2 - 4.8 - 6.0
Loans to corporates or SMEs 5.1 (1.5) (0.3) - 3.3
Consumer loans 4.6 - 2.0 0.2 6.8
Trade receivables 1 16.2 0.4 (11.2) - 5.4
Other assets 1.0 - (0.2) (0.3) 0.5
----------
Re-securitisations 1.8 (0.8) (0.6) - 0.4
----------
2018 37.6 (1.9) (1.0) 0.6 35.3
----------
1 Exposures previously presented as 'trade receivables' have
been represented in 'consumer loans', 'leasing' and 'residential
mortgage' exposures at 31 December 2018 to provide more information
on the composition of the Group's securitisation exposures.
Table 40: Securitisation - asset values and impairments
2018 2017
Underlying
Underlying assets(1) assets(1)
Impaired Securitisation Impaired Securitisation
and past exposures and past exposures
Total(4) due impairment Total(4) due impairment
Footnotes $bn $bn $bn $bn $bn $bn
----------- ------------ -------------- -------- ---------
As originator 5.4 - - 5.8 0.5 0.2
- loans to
corporates and
SMEs 5.0 - - 5.0 - -
-----------
- trade receivables 0.4 - - - - -
-
re-securitisations 2 - - - 0.8 0.5 0.2
As sponsor 19.9 - - 21.1 0.4 0.1
- residential
mortgages 4.3 - - 0.3 - -
- commercial
mortgages 0.1 - - 0.1 0.1 0.1
- credit cards 0.7 - - - - -
-----------
- leasing 5.6 - - 0.8 - -
-----------
- loans to
corporates and
SMEs - - - 0.3 0.3 -
-----------
- consumer loans 3.6 - - 1.9 - -
-----------
- trade receivables 3 5.0 - - 16.2 - -
-
re-securitisations 2 0.4 - - 1.0 - -
-----------
- other assets 0.2 - - 0.5 - -
----------- -------- ---------
At 31 Dec 25.3 - - 26.9 0.9 0.3
----------- -------------- -------- ---------
1 Securitisation exposures may exceed the underlying asset
values when HSBC provides liquidity facilities while also acting as
derivative counterparty and a note holder in the SPE.
2 The amount of underlying assets reported for
re-securitisations denotes the value of collateral within the
re-securitisation vehicles.
3 Exposures previously presented as 'trade receivables' have
been represented in 'consumer loans', 'leasing' and 'residential
mortgage' exposures at 31 December 2018 to provide more information
on the composition of the Group's securitisation exposures.
4 As originator and sponsor, all associated underlying assets
are held in the non-trading book. These assets are all underlying
to traditional securitisations with the exception of 'loans to
corporates and SMEs', which is underlying to a synthetic
securitisation.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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