TIDMHSBA
RNS Number : 3771X
HSBC Holdings PLC
21 February 2017
HSBC Holdings plc
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Contents
Page
Tables 2
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Regulatory framework for disclosures 3
Pillar 3 disclosures 3
Regulatory developments 3
Risk management 4
Linkage to the Annual Report and Accounts 2016 5
Capital and RWAs
Capital management 13
Own funds 13
Leverage ratio 15
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Pillar 1 capital requirements and RWA flow 17
Pillar 2 and ICAAP 20
Credit risk
Overview and responsibilities 21
Credit risk management 21
Credit risk models governance 21
Credit quality of assets 22
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Risk mitigation 33
Global risk 37
Wholesale risk 38
Retail risk 43
Counterparty credit risk
Counterparty credit risk management 50
Securitisation
Group securitisation strategy 53
Group securitisation roles 53
Monitoring of securitisation positions 54
Securitisation accounting treatment 54
Securitisation regulatory treatment 54
Analysis of securitisation exposures 54
Market risk
Overview of market risk in global businesses 56
Market risk governance 56
Market risk measures 56
Market risk capital models 59
Prudent valuation adjustment 60
Structural foreign exchange exposures 60
Interest rate risk in the banking book 60
Operational risk
Overview and objectives 62
Organisation and responsibilities 62
Measurement and monitoring 63
Other risks
Pension risk 63
Non-trading book exposures in equities 63
Risk management of insurance operations 64
Liquidity and funding risk 64
Reputational risk 65
Sustainability risk 65
Business risk 65
Dilution risk 65
Remuneration 65
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Appendices
Page
I Additional CRD IV and BCBS tables 66
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II Simplified organisation chart for regulatory purposes 98
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III Asset encumbrance 99
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IV Summary of disclosures withheld 100
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Other Information
Abbreviations 101
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Cautionary statement regarding forward-looking statements 103
Contacts 103
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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.
HSBC Holdings plc Pillar 3 2016 1
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Tables
Page
1 Reconciliation of balance sheets - financial accounting to regulatory scope of consolidation 6
----
2 Principal entities with a different regulatory and accounting scope of consolidation 10
3 Mapping of financial statement categories with regulatory risk categories 11
4 Main sources of differences between regulatory exposure values and carrying values in financial
statements 12
5 Own funds disclosure 13
6 Summary reconciliation of accounting assets and leverage ratio exposures 15
7 Leverage ratio common disclosure 16
8 Leverage ratio - Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted
exposures) 16
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9 Total RWAs by risk type 18
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10 Overview of RWAs 18
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11 RWA flow statements of credit risk exposures under IRB 19
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12 RWA flow statements of CCR exposures under IMM 19
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13 RWA flow statements of market risk exposures under an IMA 20
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14 Credit quality of assets 22
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15 Credit risk exposure - summary 22
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16 Credit risk exposure - by geographical region 24
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17 Credit risk RWAs - by geographical region 26
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18 Credit risk exposure - by industry sector 28
----
19 Credit risk exposure - by maturity 30
----
20 Ageing analysis of accounting past due and not impaired exposures 31
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21 Breakdown of renegotiated exposures between impaired and non-impaired exposures 32
22 Amount of impaired exposures and related allowances, broken down by geographical region 32
23 Movement in specific credit risk adjustments by industry and geographical region 33
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24 Credit risk mitigation techniques - overview 35
25 Standardised approach - credit risk exposure and Credit Risk Mitigation (CRM) effects 35
26 Standardised approach - exposures by asset classes and risk weights 36
27 IRB - Effect on RWA of credit derivatives used as CRM techniques 36
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28 Credit derivatives exposures 37
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29 Wholesale IRB credit risk models 40
----
30 IRB models - estimated and actual values (wholesale)(1) 41
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31 IRB models - corporate PD models - performance by CRR grade 41
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32 Material retail IRB risk rating systems 44
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Page
33 Retail IRB exposures secured by mortgages on immovable property (non-SME) 46
----
34 IRB models - estimated and actual values (retail) 47
----
35 Wholesale IRB exposure - Back-testing of probability of default (PD) per portfolio(1) 48
----
36 Retail IRB exposure - Back-testing of probability of default (PD) per portfolio(1) 49
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37 Counterparty credit risk exposure - by exposure class, product and geographical region 51
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38 Counterparty credit risk - RWAs by exposure class, product and geographical region 52
----
39 Securitisation exposure - movement in the year 55
----
40 Securitisation - asset values and impairments 55
----
41 Market risk under standardised approach 56
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42 Market risk models 59
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43 IMA values for trading portfolios 59
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44 Operational risk RWAs 62
45 Non-trading book equity investments 63
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46 Wholesale IRB exposure - by obligor grade 66
47 PD, LGD, RWA and exposure by country 69
48 Retail IRB exposure - by internal PD band 83
49 IRB expected loss and CRAs - by exposure class 85
50 IRB expected loss and CRAs - by region 85
51 IRB exposure - credit risk mitigation 86
52 Standardised exposure - credit risk mitigation 86
53 Standardised exposure - by credit quality step 87
54 Changes in stock of defaulted loans and debt securities 88
55 IRB - Credit risk exposures by portfolio and PD range 88
56 Specialised lending - Slotting only 92
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57 Analysis of counterparty credit risk (CCR) exposure by approach (excluding centrally cleared
exposures) 92
58 Credit valuation adjustment (CVA) capital charge 92
59 Standardised approach - CCR exposures by regulatory portfolio and risk weights 93
60 IRB - CCR exposures by portfolio and PD scale 93
61 Composition of collateral for CCR exposure 94
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62 Exposures to central counterparties 94
63 Securitisation exposures in the non-trading book 94
64 Securitisation exposures in the trading book 95
65 Securitisation exposures in the non-trading book and associated regulatory capital requirements
- bank acting as originator or as sponsor 95
66 Securitisation exposures in the non-trading book and associated capital requirements - bank
acting as investor 96
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67 Asset encumbrance 99
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2 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
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 2016 using the
Basel III framework of the Basel Committee 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 2016 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, enabling 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 2016 comprise all 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. Additionally, we have implemented Basel
Committee on Banking Supervision ('BCBS') final standards on
revised Pillar 3 disclosures issued in January 2015. 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 IV.
In our disclosures, to give insight into movements during the
year, we provide comparative figures for the previous year,
analytical review of variances and 'flow' tables for capital
requirements. Geographical comparative data for Europe and Middle
East and North Africa ('MENA') have been re-presented to reflect
the management oversight provided by the MENA region following the
management services agreement entered into by HSBC Bank Middle East
Limited in 2016 in respect of HSBC Bank A.S. (Turkey).
Key ratios and figures are reflected throughout the Pillar 3
2016 disclosures and are also available on pages 2 to 3 of the
Annual Reports and Accounts 2016. Where disclosures have been
enhanced or are new we do not generally restate or provide prior
year comparatives. The capital resources tables track the position
from a CRD IV transitional to an end point basis.
We publish comprehensive Pillar 3 disclosures annually on the
HSBC website www.hsbc.com, simultaneously with the release of our
Annual Report and Accounts. A Pillar 3 document will also be
disclosed at half-year following our Interim Report
disclosure. Earnings Releases will include regulatory
information complementing the financial and risk information
presented there and in line with the new requirements 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 or
other location.
We continue to engage constructively in the work of the UK
authorities and industry associations to improve the transparency
and comparability of UK banks' Pillar 3 disclosures.
Regulatory developments
Throughout 2016, the BCBS and the Financial Stability Board
('FSB') continued to develop their package of reforms to the
existing Basel III regulatory capital framework. In particular, the
BCBS has proposed modifications to the existing risk-weighted asset
('RWA') and leverage frameworks. While many of these proposals are
now finalised, certain key elements remain in draft, subject to
international agreement. These include:
-- changes to the framework for credit risk capital requirements under both the internal ratings
based ('IRB') and standardised ('STD') approaches;
-- a new single operational risk methodology, replacing those currently available;
-- changes to leverage ratio exposure calculation and a new leverage buffer for global systemically
important banks ('G-SIBs'); and
-- the introduction of a capital floor based on the new STD approaches.
Separately, in response to the implementation of International
Financial Reporting Standards 9 Financial Instruments ('IFRS 9')
into the accounting framework in 2018, the BCBS has consulted on
the long-term treatment of accounting provisions in the regulatory
framework and potential transitional arrangements. It is the BCBS's
aim that all of the above proposals will be finalised in 2017.
Meanwhile, in November, the European Commission ('EC') proposed
a number of revisions to CRD IV, which reflect some of the
proposals already completed or under development by the BCBS.
Together, these changes are known as the 'CRR2' package.
The CRR2 package includes the following:
-- a new STD approach for counterparty credit risk ('CCR') to replace the existing current exposure
and STD methods;
-- changes to the rules for determining the trading book boundary and the methodologies for calculating
market risk capital charges;
-- a binding leverage ratio and changes to the exposure measure;
-- a new methodology for capital charges for equity investments in funds;
-- restrictions to the capital base and changes to the exposure limits for the calculation of
large exposures; and
-- the final FSB Total Loss Absorbing Capacity ('TLAC') requirements in the EU in the form of
Minimum Requirements for own funds and Eligible Liabilities ('MREL'). In relation to MREL
implementation in the UK, the Bank of England also published its final requirements in November
2016, which introduces MREL from 2019 onwards consistent with international timelines.
The CRR2 package is expected to apply from 1 January 2021, save
for the rules on TLAC, which may apply from 1 January
HSBC Holdings plc Pillar 3 2016 3
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
2019, and the transitional provisions for IFRS 9, which may
apply from 1 January 2018.
All changes to the regulatory framework would need to be
transposed into the relevant law before coming into effect.
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 HSBC Values and our Global
Standards programme.
The framework fosters continuous monitoring of the risk
environment, and an integrated evaluation of risks and their
interactions. 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 68 of the Annual Report and Accounts
2016. The management and mitigation of principal risks facing the
Group is described in our top and emerging risks on page 64 of the
Annual Report and Accounts 2016.
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 16 on page 230 of the Annual Report and Accounts
2016.
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 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 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 page
64 of the Annual Report and Accounts 2016.
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'), the
Financial System Vulnerabilities Committee ('FSVC') and the Conduct
and Values Committee ('CVC'). The activities of the GRC, FSVC and
CVC are set out on pages 138 to 140 of the Annual Report and
Accounts 2016.
Executive accountability for the monitoring, assessment and
management of risk resides with the Group Chief Risk Officer. He is
supported by the Risk Management Meeting ('RMM') of the Group
Management Board ('GMB').
The management of financial crime risk resides with the Group
Head of Financial Crime Risk. He is supported by the Global
Standards Steering Meeting, as described on page 81 of the Annual
Report and Accounts 2016.
Day-to-day responsibility for risk management is delegated to
senior managers with individual accountability for decision making.
These managers are supported by global functions as described under
'Three lines of defence' (see page 69 of the Annual Report and
Accounts 2016).
Our executive risk governance structures ensure appropriate
oversight and accountability of risk, which facilitates the
reporting and escalation to the RMM (see page 68 of the Annual
Report and Accounts 2016).
Risk appetite
Risk appetite is a key component of our management of risk. It
describes the aggregate level and risk types that we are willing to
accept in achieving our medium to long-term business objectives.
Within HSBC, risk appetite is managed through a global risk
appetite framework and articulated in a risk appetite statement
('RAS'), which is biannually approved 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 on
our risk management tools is set out on page 68 of the Annual
Report and Accounts 2016. Details on the Group's overarching risk
appetite are set out on page 64 of the Annual Report and Accounts
2016.
Stress testing
HSBC operates a comprehensive 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 demonstrates 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 regulators' 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 on stress testing and details of the Group's
regulatory stress test results are set out on page 70 of the Annual
Report and Accounts 2016.
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 (see page
69 of the Annual Report and Accounts 2016).
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 over other than financial reporting, including
enterprise-wide stress testing.
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 145 of the Annual Report and Accounts
4 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
2016, where the Directors' Report 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 policy promotes the deployment of preferred
technology where practicable. 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 such matters as risk governance
and oversight, compliance risks, approval authorities and lending
guidelines, global and local scorecards, management information and
reporting, and relations with third parties, including regulators,
rating agencies and auditors.
Risk analytics and model governance
The Global Risk function manages a number of analytics
disciplines supporting rating and scoring models for different risk
types and business segments, economic capital and stress testing.
It formulates 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 in progress toward our implementation targets for
the IRB advanced approach.
Model governance is under the general oversight of Global Model
Oversight Committee ('MOC'). Global MOC is supported by specific
global functional MOCs for wholesale credit risk, market risk,
Retail Banking and Wealth Management ('RBWM'), Global Private
Banking ('GPB'), Finance, regulatory compliance, operational risk,
fraud risk and financial intelligence, pensions risk, financial
crime risk, and has functional and/or regional and entity-level
counterparts with comparable terms of reference.
The Global MOC meets regularly and reports to RMM. It is chaired
by the Global Risk function, and its membership is drawn from Risk,
Finance and global businesses. Its primary responsibilities are to
oversee the framework for the management of model risk, bring a
strategic approach to model-related issues across the Group and to
oversee the governance of our risk rating models, their consistency
and approval, within the regulatory framework. 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 model review process
led by the Independent Model Review team within Global Risk. The
Independent Model Review team provides robust challenge to the
modelling approaches used across the Group, and 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
2016
Basis of consolidation
The basis of consolidation for the purpose of financial
accounting under IFRSs, described in Note 1 of the Annual Report
and Accounts 2016, differs from that used for regulatory purposes
as described in 'Structure of the regulatory group' on page 10.
HSBC Holdings plc Pillar 3 2016 5
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 1: 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 128,009 (27) 1,197 129,179
Items in the course of collection from other banks 5,003 - 26 5,029
Hong Kong Government certificates of indebtedness 31,228 - - 31,228
Trading assets 235,125 (198) 1 234,928
Financial assets designated at fair value 24,756 (24,481) - 275
Derivatives 290,872 (145) 77 290,804
Loans and advances to banks 88,126 (1,845) 922 87,203
Loans and advances to customers 861,504 (3,307) 12,897 871,094
- of which:
impairment allowances on IRB portfolios h (5,096) - - (5,096)
impairment allowances on standardised portfolios (2,754) - (235) (2,989)
---------- --------------- ------------- ----------
Reverse repurchase agreements - non-trading 160,974 344 1,444 162,762
Financial investments 436,797 (54,904) 3,500 385,393
Assets held for sale 4,389 (7) - 4,382
- of which:
goodwill and intangible assets e 1 - - 1
impairment allowances (250) - - (250)
---------- --------------- ------------- ----------
- of which:
IRB portfolios h (146) - - (146)
standardised portfolios (104) - - (104)
---------- --------------- ------------- ----------
Capital invested in insurance and other entities - 2,214 - 2,214
Current tax assets 1,145 (118) - 1,027
Prepayments, accrued income and other assets 59,520 (3,066) 306 56,760
-------------------------------------------------- ---------- --------------- ------------- ----------
- of which: retirement benefit assets i 4,714 - - 4,714
---------- --------------- ------------- ----------
Interests in associates and joint ventures 20,029 - (4,195) 15,834
-------------------------------------------------- ---------- --------------- ------------- ----------
- of which: positive goodwill on acquisition e 488 - (475) 13
---------- --------------- ------------- ----------
Goodwill and intangible assets e 21,346 (6,651) 481 15,176
Deferred tax assets f 6,163 176 5 6,344
Total assets at 31 Dec 2016 2,374,986 (92,015) 16,661 2,299,632
-------------------------------------------------- ---------- --------------- ------------- ----------
6 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 1: 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
Liabilities and equity
--------------------------------------- ----------- ----------- ---------------- ------------- ------------
Hong Kong currency notes in circulation 31,228 - - 31,228
Deposits by banks 59,939 (50) 441 60,330
Customer accounts 1,272,386 (44) 14,997 1,287,339
Repurchase agreements - non-trading 88,958 - - 88,958
Items in course of transmission to other banks 5,977 - - 5,977
Trading liabilities 153,691 643 1 154,335
Financial liabilities designated at fair value 86,832 (6,012) - 80,820
- of which:
term subordinated debt included in
tier 2 capital n, q 23,172 - - 23,172
preferred securities included in tier
1 capital m 411 - - 411
---------- --------------- ------------- ----------
Derivatives 279,819 193 64 280,076
Debt securities in issue 65,915 (3,547) 662 63,030
Liabilities of disposal groups held for sale 2,790 - - 2,790
Current tax liabilities 719 (26) - 693
Liabilities under insurance contracts 75,273 (75,273) - -
Accruals, deferred income and other liabilities 41,501 1,810 495 43,806
---------------------------------------------------- ---------- --------------- ------------- ----------
- of which: retirement benefit liabilities 2,681 (2) 61 2,740
---------- --------------- ------------- ----------
Provisions 4,773 (18) - 4,755
---------------------------------------------------- ---------- --------------- ------------- ----------
- of which: contingent liabilities and contractual
commitments 299 - - 299
---------- --------------- ------------- ----------
- of which:
credit-related provisions on IRB
portfolios h 267 - - 267
credit-related provisions on standardised
portfolios 32 - - 32
---------- --------------- ------------- ----------
Deferred tax liabilities 1,623 (981) 1 643
Subordinated liabilities 20,984 1 - 20,985
- of which:
preferred securities included in tier
1 capital k, m 1,754 - - 1,754
perpetual subordinated debt included
in tier 2 capital o 1,967 - - 1,967
term subordinated debt included in
tier 2 capital n, q 16,685 - - 16,685
---------- --------------- ------------- ----------
Total liabilities at 31 Dec 2016 2,192,408 (83,304) 16,661 2,125,765
---------------------------------------------------- ---------- --------------- ------------- ----------
Called up share capital a 10,096 - - 10,096
Share premium account a, k 12,619 - - 12,619
Other equity instruments j, k 17,110 - - 17,110
Other reserves c, g (1,234) 1,735 - 501
Retained earnings b, c 136,795 (9,442) - 127,353
-----------
Total shareholders' equity 175,386 (7,707) - 167,679
Non-controlling interests d, l, m, p 7,192 (1,004) - 6,188
- of which: non-cumulative preference
shares issued by subsidiaries
included in tier 1 capital m 260 - - 260
---------- --------------- ------------- ----------
Total equity at 31 Dec 2016 182,578 (8,711) - 173,867
---------------------------------------------------- ---------- --------------- ------------- ----------
Total liabilities and equity at 31 Dec 2016 2,374,986 (92,015) 16,661 2,299,632
---------------------------------------------------- ---------- --------------- ------------- ----------
The references (a) - (q) identify balance sheet components that
are used in the calculation of regulatory capital on page 13.
HSBC Holdings plc Pillar 3 2016 7
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 1: 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 98,934 (2) 28,784 127,716
Items in the course of collection from other banks 5,768 - 22 5,790
Hong Kong Government certificates of indebtedness 28,410 - - 28,410
Trading assets 224,837 340 4,390 229,567
Financial assets designated at fair value 23,852 (23,521) 2,034 2,365
Derivatives 288,476 (146) 495 288,825
Loans and advances to banks 90,401 (3,008) 16,413 103,806
Loans and advances to customers 924,454 (7,427) 120,016 1,037,043
- of which:
impairment allowances on IRB portfolios h (6,291) - - (6,291)
impairment allowances on standardised portfolios (3,263) - (2,780) (6,043)
---------- --------------- ------------- ----------
Reverse repurchase agreements - non-trading 146,255 711 5,935 152,901
Financial investments 428,955 (51,684) 42,732 420,003
Assets held for sale 43,900 (4,107) - 39,793
- of which:
goodwill and intangible assets e 1,680 (219) - 1,461
impairment allowances (1,454) - - (1,454)
---------- --------------- ------------- ----------
- of which:
IRB portfolios h (7) - - (7)
standardised portfolios (1,447) - - (1,447)
---------- --------------- ------------- ----------
Capital invested in insurance and other entities - 2,371 - 2,371
Current tax assets 1,221 (15) - 1,206
Prepayments, accrued income and other assets 54,398 (2,539) 9,692 61,551
---------- --------------- ------------- ----------
- of which: retirement benefit assets i 5,272 - - 5,272
---------- --------------- ------------- ----------
Interests in associates and joint ventures 19,139 - (18,571) 568
---------- --------------- ------------- ----------
- of which: positive goodwill on acquisition e 593 - (579) 14
---------- --------------- ------------- ----------
Goodwill and intangible assets e 24,605 (6,068) 623 19,160
Deferred tax assets f 6,051 195 518 6,764
Total assets at 31 Dec 2015 2,409,656 (94,900) 213,083 2,527,839
-------------------------------------------------- ---------- --------------- ------------- ----------
8 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 1: 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
Liabilities and equity
---------------------------------------- ----------- ---------- ---------------- ------------- ------------
Hong Kong currency notes in circulation 28,410 - - 28,410
Deposits by banks 54,371 (97) 50,005 104,279
Customer accounts 1,289,586 (119) 147,522 1,436,989
Repurchase agreements - non-trading 80,400 - - 80,400
Items in course of transmission to other banks 5,638 - - 5,638
Trading liabilities 141,614 (66) 59 141,607
Financial liabilities designated at fair value 66,408 (6,046) - 60,362
- of which:
term subordinated debt included in
tier 2 capital n, q 21,168 - - 21,168
preferred capital securities included
in tier 1 capital m 1,342 - - 1,342
---------- --------------- ------------- ----------
Derivatives 281,071 87 508 281,666
Debt securities in issue 88,949 (7,885) 5,065 86,129
Liabilities of disposal groups held for sale 36,840 (3,690) - 33,150
Current tax liabilities 783 (84) 409 1,108
Liabilities under insurance contracts 69,938 (69,938) - -
Accruals, deferred income and other liabilities 38,116 2,326 6,669 47,111
----------------------------------------------------- ---------- --------------- ------------- ----------
- of which: retirement benefit liabilities 2,809 (2) 61 2,868
---------- --------------- ------------- ----------
Provisions 5,552 (25) - 5,527
----------------------------------------------------- ---------- --------------- ------------- ----------
- of which: contingent liabilities and contractual
commitments 240 - - 240
---------- --------------- ------------- ----------
- of which:
credit-related provisions on IRB
portfolios h 201 - - 201
credit-related provisions on standardised
portfolios 39 - - 39
---------- --------------- ------------- ----------
Deferred tax liabilities 1,760 (868) 5 897
Subordinated liabilities 22,702 - 2,841 25,543
- of which:
preferred capital securities included
in tier 1 capital k, m 1,929 - - 1,929
---------- --------------- ------------- ----------
perpetual subordinated debt included
in tier 2 capital o 2,368 - - 2,368
term subordinated debt included in
tier 2 capital n, q 18,405 - - 18,405
---------- --------------- ------------- ----------
Total liabilities at 31 Dec 2015 2,212,138 (86,405) 213,083 2,338,816
----------------------------------------------------- ---------- --------------- ------------- ----------
Called up share capital a 9,843 - - 9,843
Share premium account a, k 12,421 - - 12,421
Other equity instruments j, k 15,112 - - 15,112
Other reserves c, g 7,143 1,650 - 8,793
Retained earnings b, c 143,941 (9,212) - 134,729
Total shareholders' equity 188,460 (7,562) - 180,898
----------------------------------------------------- ---------- --------------- ------------- ----------
Non-controlling interests d, l, m, p 9,058 (933) - 8,125
---------------------------------------- -----------
- of which: non-cumulative preference
shares issued by subsidiaries
included in tier 1 capital m 2,077 - - 2,077
---------- --------------- ------------- ----------
Total equity at 31 Dec 2015 197,518 (8,495) - 189,023
----------------------------------------------------- ---------- --------------- ------------- ----------
Total liabilities and equity at 31 Dec 2015 2,409,656 (94,900) 213,083 2,527,839
----------------------------------------------------- ---------- --------------- ------------- ----------
The references (a) - (q) identify balance sheet components that
are used in the calculation of regulatory capital on page 13.
HSBC Holdings plc Pillar 3 2016 9
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Structure of the regulatory group
HSBC's organisation is that of a financial holding company whose
major subsidiaries are almost entirely wholly-owned banking
entities. A simplified organisation chart showing the difference
between the accounting and regulatory consolidation groups is
included in Appendix II.
Following a clarification of policy by the PRA, at 30 September
2016 the regulatory treatment of our investment in Bank of
Communications Co., Limited ('BoCom') changed from proportional
consolidation of RWAs to a deduction from capital (subject to
regulatory thresholds). The revised regulatory treatment is more
consistent with our financial reporting treatment, aligning with
the equity method of accounting, and better reflects our
relationship with BoCom, including the nature of our obligations
and financial commitments. This also results in BoCom no longer
being a difference between the financial accounting and regulatory
balance sheets in table 1.
Interests in other banking associates are proportionally
consolidated for regulatory purposes by including our share of
assets, liabilities, profit and loss, and RWAs in accordance with
the PRA's application of EU legislation. As shown in table 2, the
principal associate subject to proportional regulatory
consolidation at 31 December 2016 is The Saudi British Bank.
Subsidiaries engaged in insurance activities are excluded from
the regulatory consolidation by excluding assets, liabilities and
post-acquisition reserves, leaving the investment of these
insurance subsidiaries to be recorded at cost and deducted from
common equity tier 1 ('CET1') (subject to thresholds). In the
column 'Deconsolidation of insurance/other entities', in table 1,
the amount of $2.2bn (2015: $2.4bn) shown as 'Capital invested in
insurance and other entities' represents the cost of investment in
our insurance business. The principal insurance entities are listed
in table 2.
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. The
deconsolidation of SPEs connected to securitisation activity and
other entities mainly impacts the adjustments to 'Loans and
advances to customers', 'Financial investments' and 'Debt
securities in issue'. Table 2 lists the principal SPEs excluded
from the regulatory consolidation with their total assets and total
equity. Further details of the use of SPEs in the Group's
securitisation activities are shown in Note 19 of the Annual Report
and Accounts 2016 and on page 236.
Table 2: Principal entities with a different regulatory and accounting scope of consolidation
At 31 Dec 2016 At 31 Dec 2015
------------------ ---------------------
Total Total Total Total
Principal activities assets equity assets equity
Footnotes $m $m $m $m
Principal associates
---------------------------- --------- ---------------------------- --------- ------- --------- ----------
Bank of Communications Co.,
Limited 1, 2 Banking services 1,165,535 89,364 1,110,088 80,657
--------- -------
The Saudi British Bank Banking services 49,784 8,202 50,189 7,356
Principal insurance entities
excluded from the
regulatory consolidation
---------------------------- --------- ---------------------------- --------- ------- --------- ----------
HSBC Life (International)
Ltd Life insurance manufacturing 39,346 2,838 34,808 2,805
--------- --------- -------
HSBC Assurances Vie (France) Life insurance manufacturing 23,418 721 23,713 663
Hang Seng Insurance Company
Ltd Life insurance manufacturing 15,225 1,107 14,455 1,154
HSBC Insurance (Singapore)
Pte Ltd Life insurance manufacturing 3,589 360 3,102 315
HSBC Life (UK) Ltd Life insurance manufacturing 1,678 158 1,941 390
HSBC Life Insurance Company
Ltd Life insurance manufacturing 864 85 764 109
HSBC Seguros S.A. (Mexico) Life insurance manufacturing 716 118 870 182
HSBC Amanah Takaful
(Malaysia) SB Life insurance manufacturing 298 26 302 27
HSBC Vida e Previdência
(Brasil) S.A. Life insurance manufacturing - - 3,418 155
HSBC Seguros (Brasil) S.A. Life insurance manufacturing - - 484 283
Principal SPEs excluded from
the
regulatory consolidation 3
---------------------------- --------- ---------------------------- --------- ------- --------- ----------
Regency Assets Ltd Securitisation 7,380 - 15,183 -
Mazarin Funding Ltd Securitisation 1,117 12 1,879 (9)
Turquoise Receivables
Trustee Ltd Securitisation 838 - 852 (1)
--------- -------
Barion Funding Ltd Securitisation 653 56 1,132 68
Malachite Funding Ltd Securitisation 356 34 442 26
---------------------------- --------- ---------------------------- --------- ------- --------- -------
Metrix Portfolio
Distribution Plc Securitisation 333 - 304 -
---------------------------- --------- ---------------------------- --------- ------- --------- -------
1 Since 30 September 2016, both the accounting and regulatory balance sheets use the equity
method to consolidate our interest in BoCom. For further details, see 'Structure of the regulatory
group' above.
2 Total assets and total equity for 2016 are as at 30 September 2016.
3 These SPEs issued no or de minimis share capital. The negative equity represents net unrealised
losses on unimpaired assets on their balance sheets and negative retained earnings.
Table 2 also presents the total assets and total equity, on a
stand-alone IFRS basis, of the entities which are included in the
Group consolidation on different bases for accounting and
regulatory purposes. The figures shown therefore include
intra-Group balances. For associates, table 2 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 in-force long-term
insurance business asset of $6.5bn and the related deferred tax
liability are recognised at the financial reporting consolidated
level only, and are therefore not included in the asset or equity
positions for the stand-alone entities presented in table 2. 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 2016.
The Pillar 3 Disclosures 2016 are prepared in accordance with
regulatory capital adequacy concepts and rules, while the Annual
Report and Accounts 2016 are prepared in accordance
10 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
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.
The difference between total assets on the regulatory balance
sheet is shown in table 3, and the credit risk and CCR exposure
values are shown in table 4.
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 3 below shows a breakdown of the
accounting balances into the risk types that form the basis for
regulatory capital requirements. Table 4 then shows the main
differences between the accounting balances and regulatory
exposures by regulatory risk type.
Table 3: Mapping of financial statement categories with regulatory risk categories
Carrying value of items
----------------------------------------------------------------------
Carrying Subject to
values as deduction from
reported Subject capital or not
in Carrying values Subject to the subject to
published under scope of to credit Subject to Subject to market regulatory
financial regulatory risk CCR securitisation risk capital
statements consolidation(1) framework framework(2) framework(3) framework requirements(4)
$bn $bn $bn $bn $bn $bn $bn
------------- ---------- ---------------- --------- ------------ -------------- --------- ---------------
Assets
Cash and
balances at
central
banks 128.0 129.2 129.2 - - - -
Items in the
course of
collection
from other
banks 5.0 5.0 5.0 - - - -
Hong Kong
Government
certificates
of
indebtedness 31.2 31.2 31.2 - - - -
Trading
assets 235.1 234.9 8.4 11.3 - 208.7 17.6
Financial
assets
designated
at fair
value 24.8 0.3 0.3 - - - -
Derivatives 290.9 290.8 - 289.9 0.9 290.8 -
Loans and
advances to
banks 88.1 87.2 76.3 2.0 1.2 - 7.7
Loans and
advances to
customers 861.5 871.1 847.4 8.9 10.8 - 4.0
Reverse
repurchase
agreements -
non-trading 161.0 162.8 - 162.4 0.4 - -
--------- --------------
Financial
investments 436.8 385.4 375.8 - 9.5 - 0.1
Assets held
for sale 4.4 4.4 4.4 - - - -
---------- ---------------- --------- ---------------
Capital
invested in
insurance
and other
entities 2.2 2.2 1.4 - - - 0.8
---------
Current tax
assets 1.1 1.0 1.0 - - - -
Prepayments,
accrued
income and
other assets 59.5 56.8 38.0 3.9 - 8.2 6.7
Interests in
associates
and joint
ventures 17.8 15.8 10.3 - - - 5.5
Goodwill and
intangible
assets 21.3 15.2 - - - - 15.2
Deferred tax
assets 6.2 6.3 5.2 - - - 1.1
Total assets
at 31 Dec
2016 2,374.9 2,299.6 1,533.9 478.4 22.8 507.7 58.7
------------- ---------- ---------------- --------- ------------ -------------- --------- ---------------
Cash and
balances at
central
banks 98.9 127.7 127.7 - - - -
---------- ----------------
Items in the
course of
collection
from other
banks 5.8 5.8 5.8 - - - -
Hong Kong
Government
certificates
of
indebtedness 28.4 28.4 28.4 - - - -
Trading
assets 224.8 229.5 4.4 17.4 - 225.1 -
Financial
assets
designated
at fair
value 23.9 2.4 2.4 - - - -
Derivatives 288.5 288.8 0.3 287.5 0.9 288.5 -
Loans and
advances to
banks 90.4 103.8 103.8 - - - -
Loans and
advances to
customers 924.4 1,037.0 1,027.5 - 9.5 - -
Reverse
repurchase
agreements -
non-trading 146.3 152.9 5.9 147.0 - -
Financial
investments 429.0 420.0 408.7 - 11.3 - -
Assets held
for sale 43.9 39.8 32.8 5.3 - - 1.7
Capital
invested in
insurance
and other
entities 2.4 2.4 2.4 - - - -
Current tax
assets 1.2 1.2 1.2 - - - -
Prepayments,
accrued
income and
other assets 54.4 61.5 44.9 - - 11.5 5.1
Interests in
associates
and joint
ventures 16.7 0.6 - - - - 0.6
Goodwill and
intangible
assets 24.6 19.2 - - - - 19.2
Deferred tax
assets 6.1 6.8 7.8 - - - (1.0)
Total assets
at 31 Dec
2015 2,409.7 2,527.8 1,804.0 457.2 21.7 525.1 25.6
------------- ---------- ---------------- --------- ------------ -------------- --------- ---------------
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' and 'Trading 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 CCR framework' include both non-trading book and
trading book.
3 The amounts shown in the column 'Subject to securitisation framework' only include non-trading
book. Trading book securitisation positions are included in the market risk column.
4 In the comparative period, the carrying value of settlement accounts not subject to regulatory
capital requirements were reported in credit risk and market risk.
HSBC Holdings plc Pillar 3 2016 11
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 4: Main sources of differences between regulatory exposure values and carrying values
in financial statements
Items subject to:
---------------------------------------
Credit risk CCR Securitisation
Footnotes $bn $bn $bn
-------------------------------------------------------------- --------- ----------- ------ --------------
Asset carrying value amount under scope of regulatory
consolidation 1,533.9 478.4 22.8
- differences due to reversal of IFRS netting 14.6 110.3 -
- differences due to financial collateral on standardised
approach (12.3) - -
- differences due to consideration of provisions on IRB
approach 6.0 - -
--------------
- differences due to modelling and standardised CCFs for
credit risk and other differences 1 250.7 - 12.4
- differences due to credit risk mitigation and potential
exposures for counterparty risk - (426.4) -
- differences due to free deliveries and sundry balances - 2.5 -
-------------------------------------------------------------- --------- ----------- ------ --------------
Exposure values considered for regulatory purposes at 31 Dec
2016 1,792.9 164.8 35.2
-------------------------------------------------------------- --------- ----------- ------ --------------
Asset carrying value amount under scope of regulatory
consolidation 1,804.0 457.2 21.7
- differences due to reversal of IFRS netting 2 31.7 110.0 -
---------
- differences due to financial collateral on standardised
approach (13.8) - -
- differences due to consideration of provisions on IRB
approach 7.2 - 0.6
- differences due to modelling and standardised CCFs for
credit risk and other differences 1 275.8 - 19.3
- differences due to credit risk mitigation and potential
exposures for counterparty risk - (395.5) -
- differences due to free deliveries and sundry balances - 6.9 -
Exposure values considered for regulatory purposes at 31 Dec
2015 2,104.9 178.6 41.6
-------------------------------------------------------------- --------- ----------- ------ --------------
1 This includes the undrawn portion of committed facilities, various trade finance commitments
and guarantees, by applying CCFs to these items.
2 In the comparative period, 'differences due to reversal of IFRS netting' have been reallocated
from 'differences due to credit risk mitigation and potential exposures for counterparty risk'.
Explanations of differences between accounting and regulatory
exposure amounts
Under IFRS, netting is only permitted if legal right of set-off
exists and the cash flows are intended to be settled on a net
basis. Under the PRA's regulatory rules, however, netting is
applied for capital calculations if there is legal certainty and
the positions are managed on a net collateralised basis. As a
consequence, we recognise greater netting under the PRA's rules,
reflecting the close-out provisions that would take effect in the
event of default of a counterparty rather than just those
transactions that are actually settled net in the normal course of
business.
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.
While bid/offer are often commensurate with market price
dispersion, these adjustments essentially capture an execution cost
and not market uncertainty. However, it is recognised that a
variety of valuation techniques combined with the range of
plausible market parameters at a given PIT 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 and that may differ 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 spread and funding fair value
adjustment ('FFVA').
AVAs are not limited to level 3 exposures, for which a 95%
uncertainty range is already computed and disclosed, but must be
also calculated for any exposure for which the exit price cannot be
determined without a degree of uncertainty.
12 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Capital and RWAs
Capital management
Approach and policy
Our approach to capital management is designed to ensure we meet
current regulatory requirements and that we respect the payment
priority of our capital providers. We aim to maintain a strong
capital base, to support the risks inherent in our business and to
invest in accordance with our six filters framework, 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 2016, 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. Also, there are no foreseen restrictions 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 does not have any Group Financial Support Agreements
outstanding.
All capital securities included in the capital base of HSBC have
been either 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 capital ('T2 capital'), are set out on
the HSBC website, www.hsbc.com.
The values disclosed are the IFRSs balance sheet carrying
amounts, not the amounts that these securities contribute to
regulatory capital. For example, the IFRSs accounting and the
regulatory treatments differ in their approaches to issuance costs,
regulatory amortisation and regulatory eligibility limits
prescribed in the grand-fathering provisions under CRD IV.
A list of the 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 2016. 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 127 of the Annual Report and Accounts 2016.
Own funds
Table 5: Own funds disclosure
CRD IV
At prescribed Final
31 Dec residual CRD IV
2016 amount text
Ref(*) Ref $m $m $m
------- ----------- -------
Common equity tier 1 ('CET1') capital: instruments and reserves
------ ----------------------------------------------------------------- --- ---------- -------------- ----------
1 Capital instruments and the related share premium accounts 21,310 21,310
- ordinary shares a 21,310 21,310
--- ------- -------------- -------
2 Retained earnings b 125,442 125,442
---
3 Accumulated other comprehensive income (and other reserves) c 560 560
---
5 Minority interests (amount allowed in consolidated CET1) d 3,878 3,878
---
5a Independently reviewed interim net profits net of any foreseeable
charge or dividend b (1,899) (1,899)
---
6 Common equity tier 1 capital before regulatory adjustments 149,291 149,291
------ ----------------------------------------------------------------- --- ------- -------------- -------
Common equity tier 1 capital: regulatory adjustments
------ ----------------------------------------------------------------- --- ---------- -------------- ----------
7 Additional value adjustments (1,358) (1,358)
---
8 Intangible assets (net of related deferred tax liability) e (15,037) (15,037)
---
10 Deferred tax assets that rely on future profitability excluding
those arising from temporary
differences (net of related tax liability) f (1,696) (1,696)
---
11 Fair value reserves related to gains or losses on cash flow
hedges g (52) (52)
---
12 Negative amounts resulting from the calculation of expected loss
amounts h (4,025) (4,025)
---
14 Gains or losses on liabilities valued at fair value resulting
from changes in own credit standing 1,052 1,052
---
15 Defined-benefit pension fund assets i (3,680) (3,680)
---
16 Direct and indirect holdings of own CET1 instruments (1,573 ) (1,573 )
------ ----------------------------------------------------------------- --- ------- -------------- -------
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) (6,370 ) (6,370 )
------ ----------------------------------------------------------------- --- ------- -------
22 Amount exceeding the 15%/17.65% threshold - (568 ) (568 )
------ ----------------------------------------------------------------- --- ------- ----------- -------
23 - 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 - (388 ) (388 )
------ ----------------------------------------------------------------- --- ------- ----------- -------
HSBC Holdings plc Pillar 3 2016 13
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 5: Own funds disclosure (continued)
CRD IV
At prescribed Final
31 Dec residual CRD IV
2016 amount text
Ref(*) Ref $m $m $m
------ -------------------------------------------------------------- ---- ------- ----------- -------
25 - deferred tax assets arising from temporary differences - (180) (180)
------ -------------------------------------------------------------- ---- ------- ----------- -------
28 Total regulatory adjustments to Common equity tier 1 (32,739) (568) (33,307)
------ -------------------------------------------------------------- ---- ------- ----------- -------
29 Common equity tier 1 capital 116,552 (568) 115,984
------ -------------------------------------------------------------- ---- ------- ----------- -------
Additional tier 1 ('AT1') capital: instruments
------ -------------------------------------------------------------- ---- ----------- -------------- -----------
30 Capital instruments and the related share premium accounts 11,259 11,259
31 - classified as equity under IFRSs j 11,259 11,259
---- ------- ----------- -------
33 Amount of qualifying items and the related share premium
accounts subject to phase out
from AT1 k 7,946 (7,946) -
----
34 Qualifying tier 1 capital included in consolidated AT1 capital
(including minority interests
not included in CET1) issued by subsidiaries and held by third
parties l, m 2,419 (2,267) 152
----
35 - of which: instruments issued by subsidiaries subject to
phase out m 1,522 (1,522) -
----
36 Additional tier 1 capital before regulatory adjustments 21,624 (10,213) 11,411
------ -------------------------------------------------------------- ---- ------- ----------- -------
Additional tier 1 capital: regulatory adjustments
------ -------------------------------------------------------------- ---- ----------- -------------- -----------
37 Direct and indirect holdings of own AT1 instruments (60) (60)
41b Residual amounts deducted from AT1 capital with regard to
deduction from tier 2 ('T2') capital
during the transitional period (94) 94 -
- 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 (94) 94 -
------ -------------------------------------------------------------- ---- ------- ----------- -------
43 Total regulatory adjustments to additional tier 1 capital (154) 94 (60)
------ -------------------------------------------------------------- ---- ------- ----------- -------
44 Additional tier 1 capital 21,470 (10,119) 11,351
------ -------------------------------------------------------------- ---- ------- ----------- -------
45 Tier 1 capital (T1 = CET1 + AT1) 138,022 (10,687) 127,335
------ -------------------------------------------------------------- ---- ------- ----------- -------
Tier 2 capital: instruments and provisions
------ -------------------------------------------------------------- ---- ----------- -------------- -----------
46 Capital instruments and the related share premium accounts n 16,732 16,732
----
47 Amount of qualifying items and the related share premium
accounts subject to phase out
from T2 o 5,695 (5,695) -
----
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 and held by third
parties p, q 12,323 (12,258) 65
----
49 - of which: instruments issued by subsidiaries subject to
phase out q 12,283 (12,283) -
----
51 Tier 2 capital before regulatory adjustments 34,750 (17,953) 16,797
------ -------------------------------------------------------------- ---- ------- ----------- -------
Tier 2 capital: regulatory adjustments
------ -------------------------------------------------------------- ---- ----------- -------------- -----------
52 Direct and indirect holdings of own T2 instruments (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) (374) (94) (468)
57 Total regulatory adjustments to tier 2 capital (414) (94) (508)
------ -------------------------------------------------------------- ---- ------- ----------- -------
58 Tier 2 capital 34,336 (18,047) 16,289
------ -------------------------------------------------------------- ---- ------- ----------- -------
59 Total capital (TC = T1 + T2) 172,358 (28,734) 143,624
------ -------------------------------------------------------------- ---- ------- ----------- -------
59a Risk-weighted assets in respect of amounts subject to
pre-capital requirements regulation
treatment and transitional treatments subject to phase out as
prescribed in Regulation (EU)
No 575/2013 1,419 (1,419) -
- items not deducted from CET1: 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 971 (971) -
- items not deducted from CET1: deferred tax assets arising
from temporary differences 448 (448) -
------- ----------- -------
60 Total risk-weighted assets 857,181 (1,419) 855,762
------ -------------------------------------------------------------- ---- ------- ----------- -------
Capital ratios and buffers
------ -------------------------------------------------------------- ---- ----------- -------------- -----------
61 Common equity tier 1 13.6% 13.6%
-------
62 Tier 1 16.1% 14.9%
63 Total capital 20.1% 16.8%
-------
64 Institution specific buffer requirement 1.348%
------ -------------------------------------------------------------- ---- ------- -------------- -----------
65 - capital conservation buffer requirement 0.625%
-------------- -----------
66 - counter cyclical buffer requirement 0.098%
-------------- -----------
67a - Global Systemically Important Institution ('G-SII') buffer 0.625 %
-------------- -----------
68 Common equity tier 1 available to meet buffers 7.7 %
-------
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) 3,056
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) 12,292
75 Deferred tax assets arising from temporary differences (amount
below 10% threshold, net of
related tax liability) 5,675
------ -------------------------------------------------------------- ---- ------- -------------- -----------
14 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 5: Own funds disclosure (continued)
CRD IV
At prescribed Final
31 Dec residual CRD IV
2016 amount text
Ref(*) Ref $m $m $m
------- ------------------------------------------------------------------ ---- ------- ----------- -------
Applicable caps on the inclusion of provisions in tier 2
------- ------------------------------------------------------------------ ---- ------- ----------- ---------
Cap on inclusion of credit risk adjustments in T2 under standardised
77 approach 2,109
79 Cap for inclusion of credit risk adjustments in T2 under internal
ratings-based approach 3,090
Capital instruments subject to phase-out arrangements (only applicable
between
1 Jan 2013 and 1 Jan 2022)
------------------------------------------------------------------------ ------ ------- ----------- ---------
82 Current cap on AT1 instruments subject to phase out arrangements 10,382
83 Amount excluded from AT1 due to cap (excess over cap after redemptions
and maturities) 202
84 Current cap on T2 instruments subject to phase out arrangements 17,978
85 Amount excluded from T2 due to cap (excess over cap after redemptions
and maturities) 3,712
------- ------------------------------------------------------------------------ ------- ----------- ---------
* The references identify the lines prescribed in the European Banking Authority ('EBA') template.
Lines represented in this table are those lines which are applicable and where there is a
value.
The references (a) - (q) identify balance sheet components on page 6 which are used in the
calculation of regulatory capital.
Leverage ratio
Our leverage ratio calculated on the Capital Requirements
Regulation basis was 5.4% at 31 December 2016, up from 5.0% at 31
December 2015. This was mainly due to a reduction in the exposure
measure resulting from the change in regulatory treatment of our
investment in BoCom.
The Group's UK leverage ratio on a modified basis, excluding
qualifying central bank balances, was 5.7%. This modification to
the leverage ratio exposure measure was made following
recommendations by the Bank of England's Financial Policy Committee
('FPC').
The FPC has stated that it intends to recalibrate the leverage
ratio in 2017 to take account of this modification. Any uplift in
HSBC's UK leverage ratio should be considered in this context.
At 31 December 2016, our UK minimum leverage ratio requirement
of 3% was supplemented by an additional
leverage ratio buffer of 0.2% that translates to a value of
$5bn, and a countercyclical leverage ratio buffer which results in
no capital impact. We comfortably exceeded these leverage
requirements.
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 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 64 of the Annual Report and Accounts
2016.
Table 6: Summary reconciliation of accounting assets and leverage ratio exposures
At 31 Dec
----------------------
2016 2015
Ref* $bn $bn
1 Total assets as per published financial statements 2,375.0 2,409.7
---- ---------------------------------------------------------------------------------------- ------- -------
Adjustments for:
2 - entities which are consolidated for accounting purposes but are outside the scope of
regulatory
consolidation (75.4) 112.4
4 - derivative financial instruments (158.6) (140.8)
5 - securities financing transactions ('SFT') 10.1 13.4
6 - off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance
sheet
exposures) 223.1 400.9
7 - other (19.8) (1.2)
---- ---------------------------------------------------------------------------------------- ------- -------
8 Total leverage ratio exposure 2,354.4 2,794.4
---- ---------------------------------------------------------------------------------------- ------- -------
* 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.
HSBC Holdings plc Pillar 3 2016 15
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 7: Leverage ratio common disclosure
At 31 Dec
----------------------------------------
2016 2015
----- --------------------------------------------------------------------- --------------- ---------------
Ref* $bn $bn
----- --------------------------------------------------------------------- --------------- ---------------
On-balance sheet exposures (excluding derivatives and SFT)
----- --------------------------------------------------------------------- ------------------- -------------------
On-balance sheet items (excluding derivatives, SFTs and fiduciary
1 assets, but including collateral) 1,844.4 2,103.5
2 (Asset amounts deducted in determining tier 1 capital) (34.4) (32.8)
3 Total on-balance sheet exposures (excluding derivatives, SFTs and
fiduciary assets) 1,810.0 2,070.7
----- --------------------------------------------------------------------- --------------- ---------------
Derivative exposures
----- --------------------------------------------------------------------- ------------------- -------------------
4 Replacement cost associated with all derivatives transactions (i.e.
net of eligible cash variation
margin) 43.7 31.0
5 Add-on amounts for potential future exposure ('PFE') associated with
all derivatives transactions
(mark-to-market method) 110.2 124.5
6 Gross-up for derivatives collateral provided where deducted from the
balance sheet assets
pursuant to IFRSs 5.9 4.2
7 (Deductions of receivables assets for cash variation margin provided
in derivatives transactions) (30.6) (30.5)
8 (Exempted central counterparty ('CCP') leg of client-cleared trade
exposures) (4.1) -
9 Adjusted effective notional amount of written credit derivatives 216.4 226.1
10 (Adjusted effective notional offsets and add-on deductions for
written credit derivatives) (209.3) (205.9)
11 Total derivative exposures 132.2 149.4
----- --------------------------------------------------------------------- --------------- ---------------
Securities financing transaction exposures
----- --------------------------------------------------------------------- ------------------- -------------------
12 Gross SFT assets (with no recognition of netting), after adjusting
for sales accounting transactions 266.6 243.0
13 (Netted amounts of cash payables and cash receivables of gross SFT
assets) (87.9) (77.9)
14 Counterparty credit risk exposure for SFT assets 10.4 8.3
16 Total securities financing transaction exposures 189.1 173.4
----- --------------------------------------------------------------------- --------------- ---------------
Other off-balance sheet exposures
----- --------------------------------------------------------------------- ------------------- -------------------
17 Off-balance sheet exposures at gross notional amount 757.7 906.0
18 (Adjustments for conversion to credit equivalent amounts) (534.6) (505.1)
19 Total off-balance sheet exposures 223.1 400.9
----- --------------------------------------------------------------------- --------------- ---------------
Capital and total exposures
----- --------------------------------------------------------------------- ------------------- -------------------
20 Tier 1 capital 127.3 140.2
21 Total leverage ratio exposure 2,354.4 2,794.4
----- --------------------------------------------------------------------- --------------- ---------------
22 Leverage ratio 5.4% 5.0%
----- --------------------------------------------------------------------- --------------- ---------------
EU-23 Choice on 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 8: Leverage ratio - Split of on-balance sheet exposures (excluding derivatives, SFTs
and exempted exposures)
At 31 Dec
------------------
2016 2015
Ref(*) $bn $bn
EU-1 Total on-balance sheet exposures (excluding derivatives, SFTs, and exempted exposures) 1,844.4 2,103.5
EU-2 trading book exposures 267.5 224.5
EU-3 banking book exposures 1,576.9 1,879.0
-------
- of which:
EU-4 covered bonds 1.1 1.0
------- -------
EU-5 exposures treated as sovereigns 504.4 521.0
------- -------
exposures to regional governments, multilateral development banks ('MDB'),
international organisations
EU-6 and public sector entities ('PSE') not treated as sovereigns 6.0 1.0
------- -------
EU-7 institutions 67.6 129.0
------- -------
EU-8 secured by mortgages of immovable properties 254.6 292.0
------- -------
EU-9 retail exposures 84.6 113.0
------- -------
EU-10 corporate 532.4 677.0
------- -------
EU-11 exposures in default 12.4 15.0
------- -------
other exposures (e.g. equity, securitisations and other non-credit obligation
EU-12 assets) 113.8 130.0
------- --------------------------------------------------------------------------------------- ------- -------
* 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
The geographical breakdown and institution specific
countercyclical capital buffer ('CCyB') disclosure is published
annually on the HSBC website, www.hsbc.com.
Our G-SIB Indicator disclosure is published annually on the HSBC
website, www.hsbc.com.
16 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Pillar 1 capital requirements and RWA flow
Pillar 1 covers the capital resources requirements for credit
risk, counterparty credit risk, equity, securitisation, market risk
and
operational risk. These requirements are expressed in terms of
RWAs.
Risk category Scope of permissible approaches Approach adopted by HSBC
Credit risk The Basel Committee framework applies three For
approaches of increasing sophistication to consolidated
the Group
calculation of Pillar 1 credit risk capital reporting,
requirements. The most basic level, the we
standardised have
approach, requires banks to use external adopted
credit ratings to determine the risk the
weightings applied advanced
to rated counterparties. Other IRB
counterparties are grouped into broad approach
categories and standardised for
risk weightings are applied to these the
categories. The next level, the IRB majority
foundation approach, of
allows banks to calculate their credit risk our
capital requirements on the basis of their business.
internal
assessment of a counterparty's Probability Some
of Default ('PD'), but subjects their portfolios
quantified remain
estimates of EAD and Loss Given Default on
('LGD') to standard supervisory parameters. the
Finally, standardised
the IRB advanced approach allows banks to or
use their own internal assessment in both foundation
determining IRB
PD and quantifying EAD and LGD. approaches:
--
pending
the
issuance
of
local
regulations
or
model
approval;
--
following
supervisory
prescription
of
a
non-advanced
approach;
or
--
under
exemptions
from
IRB
treatment.
=============================================
Counterparty credit risk Three approaches to calculating CCR and We use the mark-to-market and IMM approaches
determining exposure values are defined by for CCR. Details of the IMM permission we
the Basel have
Committee: mark-to-market, standardised and received from the PRA can be found in the
Internal Model Method ('IMM'). These Financial Services Register on the PRA
exposure website.
values are used to determine capital Our aim is to increase the proportion of
requirements under one of the credit risk positions on IMM over time.
approaches;
standardised, IRB foundation or IRB
advanced.
------------------------ ------------------------------------------- ---------------------------------------------
Equity For non-trading book, equity exposures can For Group reporting purposes all equity
be assessed under standardised or IRB exposures are treated under the standardised
approaches. approach.
------------------------ ------------------------------------------- ---------------------------------------------
Securitisation Basel specifies two methods for calculating For the majority of the non-trading book
credit risk requirements for securitisation securitisation positions we use the IRB
positions approach,
in the non-trading book: the standardised and within this principally the RBM, with
approach and the IRB approach, which lesser amounts on the IAA and the SFM. We
incorporates also use
the Ratings Based Method ('RBM'), the the standardised approach for an immaterial
Internal Assessment Approach ('IAA') and amount of non-trading book positions.
the Supervisory Securitisation
Formula Method ('SFM'). positions in the trading book are treated
within the market risk framework, using the
CRD
IV standard rules.
------------------------ ------------------------------------------- ---------------------------------------------
Market risk Market risk capital requirements can be The market risk capital requirement is
determined under either the standard rules measured using internal market risk models,
or the where approved
Internal Models Approach ('IMA'). The by the PRA, or under the standard rules. Our
latter involves the use of internal Value internal market risk models comprise VaR,
at Risk ('VaR') stressed
models to measure market risks and VaR and IRC. Non-proprietary details of the
determine the appropriate capital scope of our IMA permission are available in
requirement. the
In addition to the VaR models, other Financial Services Register on the PRA
internal models include Stressed VaR, website. We are in compliance with the
Incremental Risk requirements
Charge ('IRC') and Comprehensive Risk set out in Articles 104 and 105 of the
Measure. Capital Requirements Regulation.
------------------------ ------------------------------------------- ---------------------------------------------
Operational risk The Basel Committee allows for firms to We have historically adopted and currently
calculate their operational risk capital use the standardised approach in determining
requirement our
under the basic indicator approach, the operational risk capital requirement.
standardised approach or the advanced We have in place an operational risk model
measurement which is used for economic capital
approach. calculation
purposes.
------------------------ ------------------------------------------- ---------------------------------------------
HSBC Holdings plc Pillar 3 2016 17
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 9: Total RWAs by risk type
RWAs Capital required(1)
$bn $bn
--------------------------------- ----- -------------------
Credit risk 655.7 52.5
---------------------------------
Standardised approach 166.3 13.3
IRB foundation approach 25.9 2.1
IRB advanced approach 463.5 37.1
--------------------------------- ----- -------------------
Counterparty credit risk 62.0 5.0
Standardised approach 15.0 1.2
---------------------------------
- CCR standardised approach 2.8 0.2
- credit valuation adjustment 10.9 0.9
- central counterparty 1.3 0.1
--------------------------------- ----- -------------------
Advanced approach 47.0 3.8
--------------------------------- -------------------
- CCR IRB approach 43.5 3.5
- credit valuation adjustment 3.5 0.3
---------------------------------
Market risk 41.5 3.3
----- -------------------
Internal model based 36.5 3.0
---------------------------------
- VaR 8.7 0.7
- stressed VaR 15.8 1.3
- incremental risk charge 9.5 0.8
- other VaR and stressed VaR 2.5 0.2
--------------------------------- ----- -------------------
Standardised approach 5.0 0.3
---------------------------------
- interest rate positions risk 1.5 0.1
- foreign exchange position risk 0.3 -
- equity position risk 1.7 0.1
- commodity position risk - -
- securitisation 1.5 0.1
- options - -
--------------------------------- ----- -------------------
Operational risk 98.0 7.8
--------------------------------- ----- -------------------
At 31 Dec 2016 857.2 68.6
--------------------------------- ----- -------------------
1 'Capital required' here and in all tables where the term is used, represents the Pillar 1
capital charge at 8% of RWAs.
Table 10: Overview of RWAs
a b c
------- --------- -----------
2016 2015 2016
----- ------- ---------
Capital
RWA RWA required
Footnote $bn $bn $bn
-----------------------------------------------------------------------
1 Credit risk (excluding counterparty credit risk) 589.1 818.7 47.1
-----------------------------------------------------------------------
2 Standardised approach ('SA') 120.6 303.9 9.6
-----------------------------------------------------------------------
3 Internal rating-based ('IRB') approach 468.5 514.8 37.5
-----------------------------------------------------------------------
4 Counterparty credit risk 61.8 69.1 5.0
-----------------------------------------------------------------------
5 Standardised approach for counterparty credit risk ('SA-CCR') 1 47.4 55.0 3.8
-----------------------------------------------------------------------
6 Internal model method ('IMM') 14.4 14.1 1.2
-----------------------------------------------------------------------
11 Settlement risk 0.2 0.1 -
12 Securitisation exposures in non-trading book 21.8 29.1 1.8
-----------------------------------------------------------------------
13 IRB ratings-based approach ('RBA') 20.7 28.2 1.7
-----------------------------------------------------------------------
14 IRB Supervisory Formula Approach ('SFA') 0.2 0.2 -
-----------------------------------------------------------------------
15 SA/simplified supervisory formula approach ('SSFA') 0.9 0.7 0.1
-----------------------------------------------------------------------
16 Market risk 41.5 42.5 3.3
17 Standardised approach ('SA') 5.0 7.6 0.4
-----------------------------------------------------------------------
18 Internal model approaches ('IMA') 36.5 34.9 2.9
-----------------------------------------------------------------------
19 Operational risk 98.0 115.4 7.8
-----------------------------------------------------------------------
21 Standardised Approach 98.0 115.4 7.8
----------------------------------------------------------------------- ----- ------- ---------
23 Amounts below the thresholds for deduction (subject to 250% risk 44.8 28.1 3.6
weight)
-------- ----- ------- ---------
24 Floor adjustment - - -
----------------------------------------------------------------------- -------- ----- ------- ---------
25 Total 857.2 1,103.0 68.6
----------------------------------------------------------------------- -------- ----- ------- ---------
1 Prior to the implementation of SA-CCR, this row represents the RWA under the mark-to-market
method.
18 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Credit Risk, including amounts below the thresholds for
deduction
During the financial year RWAs decreased by $212.9bn, of which
$38.1bn was due to foreign currency translation differences. The
main drivers of these reductions were the change of regulatory
treatment of our investment in BoCom, which has reduced credit risk
RWAs by $136.0bn and increased our significant investments subject
to 250% risk weight by $24.3bn. In addition, the sale of our
operations in Brazil and continued reductions in US run-off
portfolios reduced RWAs by $36.9bn and $23.2bn, respectively.
Counterparty credit risk
Overall counterparty credit risk RWAs reduced by $7.3bn, due to
reductions from RWA initiatives of $17.3bn offset by increases of
$10.0bn, which were predominantly due to trading activity in the
first half of the year and the impact of negative interest rates
and exchange rate movements. RWA initiatives comprised various
trade actions including portfolio compression and trade novation to
central counterparties $7.3bn, the implementation of a new internal
model to reflect the current interest rate environment $3.8bn,
various other process and data refinements $3.8bn, and the disposal
of our operations in Brazil $2.4bn.
Securitisation in non-trading book
The $7.3bn RWA reduction arises predominantly from disposals of
investments in traditional securitisations.
Market risk
Overall market risk RWAs fell by $1.0bn in the year, comprised
of a $2.6bn decrease related to the standardised approach offset by
a $1.6bn increase under internal models.
The reduction in RWAs related to the standardised approach was
driven by a $2.1bn saving through a reduction in legacy positions
held in CoCo and securitisation bonds and a $0.5bn reduction due to
the disposal of our operations in Brazil. Under internal models,
movements in risk levels led to an increase of $5.3bn, primarily
driven by increases in the VaR and sVaR due to position changes
following the modelling impact of external market risk parameters
(predominantly in interest rate risk). Offsetting this increase,
was a reduction of $3.7bn due to RWA initiatives, described in more
detail under table 13.
Operational risk
During the year, operational risk reduced by $17.4bn mainly due
to the change in regulatory treatment of BoCom $10.0bn and the
three-year income averaging effect.
Table 11: RWA flow statements of credit risk exposures under IRB
a
-------------
RWA
$bn
---- -------------------------------------------------- ----------
1 At 31 Dec 2015 514.8
--------------------------------------------------
2 Asset size 30.7
3 Asset quality 14.0
4 Model updates (0.9)
5 Methodology and policy 0.5
6 Acquisitions and disposals -
7 Foreign exchange movements (28.7)
10 RWA initiatives (61.9)
8 Other -
---- -------------------------------------------------- ----------
9 At 31 Dec 2016 468.5
---- -------------------------------------------------- ----------
RWAs decreased in 2016 by $46.3bn, of which $28.7bn was due to
foreign currency translation differences.
RWA initiatives
The main drivers of these reductions were:
-- $29.8bn as a result of reduced exposures, refined calculations and process improvements;
-- $23.2bn through the continued reduction in US run-off portfolios; and
-- $9.0bn from the sale of our activities in Brazil.
Asset size
Asset size movements increased RWAs by $30.7bn, principally as a
result of a corporate book growth in Europe and Asia.
Table 12: RWA flow statements of CCR exposures under IMM
a
---------
RWA
$bn
1 At 31 Dec 2015 14.1
----------------------------------------------
2 Asset size 3.7
3 Asset quality 0.2
4 Model updates -
5 Methodology and policy -
- internal updates -
- external regulatory updates -
6 Acquisitions and disposals -
7 Foreign exchange movements -
10 RWA initiatives (3.6)
---- ---------------------------------------------- ------
8 Other -
---- ----------------------------------------------
9 At 31 Dec 2016 14.4
---- ---------------------------------------------- ------
Modelled counterparty credit risk RWAs increased by $0.3bn over
the year.
HSBC Holdings plc Pillar 3 2016 19
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
RWA initiatives
Reviews of the client portfolio and the renegotiation of Credit
Support Annex ('CSA') terms led to savings of $3.6bn with an
additional $1.1bn of savings due to calculation improvements.
These were broadly offset by a $1.1bn increase following the PRA
approval and subsequent implementation of a new IMM model (this
resulted in a net saving of $3.8bn across both the IMM and
standardised approach portfolios).
Table 13: RWA flow statements of market risk exposures under an IMA
a b c e f
VaR Stressed VaR IRC Other Total RWA(1)
$bn $bn $bn $bn $bn
1 At 31 Dec 2015 8.6 12.8 11.4 2.1 34.9
--------------------------
2 Movement in risk levels 2.4 2.9 (0.5) 0.5 5.3
3 Model updates/changes - - - - -
4 Methodology and policy - - - - -
5 Acquisitions and disposals - - - - -
6 Foreign exchange movements - - - - -
9 RWA initiatives (2.3) - (1.4) - (3.7)
-------------------------- ---- ------------ ---- ----- ------------
7 Other - - - - -
--------------------------
8 At 31 Dec 2016 8.7 15.7 9.5 2.6 36.5
-------------------------- ---- ------------ ---- ----- ------------
1 Internal model based RWAs as defined under CRD IV, including those undertakings which are
outside the scope of line by line consolidation.
Market risk RWAs arising from internal models increased by
$1.6bn over the year, mainly coming from the modelling impact of
external market risk parameter changes leading to additional
capital requirements as described above.
RWA Initiatives
Savings of $3.7bn of RWAs were partly due to the active risk
management of the overall IRC position within Global Markets,
creating savings of $1.5bn. Various changes to models comprised the
remaining RWA initiatives, post the relevant PRA approvals, which
included: the inclusion of the equity skew risk within VaR models
and the removal of the corresponding risk not in VaR; the
incorporation of the currency of collateral within risk pricing;
and the refinement of risk model calculations for FX options and
deal contingent swaps.
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 EEA
supervisors, as part of the Joint Risk Assessment and Decision
process, during the supervisory review and evaluation process. This
process occurs periodically to enable the regulator to define the
Individual Capital Guidance ('ICG') or minimum capital requirements
for HSBC, and the PRA to define the PRA buffer, where required.
Under the revised Pillar 2 PRA regime, which came into effect from
1 January 2016, 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 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
ICG and any PRA buffer that may be required.
Within Pillar 2, 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 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 ICG 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 a
firm's risk management and governance to be 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 regulatory and
economic capital viewpoints, aiming 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 influence
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-
20 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
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 management of risk. 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, and to a 99.5%
level of confidence for our insurance activities and pension
risks.
The ICAAP and its constituent economic capital calculations are
examined by the PRA as part of its supervisory review and
evaluation process. 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 and
operational risk, interest rate risk in the banking book, insurance
risk, pension risk, residual 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, owning our credit policy and credit systems
programmes, overseeing portfolio management and reporting on risk
matters to senior executive management and to 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
69 of the Annual Report and Accounts 2016.
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.
Credit risk operates 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.
Risk proposals in certain portfolios - sovereign obligors,
banks, some non-bank financial institutions and intra-Group
exposures - are approved centrally in Global Risk to facilitate
efficient control and the reporting of regulatory large and
cross-border exposures.
Credit risk management
Our exposure to credit risk arises from a wide range of customer
and product types, 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 loan impairments, 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 37 .
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. For central management and reporting purposes, Group IT
systems to 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 over-ridden 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 and 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 48.
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 37, and
throughout HSBC such models fall directly under the remit of the
global functional MOCs. Additionally, the global functional MOCs
are responsible for the approval of stress testing models
HSBC Holdings plc Pillar 3 2016 21
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
used for regulatory stress testing exercises such as those
carried out by the European Banking Authority ('EBA') and the Bank
of England.
The global functional MOCs are responsible for defining which
models require their approval.
Wholesale MOC requires all credit risk models for which it is
responsible to be approved by delegated senior managers with
notification to the committee that retains the responsibility for
oversight. RBWM MOC applies materiality thresholds for approval at
the committee. For models falling below these thresholds, final
approval is delegated to regional committees or Regional Heads of
RBWM Risk.
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 both
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 14: Credit quality of assets
a b c d
--------------------- ------------------------- -------------- ------------
Gross carrying values of
------------------------------------------------
Allowances/ Net values
Defaulted exposures Non-defaulted exposures impairments (a+b-c)
$bn $bn $bn $bn
------------------- ----------------------- ------------ ----------
1 Loans 17.9 1,067.8 8.3 1,077.4
2 Debt Securities - 377.4 - 377.4
3 Off-balance sheet exposures 1.5 735.0 0.3 736.2
4 Total at 31 Dec 2016 19.4 2,180.2 8.6 2,191.0
--------------------------- ------------------- ----------------------- ------------ ----------
Table 15: Credit risk exposure - summary
Average
Exposure exposure Capital
value value(3) RWAs required
Footnotes $bn $bn $bn $bn
IRB advanced approach 1,450.7 1,502.4 463.5 37.1
- central governments and central banks 339.4 346.6 35.4 2.8
- institutions 75.7 81.1 15.0 1.2
- corporates 1 583.1 591.2 314.0 25.1
- total retail 366.8 388.0 66.1 5.3
----------------------------------------------------------- ---------
- of which:
secured by mortgages on immovable property SME 1.5 2.4 0.3 -
secured by mortgages on immovable property non-SME 249.0 263.9 36.5 2.9
qualifying revolving retail 64.0 65.7 14.7 1.2
other SME 8.7 10.5 4.5 0.4
other non-SME 43.6 45.5 10.1 0.8
-------- --------- ------ ---------
IRB securitisation positions 33.8 37.4 20.9 1.7
IRB non-credit obligation assets 51.9 58.1 12.1 1.0
----------------------------------------------------------- --------- -------- --------- ------ ---------
IRB foundation approach 42.8 44.7 25.9 2.1
- central governments and central banks 0.1 0.1 - -
- institutions 0.3 0.3 0.1 -
- corporates 42.4 44.3 25.8 2.1
-------- --------- ------ ---------
Standardised approach 334.1 493.3 166.3 13.3
- central governments and central banks 167.3 192.9 14.7 1.2
- institutions 2.1 22.9 1.0 0.1
- corporates 78.4 164.4 75.0 6.0
- retail 22.0 35.5 16.3 1.3
- secured by mortgages on immovable property 25.7 35.5 9.3 0.7
- exposures in default 3.3 4.2 4.3 0.3
- regional governments or local authorities 2.9 2.8 0.9 0.1
- equity 2 15.2 10.5 33.6 2.7
- items associated with particularly high risk 3.4 4.2 5.1 0.4
- securitisation positions 0.9 0.8 0.9 0.1
- claims in the form of Collective investment undertakings
('CIU') 0.5 0.5 0.5 -
-----------------------------------------------------------
- international organisations 2.7 2.8 - -
- multilateral development banks 0.2 0.2 - -
----------------------------------------------------------- ---------
- other items 9.5 16.1 4.7 0.4
----------------------------------------------------------- --------- -------- --------- ------ ---------
At 31 Dec 2016 1,827.6 2,040.4 655.7 52.5
----------------------------------------------------------- --------- -------- --------- ------ ---------
22 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 15: Credit risk exposure - summary (continued)
Average
Exposure exposure Capital
value value(3) RWAs required
Footnotes $bn $bn $bn $bn
IRB advanced approach 1,510.8 1,564.0 515.8 41.3
-------- --------- ------ ---------
- central governments and central banks 327.4 331.8 49.4 4.0
- institutions 90.5 114.3 18.4 1.5
- corporates 1 597.3 617.0 314.3 25.1
- total retail 404.5 412.4 93.2 7.4
----------------------------------------------------- ---------
- of which:
secured by mortgages on immovable property SME 2.9 3.0 0.6 -
secured by mortgages on immovable property non-SME 275.4 283.0 60.0 4.8
qualifying revolving retail 67.8 67.0 15.3 1.2
other SME 12.1 12.9 5.8 0.5
other non-SME 46.3 46.5 11.5 0.9
-------- --------- ------ ---------
IRB securitisation positions 40.9 36.6 28.4 2.3
IRB non-credit obligation assets 50.2 51.9 12.1 1.0
----------------------------------------------------- --------- -------- --------- ------ ---------
IRB foundation approach 43.7 36.2 27.4 2.2
----------------------------------------------------- ---------
- central governments and central banks 0.1 0.1 - -
----------------------------------------------------- ---------
- institutions 0.3 0.2 0.2 -
- corporates 43.3 35.9 27.2 2.2
----------------------------------------------------- --------- -------- --------- ------ ---------
Standardised approach 592.0 592.3 332.7 26.6
- central governments and central banks 199.9 194.5 20.0 1.6
- institutions 38.9 34.2 14.7 1.2
- corporates 226.4 234.3 210.6 16.8
- retail 44.2 45.7 32.5 2.6
- secured by mortgages on immovable property 40.3 39.4 14.4 1.2
- exposures in default 4.9 4.6 6.4 0.5
- regional governments or local authorities 2.8 1.9 1.0 0.1
- equity 2 7.0 9.1 12.2 1.0
- items associated with particularly high risk 4.4 4.4 6.6 0.5
- securitisation positions 0.7 0.6 0.7 0.1
- claims in the form of CIU 0.5 0.6 0.5 -
- international organisations 2.6 2.9 - -
- other items 19.4 20.1 13.1 1.0
----------------------------------------------------- --------- -------- --------- ------ ---------
At 31 Dec 2015 2,146.5 2,192.5 875.9 70.1
----------------------------------------------------- --------- -------- --------- ------ ---------
1 Corporates includes specialised lending exposures subject to supervisory slotting approach
of $33.1bn (2015: $24.9bn) and RWAs of $22.2bn (2015: $18.2bn).
2 This includes investment in Insurance companies that are risk weighted at 250%.
3 Average exposures are calculated by aggregating exposure value of the last five quarters and
dividing by five.
HSBC Holdings plc Pillar 3 2016 23
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 16: Credit risk exposure - by geographical region
Exposure value
--------------------------------------------------
North Latin
Europe Asia MENA America America Total
Footnotes $bn $bn $bn $bn $bn $bn
--------------------------------------------- --------- ------ ----- ---- -------- -------- -------
IRB advanced approach 459.1 693.8 22.9 263.1 11.8 1,450.7
- central governments and central banks 37.2 205.4 14.0 73.6 9.2 339.4
- institutions 14.2 52.5 1.8 6.8 0.4 75.7
- corporates 1 183.0 264.5 6.4 128.6 0.6 583.1
--------------------------------------------- ---------
- total retail 187.9 130.4 - 48.5 - 366.8
---------------------------------------------
- of which:
secured by mortgages on immovable property
SME 0.6 0.6 - 0.3 - 1.5
secured by mortgages on immovable property
non-SME 118.5 90.6 - 39.9 - 249.0
qualifying revolving retail 28.0 32.2 - 3.8 - 64.0
other SME 8.4 0.1 - 0.2 - 8.7
other non-SME 32.4 6.9 - 4.3 - 43.6
------ ----- ---- -------- -------- -------
IRB securitisation positions 29.0 0.8 - 4.0 - 33.8
------ ----- ---- -------- -------- -------
IRB non-credit obligation assets 7.8 40.2 0.7 1.6 1.6 51.9
IRB foundation approach 26.1 - 16.7 - - 42.8
--------------------------------------------- --------- ------ ----- ---- -------- -------- -------
- central governments and central banks - - 0.1 - - 0.1
- institutions - - 0.3 - - 0.3
- corporates 26.1 - 16.3 - - 42.4
Standardised approach 172.2 85.8 41.3 15.6 19.2 334.1
- central governments and central banks 131.7 27.5 3.0 4.3 0.8 167.3
- institutions 0.3 0.2 1.4 0.2 - 2.1
- corporates 21.9 18.2 22.2 5.5 10.6 78.4
- retail 1.9 7.9 6.5 1.4 4.3 22.0
- secured by mortgages on immovable property 5.2 14.0 3.6 1.1 1.8 25.7
- exposures in default 1.0 0.4 1.2 0.3 0.4 3.3
- regional governments or local authorities - - 2.4 - 0.5 2.9
- equity 2 1.4 12.1 0.2 1.1 0.4 15.2
---------
- items associated with particularly high
risk 2.8 - 0.1 0.4 0.1 3.4
- securitisation positions - 0.8 - - 0.1 0.9
- claims in the form of CIU 0.4 - 0.1 - - 0.5
- international organisations 2.7 - - - - 2.7
- multilateral development banks - - 0.2 - - 0.2
- other items 2.9 4.7 0.4 1.3 0.2 9.5
------ ----- ---- -------- -------- -------
At 31 Dec 2016 657.4 779.6 80.9 278.7 31.0 1,827.6
--------------------------------------------- --------- ------ ----- ---- -------- -------- -------
24 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 16: Credit risk exposure - by geographical region (continued)
Exposure value
--------------------------------------------------
North Latin
Europe Asia MENA America America Total
Footnotes $bn $bn $bn $bn $bn $bn
------ ----- ---- -------- -------- -------
IRB advanced approach 541.8 659.5 25.6 261.4 22.5 1,510.8
- central governments and central banks 37.4 189.3 17.2 66.1 17.4 327.4
- institutions 26.1 52.4 1.0 9.0 2.0 90.5
- corporates 1 215.2 254.4 6.3 120.8 0.6 597.3
--------------------------------------------- ---------
- total retail 217.8 126.4 - 60.3 - 404.5
--------------------------------------------- ---------
- of which:
secured by mortgages on immovable property
SME 2.0 0.6 - 0.3 - 2.9
--------------------------------------------- ---------
secured by mortgages on immovable property
non-SME 136.7 88.6 - 50.1 - 275.4
qualifying revolving retail 33.2 30.6 - 4.0 - 67.8
other SME 11.6 0.1 - 0.4 - 12.1
other non-SME 34.3 6.5 - 5.5 - 46.3
------ ----- ---- -------- -------- -------
IRB securitisation positions 36.9 0.3 - 3.7 - 40.9
IRB non-credit obligation assets 8.4 36.7 1.1 1.5 2.5 50.2
----
IRB foundation approach 27.7 - 16.0 - - 43.7
--------------------------------------------- --------- ------ ----- ---- -------- -------- -------
- central governments and central banks - - 0.1 - - 0.1
- institutions - - 0.3 - - 0.3
- corporates 27.7 - 15.6 - - 43.3
--------
Standardised approach 164.4 302.0 51.2 30.8 43.6 592.0
- central governments and central banks 121.8 65.9 4.8 5.3 2.1 199.9
- institutions 0.2 36.6 2.0 0.1 - 38.9
- corporates 22.8 132.2 28.2 18.6 24.6 226.4
- retail 2.4 21.6 8.6 1.7 9.9 44.2
- secured by mortgages on immovable property 5.1 27.3 3.6 1.0 3.3 40.3
- exposures in default 1.1 0.4 1.0 0.8 1.6 4.9
- regional governments or local authorities - - 2.1 - 0.7 2.8
- equity 2 2.0 2.8 0.2 1.5 0.5 7.0
---------
- items associated with particularly high
risk 2.7 - 0.1 1.0 0.6 4.4
- securitisation positions - 0.7 - - - 0.7
- claims in the form of CIU 0.3 - 0.2 - - 0.5
- international organisations 2.6 - - - - 2.6
- multilateral development banks - - - - - -
- other items 3.4 14.5 0.4 0.8 0.3 19.4
------ ----- ---- -------- -------- -------
At 31 Dec 2015 733.9 961.5 92.8 292.2 66.1 2,146.5
--------------------------------------------- --------- ------ ----- ---- -------- -------- -------
For footnotes, see page 23.
HSBC Holdings plc Pillar 3 2016 25
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 17: Credit risk RWAs - by geographical
region
RWAs
------------------------------------------------
North Latin
Europe Asia MENA America America Total
Footnotes $bn $bn $bn $bn $bn $bn
IRB advanced approach 152.4 197.6 7.7 100.7 5.1 463.5
------ ----- ---- -------- -------- -----
- central governments and central banks 3.9 15.9 5.3 6.4 3.9 35.4
- institutions 3.2 9.4 0.4 1.6 0.4 15.0
- corporates 1 98.4 143.4 1.7 70.3 0.2 314.0
- total retail 21.6 23.7 - 20.8 - 66.1
----------------------------------------------- ---------
- of which:
secured by mortgages on immovable property
SME 0.2 - - 0.1 - 0.3
-----------------------------------------------
secured by mortgages on immovable property
non-SME 6.0 14.1 - 16.4 - 36.5
qualifying revolving retail 5.4 8.2 - 1.1 - 14.7
other SME 4.4 - - 0.1 - 4.5
other non-SME 5.6 1.4 - 3.1 - 10.1
----------------------------------------------- ------ ----- ---- -------- -------- -----
IRB securitisation positions 20.5 0.1 - 0.3 - 20.9
IRB non-credit obligation assets 4.8 5.1 0.3 1.3 0.6 12.1
IRB foundation approach 16.1 - 9.8 - - 25.9
- central governments and central banks - - - - - -
- institutions - - 0.1 - - 0.1
- corporates 16.1 - 9.7 - - 25.8
------ ----- ---- -------- -------- -----
Standardised approach 37.3 62.4 31.5 17.9 17.2 166.3
- central governments and central banks 3.1 1.5 0.7 8.2 1.2 14.7
- institutions 0.1 0.2 0.6 0.1 - 1.0
- corporates 21.0 17.2 21.2 5.0 10.6 75.0
- retail 1.4 5.9 4.8 1.1 3.1 16.3
- secured by mortgages on immovable property 2.0 4.9 1.3 0.5 0.6 9.3
- exposures in default 1.3 0.5 1.5 0.6 0.4 4.3
- regional governments or local authorities - - 0.6 - 0.3 0.9
- equity 2 2.7 29.1 0.2 1.1 0.5 33.6
- items associated with particularly high risk 4.2 - 0.2 0.6 0.1 5.1
- securitisation positions - 0.7 - - 0.2 0.9
- claims in the form of CIU 0.4 - 0.1 - - 0.5
- international organisations - - - - - -
- other items 1.1 2.4 0.3 0.7 0.2 4.7
------ ----- ---- -------- -------- -----
At 31 Dec 2016 205.8 260.0 49.0 118.6 22.3 655.7
----------------------------------------------- --------- ------ ----- ---- -------- -------- -----
26 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 17: Credit risk RWAs - by geographical region (continued)
RWAs
------------------------------------------------
North Latin
Europe Asia MENA America America Total
Footnotes $bn $bn $bn $bn $bn $bn
IRB advanced approach 173.9 195.9 10.7 122.5 12.8 515.8
- central governments and central banks 4.3 19.2 7.8 8.5 9.6 49.4
- institutions 4.7 9.0 0.3 2.5 1.9 18.4
- corporates 1 107.6 140.4 2.2 63.8 0.3 314.3
- total retail 25.2 21.8 - 46.2 - 93.2
----------------------------------------------- ---------
- of which:
secured by mortgages on immovable property
SME 0.5 - - 0.1 - 0.6
----------------------------------------------- ---------
secured by mortgages on immovable property
non-SME 7.5 12.5 - 40.0 - 60.0
qualifying revolving retail 6.1 8.0 - 1.2 - 15.3
other SME 5.6 - - 0.2 - 5.8
other non-SME 5.5 1.3 - 4.7 - 11.5
----------------------------------------------- ------ ----- ---- -------- -------- -----
IRB securitisation positions 27.9 0.1 - 0.4 - 28.4
--------- ------ ----- ---- -------- -------- -----
IRB non-credit obligation assets 4.2 5.4 0.4 1.1 1.0 12.1
------ ----- ---- -------- -------- -----
IRB foundation approach 17.5 - 9.9 - - 27.4
-----------------------------------------------
- central governments and central banks - - - - - -
- institutions - - 0.2 - - 0.2
- corporates 17.5 - 9.7 - - 27.2
------ ----- ---- -------- -------- -----
Standardised approach 40.2 177.7 38.6 33.9 42.3 332.7
- central governments and central banks 2.6 3.0 0.6 9.3 4.5 20.0
- institutions 0.1 13.7 0.8 0.1 - 14.7
- corporates 22.7 117.9 26.7 18.3 25.0 210.6
- retail 1.7 16.2 6.3 1.2 7.1 32.5
- secured by mortgages on immovable property 1.9 9.5 1.4 0.4 1.2 14.4
- exposures in default 1.3 0.5 1.4 1.2 2.0 6.4
- regional governments or local authorities - - 0.5 - 0.5 1.0
- equity 2 4.2 5.5 0.2 1.5 0.8 12.2
- items associated with particularly high risk 4.0 - 0.2 1.5 0.9 6.6
- securitisation positions - 0.6 - - 0.1 0.7
- claims in the form of CIU 0.3 - 0.2 - - 0.5
- international organisations - - - - - -
- other items 1.4 10.8 0.3 0.4 0.2 13.1
----------------------------------------------- --------- ------ ----- ---- -------- -------- -----
At 31 Dec 2015 231.6 373.6 59.2 156.4 55.1 875.9
----------------------------------------------- --------- ------ ----- ---- -------- -------- -----
For footnotes, see page 23.
HSBC Holdings plc Pillar 3 2016 27
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 18: Credit risk exposure - by industry sector
Exposure value
------------------------------------------------------------------------------------------------------------------
Property
International and other Government and
trade and business public Other Non-customer
Personal Manufacturing services activities administration commercial Financial assets Total
Footnotes $bn $bn $bn $bn $bn $bn $bn $bn $bn
---------
IRB advanced
approach 357.4 120.1 124.5 165.3 131.4 77.7 422.4 51.9 1,450.7
- central
governments
and central
banks - - 0.2 - 115.3 - 223.9 - 339.4
--------------- ---------
- institutions - - - - - 0.3 75.4 - 75.7
--------------- ---------
- corporates 1 0.3 119.8 123.4 157.6 15.8 77.0 89.2 - 583.1
--------------- ---------
- total retail 357.1 0.3 0.9 7.7 0.3 0.4 0.1 - 366.8
--------------- ---------
- of which:
secured by
mortgages on
immovable
property SME 0.5 - 0.1 0.8 0.1 - - - 1.5
secured by
mortgages on
immovable
property
non-SME 249.0 - - - - - - - 249.0
qualifying
revolving
retail 64.0 - - - - - - - 64.0
other SME - 0.3 0.8 6.9 0.2 0.4 0.1 - 8.7
other non-SME 43.6 - - - - - - - 43.6
--------------- -------- ------------- ------------- ---------- -------------- ---------- --------- ------------ -------
IRB
securitisation
positions - - - - - - 33.8 - 33.8
IRB non-credit
obligation
assets - - - - - - - 51.9 51.9
IRB foundation
approach 0.2 13.3 10.8 5.6 0.7 8.2 4.0 - 42.8
--------------- --------- -------- ------------- ------------- ---------- -------------- ---------- --------- ------------ -------
- central
governments
and central
banks - - - - - - 0.1 - 0.1
- institutions - - 0.2 - 0.1 - - - 0.3
- corporates 0.2 13.3 10.6 5.6 0.6 8.2 3.9 - 42.4
Standardised
approach 48.9 16.2 16.9 28.3 79.9 10.6 111.5 21.8 334.1
--------------- ---------
- central
governments or
central banks - 0.1 0.2 - 73.1 - 88.2 5.7 167.3
- institutions - - - - - - 2.1 - 2.1
- corporates 1.6 15.3 16.1 26.2 2.0 9.9 7.3 - 78.4
- retail 20.7 0.1 0.1 0.7 0.1 0.1 0.2 - 22.0
- secured by
mortgages on
immovable
property 25.3 - - 0.3 - 0.1 - - 25.7
- exposures in
default 1.3 0.5 0.4 0.5 0.1 0.4 0.1 - 3.3
- regional
governments or
local
authorities - - - - 1.7 - 1.2 - 2.9
- equity 2 - - - 0.1 0.2 - 2.6 12.3 15.2
---------
- items
associated
with
particularly
high risk - - 0.1 0.3 - 0.1 2.9 - 3.4
-
securitisation
positions - - - - - - 0.9 - 0.9
--------------- ---------
- claims in the
form of CIU - - - - - - 0.5 - 0.5
- international
organisations - - - - 2.7 - - - 2.7
---------------
- multilateral
development
banks - - - - - - 0.2 - 0.2
- other items - 0.2 - 0.2 - - 5.3 3.8 9.5
At 31 Dec 2016 406.5 149.6 152.2 199.2 212.0 96.5 537.9 73.7 1,827.6
--------------- --------- -------- ------------- ------------- ---------- -------------- ---------- --------- ------------ -------
28 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 18: Credit risk exposure - by industry sector (continued)
Exposure value
------------------------------------------------------------------------------------------------------------------
Property
International and other Government and
trade and business public Other Non-customer
Personal Manufacturing services activities administration commercial Financial assets Total
Footnotes $bn $bn $bn $bn $bn $bn $bn $bn $bn
---------
IRB advanced
approach 390.2 125.3 136.6 158.7 137.3 87.3 425.2 50.2 1,510.8
- central
governments
and central
banks - - 0.1 - 119.9 - 207.4 - 327.4
--------------- ---------
- institutions - - - - 0.8 0.1 89.6 - 90.5
--------------- ---------
- corporates 1 0.4 124.9 135.4 146.4 16.3 86.7 87.2 - 597.3
--------------- ---------
- total retail 389.8 0.4 1.1 12.3 0.3 0.5 0.1 - 404.5
--------------- ---------
- of which:
secured by
mortgages on
immovable
property SME 0.5 - 0.1 2.3 - - - - 2.9
secured by
mortgages on
immovable
property
non-SME 275.4 - - - - - - - 275.4
qualifying
revolving
retail 67.8 - - - - - - - 67.8
other SME - 0.4 1.0 10.0 0.1 0.5 0.1 - 12.1
other non-SME 46.1 - - - 0.2 - - - 46.3
--------------- -------- ------------- ------------- ---------- -------------- ---------- --------- ------------ -------
IRB
securitisation
positions - - - - - - 40.9 - 40.9
IRB non-credit
obligation
assets - - - - - - - 50.2 50.2
IRB foundation
approach - 11.9 10.6 8.3 0.7 7.9 4.3 - 43.7
--------------- --------- -------- ------------- ------------- ---------- -------------- ---------- --------- ------------ -------
- central
governments
and central
banks - - - - - - 0.1 - 0.1
- institutions - - - - - - 0.3 - 0.3
- corporates - 11.9 10.6 8.3 0.7 7.9 3.9 - 43.3
Standardised
approach 83.5 57.9 45.4 49.8 97.2 41.8 201.9 14.5 592.0
--------------- ---------
- central
governments
and central
banks - 0.1 - - 70.2 - 121.9 7.7 199.9
- institutions - - - - - - 38.9 - 38.9
- corporates 1.5 56.2 43.5 46.1 21.9 40.2 17.0 - 226.4
- retail 40.8 0.6 1.0 1.2 0.1 0.3 0.2 - 44.2
- secured by
mortgages on
immovable
property 39.7 0.1 - 0.4 - 0.1 - - 40.3
- exposures in
default 1.5 0.9 0.8 0.8 0.1 0.7 0.1 - 4.9
- regional
governments or
local
authorities - - - - 2.3 - 0.5 - 2.8
- equity 2 - - - 0.1 - - 3.4 3.5 7.0
---------
- items
associated
with
particularly
high risk - - 0.1 1.1 - 0.5 2.7 - 4.4
-
securitisation
positions - - - - - - 0.7 - 0.7
- claims in the
form of CIU - - - - - - 0.5 - 0.5
- international
organisations - - - - 2.6 - - - 2.6
- multilateral
development
banks - - - - - - - - -
- other items - - - 0.1 - - 16.0 3.3 19.4
--------------- -------- ------------- ------------- ---------- -------------- ---------- --------- ------------ -------
At 31 Dec 2015 473.7 195.1 192.6 216.8 235.2 137.0 631.4 64.7 2,146.5
--------------- --------- -------- ------------- ------------- ---------- -------------- ---------- --------- ------------ -------
For footnotes, see page 23.
HSBC Holdings plc Pillar 3 2016 29
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 19: Credit risk exposure - by maturity
Exposure value
Between More
Less than 1 and than
1 year 5 years 5 years Undated Total
Footnotes $bn $bn $bn $bn $bn
IRB advanced approach 625.2 378.1 395.7 51.7 1,450.7
- central governments and central banks 203.9 87.7 47.8 - 339.4
------------------------------------------------ ---------
- institutions 55.0 19.8 0.9 - 75.7
------------------------------------------------ ---------
- corporates 1 274.4 241.8 66.9 - 583.1
------------------------------------------------ ---------
- total retail 80.8 21.8 264.2 - 366.8
------------------------------------------------ ---------
- of which:
secured by mortgages on immovable property SME 0.2 0.3 1.0 - 1.5
secured by mortgages on immovable property
non-SME 1.7 4.1 243.2 - 249.0
qualifying revolving retail 64.0 - - - 64.0
other SME 2.0 4.8 1.9 - 8.7
other non-SME 12.9 12.6 18.1 - 43.6
------------------------------------------------ --------- -------- -------- ------- -------
IRB securitisation positions 11.0 6.9 15.9 - 33.8
--------- --------- -------- -------- ------- -------
IRB non-credit obligation assets 0.1 0.1 - 51.7 51.9
IRB foundation approach 19.4 19.4 4.0 - 42.8
------------------------------------------------ --------- --------- -------- -------- ------- -------
- central governments and central banks - - 0.1 - 0.1
- institutions - 0.3 - - 0.3
- corporates 19.4 19.1 3.9 - 42.4
Standardised approach 168.1 77.7 56.0 32.3 334.1
------------------------------------------------ ---------
- central governments and central banks 101.9 40.6 19.0 5.8 167.3
- institutions 1.1 0.3 0.7 - 2.1
- corporates 50.1 21.1 7.2 - 78.4
- retail 8.2 9.4 4.4 - 22.0
- secured by mortgages on immovable property 2.0 2.5 21.2 - 25.7
- exposures in default 1.7 0.7 0.9 - 3.3
- regional governments or local authorities 1.2 0.4 1.3 - 2.9
- equity 2 - - - 15.2 15.2
- items associated with particularly high risk 0.4 0.6 0.1 2.3 3.4
- securitisation positions 0.2 - 0.7 - 0.9
------------------------------------------------ ---------
- claims in the form of CIU 0.4 - - 0.1 0.5
- international organisations 0.4 2.0 0.3 - 2.7
- multilateral development banks 0.2 - - - 0.2
- other items 0.3 0.1 0.2 8.9 9.5
--------- -------- -------- ------- -------
At 31 Dec 2016 812.7 475.2 455.7 84.0 1,827.6
------------------------------------------------ --------- --------- -------- -------- ------- -------
30 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 19: Credit risk exposure - by maturity (continued)
Exposure value
-------------------------------------------------
Between More
Less than 1 and than
1 year 5 years 5 years Undated Total
Footnotes $bn $bn $bn $bn $bn
------------------------------------------------ --------- --------- -------- -------- ------- -------
IRB advanced approach 654.2 376.1 430.4 50.1 1,510.8
- central governments and central banks 200.9 75.6 50.9 - 327.4
- institutions 66.9 20.1 3.5 - 90.5
- corporates 1 289.8 246.0 61.5 - 597.3
------------------------------------------------ ---------
- total retail 86.7 23.8 294.0 - 404.5
------------------------------------------------ ---------
- of which:
secured by mortgages on immovable property SME 0.2 0.4 2.3 - 2.9
secured by mortgages on immovable property
non-SME 2.4 4.2 268.8 - 275.4
qualifying revolving retail 67.8 - - - 67.8
other SME 2.4 6.4 3.3 - 12.1
other non-SME 13.9 12.8 19.6 - 46.3
------------------------------------------------ --------- -------- -------- ------- -------
IRB securitisation positions 9.9 10.5 20.5 - 40.9
IRB non-credit obligation assets - 0.1 - 50.1 50.2
IRB foundation approach 20.0 19.1 4.6 - 43.7
------------------------------------------------ --------- --------- -------- -------- ------- -------
- central governments and central banks - - 0.1 - 0.1
- institutions 0.1 0.2 - - 0.3
- corporates 19.9 18.9 4.5 - 43.3
Standardised approach 230.0 207.5 120.8 33.7 592.0
------------------------------------------------ ---------
- central governments and central banks 126.2 48.0 18.0 7.7 199.9
- institutions 22.4 0.5 16.0 - 38.9
- corporates 60.1 136.7 29.6 - 226.4
- retail 11.9 14.1 18.2 - 44.2
- secured by mortgages on immovable property 2.3 2.6 35.4 - 40.3
- exposures in default 2.6 1.2 1.1 - 4.9
- regional governments or local authorities 1.2 1.2 0.4 - 2.8
- equity 2 - - - 7.0 7.0
- items associated with particularly high risk 0.4 1.6 0.7 1.7 4.4
- securitisation positions - - 0.7 - 0.7
- claims in the form of CIU 0.4 - - 0.1 0.5
- international organisations 0.4 1.6 0.6 - 2.6
- multilateral development banks - - - - -
- other items 2.1 - 0.1 17.2 19.4
------------------------------------------------ --------- --------- -------- -------- ------- -------
At 31 Dec 2015 904.2 602.7 555.8 83.8 2,146.5
------------------------------------------------ --------- --------- -------- -------- ------- -------
For footnotes, see page 23.
Past due but not impaired exposures, impaired exposures,
renegotiated exposures and credit risk adjustments
Tables 20 to 23 analyse past due but not impaired exposures,
impaired exposures, renegotiated exposures and impairment
allowances and other credit risk provisions on a regulatory
consolidation basis. These tables use accounting values. The
proportional consolidation of associates is the main difference
between the amounts presented here and those on a financial
consolidation basis.
Our approach for determining impairment allowances is explained
on page 199 of the Annual Report and Accounts 2016, and the Group's
definitions for accounting purposes of 'past
due', 'impaired' and 'renegotiated' are set out on pages 88, 90
and 74, respectively. The accounting definition of impaired and the
regulatory definition of default are generally aligned. In certain
jurisdictions, for certain retail exposures, regulatory default is
identified at 180 days past due, while the exposures are identified
as impaired at 90 days past due. In the retail portfolio in the US,
for accounting purposes, a renegotiation would normally trigger
identification as 'impaired', whereas for regulatory purposes,
default is identified mainly based on the 180 days past due
criterion.
Under the accounting standards currently adopted by HSBC,
impairment allowances, value adjustments and credit-related
provisions for off-balance sheet amounts are treated as specific
Credit risk adjustments ('CRAs').
Table 20: Ageing analysis of accounting past due and not impaired exposures
Europe Asia MENA North America Latin America Total
-------- ------ ------ --------------- --------------- -----
Up to 29 days 876 2,769 1,163 2,016 395 7,219
30-59 days 220 506 177 402 86 1,391
60-89 days 110 187 136 128 48 609
90-179 days - 11 38 3 - 52
---------------------- -------- ------ ------ --------------- --------------- -----
180 days and over - 11 11 - - 22
Total at Dec 2016 1,206 3,484 1,525 2,549 529 9,293
---------------------- -------- ------ ------ --------------- --------------- -----
HSBC Holdings plc Pillar 3 2016 31
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 21: Breakdown of renegotiated exposures between impaired and non-impaired exposures
Renegotiated
First lien Non-bank loans at
residential Other personal Corporate and financial 31 Dec
mortgages lending commercial institutions 2016
$m $m $m $m $m
Neither past due
nor impaired 976 282 1,848 260 3,366
Past due but not
impaired 346 78 301 - 725
Impaired 2,751 325 5,416 257 8,749
Renegotiated loans
at 31 Dec 2016 4,073 685 7,565 517 12,840
Impairment
allowances on
renegotiated
loans 267 150 1,667 130 2,214
------------------ ----------------- ----------------- ----------------- ----------------- ------------
Neither past due
nor impaired 3,973 716 2,152 391 7,232
Past due but not
impaired 1,753 243 123 24 2,143
Impaired 6,556 733 6,094 201 13,584
Renegotiated loans
at 31 Dec 2015 12,282 1,692 8,369 616 22,959
------------------ ----------------- ----------------- ----------------- ----------------- ------------
Impairment
allowances on
renegotiated
loans 871 251 2,097 120 3,339
------------------ ----------------- ----------------- ----------------- ----------------- ------------
Table 22: Amount of impaired exposures and related allowances, broken down by geographical
region
North
Europe Asia MENA America Latin America Total
31 Dec 2016 $m $m $m $m $m $m
------ ------ ------ -------- ------------- -------
Past due but not impaired exposures 1,206 3,484 1,525 2,549 529 9,293
------------------------------------------
- personal 769 2,351 558 1,399 381 5,458
------------------------------------------
- corporate and commercial 423 1,084 861 754 146 3,268
------------------------------------------
- financial 14 49 106 396 2 567
------------------------------------------ ------ ------ ------ -------- ------------- -------
Impaired exposures 8,137 2,561 2,449 5,891 621 19,659
------------------------------------------
- personal 1,953 579 545 4,226 261 7,564
- corporate and commercial 5,903 1,954 1,726 1,660 360 11,603
- financial 281 28 178 5 - 492
------ ------ ------ -------- ------------- -------
Impairment allowances and other credit
risk provisions (2,859) (1,640) (1,942) (1,705) (486) (8,632)
------------------------------------------
- personal (530) (283) (571) (605) (263) (2,252)
- corporate and commercial (2,114) (1,348) (1,185) (1,080) (223) (5,950)
- financial (215) (9) (186) (20) - (430)
------------------------------------------ ------ ------ ------ -------- ------------- -------
31 Dec 2015
Past due but not impaired exposures 1,589 4,925 1,498 5,466 1,252 14,730
------------------------------------------
- personal 876 2,935 605 3,332 790 8,538
------------------------------------------
- corporate and commercial 699 1,948 795 1,868 460 5,770
------------------------------------------
- financial 14 42 98 266 2 422
------------------------------------------ ------ ------ ------ -------- ------------- -------
Impaired exposures 10,385 4,095 2,801 9,135 3,151 29,567
------------------------------------------
- personal 2,121 817 642 8,130 857 12,567
- corporate and commercial 6,582 3,267 1,920 1,003 2,285 15,057
- financial 1,682 11 239 2 9 1,943
------ ------ ------ -------- ------------- -------
Impairment allowances and other credit
risk provisions (3,503) (4,087) (2,035) (2,235) (2,168) (14,028)
------------------------------------------
- personal (653) (735) (562) (1,232) (872) (4,054)
- corporate and commercial (2,655) (3,339) (1,279) (971) (1,296) (9,540)
- financial (195) (13) (194) (32) - (434)
------------------------------------------ ------ ------ ------ -------- ------------- -------
32 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 23: Movement in specific credit risk adjustments by industry and geographical region
North Latin
Europe Asia MENA America America Total
$m $m $m $m $m $m
Specific credit risk adjustments at 1 Jan 2016 3,503 4,087 2,035 2,235 2,168 14,028
Amounts written off (1,141) (648) (363) (665) (637) (3,454)
-------------------------------------------------
- personal (412) (358) (208) (284) (340) (1,602)
- corporate and commercial (728) (285) (137) (381) (297) (1,828)
- financial (1) (5) (18) - - (24)
------ ------ ----- -------- -------- ------
Recoveries of amounts written off in previous
years 260 149 44 73 100 626
-------------------------------------------------
- personal 225 124 34 54 78 515
- corporate and commercial 33 24 10 18 22 107
- financial 2 1 - 1 - 4
------ ------ ----- -------- -------- ------
Charge to income statement 575 675 352 796 1,164 3,562
-------------------------------------------------
- personal 155 274 226 219 832 1,706
- corporate and commercial 386 399 113 587 332 1,817
- financial 34 2 13 (10) - 39
------ ------ ----- -------- -------- ------
Exchange and other movements (338) (2,623) (126) (734) (2,309) (6,130)
Specific credit risk adjustments at 31 Dec 2016 2,859 1,640 1,942 1,705 486 8,632
------------------------------------------------- ------ ------ ----- -------- -------- ------
Specific credit risk adjustments at 1 Jan 2015 3,946 3,883 2,117 2,764 2,621 15,331
Amounts written off (1,123) (595) (508) (662) (1,306) (4,194)
-------------------------------------------------
- personal (467) (416) (273) (554) (997) (2,707)
- corporate and commercial (644) (179) (235) (106) (309) (1,473)
- financial (12) - - (2) - (14)
------ ------ ----- -------- -------- ------
Recoveries of amounts written off in previous
years 368 165 53 76 146 808
-------------------------------------------------
- personal 320 135 50 57 119 681
- corporate and commercial 46 30 3 18 27 124
- financial 2 - - 1 - 3
------ ------ ----- -------- -------- ------
Charge to income statement 563 1,392 507 547 1,450 4,459
-------------------------------------------------
- personal 109 334 281 157 983 1,864
- corporate and commercial 440 1,058 216 397 467 2,578
- financial 14 - 10 (7) - 17
------ ------ ----- -------- -------- ------
Exchange and other movements (251) (758) (134) (490) (743) (2,376)
------------------------------------------------- ------ ------ ----- -------- -------- ------
Specific credit risk adjustments at 31 Dec 2015 3,503 4,087 2,035 2,235 2,168 14,028
------------------------------------------------- ------ ------ ----- -------- -------- ------
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. Specifically, detailed policies cover the
acceptability, structuring and terms with regard to the
availability of credit risk mitigation; for example 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 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 97 and 103, respectively,
of the Annual Report and Accounts 2016.
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 78.
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 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 2016, circa $35bn of customer accounts were treated as
cash collateral, mainly in the UK.
HSBC Holdings plc Pillar 3 2016 33
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
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 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 the
guarantor's PD.
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, or both;
-- 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; and
-- for all other types of collateral, including real estate, the LGD for exposures calculated
under the IRB advanced approach are 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 51 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 2016.
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 credit derivatives,
the exposure is divided into covered and uncovered portions. The
covered portion, which is determined after applying an appropriate
'haircut' for currency and maturity mismatches (and for omission of
restructuring clauses for credit derivatives, where appropriate) to
the amount of the protection provided, attracts the risk weight of
the protection provider. The uncovered portion attracts the risk
weight of the obligor. For exposures fully or partially covered by
eligible financial collateral, the value of the exposure is
adjusted under the financial collateral comprehensive method using
supervisory volatility adjustments, including those arising from
currency mismatch, which are determined by the specific type of
collateral (and, in the case of eligible debt securities, their
credit quality) and its liquidation period. The adjusted exposure
value is subject to the risk weight of the obligor.
34 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 24: Credit risk mitigation techniques - overview
a b c d e f g
---------------- ------- ----------------- ------ ----------------- ------- ----------------
Exposures secured Exposures secured Exposures secured by
by collateral by financial guarantees credit derivatives
-------------------------- ------------------------- -------------------------
Exposures
unsecured:
carrying of which: of which: of which:
amount secured amount secured amount secured amount
$bn $bn $bn $bn $bn $bn $bn
-------------- ----- --------------- ---- --------------- ----- --------------
1 Loans 601.2 402.0 362.2 68.1 64.4 6.1 5.0
2 Debt securities 370.1 2.0 1.9 5.3 5.2 - -
Total at 31 Dec
3 2016 971.3 404.0 364.1 73.4 69.6 6.1 5.0
--------------- -------------- ----- --------------- ---- --------------- ----- --------------
Of which
4 defaulted 9.5 4.3 3.1 0.1 - - -
--------------- -------------- ----- --------------- ---- --------------- ----- --------------
Table 25: Standardised approach - credit risk exposure and Credit Risk Mitigation (CRM) effects
a b c d e f
----------------- ---------------- ----------------- ----------------- -------- -------------
Exposures before CCF Exposures post-CCF
and CRM and CRM RWA and RWA density
----------------------------------- ------------------------------------ -----------------------
On-balance Off-balance On-balance Off-balance
sheet amount sheet amount sheet amount sheet amount RWA RWA density %
$bn $bn $bn $bn $bn $bn
-------------- --------------- -------------- --------------- --------------- ------ -------------
Asset
classes(1)
-------------- ----------------- ---------------- ----------------- ----------------- -------- -------------
Central
governments
and central
1 banks 161.9 1.5 166.2 1.1 14.7 9
2 Institutions 2.2 - 2.1 - 1.0 46
3 Corporates 80.2 79.9 66.3 12.1 75.0 96
4 Retail 22.7 44.2 21.6 0.4 16.3 74
Secured by
mortgages on
immovable
5 property 25.5 0.8 25.5 0.2 9.3 36
Exposures in
6 default 3.2 0.4 3.2 0.1 4.3 130
7 Regional
governments or
local
authorities 2.9 0.3 2.9 - 0.9 32
Equity
8 exposures 15.2 - 15.2 - 33.6 221
9 Items
associated
with
particularly
high risk 2.1 1.4 2.1 1.3 5.1 150
Claims in the
10 form of CIU 0.5 - 0.5 - 0.5 100
Public sector
11 entities - - - - - -
12 Claims on
institutions
and corporates
with a
short-term
credit
assessment - - - - - -
13 Covered bonds - - - - - -
International
14 organisations 2.7 - 2.7 - - -
Multilateral
development
15 banks 0.2 - 0.2 - - 5
16 Other items 9.5 - 9.5 - 4.7 50
Total at 31
17 Dec 2016 328.8 128.5 318.0 15.2 165.4 50
-------------- --------------- -------------- --------------- --------------- ------ -------------
1 Securitisation positions are not included in this table.
HSBC Holdings plc Pillar 3 2016 35
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 26: Standardised approach - exposures by asset classes and risk weights
a b e f g h i j k l p
--------- ------- -------- -------- ------- ------- -------- -------- ------- -------- ---------------
Total credit
exposure
amount
(post-CCF and
Risk weight 0 % 2 % 20 % 35 % 50 % 70 % 75 % 100 % 150 % 250 % post-CRM)
$bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn
----- --- ---- ---- --- --- ---- ---- --- ---- -------------
Asset
classes(1)
--------- ------- -------- -------- ------- ------- -------- -------- ------- -------- ---------------
Central
governments
or central
1 banks 160.4 - 0.8 - 0.3 - - 0.2 - 5.6 167.3
2 Institutions - 0.1 0.8 - 0.7 - - 0.5 - - 2.1
3 Corporates - - 2.1 0.2 2.7 0.1 - 72.6 0.7 - 78.4
4 Retail - - - - - - 22.0 - - - 22.0
Secured by
mortgages on
immovable
5 property - - - 25.2 - - - 0.5 - - 25.7
Exposures in
6 default - - - - - - - 1.3 2.0 - 3.3
7 Regional
governments
or local
authorities 0.2 - 1.8 - 0.7 - - 0.2 - - 2.9
Equity
8 exposures - - - - - - - 2.9 - 12.3 15.2
9 Items
associated
with
particularly
high risk - - - - - - - - 3.4 - 3.4
Claims in the
10 form of CIU - - - - - - - 0.5 - - 0.5
Public sector
11 entities - - - - - - - - - - -
12 Claims on
institutions
and
corporates
with a
short-term
credit
assessment - - - - - - - - - - -
13 Covered bonds - - - - - - - - - - -
International
14 organisations 2.7 - - - - - - - - - 2.7
Multilateral
development
15 banks 0.1 - 0.1 - - - - - - - 0.2
16 Other items 0.7 - 5.1 - - - - 3.7 - - 9.5
Total at 31
17 Dec 2016 164.1 0.1 10.7 25.4 4.4 0.1 22.0 82.4 6.1 17.9 333.2
------------- ----- --- ---- ---- --- --- ---- ---- --- ---- -------------
1 Securitisation positions are not included in this table.
Table 27: IRB - Effect on RWA of credit derivatives used as CRM techniques
a b
---------------------------- ------------
Pre-credit derivatives RWA Actual RWA
$bn $bn
IRB advanced approach(1)
2 Central governments and central banks 5.9 5.9
4 Institutions 2.7 2.7
6 Total corporates 119.6 118.5
----------------------------------------------------
6.1 - corporates - SME - -
----------------------------------------------------
6.2 - corporates - specialised lending 14.4 14.4
6.3 - corporates - other 105.2 104.1
14 Equity - -
---- ---------------------------------------------------- -------------------------- ----------
20 Total retail 31.5 31.5
---- ----------------------------------------------------
10 - Secured by mortgages on immovable property SME - -
10.1 - Secured by mortgages on immovable property non-SME 18.4 18.4
9 - Qualifying revolving retail exposures 4.4 4.4
18 - Other SME 3.0 3.0
19 - Other non-SME 5.7 5.7
-------------------------- ----------
IRB foundation approach
1 Central governments and central banks - -
3 Institutions - -
5 Total corporates 0.3 0.3
5.1 - corporates - SME - -
----------------------------------------------------
5.2 - corporates - specialised lending - -
5.3 - corporates - other 0.3 0.3
---------------------------------------------------- -------------------------- ----------
13 Equity - -
Total at 31 Dec 2016 160.0 158.9
---- ---------------------------------------------------- -------------------------- ----------
1 Securitisation positions are not included in this table.
36 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 28: Credit derivatives exposures
a b a b
------------------ ---------------- ------------------ ------------------
2016 2015
------------------------------------ --------------------------------------
Footnote Protection bought Protection sold Protection bought Protection sold
$bn $bn $bn $bn
----------------- --------------- ----------------- ---------------
Notionals
------------------------
Credit derivative
products used for own
credit portfolio
------------------------ -------- ------------------ ---------------- ------------------ ------------------
- Index credit default
swaps 4.6 1.9 3.5 0.7
- Total return swaps - - - -
Total notionals 4.6 1.9 3.5 0.7
------------------------
Credit derivative
products used for
intermediation 1
- Index credit default
swaps 214.6 207.4 222.5 217.7
----------------- ---------------
- Total return swaps 12.3 7.0 11.2 7.7
----------------- ---------------
Total notionals 226.9 214.4 233.7 225.4
------------------------
Total credit derivative
notionals 231.5 216.3 237.2 226.1
------------------------
Fair values
- Positive fair value
(asset) 2.3 2.9 5.1 2.2
- Negative fair value
(liability) (3.1) (2.7) (1.8) (3.9)
------------------------ -------- ----------------- --------------- ----------------- ---------------
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.
The above table 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 the
resulting credit risk impact is seen in table 28 above and no
counterparty credit risk capital requirement arises. For a
discussion on hedging risk and monitoring the continuing
effectiveness of hedges refer to page 201 of the Annual Report and
Accounts 2016.
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 approach
for the majority of our business. At the end of 2016, 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 2016, 80% of the exposures were treated under
advanced IRB, 2% under foundation IRB and 18% under 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.
This analysis includes comparison of the EL calculated in the
use of IRB risk rating models, which drives part of the regulatory
capital calculation, with other reported measures of credit loss
within financial statements prepared under IFRSs. These measures
include loan impairment allowances, value adjustments and
credit-related provisions for off-balance sheet amounts,
collectively referred to as CRAs. The excess of EL over CRAs is
treated as a capital deduction in the composition of regulatory
capital.
The disclosures below set out:
-- commentary on aspects of the relationship between regulatory EL and CRAs recognised in our
financial statements; and
-- tables of EL and CRA balances, and charges during the period by exposure class (within retail
IRB, also by sub-class) and by region.
When comparing EL with measures of credit losses under IFRSs, it
is necessary to take into account differences in the definition and
scope of each. Below are examples of matters that 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.
Tables 49 and 50 in Appendix I set out for IRB credit exposures
the EL, CRA balances and actual loss experience reflected in the
charges for CRAs.
CRA balances represent management's best estimate of losses
incurred in the loan portfolios at the balance sheet date. Charges
for CRAs represent a movement in the CRA balance during the year,
reflecting loss events that occurred during the financial year and
changes in estimates of losses arising on events that occurred
prior to the current year. EL represents the one-year regulatory
expected loss accumulated in the book and is calculated at a
PIT.
HSBC Holdings plc Pillar 3 2016 37
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Examples of differences in definition and scope between EL and CRA balances:
--
Under
IAS
39,
our
estimates
of
loss
in
impairment
allowances
are
required
to
reflect
the
current
circumstances
and
specific
cash
flow
expectations
of
a
customer.
EL
is
based
on
modelled
estimates
and
although
the
estimates
may
be
individually
assigned
to
specific
exposures,
the
statistical
nature
of
these
models
means
that
they
are
influenced
by
the
behaviour
of
the
overall
portfolio;
--
EL
is
based
on
exposure
values
that
incorporate
expected
future
drawings
of
committed
credit
lines,
while
CRAs
are
recognised
in
respect
of
financial
assets
recognised
on
the
balance
sheet
and
in
respect
of
committed
credit
lines
where
a
loss
is
probable;
--
EL
is
generally
based
on
through-the-cycle
('TTC')
estimates
of
PD
over
a
one-year
future
horizon,
determined
via
statistical
analysis
of
historical
default
experience.
CRAs
are
recognised
for
losses
that
have
been
incurred
at
the
balance
sheet
date;
--
in
the
majority
of
cases,
EL
is
based
on
economic
downturn
estimates
of
LGD,
while
CRAs
are
measured
using
estimated
future
cash
flows
at
the
balance
sheet
date;
--
EL
incorporates
LGD,
which
may
discount
recoveries
at
a
different
rate
from
the
effective
interest
rate
employed
in
discounted
cash
flow
analysis
for
CRAs;
--
LGDs
typically
include
all
costs
associated
with
recovery,
whereas
the
accounting
measurement
considers
only
the
costs
of
obtaining
and
selling
collateral;
--
In
the
foundation
IRB
approach,
LGD
and
the
conversion
factors
used
to
calculate
EAD
are
set
by
regulations,
and
may
differ
significantly
from
the
accounting
assumptions
about
estimated
cash
flows;
--
for
EL,
certain
exposures
are
subject
to
regulatory
minimum
thresholds
for
one
or
more
parameters,
whereas
credit
losses
under
IFRSs
are
determined
using
management's
judgement
about
estimated
future
cash
flows;
and
--
in
the
case
of
EL,
to
meet
regulatory
prudential
standards,
HSBC's
model
philosophy
favours
the
incorporation
of
conservative
estimation
to
accommodate
uncertainty;
for
instance
where
modelling
portfolios
with
limited
data.
Under
IFRSs,
uncertainty
is
considered
when
forming
management's
estimates
of
future
cash
flows,
using
balanced
and
neutral
judgement.
============================================================================
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
Institution ('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;
-- institutions;
-- corporates;
-- securitisation positions;
-- short-term claims on institutions and corporates;
-- regional governments and local authorities; and
-- multilateral development banks.
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'). 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 step S&P's Fitch's
Moody's assessments assessments assessments
------------------- ------------------- -------------- --------------
1 Aaa to Aa3 AAA to AA- AAA to AA-
2 A1 to A3 A+ to A- A+ to A-
3 Baa1 to Baa3 BBB+ to BBB- BBB+ to BBB-
4 Ba1 to Ba3 BB+ to BB- BB+ to BB-
5 B1 to B3 B+ to B- B+ to B-
6 Caa1 and below CCC+ and below CCC+ and 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
estimated using a 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.
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 finally assigned CRR determines the applicable master-scale
PD range from which the reference PD is 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. 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 51 and for the
standardised approach in table 52.
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 TTC. That is,
while models are calibrated to long-run default rates, obligor
ratings are reviewed annually, or more frequently if necessary,
38 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
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. This includes 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 2016, 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.
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 are 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 29 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.
HSBC Holdings plc Pillar 3 2016 39
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 29: Wholesale IRB credit risk models
RWAs for
associated Number of Number
Regulatory asset asset class significant Model description and of years
classes measured $bn Component models methodology loss data Regulatory Floors
Central governments 35.4 PD 1 A shadow rating >10 No
and central banks approach that
includes
macroeconomic and
political factors,
constrained with
expert judgement.
--------------------
An unsecured model
built on assessment
of structural factors
that influence the
country's
long-term economic
performance. For
unsecured LGD, a
floor of 45% is
LGD 1 applied. 8 45%
--------------------
EAD 1 A 8 EAD must be at
cross-classification least equal to the
model that uses both current
internal data and utilisation of the
expert judgement, as balance at account
well as level
information on
similar exposure
types from other
asset classes.
--------------------
Institutions 15.1 PD 1 A statistical model 10 PD > 0.03%
that combines
quantitative analysis
on financial
information with
expert
inputs and
macroeconomic
factors.
-------------------- ------------
LGD 1 A quantitative model 10 45%
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,
a floor of 45% is
applied.
-------------------- ------------
EAD 1 A quantitative model 10 EAD must be at
that assigns credit least equal to the
conversion factors current
('CCF') taking into utilisation of the
account product balance at account
types and level
committed/uncommitted
indicator to
calculate EAD using
current utilisation
and available
headroom.
-------------------- ------------ --------- ------------ --------------------- ---------- ------------------
Corporates(1) 317.6
Global large PD 1 A statistical model 15 PD > 0.03%
corporates built on 15 years of
data. The model uses
financial
information,
macroeconomic
information and
market-driven data,
and is complemented
by a qualitative
assessment.
Other regional / PD 11 Corporates that fall >10
local corporates below the global
large corporate
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.
Non-bank financial PD 10 Predominantly 10 PD > 0.03%
institutions statistical models
that combines
quantitative analysis
on financial
information
with expert inputs.
All corporates LGD 7 Regional/local >7 UK 45%
statistical 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 >7 EAD must be at
statistical models least equal to the
covering all current
corporates, including utilisation of the
global large balance at account
corporates, level
developed using
historical
utilisation
information and
various data inputs,
including product
type and geography.
-------------------- ------------ --------- ------------ --------------------- ---------- ------------------
1 Excludes specialised lending exposures subject to supervisory slotting approach (see table
56a&b).
40 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 30: IRB models - estimated and actual values (wholesale)(1)
PD(2) LGD(3) EAD(4)
------------------ ------------------------ --------------------
Estimated Actuals Estimated(5) Actuals(5) Estimated Actuals
Footnotes % % % % % %
2016
- Sovereigns model 6 3.43 - 45.00 - - -
- 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 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 For 2016, 2015 and 2014, 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. For 2016, 2015
and 2014, the estimated and observed PDs were calculated only for unique obligors.
Table 31: IRB models - corporate PD models - performance by CRR grade
Corporates(1)
------------------------------------------------------------------------
Facility(2) Defaulted(3) Estimated PD(4) Actual PD(5) Diff. in PD
Actual PD(5) Footnotes % % % % %
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
------------- --------- ----------- ------------ --------------- ------------ --------------
HSBC Holdings plc Pillar 3 2016 41
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 31: IRB models - corporate PD models - performance by CRR grade (continued)
Corporates(1)
---------------------------------------------------------------------------
Facility(2) Defaulted(3) Estimated PD(4) Actual PD(5) Diff. in PD
Footnotes % % % % %
-----------
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 100.0
--------- --------- ----------- ------------ --------------- ------------ -----------------
42 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 31: IRB models - corporate PD models - performance by CRR grade (continued)
Corporates(1)
-------------------------------------------------------------------------
Facility(2) Defaulted(3) Estimated PD(4) Actual PD(5) Diff. in PD
Footnote % % % % %
------------
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 100.0
--------- --------- ------------ ------------- ----------------- ------------ -----------
1 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.
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, but 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 120 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 approximately $35bn or 54% 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 or, 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:
-- closed-end products without the facility for additional drawdowns, EAD is estimated as the
outstanding balance of accounts at the time of observation; or
-- EAD for products with the facility for additional drawdowns 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.
HSBC Holdings plc Pillar 3 2016 43
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 32: Material retail IRB risk rating systems
Applicable
Number of Model Pillar 1
material description Number of regulatory
CRD IV asset RWA component and years loss thresholds
Portfolio class $bn Component model models methodology data(1) and overlays
UK HSBC Retail 3.70 PD 1 Statistical 7-10 PD floor of
residential - secured by model built on 0.03%
mortgages mortgages on internal
immovable behavioural
property data and
non-SME bureau
information.
Underlying PiT
model is
calibrated to
the latest
observed PD.
An adjustment
is then
applied to
generate the
long-run PD
based on a
combination of
historical
misalignment
of the
underlying
model and
expert
judgement.
LGD 1 Statistical > 10 LGD floor of
estimates of 10% at
loss and portfolio
probability of level
possession in
combination
with the
workout
process and
using the
1990s
recession in
benchmarking
the downturn
LGD.
--------------- --------------- -------------- -------------- -------------
EAD 1 Logical model 7-10 EAD must at
that uses the least be
sum of balance equal to
at observation current
plus further balance
unpaid
interest that
could accrue
before
default.
UK HSBC Retail 1.68 PD 1 Statistical 7-10 PD floor of
credit cards - qualifying model built on 0.03%
revolving internal
behavioural
data and
bureau
information.
Underlying PiT
model is
calibrated to
the latest
observed PD.
An adjustment
is then
applied to
generate the
long run PD
based on
historical
observed
misalignment
of the
underlying
model.
-------------- -------------- -----
Statistical model based on forecasting the amount
of expected future recoveries, segmented
LGD 1 by default status. 7-10
--------------- --------------- -------------------------------------------------- -------------- -------------
EAD 1 Statistical model that directly estimates EAD for 7-10 EAD must at
different segments of the portfolio using least be
either balance or limit as the key input. equal to
current
balance
--------------- --------------- -------------------------------------------------- -------------- -------------
UK HSBC Retail 2.70 PD 1 Statistical 7-10 PD floor of
personal - other model built 0.03%
loans non-SME on internal
behavioural
data and
bureau
information.
Underlying
PiT
model is
calibrated to
the latest
observed PD.
An adjustment
is then
applied to
generate the
long run PD
based on
historical
observed
misalignment
of the
underlying
model.
-------------- -------------- -----
LGD 1 Statistical model based on forecasting the amount 7-10
of expected future recoveries, segmented
by default status.
--------------- --------------- -------------------------------------------------- -------------- -------------
EAD 1 EAD is equal to current balance as this provides a 7-10 EAD must at
conservative estimate. least be
equal to
current
balance
--------------- --------------- -------------------------------------------------- -------------- -------------
UK business Retail 3.75 PD 1 Statistical 7-10 PD floor of
banking - other SME model built 0.03%
on internal
behavioural
data and
bureau
information.
Underlying
PiT
model is
calibrated to
the latest
observed PD.
An adjustment
is then
applied to
generate the
long run PD
based on
historical
observed
misalignment
of the
underlying
model.
-------------- -------------- -----
LGD 2 Two sets of models - one for secured and another 7-10
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
portion.
--------------- --------------- -------------------------------------------------- -------------- -------------
EAD 1 Statistical model using segmentation according to 7-10 EAD must at
limit and utilisation and estimation of least be
the undrawn exposure. equal to
current
balance
--------------- --------------- -------------------------------------------------- -------------- -------------
Hong Kong Retail 6.71 PD 2 Statistical > 10 PD floor of
HSBC personal - secured by model built 0.03%
residential mortgages on on internal
mortgages(2) immovable behavioural
property data and
non-SME bureau
information,
and
calibrated
to a long-run
default rate.
LGD 2 Statistical model based on estimate of loss > 10 LGD floor of
incurred over a recovery period derived from 10% at
historical portfolio
data with downturn LGD based on the worst level
observed default rate.
--------------- --------------- -------------------------------------------------- -------------- -------------
EAD 2 Rule-based calculation based on current balance > 10 EAD must at
which continues to be a conservative estimate least be
for EAD. equal to
current
balance
44 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 32: Material retail IRB risk rating systems
Applicable
Number of Model Pillar 1
material description Number of years regulatory
CRD IV asset RWA component and loss thresholds and
Portfolio class $bn Component model models methodology data(1) overlays
Hong Kong Retail 3.25 PD 1 Statistical > 10 PD floor of
HSBC credit - qualifying model built on 0.03%
cards revolving internal
behavioural
data and
bureau
information,
and calibrated
to a long-run
default rate.
-------------- -------------- ----
LGD 1 Statistical > 10
model based on
forecasting
the amount of
expected
losses.
Downturn LGD
derived
using data
from the
period with
the highest
default rate.
-------------- -------------- ---- --------------- -------------- -------------- --------------- --------------
EAD 1 Statistical > 10 EAD must at
model which least be equal
derives a to current
credit balance
utilisation
which is used
to determine
the EAD.
-------------- -------------- ---- --------------- -------------- -------------- --------------- --------------
Hong Kong Retail 1.44 PD 1 Statistical > 10 PD floor of
HSBC personal - other model built on 0.03%
instalment non-SME internal
loans behavioural
data and
bureau
information,
and calibrated
to a long-run
default rate.
-------------- -------------- ----
LGD 1 Statistical > 10
model based on
forecasting
the amount of
expected
future losses.
Downturn LGD
derived using
data from the
period with
the highest
default rate.
-------------- -------------- ---- --------------- -------------- -------------- --------------- --------------
EAD 1 Statistical > 10 EAD must at
model which least be equal
derives a to current
credit balance
conversion
factor to
determine the
proportion of
undrawn limit
to be added to
the balance at
observation.
-------------- -------------- ---- --------------- -------------- -------------- --------------- --------------
US Consumer Retail 5.02 PD 1 Statistical > 10 PD floor of
Lending first - secured by model built on 0.03%
lien(3) mortgages on internal
immovable behavioural
property data and
non-SME bureau
information,
and calibrated
to a long-run
default rate.
-------------- -------------- ----
LGD 1 Statistical > 10 LGD floor of
model based on 10% at
identifying portfolio
the main risk level;
drivers of 10% uplift on
loss and the total LGD
recovery and for first lien
grouping portfolio;
them into LGD floor at
homogeneous the segment
pools. level based on
Downturn LGD the value
is derived notified to
based on the the PRA and
peak default ranges from
rate observed circa
while 60% to circa
additional 98%
assumptions
and
estimations
are made on
incomplete
workouts.
-------------- -------------- ---- --------------- -------------- -------------- --------------- --------------
EAD 1 Rule-based > 10 EAD must at
calculation least be equal
based on to current
current balance
balance that
continues to
be a
conservative
estimate
for EAD.
-------------- -------------- ---- --------------- -------------- -------------- --------------- --------------
US Mortgage Retail 1.80 PD 1 Statistical > 10 PD floor of
Services first - secured by model built on 0.03%
lien(3) mortgages on internal
immovable behavioural
property data and
non-SME bureau
information,
and calibrated
to a long-run
default rate.
LGD 1 Statistical > 10 LGD floor of
model based on 10% at
identifying portfolio
the main risk level;
drivers of 10% uplift on
loss and the total LGD
recovery and for first lien
grouping portfolio;
them into LGD floor at
homogeneous the segment
pools. level based on
Downturn LGD the value
is derived notified to
based on the the PRA and
peak default ranges from
rate observed circa
while 60% to circa
additional 98%
assumptions
and
estimations
are made on
incomplete
workouts.
--------------- -------------- -------------- --------------- --------------
EAD 1 Rule-based > 10 EAD must at
calculation least be equal
based on to current
current balance
balance which
continues to
be a
conservative
estimate
for EAD.
HSBC Holdings plc Pillar 3 2016 45
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 32: Material retail IRB risk rating systems
Applicable
Number of Model Pillar 1
material description Number of years regulatory
CRD IV asset RWA component and loss thresholds and
Portfolio class $bn Component model models methodology data(1) overlays
US HSBC Retail 5.31 PD 1 Statistical > 10 PD floor of
Mortgage - secured by model built on 0.03%
Corporation mortgages on internal
first lien(3) immovable behavioural
property data and
non-SME bureau
information,
and calibrated
to a long-run
default rate.
-------------- -------------- ----
LGD 1 Statistical > 10 LGD floor of
model based on 10% at
identifying portfolio
the main risk level
drivers of
loss and
recovery and
grouping
them into
homogeneous
pools.
Downturn LGD
is derived
based on the
peak default
rate observed.
Additional
assumptions
and
estimations
are made on
incomplete
workouts.
-------------- -------------- ---- --------------- -------------- -------------- --------------- --------------
EAD 1 Rule-based > 10 EAD must at
calculation least be equal
based on to current
current balance
balance that
continues to
be a
conservative
estimate
for EAD.
-------------- -------------- ---- --------------- -------------- -------------- --------------- --------------
1 Defined as the number of years of historical data used in model development and estimation.
2 In 2016, the Hong Kong Monetary Authority ('HKMA') extended a 15% risk weight floor to all
residential mortgages.
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.
Within table 33, the RWAs and other metrics have decreased in
2016 in the UK and the US due to the increasing house prices in
most regions of the UK and the continued sale of assets and
improving house prices in the US. The extension of the
risk-weight floor to 15% for all residential mortgages in June
2016, not just those granted after 22 February 2013, increased the
RWAs and RWA density in Hong Kong.
Table 33: Retail IRB exposures secured by mortgages on immovable property (non-SME)
Exposure Average Average RWA
value PD LGD density RWAs
$bn % % % $bn
At 31 Dec 2016
Total Retail IRB exposures secured by mortgages on immovable
property (non-SME) 249.0 2.14 16.6 15 36.5
---------------------------------------------------------------- -------- ------- ------- -------- ----
- of which:
UK HSBC residential mortgages 83.4 1.30 10.9 4 3.7
Hong Kong residential mortgages 62.4 0.70 10.0 17 10.6
---------------------------------------------------------------- -------- ------- ------- -------- ----
US first lien residential mortgages 19.8 12.20 58.5 61 12.1
---------------------------------------------------------------- -------- ------- ------- -------- ----
At 31 Dec 2015
Total Retail IRB exposures secured by mortgages on immovable
property (non-SME) 275.4 2.78 18.1 22 60.0
---------------------------------------------------------------- -------- ------- ------- -------- ----
- of which:
UK HSBC residential mortgages 94.0 1.49 11.1 5 5.0
Hong Kong residential mortgages 60.4 0.76 10.0 15 9.0
---------------------------------------------------------------- -------- ------- ------- -------- ----
US first lien residential mortgages 34.2 12.66 52.0 112 38.2
---------------------------------------------------------------- -------- ------- ------- -------- ----
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 the HSBC brand
portfolios in the UK, the HSBC portfolios in Hong Kong and the
residential mortgage portfolios in the US.
The PD, LGD and EAD estimated values here were calculated to
compare with the reported actual values and have a different basis
of preparation to the estimates reported in table 33.
Within table 34, 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
presentation 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 HSBC residential mortgage portfolio, the estimated
values in table 34 for 2016 are based on a different default
criteria than in 2015. The inclusion of additional forbearance
criteria and specific provisions being raised as default events has
resulted in higher PD estimates and lower LGD estimates. The model
outputs include required regulatory downturn adjustments. In
conducting the back-testing, our UK HSBC residential mortgage LGD
model uses a recovery outcome period of 24 months starting at the
date of default. Actual LGD values decreased as a result of a
higher proportion of defaulted loans resulting in no loss and
improving house prices in most regions of the UK. Overall, UK
estimates in table 34 remain higher than calculated actual
values.
The Hong Kong estimated PD and LGD values in table 34 include
required stressed factors to reflect downturn conditions. The LGD
model for our Hong Kong HSBC residential mortgage portfolio uses a
recovery outcome period of 24 months starting at the date of
default. The estimates for our Hong Kong HSBC residential mortgage
LGD remain higher than the calculated actual values but below the
10% regulatory floor. The Hong
46 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
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 local regulator for approval and is expected to be
implemented during 2017.
The US estimates in table 34 include downturn adjustments and
model overlays agreed with the PRA. The LGD models for our Consumer
Lending and Mortgage Services portfolios use a recovery outcome
period of 30 months, and for HSBC Mortgage Corporation portfolio 36
months, reflecting the longer recovery process due to foreclosure
moratoria.
The LGD estimates and actual LGD values for our Consumer Lending
and Mortgage Services portfolios remained stable in 2016.
For the HSBC Mortgage Corporation portfolio, new models were
implemented in 2016 following approval from the PRA. The new models
provide a better assessment of risk for the current loan profile
and address the underestimation of loss inherent in the previous
LGD model. Actual LGD values decreased due to improving house
prices.
Table 34: IRB models - estimated and actual values (retail)
PD LGD EAD
------------------ ------------------ --------------------
Estimated Actuals Estimated Actuals Estimated Actuals
% % % % % %
----------------------------------------- --------- ------- --------- ------- --------- -------
2016
----------------------------------------- --------- ------- --------- ------- --------- ---------
UK
HSBC residential mortgage 0.50 0.35 10.53 1.09 0.34 0.31
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
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
HSBC Mortgage Corporation first lien 2.20 1.27 41.18 29.25 0.50 0.50
----------------------------------------- --------- ------- --------- ------- --------- -------
2015
----------------------------------------- --------- ------- --------- ------- --------- ---------
UK
HSBC residential mortgage 0.45 0.22 16.43 3.54 0.17 0.17
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
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
HSBC Mortgage Corporation first lien 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
----------------------------------------- --------- ------- --------- ------- --------- -------
HSBC Mortgage Corporation first lien 5.24 2.28 29.63 39.36 1.00 1.00
----------------------------------------- --------- ------- --------- ------- --------- -------
HSBC Holdings plc Pillar 3 2016 47
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 34: IRB models - estimated and actual values (retail) (continued)
PD LGD EAD
------------------ ------------------ --------------------
Estimated Actuals Estimated Actuals Estimated Actuals
% % % % % %
--------- ------- --------- ------- --------- -------
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
-----------------------------------------
HSBC Mortgage Corporation first lien 4.64 4.43 49.85 37.17 2.40 2.40
----------------------------------------- --------- ------- --------- ------- --------- -------
Model performance
Model validation is subject to global internal standards. The
standards are 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.
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.
Our Retail PD models are generally conservative. However, in the
case of mortgages, the sale of assets over recent years for our US
Consumer Lending and Mortgage Services portfolios means that the
average historical annual default rate is based on a different
profile of loans than current PD estimates.
Table 35: Wholesale IRB exposure - Back-testing of probability of default (PD) per portfolio(1)
a b c d e f g h i
----------- -------- ------------------------------------- -------- ---------- -------------- --------- --------- ----------
Number of
obligors
----------- --------------
of which:
new Average
External External External Arithmetic End Defaulted defaulted historical
rating rating rating Weighted average PD End of of obligors obligors annual
equivalent equivalent equivalent average by previous the in the in the default
Sovereigns PD range (S&P) (Moody's) (Fitch) PD % obligors % year year year year rate %
-----------
0.00 to
<0.15 AAA to A- Aaa to Baa1 AAA to BBB+ 0.02 0.05 60 60 - - -
-------- ----------- -----------
0.15 to
<0.25 BBB+ Baa2 BBB 0.22 0.22 8 11 - - -
-------- ----------- -----------
0.25 to
<0.50 BBB Baa3 BBB- 0.37 0.37 10 7 - - -
-------- ----------- -----------
0.50 to
<0.75 BBB- Baa3 BBB- 0.63 0.63 7 7 - - -
0.75 to
<2.50 BB+ to BB- Ba1 to B1 BB+ to B+ 2.01 1.58 19 25 - - -
-------- ----------- -----------
2.5 to
<10.00 B+ to B- B2 to Caa1 B to CCC+ 4.66 5.32 35 27 - - -
-------- ----------- ----------- ----------------------- -------- ---------- -------- ---- --------- --------- ----------
10.00 to
<100.00 CCC+ to C Caa1 to C CCC to C 20.27 21.07 14 16 - - 1.67
-------- ----------- ----------- ----------------------- -------- ---------- -------- ---- --------- --------- ----------
a b c d e f gh i
----------------- --------------------------------------- ----- ----- -------- ----
Banks
------ ----------------- ----------- ------------ ------------ ----- ----- --- --- ----
0.00 to <0.15 AAA to A- Aaa to Baa1 AAA to BBB+ 0.05 0.08 235 250 -- -
0.15 to <0.25 BBB+ Baa2 BBB 0.22 0.22 91 72 -- -
0.25 to <0.50 BBB Baa3 BBB- 0.37 0.37 37 59 -- -
0.50 to <0.75 BBB- Baa3 BBB- 0.63 0.63 64 68 -- -
0.75 to <2.50 BB+ to BB- Ba1 to B1 BB+ to B+ 1.16 1.36 139 122 -- -
2.5 to <10.00 B+ to B- B2 to Caa1 B to CCC+ 4.96 4.87 109 100 --0.29
----------------- ----------- ------------ ------------------- ----- ----- --- --- ----
10.00 to <100.00 CCC+ to C Caa1 to C CCC to C 11.38 11.55 29 32 --1.70
----------------- ----------- ------------ ------------------- ----- ----- --- --- ----
48 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
a b c d e f g h i
Corporates
----------- ----------- ----------- ----------- ------------ ----- ----- ------ ------ --- -----
0.00 to
<0.15 AAA to A- Aaa to Baa1 AAA to BBB+ 0.09 0.10 11,742 11,245 2 - 0.01
0.15 to
<0.25 BBB+ Baa2 BBB 0.22 0.22 11,003 10,904 28 1 0.13
0.25 to
<0.50 BBB Baa3 BBB- 0.37 0.37 12,384 12,183 48 1 0.28
0.50 to
<0.75 BBB- Baa3 BBB- 0.63 0.63 10,516 10,924 54 2 0.50
0.75 to
<2.50 BB+ to BB- Ba1 to B1 BB+ to B+ 1.39 1.47 36,308 35,588 416 31 1.03
2.5 to
<10.00 B+ to B- B2 to Caa1 B to CCC+ 4.39 4.43 13,419 13,488 437 21 3.06
----------- ----------- ----------- ------------------------ ----- ----- ------ ------ --- -----
10.00 to
<100.00 CCC+ to C Caa1 to C CCC to C 19.08 20.29 2,319 2,141 285 12 13.42
----------- ----------- ----------- ------------------------ ----- ----- ------ ------ --- -----
1 Data represents an annual view, analysed at 30 September.
Table 36: Retail IRB exposure - Back-testing of probability of default (PD) per portfolio(1)
a b d e f g h i
---------- ---------- --------- ---------- -------------------- --------- --------- ------------
Number of obligors
--------------------
of which:
Retail - new Average
Secured by Arithmetic Defaulted defaulted historical
real Weighted average PD End of obligors obligors annual
estate average by previous End of in the in the default
non-SME PD range PD obligors year the year year year rate
0.00 to < 0.15 0.06 0.06 454,384 472,033 196 3 0.03
0.15 to < 0.25 0.20 0.19 42,290 40,896 37 - 0.07
0.25 to < 0.50 0.39 0.40 78,127 76,119 154 - 0.28
0.50 to < 0.75 0.59 0.59 16,323 16,596 22 - 0.10
0.75 to < 2.50 1.27 1.32 105,008 70,068 967 2 1.10
2.50 to < 10.00 4.83 4.74 52,157 25,774 739 12 3.68
---------------------
10.00 to < 100.00 28.19 27.67 55,403 11,411 2,873 152 33.03
--------------------- --------- ---------- --------- --------- --------- --------- ----------
a b d e f g h i
Retail - qualifying revolving
----------------------------- ------------------ ----- ----- --------- --------- ------ -------
0.00 to < 0.15 0.07 0.07 3,081,238 3,212,010 1,556 94 0.05
0.15 to < 0.25 0.19 0.20 739,131 686,815 661 15 0.10
0.25 to < 0.50 0.36 0.35 577,288 601,986 1,265 18 0.19
0.50 to < 0.75 0.61 0.62 291,303 301,068 1,060 15 0.33
0.75 to < 2.50 1.35 1.33 649,838 657,683 5,519 80 0.79
2.50 to < 10.00 4.42 4.30 180,889 184,846 5,739 29 2.87
------------------------------------------------
10.00 to < 100.00 25.88 28.08 62,487 46,776 14,159 2 18.71
------------------------------------------------ ----- ----- --------- --------- ------ -----
a b d e f g h i
Retail - other non-SME
----------------------- ------------------ ----- ----- ------- ------- ----- --- -------
0.00 to < 0.15 0.09 0.09 113,178 150,991 142 6 0.13
0.15 to < 0.25 0.19 0.19 70,557 82,256 91 3 0.13
0.25 to < 0.50 0.34 0.36 135,970 149,246 339 65 0.28
0.50 to < 0.75 0.60 0.60 67,774 67,475 313 29 0.53
0.75 to < 2.50 1.36 1.37 146,702 145,343 1,171 122 1.14
2.50 to < 10.00 4.57 4.91 67,842 59,099 1,584 93 3.20
10.00 to < 100.00 25.26 26.44 20,318 12,085 3,722 9 19.94
------------------------------------------ ----- ----- ------- ------- ----- --- -----
a b d e f g h i
Retail - other SME
------------------- ------------------ ----- ----- ------- ------- ----- --- -------
0.00 to < 0.15 0.10 0.09 119,633 119,245 142 1 0.09
0.15 to < 0.25 0.20 0.20 72,127 79,047 239 4 0.27
0.25 to < 0.50 0.37 0.37 150,563 163,934 737 26 0.49
0.50 to < 0.75 0.60 0.60 124,371 124,797 998 22 0.84
0.75 to < 2.50 1.54 1.38 275,325 262,619 4,569 117 1.66
2.50 to < 10.00 4.81 4.73 155,368 133,616 6,953 62 4.27
--------------------------------------
10.00 to < 100.00 18.06 20.84 38,418 26,680 6,982 22 16.62
-------------------------------------- ----- ----- ------- ------- ----- --- -----
1 Data represents an annual view, analysed at 30 September.
HSBC Holdings plc Pillar 3 2016 49
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Counterparty credit risk
Counterparty credit risk management
CCR risk 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.
Three approaches may be used under CRD IV to calculate exposure
values for CCR: mark-to-market, 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:
-- 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 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. The only IMM site is London where
approximately 91% of the trade population falls under the IMM
approach.
From a risk management perspective, including daily monitoring
of credit limit utilisation, products not covered by IMM are
subject to conservative asset class add-on calculated or Repo VaR
outside of the IMM framework.
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 derivatives 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 trading
undertaken with the counterparty.
The models and methodologies used in the calculation of CCR are
approved by the Markets MOC. Models are subject to ongoing
monitoring and validation. Additionally, they are subject to
independent review at inception and annually thereafter.
Credit valuation adjustment
CRD IV introduced a regulatory capital charge to cover Credit
valuation adjustment ('CVA') risk, the risk of adverse moves in the
credit valuation adjustments 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. At least 96%
of collateral held as credit risk mitigation 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 252 of the Annual Report and Accounts 2016.
Credit ratings downgrade
A credit rating downgrade clause in a Master Agreement or a
credit rating downgrade threshold clause in a 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 2016, 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 $0.3bn (2015: $0.3bn) and for a two-notch downgrade was
$0.8bn (2015: $0.5bn).
50 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Counterparty credit risk exposures
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 62.3 36.1 0.5 22.0 0.7 121.6
--------------------------------------------- ---------
- central governments and central banks 5.0 4.1 - 3.0 0.2 12.3
- institutions 27.9 19.8 0.2 9.2 0.4 57.5
- corporates 29.4 12.2 0.3 9.8 0.1 51.8
------ ---- ---- -------- -------- -----
IRB foundation approach 5.0 - 0.5 - - 5.5
--------------------------------------------- ---------
- corporates 5.0 - 0.5 - - 5.5
------ ---- ---- -------- -------- -----
Standardised approach 6.5 0.7 2.1 0.1 0.7 10.1
--------------------------------------------- ---------
- central governments and central banks 5.9 - 1.4 - - 7.3
- institutions - - 0.2 - - 0.2
- corporates 0.6 0.7 0.5 0.1 0.7 2.6
------ ---- ---- -------- -------- -----
CVA advanced 2 - - - - -
CVA standardised 2 - - - - -
------ ---- ---- -------- -------- -------
CCP standardised 13.3 5.5 - 8.8 - 27.6
At 31 Dec 2016 87.1 42.3 3.1 30.9 1.4 164.8
--------------------------------------------- --------- ------ ---- ---- -------- -------- -----
By product
--------------------------------------------- --------- ------ ---- ---- -------- -------- -------
Derivatives (OTC and Exchange traded
derivatives) 58.9 33.8 1.6 21.5 1.2 117.0
SFTs 25.3 5.0 1.5 9.4 0.2 41.4
Other 1 2.9 3.5 - - - 6.4
CVA advanced 2 - - - - - -
CVA standardised 2 - - - - - -
------ ---- ---- -------- -------- -----
CCP default funds 3 - - - - - -
------ ---- ---- -------- -------- -----
At 31 Dec 2016 87.1 42.3 3.1 30.9 1.4 164.8
--------------------------------------------- --------- ------ ---- ---- -------- -------- -----
By exposure class
--------------------------------------------- --------- ------ ---- ---- -------- -------- -------
IRB advanced approach 68.7 34.3 0.2 24.8 1.2 129.2
- central governments and central banks 4.9 3.8 - 4.3 0.3 13.3
- institutions 31.2 17.8 0.2 10.4 0.8 60.4
- corporates 32.6 12.7 - 10.1 0.1 55.5
------ ---- ---- -------- -------- -----
IRB foundation approach 4.7 - 0.7 - - 5.4
- corporates 4.7 - 0.7 - - 5.4
------ ---- ---- -------- -------- -----
Standardised approach 4.7 0.4 1.5 0.3 2.2 9.1
- central governments and central banks 4.1 - - - - 4.1
- institutions - - 0.2 0.3 - 0.5
- corporates 0.6 0.4 1.3 - 2.2 4.5
------ ---- ---- -------- -------- -----
CVA advanced 2 - - - - - -
CVA standardised 2 - - - - - -
------ ---- ---- -------- -------- -----
CCP standardised 14.8 4.2 - 15.5 0.4 34.9
At 31 Dec 2015 92.9 38.9 2.4 40.6 3.8 178.6
--------------------------------------------- --------- ------ ---- ---- -------- -------- -----
By product
Derivatives (OTC and Exchange traded
derivatives) 60.9 31.2 2.3 28.8 3.4 126.6
SFTs 28.8 4.1 0.1 11.7 0.4 45.1
Other 1 3.2 3.6 - 0.1 - 6.9
CVA advanced 2 - - - - - -
CVA standardised 2 - - - - - -
------ ---- ---- -------- -------- -----
CCP default funds 3 - - - - - -
--------------------------------------------- --------- ------ ---- ---- -------- -------- -----
At 31 Dec 2015 92.9 38.9 2.4 40.6 3.8 178.6
--------------------------------------------- --------- ------ ---- ---- -------- -------- -----
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.
HSBC Holdings plc Pillar 3 2016 51
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Table 38: Counterparty credit risk - RWAs by exposure class, product and geographical region
RWAs
North Latin
Europe Asia MENA America America Total
Footnotes $bn $bn $bn $bn $bn $bn
By exposure class
------------------------------------------------ --------- ------ ---- ---- -------- -------- -------
IRB advanced approach 21.3 11.2 0.2 8.6 0.3 41.6
- central governments and central banks 0.9 0.2 - 0.5 0.1 1.7
- institutions 8.1 5.2 - 2.6 0.1 16.0
- corporates 12.3 5.8 0.2 5.5 0.1 23.9
------ ---- ---- -------- -------- -----
IRB foundation approach 1.7 - 0.2 - - 1.9
- corporates 1.7 - 0.2 - - 1.9
------ ---- ---- -------- -------- -----
Standardised approach 0.8 0.7 0.6 0.1 0.6 2.8
- central governments and central banks - - - - - -
- institutions 0.1 - 0.1 - - 0.2
- corporates 0.7 0.7 0.5 0.1 0.6 2.6
------ ---- ---- -------- -------- -----
CVA advanced 2 3.5 - - - - 3.5
CVA standardised 2 2.8 4.0 0.2 3.6 0.3 10.9
------ ---- ---- -------- -------- -----
CCP standardised 0.7 0.3 - 0.3 - 1.3
------ ---- ---- -------- -------- -----
At 31 Dec 2016 30.8 16.2 1.2 12.6 1.2 62.0
------------------------------------------------ --------- ------ ---- ---- -------- -------- -----
By product
------------------------------------------------ ---------
Derivatives (OTC and Exchange traded
derivatives) 18.2 10.6 1.0 6.6 0.9 37.3
SFTs 4.5 0.6 - 2.1 0.1 7.3
Other 1 1.4 0.9 - - - 2.3
CVA advanced 2 3.5 - - - - 3.5
CVA standardised 2 2.8 4.0 0.2 3.6 0.3 10.9
------ ---- ---- -------- -------- -----
CCP default funds 3 0.4 0.1 - 0.2 - 0.7
------------------------------------------------ --------- ------ ---- ---- -------- -------- -----
At 31 Dec 2016 30.8 16.2 1.2 12.5 1.3 62.0
------------------------------------------------ --------- ------ ---- ---- -------- -------- -----
By exposure class
------------------------------------------------ --------- ------ ---- ---- -------- -------- -------
IRB advanced approach 22.0 12.3 - 9.5 0.9 44.7
- central governments and central banks 0.5 0.2 - 0.3 0.3 1.3
- institutions 7.8 4.5 - 3.0 0.4 15.7
- corporates 13.7 7.6 - 6.2 0.2 27.7
------ ---- ---- -------- -------- -----
IRB foundation approach 1.6 - 0.5 - - 2.1
- corporates 1.6 - 0.5 - - 2.1
------ ---- ---- -------- -------- -----
Standardised approach 0.8 0.5 1.2 - 2.2 4.7
- central governments and central banks - - - - - -
- institutions - - 0.1 - - 0.1
- corporates 0.8 0.5 1.1 - 2.2 4.6
------ ---- ---- -------- -------- -----
CVA advanced 2 3.3 - - - - 3.3
CVA standardised 2 3.3 3.8 0.3 4.3 0.5 12.2
------ ---- ---- -------- -------- -----
CCP standardised 0.9 0.5 - 0.8 - 2.2
At 31 Dec 2015 31.9 17.1 2.0 14.6 3.6 69.2
------------------------------------------------ --------- ------ ---- ---- -------- -------- -----
By product
------------------------------------------------ ---------
Derivatives (OTC and Exchange traded
derivatives) 19.2 12.1 1.5 7.8 2.6 43.2
SFTs 3.8 0.4 0.1 2.2 0.5 7.0
Other 1 1.6 0.6 - - - 2.2
CVA advanced 2 3.3 - - - - 3.3
CVA standardised 2 3.3 3.8 0.4 4.2 0.5 12.2
------ ---- ---- -------- -------- -----
CCP default funds 3 0.7 0.2 - 0.4 - 1.3
------------------------------------------------ --------- ------ ---- ---- -------- -------- -----
At 31 Dec 2015 31.9 17.1 2.0 14.6 3.6 69.2
------------------------------------------------ --------- ------ ---- ---- -------- -------- -----
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.
52 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
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
CCP's 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
Group 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 exposures to the Securities Investment Conduits
('SICs'): Mazarin Funding Limited, Barion Funding Limited,
Malachite Funding Limited and we 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.
Group securitisation roles
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 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 securitisations
commonly known as synthetic securitisations by which the SPE writes
CDS protection for HSBC.
In 2015, HSBC issued a synthetic securitisation, comprising
drawn and undrawn seasoned corporate loans to relationship clients
with a portfolio maximum notional amount of $5bn. The significant
risk transfer for this synthetic securitisation is effected via an
SPE which has sold protection on a $0.3bn tranche. The protection
is collateralised from the proceeds of bonds issued by the SPE. The
SPE for this securitisation is consolidated for accounting purposes
but not for regulatory purposes.
HSBC as sponsor
We are sponsor to a number of types of securitisation entities,
details of which can be found in Note 38 of the Annual Report and
Accounts 2016 and the table below.
Entity description and nature of Accounting Regulatory
Entity exposure consolidation consolidation Regulatory treatment
Solitaire Asset-backed commercial paper ü ü Look through to risk weights of
('ABCP') conduit to which a underlying assets
first-loss letter of credit and
transaction-specific liquidity
facilities are provided
-------------------------------------
Barion Vehicle to which senior term funding ü X Exposures (including derivatives and
is provided liquidity facilities) are
risk-weighted as securitisation
positions
-------------------------------------
Malachite Vehicle to which senior term funding ü X
is provided
--------- ------------------------------------ -------------- -------------- -------------------------------------
Mazarin Vehicle to which senior term funding ü X
is provided
--------- ------------------------------------ -------------- --------------
Regency Multi-seller conduit to which senior ü X
liquidity facilities and
programme-wide credit enhancement
are provided
--------- ------------------------------------ -------------- -------------- -------------------------------------
HSBC Holdings plc Pillar 3 2016 53
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
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
and further details are provided on page 75 of the Annual Report
and Accounts 2016.
Valuation of securitisation positions
The valuation process of 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. Currently, there are no material
hedges in place and no credit risk mitigation is recognised on RWAs
for our retained securitisation or re-securitisation 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(g) and Note 39
respectively of the Annual Report and Accounts 2016.
We reassess the required consolidation 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 retain the
right but 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 on sales 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 the
measurement basis of the financial asset, either
the amortised cost or the fair value of the rights and
obligations retained by the entity.
Further disclosure of such transfers may be found in Note 16 of
the Annual Report and Accounts 2016.
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 our securitisation non-trading book
positions, we use the IRB approach, and within this principally the
RBM, with lesser amounts on IAA and SFM. We also use the
standardised approach for an immaterial amount of non-trading book
positions. Securitisation positions in the trading book are
overseen within Market Risk using the standardised approach. Our
securitisation and re-securitisation RWAs do not benefit from any
credit risk mitigation.
The IAA is limited to exposures arising from Regency Assets
Limited, mainly related to liquidity facilities and credit
enhancement. 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 also audited
periodically by Internal Audit and reviewed by the PRA.
There was $0.7bn (2015: $1.0bn) of unrealised losses on
Asset-backed securities ('ABS') in the year, also disclosed on page
106 of the Annual Report and Accounts 2016, which fully relates to
assets within SPEs that are consolidated for regulatory
purposes.
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 2015;
-- facilities are not subject to early amortisation provisions (2015: nil);
-- $4.7bn positions held as synthetic transactions
(2015: $4.7bn);
-- no assets awaiting securitisation (2015: nil);
-- total exposures include off-balance sheet exposure of $15.1bn (2015: $17.1bn), 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; and
-- no realised losses on securitisation asset disposals in the year (2015: nil).
Further details of our securitisation exposures may be found on
page 106 of the Annual Report and Accounts 2016.
54 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
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 1 3.2 - - (0.1) 3.1
Commercial mortgages 1 3.8 - - (0.2) 3.6
Leasing 0.1 - - (0.1) -
--------
Loans to corporates or SMEs 6.2 - - (1.3) 4.9
Consumer loans 0.5 - - 0.6 1.1
Trade receivables 2 20.4 - (3.0) (0.1) 17.3
Other assets - - - 0.8 0.8
---------------------------------- --------- -------- ------------- ---------- ----------- --------
Re-securitisations 1 10.2 (0.4) (2.5) (0.4) 6.9
---------------------------------- --------- -------- ------------- ---------- ----------- --------
2016 44.4 (0.4) (5.5) (0.8) 37.7
---------------------------------- --------- -------- ------------- ---------- ----------- --------
Aggregate amount of securitisation exposures
Residential mortgages 1 4.2 - - (1.0) 3.2
Commercial mortgages 1 4.2 - - (0.4) 3.8
Leasing 0.1 - - - 0.1
----
Loans to corporates or SMEs 1.1 4.7 - 0.4 6.2
Consumer loans 0.3 - - 0.2 0.5
Trade receivables 215.9 - 4.5 - 20.4
Re-securitisations 115.8 (0.4) (4.6) (0.6) 10.2
--------------------------------------------- ---- ---- ---- ---- ----
2015 41.6 4.3 (0.1) (1.4) 44.4
--------------------------------------------- ---- ---- ---- ---- ----
1 Residential and Commercial mortgages and re-securitisations principally include exposures
to Solitaire Funding Limited, Mazarin Funding Limited, Barion Funding Limited and Malachite
Funding Limited and restructured on-balance sheet assets. The pools primarily comprise the
senior tranches of retail mortgage backed securities, commercial mortgage backed securities,
auto ABS, credit card ABS, student loans, collateralised debt obligations and also include
bank subordinated debt.
2 Trade receivables largely relate to Regency Assets Limited and pools are senior with a maturity
of less than 10 years.
Table 40: Securitisation - asset values and impairments
2016 2015
Underlying
Underlying assets(1) assets(1)
--------------------- -------------------
Impaired Securitisation Securitisation
and past exposures Impaired and exposures
Total(3) due impairment Total past due impairment
Footnotes $bn $bn $bn $bn $bn $bn
------------------- --------- -------- ----------- -------------- ----- ------------ --------------
As originator 6.3 1.2 0.4 6.7 1.6 0.5
- residential
mortgages - - - 0.1 - -
- loans to
corporates and
SMEs 5.0 - - 5.0 - -
-
re-securitisations 2 1.3 1.2 0.4 1.6 1.6 0.5
-------- ----------- -------------- ----- ------------ --------------
As sponsor 22.1 0.1 0.1 30.8 0.1 0.1
- commercial
mortgages - - - 2.2 - -
- trade receivables 16.5 - - 18.7 - -
-
re-securitisations 2 5.6 0.1 0.1 9.9 0.1 0.1
------------------- --------- -------- ----------- -------------- ----- ------------ --------------
At 31 Dec 0.5 0.6
------------------- --------- -------- ----------- -------------- ----- ------------ --------------
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 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.
HSBC Holdings plc Pillar 3 2016 55
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Market risk
Overview of market risk in global businesses
Market risk is the risk that movements in market factors, such
as foreign exchange rates, interest rates, credit spreads, equity
prices and commodity prices, will reduce our income or the value of
our portfolios.
Exposure to market risk
Exposure to market risk is separated into two portfolios:
-- Trading portfolios comprise positions arising from market-making.
-- Non-trading portfolios comprise positions that primarily arise from the interest rate management
of our retail and commercial banking assets and liabilities, financial investments designated
as available-for-sale ('AFS') and
held to maturity, and exposures arising from our insurance
operations.
Where appropriate, we apply similar risk management policies and
measurement techniques to both trading and non-trading portfolios.
Our objective is to manage and control market risk exposures in
order to optimise return on risk while maintaining a market profile
consistent within our established risk appetite.
The nature of the hedging and risk mitigation strategies
performed across the Group corresponds to the market risk
management instruments available within each operating
jurisdiction. These strategies range from the use of traditional
market instruments, such as interest rate swaps, to more
sophisticated hedging strategies to address a combination of risk
factors arising at portfolio level. For a discussion on hedging
risk and monitoring the continuing effectiveness of hedges, refer
to page 201 of the Annual Report and Accounts 2016.
The table below reflects the components of capital requirement
under the standardised approach for market risk.
Table 41: Market risk under standardised approach
a
-----
RWA
$bn
Outright products
1 - interest rate risk (general and specific) 1.5
2 - equity risk (general and specific) 1.7
3 - foreign exchange risk 0.3
4 - commodity risk -
Options
5 - simplified approach -
6 - delta-plus method -
7 - scenario approach -
8 Securitisation 1.5
--------------------------------------------- ---
9 Total 5.0
--------------------------------------------- ---
Market risk governance
GB&M manages market risk, where majority of the total VaR of
HSBC (excluding insurance) and almost all trading VaR resides,
using risk limits approved by the Group Management Board ('GMB').
For a discussion on market risk governance refer to page 77 of the
Annual Report and Accounts 2016.
Market risk measures
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with our risk
appetite.
We use a range of tools to monitor and limit market risk
exposures including sensitivity analysis, VaR and stress
testing.
Sensitivity analysis
We use sensitivity measures to monitor the market risk positions
within each risk type. Sensitivity limits are set for portfolios,
products and risk types, with the depth of the market being one of
the principal factors in determining the level of limits set.
Value at risk
VaR is a technique that estimates the potential losses on risk
positions in the trading portfolio as a result of movements in
market rates and prices over a specified time horizon and to a
given level of confidence. The use of VaR is integrated into market
risk management and is calculated for all trading positions
regardless of how we capitalise those exposures.
Where there is not an approved internal model, we use the
appropriate local rules to capitalise exposures locally.
In addition, we calculate VaR for non-trading portfolios to have
a complete picture of risk. Our models are predominantly based on
historical simulation. VaR is calculated at a 99% confidence level
for a one-day holding period. Where we do not calculate VaR
explicitly, we use alternative tools as described in the stress
testing section below.
Our VaR models derive plausible future scenarios from past
series of recorded market rates and prices, taking into account
inter-relationships between different markets and rates such as
interest rates and foreign exchange rates. Our models use a mixed
approach when applying changes in market rates and prices:
-- Equity, credit and FX risk factors the potential movements are typically represented on a
relative return basis.
-- Interest rates, a mixed approach is used. Curve movements are typically absolute whereas volatilities
are on a relative return basis.
We use the past two years as the data set in our VaR models,
which is updated on a fortnightly basis, and these scenarios are
then applied to the market baselines and trading positions on a
daily basis. The models also incorporate the effect of option
features on the underlying exposures.
The valuation approach used in our models include:
-- non-linear instruments are valued using a full revaluation approach; and
-- linear instruments, such as bonds and swap, are valued using a sensitivity based approach.
The nature of the VaR models means that an increase in observed
market volatility will lead to an increase in VaR even without any
changes in the underlying positions.
56 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
VaR model limitations
Although a valuable guide to risk, VaR should always be viewed
in the context of its limitations, for example:
-- the use of historical data as a proxy for estimating future events may not encompass all potential
events, particularly those which are extreme in nature;
-- the use of a holding period assumes that all positions can be liquidated or the risks offset
during that period. This may not fully reflect the market risk arising at times of severe
illiquidity, when the holding period may be insufficient to liquidate or hedge all positions
fully;
-- the use of a 99% confidence level by definition does not take into account losses that might
occur beyond this level of confidence; and
-- VaR is calculated on the basis of exposures outstanding at close of business and therefore
does not necessarily reflect intra-day exposures.
==================================================================================================
Risk not in VaR framework
The Risks not in VaR ('RNIV') framework captures risks from
exposures in the HSBC trading book which are not captured well by
the VaR model. Our VaR model is designed to capture significant
basis risk such as CDS versus bond, asset swap spreads and
cross-currency basis. Other basis risks which are not completely
covered in VaR, such as the London interbank offered rate ('Libor')
tenor basis, are complemented by our RNIV calculations and are
integrated into our capital framework.
Risk factors are reviewed on a regular basis and either
incorporated directly in the VaR models, where possible, or
quantified through the VaR-based RNIV approach or a stress test
approach within the RNIV framework. The severity of the scenarios
is calibrated to be in line with the capital adequacy requirements.
The outcome of the VaR-based RNIV is included in the VaR
calculation and back-testing; a stressed VaR RNIV is also computed
for the risk factors considered in the VaR-based RNIV approach.
Stress-type RNIVs include a gap risk exposure measure to capture
risk on non-recourse margin loans and a de-peg risk measure to
capture risk to pegged and heavily managed currencies.
Back-testing
We routinely validate the accuracy of our VaR models by
back-testing them against both actual and hypothetical profit and
loss against the corresponding VaR numbers. Hypothetical profit and
loss excludes non-modelled items such as fees, commissions and
revenues of intra-day transactions.
The actual number of profits or losses in excess of VaR over
this period can therefore be used to gauge how well the models are
performing.
We back-test VaR at various levels which reflect a full legal
entity scope of HSBC, including entities that do not have local
permission to use VaR for regulatory purposes. Back-testing using
the regulatory hierarchy includes entities which have approval to
use VaR in the calculation of market risk regulatory capital
requirement.
HSBC submits separate back-testing results to regulators,
including the PRA and the European Central Bank, based on
applicable frequencies ranging from two business days after an
exception occurs, to quarterly submissions.
In terms of the CRD IV rules, VaR back-testing loss, and not
profit, exceptions count towards the multiplier determined by the
PRA the purposes of the capital requirement calculation for market
risk. The multiplier capital add-on does not get increased if there
are less than five loss exceptions.
Refer to the table MR4 below for a one-year history for VaR
back-testing exceptions against both actual and hypothetical profit
and loss.
In 2016, the PRA VaR approved entities experienced three profit
exceptions against actual profit and loss: the June exceptions,
driven by significant devaluations in sterling and the euro against
the US dollar resulting from the UK's referendum on EU membership
and the October exception, driven by certain cross- currency pair
spread tightening on a long position and the sterling depreciating
on short positions.
In 2016, the PRA VaR approved entities experienced two
backtesting exceptions against hypothetical profit and loss: a loss
exception in February, driven by Libor against overnight index
spread widening on long positions; and a profit exception in June,
based on the same driver described above in exceptions against
actual profit and loss.
There was no evidence of model errors or control failures.
The back-testing result excludes exceptions due from changes in
fair value adjustments.
HSBC Holdings plc Pillar 3 2016 57
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
[Please click on the following link to the PDF to view accompanying chart]
http://www.rns-pdf.londonstockexchange.com/rns/3771X_-2017-2-20.pdf
Chart: MR4: Comparison of VaR estimates with gains/losses
VaR back-testing exceptions against actual profit & loss
Actual profit and loss VaR w Back-testing profit exception
[Please click on the following link to the PDF to view accompanying chart]
http://www.rns-pdf.londonstockexchange.com/rns/3771X_-2017-2-20.pdf
VaR back-testing exceptions against hypothetical profit & loss
Hypothetical profit and loss VaR w Back-testing profit exception
Stress testing
Stress testing is an important procedure that is integrated into
our market risk management framework to evaluate the potential
impact on portfolio values of more extreme, although plausible,
events or movements in a set of financial variables. In such
scenarios, losses can be greater than those predicted by VaR
modelling.
Stress testing is implemented at legal entity, regional and
overall Group levels. A set of scenarios is used consistently
across all regions within the Group. Scenarios are tailored to
capture the relevant events or market movements at each level. The
risk appetite around potential stress losses for the Group is set
and monitored against referral limits.
Market risk reverse stress tests are undertaken on the premise
that there is a fixed loss. The stress testing process identifies
which scenarios lead to this loss. The rationale behind the reverse
stress test is to understand scenarios that are beyond normal
business settings and could have contagion and systemic
implications.
Stressed VaR and stress testing, together with reverse stress
testing and the management of gap risk, provide management with
insights regarding the 'tail risk' beyond VaR, for which HSBC's
appetite is limited.
The Market risk stress testing incorporates the historical and
hypothetical events. During 2016 we devised and ran stress
hypothetical scenarios to specific events including the UK's
European Union Referendum and the US elections.
58 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Market risk capital models
There are a number of measures which HSBC has permission to use
in calculating regulatory capital which are listed in table 42. For
regulatory purposes, the trading book comprises all positions in
CRD financial instruments and commodities which are held with
trading intent, which are taken with the intention of benefiting
from short-term gains or positions where it can be demonstrated
that they hedge positions in the trading book. Trading book
positions must either be free of any restrictive covenants on their
tradability or be capable of being hedged.
A CRD financial instrument is defined as any contract that gives
rise to both a financial asset to one party and a financial
liability or equity instrument to another party.
HSBC maintains a trading book policy which defines the minimum
requirements for trading book positions and the process for
classifying positions as trading or non-trading book. Positions in
the trading book are subject to market risk-based rules, i.e.
market risk capital, computed using regulatory approved models.
Otherwise, the market risk capital is calculated using the
Standardised approach.
If any of the policy criteria are not met, then the position is
categorised as a non-trading book exposure.
Table 42: Market risk models(1)
Confidence
Model component level Liquidity horizon Model description and methodology
VaR 99 % 10 day Uses most recent two years' history of daily returns to
determine a loss distribution. The
result is scaled, using the square root of 10, from one day to
provide an equivalent 10-day
loss.
=============== ========== ================= ================================================================
Stressed VaR 99 % 10 day Stressed VaR is calibrated to a one-year period of stress
observed in history.
=============== ========== ================= ================================================================
IRC 99.9 % 1 year Uses a multi-factor Gaussian Monte-Carlo simulation, which
includes product basis, concentration,
hedge mismatch, recovery rate and liquidity as part of the
simulation process. A minimum liquidity
horizon of three months is applied and is based on a combination
of factors, including issuer
type, currency and size of exposure.
=============== ========== ================= ================================================================
Options n/a n/a Uses a standard charge scenario approach based on a spot
volatility grid where, for each point
on the grid, there is a full revaluation of the portfolio. The
regulators prescribe the ranges
therefore there is no equivalence with confidence level and
liquidity horizon.
--------------- ---------- ----------------- ----------------------------------------------------------------
1 Non-proprietary details are available in the Financial Services Register on the PRA website.
Table 43: IMA values for trading portfolios
$m
-------
VaR (10 day 99%)
------------------------------- ------------- ---------
1 Maximum value 327.1
2 Average value 229.6
3 Minimum value 186.4
4 Period end 215.7
Stressed VaR (10 day 99%)
5 Maximum value 454.0
6 Average value 389.9
7 Minimum value 269.7
8 Period end 269.7
Incremental Risk Charge (99.9%)
9 Maximum value 1,100.7
10 Average value 787.0
11 Minimum value 697.3
12 Period end 705.6
------------------------------- ------------- -------
VaR
VaR used for regulatory purposes differs from VaR used for
management purpose with key differences listed below.
VaR Regulatory Management
Scope Regulatory approval (PRA) Broader population of trading and non-trading book positions
==================== ========================= ============================================================
Confidence interval 99% 99%
==================== ========================= ============================================================
Liquidity horizon 10 day 1 day
==================== ========================= ============================================================
Data set Past 2 years Past 2 years
-------------------- ------------------------- ------------------------------------------------------------
The trading books which received approval from the regulator to
be covered via an internal model are used to calculate VaR for
regulatory purposes. Regulatory VaR levels contribute to the
calculation of market risk RWAs.
The regulatory VaR table is based on the regulatory permissions
received, plus aggregated sites. This differs from the daily VaR
reported in the Annual Report and Accounts which shows a fully
diversified view used for internal risk management.
Stressed VaR
Stressed VaR is primarily used for regulatory capital purposes
and is integrated into the risk management process to ensure
prudent capital management. Stressed VaR complements other risk
measures by providing the potential losses under stressed market
conditions.
Stressed VaR modelling follows the same approach as our VaR risk
measure except for the following:
-- potential market movements employed for stressed VaR calculations are based on a continuous
one-year period of stress for the trading portfolio;
-- the choice of period changed from (January 2008 to December 2008) to (April 2008 to March
2009) in the second quarter of 2016 and is based on the assessment at the Group level of the
most volatile period in recent history;
-- it is calculated to a 99% confidence using a 10-day holding period; and
-- it based on an actual 10-day holding period whereas Regulatory VaR is based on a one-day holding
period scaled to 10 days.
HSBC Holdings plc Pillar 3 2016 59
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Incremental Risk Charge
The IRC measures the default and migration risk of issuers of
traded instruments.
IRC risk factors include credit migration, default, product
basis, concentration, hedge mismatch, recovery rate and liquidity.
The PDs are floored to reflect the lack of historical data on
defaults and a period of stress is used to calibrate the spread
changes for the relevant ratings. The IRC model is validated
quarterly by stressing key model parameters and reviewing the
response of the model.
The IRC is a stand-alone charge generating no diversification
benefit with other charges. We do not use weighted averages for
calculating the liquidity horizon for the IRC measure. IRC relies
on a range of liquidity horizons from three months, corresponding
to the regulatory floor, to one year. A wide range of criteria can
indicate the liquidity of a position. The liquidity horizon for the
IRC measure depends on a set of factors such as issuer features,
including rating, sector, geography and size of positions,
including product, maturity and concentration.
The IRC transition matrices are calibrated using transition and
default data published by three rating agencies (Standard &
Poor's, Moody's and Fitch Ratings) as the starting point, in
combination with internal rules for flooring. The average of the
three matrices is computed for each sector, ignoring zero
transition probabilities. The PDs are then floored: sovereign PDs
are consistent with IRB, while a 3bp floor is applied to
corporates' and banks' PDs.
The IRC correlation matrix is derived from historical CDS
spreads data, covering the latest two-year VaR period. The returns
estimation window is set equal to either three, or 12 months,
depending on the liquidity horizon of each obligor. First, each
obligor is mapped to six sector/rating categories; then the
correlation matrix is obtained by computing the arithmetic mean of
correlations for each category.
Prudent valuation adjustment
HSBC has documented policies and maintains systems and controls
for the calculation of Prudent Valuation Adjustment ('PVA').
Prudent value is an estimated conservative price with a 90% degree
of certainty that would be received to sell an asset or paid to
transfer a liability in orderly transactions occurring between
market participants at the balance sheet date. HSBC's methodology
addresses fair value uncertainties arising from a number of
sources; market price uncertainty, bid offer ('close out')
uncertainty, model risk, concentration, administrative cost, CVA
('unearned credit spread') and FFVA.
Structural foreign exchange exposures
Structural foreign exchange exposures represent net investments
in subsidiaries, branches and associates, the functional currencies
of which are currencies other than the US dollar. An entity's
functional currency is that of the primary economic environment in
which the entity operates.
Exchange differences on structural exposures are recognised in
'Other comprehensive income'. We use the US dollar as our
presentation currency in our consolidated financial statements
because the US dollar and currencies linked to it form the major
currency bloc in which we transact and fund our business. Our
consolidated balance sheet is, therefore, affected by exchange
differences between the US dollar and all the non-US dollar
functional currencies of underlying subsidiaries.
We hedge structural foreign exchange exposures only in limited
circumstances. Our structural foreign exchange exposures are
managed with the primary objective of ensuring, where practical,
that our consolidated capital ratios and the capital ratios of
individual banking subsidiaries are largely protected from the
effect of changes in exchange rates.
Details of our structural foreign exchange exposures are
provided in the Market risk section, on page 116 of the Annual
Report and Accounts 2016.
Interest rate risk in the banking book
Interest rate risk in the banking book arises principally from
mismatches between the future yield on assets and their funding
cost, as a result of interest rate changes. Analysis of this risk
is complicated by having to make assumptions on embedded
optionality within certain product areas such as the incidence of
mortgage prepayments, and from behavioural assumptions regarding
the economic duration of liabilities which are contractually
repayable on demand such as current accounts, and the repricing
behaviour of managed rate products. These assumptions around
behavioural features are captured in our interest rate risk
behaviouralisation framework, which is described below.
We aim, through our management of interest rate risk in the
banking book, to mitigate the effect of prospective interest rate
movements which could reduce future net interest income, while
balancing the cost of such hedging activities on the current net
revenue stream.
Our funds transfer pricing policies give rise to a two-stage
funds transfer pricing approach. For details, see page 76 of the
Annual Report and Accounts 2016.
The economic capital requirement for interest rate risk in the
banking book is measured using a two-step approach. For details,
see page 79 of the Annual Report and Accounts 2016.
Asset, Liability and Capital Management ('ALCM') is responsible
for measuring and controlling interest rate risk in the banking
book under the supervision of the RMM. Its primary responsibilities
are:
-- to define the rules governing the transfer of interest rate risk from the commercial bank
to Balance Sheet Management('BSM');
-- to ensure that all market interest rate risk that can be hedged is effectively transferred
from the global businesses to BSM; and
-- to define the rules and metrics for monitoring the residual interest rate risk in the global
businesses.
The different types of interest rate risk in the banking book
and the controls which the Group uses to quantify and limit its
exposure to these risks can be categorised as follows:
-- risk that is transferred to BSM and managed by BSM within a defined risk mandate;
-- risk that remains outside BSM because it cannot be hedged or which arises due to our behaviouralised
transfer pricing assumptions. This risk will be captured by our net interest income economic
value of equity ('EVE') sensitivity, and corresponding limits are part of our global and regional
risk appetite statement for non-trading interest rate risk. A typical example would be margin
compression created by unusually low rates in key currencies;
-- basis risk that is transferred to BSM when it can be hedged. Any residual basis risk remaining
in the global businesses is reported to Asset and Liability Management Committee ('ALCO').
A typical example would be a managed rate savings product transfer-priced using a Libor-based
interest rate curve; and
-- model risks that cannot be captured by net interest income or EVE sensitivity but are controlled
by our stress testing framework. A typical example would be prepayment risk on residential
mortgages or pipeline risk.
Details of the Group's monitoring of the sensitivity of
projected net interest income under varying interest rate scenarios
may be found on page 80 of the Annual Report and Accounts 2016.
60 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Interest rate risk behaviouralisation
Unlike liquidity risk, which is assessed on the basis of a very
severe stress scenario, interest rate risk in the banking book is
assessed and managed according to 'business-as-usual' conditions.
In many cases, the contractual profile of non-trading
assets/liabilities arising from assets/liabilities created outside
Markets or BSM does not reflect the behaviour observed.
Behaviouralisation is therefore used to assess the market
interest rate risk of assets/liabilities in the banking book and
this assessed market risk is transferred to BSM, in accordance with
the rules governing the transfer of interest rate risk from the
global businesses to BSM.
Behaviouralisation is applied in three key areas:
-- the assessed repricing frequency of managed rate balances;
-- the assessed duration of non-interest bearing balances, typically capital and current accounts;
and
-- the base case expected prepayment behaviour or pipeline take-up rate for fixed rate balances
with embedded optionality.
Interest rate behaviouralisation policies have to be formulated
in line with the Group's behaviouralisation policies and approved
at least annually by local ALCOs, regional ALCM teams and Group
ALCM, in conjunction with local, regional and Group market risk
monitoring teams.
The extent to which balances can be behaviouralised is driven
by:
-- the amount of the current balance that can be assessed as 'stable' under business-as-usual
conditions; and
-- for managed rate balances the historic market interest rate repricing behaviour observed;
or
-- for non-interest bearing balances the duration for which the balance is expected to remain
under business-as-usual conditions. This assessment is often driven by the re-investment tenors
available to BSM to neutralise the risk through the use of fixed rate government bonds or
interest rate derivatives, and for derivatives the availability of cash flow hedging capacity.
Balance Sheet Management
Effective governance across BSM is supported by the dual
reporting lines it has to the Chief Executive Officer of GB&M
and to the Group Treasurer. In each operating entity, BSM is
responsible for managing liquidity and funding under the
supervision of the local ALCO (which usually meets on a monthly
basis). It also manages the banking book interest rate positions
transferred to it within a Markets limit structure.
In executing the management of the liquidity risk on behalf of
ALCO, and managing the interest rate risk in the banking book
positions transferred to it, BSM invests in highly rated liquid
assets in line with the Group's liquid asset policy. The majority
of the liquidity is invested in central bank deposits and
government, supranational and agency securities with most of the
remainder held in short-term interbank and central bank loans.
Withdrawable central bank deposits are accounted for as cash
balances. Interbank loans, statutory central bank reserves and
loans to central banks are accounted for as loans and advances to
banks. BSM's holdings of securities are accounted for as AFS or, to
a lesser extent, held-to-maturity assets.
Statutory central bank reserves are not recognised as liquid
assets. The statutory reserves that would be released in line with
the Group's stressed customer deposit outflow assumptions are
reflected as stressed inflows.
BSM is permitted to use derivatives as part of its mandate to
manage interest rate risk. Derivative activity is predominantly
through the use of vanilla interest rate swaps which are part of
cash flow hedging and fair value hedging relationships.
Credit risk in BSM is predominantly limited to short-term bank
exposure created by interbank lending, exposure to central banks
and high-quality sovereigns, supranationals or agencies which
constitute the majority of BSM's liquidity portfolio. BSM does not
manage the structural credit risk of any Group entity balance
sheets.
BSM is permitted to enter into single name and index credit
derivatives activity, but it does so to manage credit risk on the
exposure specific to its securities portfolio in limited
circumstances only. The risk limits are extremely limited and
closely monitored. At 31 December 2016, BSM had no open credit
derivative index risk.
VaR is calculated on both trading and non-trading positions held
in BSM. It is calculated by applying the same methodology used for
the Markets business and utilised as a tool for market risk control
purposes.
BSM holds trading portfolio instruments in only very limited
circumstances. These positions and the associated VaR were not
significant during 2016.
Net interest income sensitivity
A principal part of our management of market risk in non-trading
portfolios is to monitor the sensitivity of projected net interest
income under varying interest rate scenarios (simulation
modelling). This monitoring is undertaken at an entity level by
local ALCOs.
Entities apply a combination of scenarios and assumptions
relevant to their local businesses, and standard scenarios which
are required throughout HSBC. The latter are consolidated to
illustrate the combined pro forma effect on our consolidated net
interest income.
Projected net interest income sensitivity figures represent the
effect of the pro forma movements in net interest income based on
the projected yield curve scenarios and the Group's current
interest rate risk profile. This effect, however, does not
incorporate actions which would probably be taken by BSM or in the
business units to mitigate the effect of interest rate risk. In
reality, BSM seeks proactively to change the interest rate risk
profile to minimise losses and optimise net revenues. The net
interest income sensitivity calculations assume that interest rates
of all maturities move by the same amount in the 'up-shock'
scenario. Rates are not assumed to become negative in the
'down-shock' scenario which may, in certain currencies, effectively
result in non-parallel shock. In addition, the net interest income
sensitivity calculations take account of the effect on net interest
income of anticipated differences in changes between interbank
interest rates and interest rates over which the entity has
discretion in terms of the timing and extent of rate changes.
HSBC Holdings plc Pillar 3 2016 61
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
Operational risk
Overview and objectives
Operational risk is the risk to achieving our strategy or
objectives as a result of inadequate or failed internal processes,
people and systems or from external events.
Operational risk is relevant to every aspect of our business. It
covers a wide spectrum of issues, in particular legal, compliance,
security and fraud. Losses arising from breaches of regulation and
law, unauthorised activities, error, omission,
inefficiency, fraud, systems failure or external events all fall
within the definition of operational risk.
We have historically experienced operational risk losses in the
following major categories:
-- possible mis-selling of products;
-- fraudulent and other external criminal activities;
-- breakdowns in processes/procedures due to human error, misjudgement or malice;
-- system failure or non-availability; and
-- breach of regulatory and/or legislative requirements.
Table 44: Operational risk RWAs
2016 2015
----------------- -------------------
Capital Capital
required RWAs required RWAs
Footnote $bn $bn $bn $bn
------------------------------------- -------- --------- ------ --------- ------
By global business
-------------------------------------
Retail Banking and Wealth Management 1 2.4 30.5 2.5 31.0
Commercial Banking 1 2.0 25.3 1.9 24.0
Global Banking and Markets 2.6 32.0 2.8 35.8
Global Private Banking 0.2 2.9 0.3 3.3
Corporate Centre 0.6 7.3 1.7 21.3
===================================== ========
At 31 Dec 7.8 98.0 9.2 115.4
------------------------------------- -------- --------- ------ --------- ------
By geographical region
Europe 2.5 30.9 2.8 34.9
Asia 2.9 36.6 3.8 47.1
Middle East and North Africa 0.6 7.5 0.5 6.2
North America 1.0 12.8 1.1 14.1
Latin America 0.8 10.2 1.0 13.1
===================================== ========
At 31 Dec 7.8 98.0 9.2 115.4
------------------------------------- -------- --------- ------ --------- ------
1 In the first half of 2015, a portfolio of customers was transferred from CMB to RBWM in Latin
America in order to better align the combined banking needs of the customers with our established
global businesses. Comparative data have been re-presented accordingly.
Requirements under CRD IV include a capital requirement for
operational risk, utilising three levels of sophistication as
stated on page 17. We have historically adopted, and currently use,
the standardised approach in determining our operational risk
capital requirements. Table 44 sets out our operational risk
capital requirements by region and global businesses. We use an
operational risk model for economic capital calculation
purposes.
During 2016, our operational risk profile continued to be
dominated by compliance risks as referred to in the 'Top and
emerging risks' section on page 64 and in the 'Regulatory
compliance risk management' section on page 81 of the Annual Report
and Accounts 2016. Operational risk losses in 2016 are lower than
in 2015, reflecting a reduction in losses incurred relating to
large legacy conduct-related events. Conduct-related costs included
in significant items are outlined on page 61.
The regulatory environment in which we operate is increasing the
cost of doing business and could reduce our future profitability.
The implementation of Global Standards remains one of the key
strategic priorities for the Group and is ongoing.
We recognise that operational risk losses can be incurred for a
wide variety of reasons, including rare but extreme events.
The objective of our operational risk management is to manage
and control operational risk in a cost-effective manner and within
our risk appetite, as defined by GMB.
Organisation and responsibilities
Responsibility for managing operational risk lies with HSBC's
staff.
HSBC's Operational Risk Management Framework ('ORMF') is our
overarching approach to managing operational risk, the purpose of
which is to:
-- identify and manage our operational risks in an effective manner;
-- remain within the Group's operational risk appetite, which helps the organisation understand
the level of risk it is willing to accept; and
-- drive forward-looking risk awareness and assist management focus during 2016.
Activity to strengthen our risk culture and better embed the use
of the ORMF was further implemented in 2016. In particular, the use
of the three lines of defence model.
The First Line of Defence owns the risk and is responsible for
identifying, recording, reporting, managing the risks and ensuring
that the right controls and assessments are in place to mitigate
these risks. The Second Line of Defence sets the policy and
guidelines for managing the risks and provides advice, guidance and
challenge to the First Line of Defence on effective risk
management. The Third Line of Defence is Internal Audit which
independently ensures we are managing risk effectively.
More details on our ORMF may be found on page 81 of the Annual
Report and Accounts 2016.
62 HSBC Holdings plc Pillar 3 2016
Capital and Risk Management Pillar 3 Disclosures at 31 December
2016
The Global Operational Risk Committee, which reports to RMM,
meets monthly to discuss key risk issues and review the effective
implementation of the ORMF.
Operational risk is organised as a specific risk discipline
within Global Risk. The Group Head of Operational Risk is
responsible for establishing and maintaining the ORMF, monitoring
the level of operational losses and the effectiveness of the
internal control environment supported by their Second Line of
Defence functions. The Group Head of Operational Risk is
accountable to the Group Chief Risk Officer in respect of this
element of the overall Enterprise Wide Risk Management
framework.
Measurement and monitoring
We have codified our ORMF in a high level standard, supplemented
by detailed policies. These policies explain our approach to
identifying, assessing, monitoring and controlling operational
risk, and give guidance on mitigating actions to be taken when
weaknesses are identified.
In 2016, we continued to enhance our ORMF policies and
procedures, and further embedded the use of the framework in the
management of the business.
Articulation of risk appetite for material operational risks
helps the business to understand the level of risk our organisation
is willing to take. Monitoring operational risk exposure against
risk appetite on a regular basis, and setting out our risk
acceptance process, drives risk awareness in a more forward-looking
manner. It assists management in determining whether further action
is required.
Risk Scenario Analysis across material legal entities provides a
top down, forward-looking assessment of risks to help determine
whether they are being effectively managed within our risk appetite
or whether further management action is required.
In each of our subsidiaries, business managers are responsible
for maintaining an appropriate level of internal control,
commensurate with the scale and nature of operations. They are
responsible for identifying and assessing risks, designing controls
and monitoring the effectiveness of these controls. The ORMF helps
managers to fulfil these responsibilities by defining a standard
risk assessment methodology and providing a tool for the systematic
reporting of operational loss data.
Operational risk and control assessment approach
Operational risk and control assessments are performed by
individual business units and functions. The risk and control
assessment process is designed to provide business areas and
functions with a forward-looking view of operational risks, an
assessment of the effectiveness of controls, and a tracking
mechanism for action plans so that they can proactively manage
operational risks within acceptable levels.
Appropriate means of mitigation and controls are considered.
These include:
-- making specific changes to strengthen the internal control environment; and
-- investigating whether cost-effective insurance cover is available to mitigate the risk.
Recording
We use a centralised database to record the results of our
operational risk management process. Operational risk and control
assessments, as described above, are input and maintained by
business units. Business management and Business Risk and Control
Managers monitor and follow up the progress of documented action
plans.
Operational risk loss reporting
To ensure that operational risk losses are consistently reported
and monitored at Group level, all Group companies are required to
report individual losses when the net loss is expected to exceed
$10,000 and to aggregate all other operational risk losses under
$10,000. Losses are entered into the Operational Risk IT system and
are reported to Governance on a monthly basis.
Other risks
Pension risk
We operate a number of pension plans throughout the world for
our employees. Our plans are either defined benefit or defined
contribution plans, which expose the Group to different types of
risks. We have a global pension risk management framework and
accompanying global policies on the management of these risks,
which is overseen by the Global Pensions Oversight Committee.
Details of our management of pension risk may be found in
'Pension risk management' on page 84 of the Annual Report and
Accounts 2016.
Non-trading book exposures in equities
At 31 December 2016, we had equity investments in the
non-trading book of $4.9bn (2015: $6.1bn). These consist of
investments held for the purposes shown in table 45.
Table 45: Non-trading book
equity investments
2016 2015
--------------------------------------- ---------------------------------------
Available for Designated at Available for Designated at
sale fair value Total sale fair value Total
Footnote $bn $bn $bn $bn $bn $bn
Strategic
investments 2.0 - 2.0 2.1 0.1 2.2
----------------
Private equity
investments 1.2 0.2 1.4 1.9 0.1 2.0
Business
facilitation 1 1.5 - 1.5 1.9 - 1.9
---------------- ---------- --------------- --------------- -----
At 31 Dec 4.7 0.2 4.9 5.9 0.2 6.1
---------------- ---------- --------------- --------------- ----- --------------- --------------- -----
1 Includes holdings in government-sponsored enterprises and local stock exchanges.
HSBC Holdings plc Pillar 3 2016 63
This information is provided by RNS
The company news service from the London Stock Exchange
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