HSBC : Capital and Risk Management Pillar 3 Disclosures at 31 December 2016 (105-page PDF 709KB)

HSBC Holdings plc‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌

Page

Page

Tables 2

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

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

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

1. Additional CRD IV and BCBS tables 66

2. Simplified organisation chart for regulatory purposes 98

3. Asset encumbrance 99

4. Summary of disclosures withheld 100

Other Information

Abbreviations 101

Cautionary statement regarding forward-looking statements 103

Contacts 103

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.

1 Reconciliation of balance sheets - financial accounting to

Page

33 Retail IRB exposures secured by mortgages on immovable

Page

regulatory scope of consolidation 6

1. Principal entities with a different regulatory and accounting

   scope of consolidation 10

2. Mapping of financial statement categories with regulatory

   risk categories 11

3. Main sources of differences between regulatory exposure

values and carrying values in financial statements 12

property (non-SME) 46

1. IRB models - estimated and actual values (retail) 47

2. Wholesale IRB exposure - Back-testing of probability of

   default (PD) per portfolio¹ 48

3. Retail IRB exposure - Back-testing of probability of default

   (PD) per portfolio¹ 49

4. Counterparty credit risk exposure - by exposure class,

exposures 31

1. Breakdown of renegotiated exposures between impaired and

   non-impaired exposures 32

2. Amount of impaired exposures and related allowances,

   broken down by geographical region 32

3. Movement in specific credit risk adjustments by industry and geographical region 33

24 Credit risk mitigation techniques - overview 35

1. Standardised approach - credit risk exposure and Credit Risk Mitigation (CRM) effects 35

2. Standardised approach - exposures by asset classes and risk

   weights 36

3. IRB - Effect on RWA of credit derivatives used as CRM

   techniques 36

4. Credit derivatives exposures 37

29 Wholesale IRB credit risk models 40

30 IRB models - estimated and actual values (wholesale)¹ 41

1. IRB models - corporate PD models - performance by CRR

   grade 41

2. Material retail IRB risk rating systems 44

54 Changes in stock of defaulted loans and debt securities 88

1. IRB - Credit risk exposures by portfolio and PD range 88

2. Specialised lending - Slotting only 92

3. 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

62 Exposures to central counterparties 94

63 Securitisation exposures in the non-trading book 94

64 Securitisation exposures in the trading book 95

1. Securitisation exposures in the non-trading book and associated regulatory capital requirements - bank acting as

   originator or as sponsor 95

2. Securitisation exposures in the non-trading book and

associated capital requirements - bank acting as investor 96

67 Asset encumbrance 99

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.

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.

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')

  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

  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