Interim Report - 21 of 28

RNS Number : 9075L

HSBC Holdings PLC

16 August 2013

Capital

	Page	App¹	Tables	Page

Capital overview .........................................	182		Capital ratios .............................................................	182

Capital management .................................		192
Approach and policy .....................................		192
Stress testing ..................................................		192
Risks to capital ..............................................		192
Risk-weighted asset targets .............................		192
Capital generation .........................................		193

Capital measurement and allocation ......		193
Regulatory capital ..........................................		193
Pillar 1 capital requirements ..........................		193
Pillar 2 capital requirements ..........................		195
Pillar 3 disclosure requirements ......................		195

Risk-weighted assets .................................	182		RWAs by risk type .......................................................	182
			Market risk RWAs ........................................................	183
			RWAs by global businesses .........................................	183
			RWAs by geographical regions ...................................	183
Credit risk RWAs ...........................................	184		RWA movement by key driver - credit risk - IRB only .	184
Counterparty credit risk and market risk RWAs ...................................................................	184		RWA movement by key driver - counterparty credit risk - IRB only ..............................................	184
			RWA movement by key driver - market risk - internal model based ...........................................................	185
Operational risk RWAs ..................................	185

RWA movement by key driver - basis of preparation and supporting notes ........		195
Credit risk and counterparty credit risk drivers - definitions and quantification ..................		195
Market risk drivers - definitions and quantification .............................................		197

Movement in total regulatory capital in the first half of 2013 ...............................	185		Source and application of total regulatory capital .....	185

Capital structure ........................................	186		Composition of regulatory capital ..............................	186
			Regulatory impact of management actions ................	187
Basel III and CRD IV .....................................	187		Estimated effect of CRD IV end point rules applied to the 30 June 2013 position ......................................	188

Basis of preparation of the estimated effect of the CRD IV end point applied to the 30 June 2013 position ............................		197
Regulatory adjustments applied to core tier 1 in respect of amounts subject to CRD IV treatment ...................................................		197
Changes to capital requirements introduced by CRD IV ......................................................		200

Future developments .................................	189
Systemically important banks ........................	189
UK regulatory update .....................................	189
Regulatory capital buffers ..............................	189
RWA integrity ...............................................	190
Leverage ratio ...............................................	190
Structural banking reform ..............................	191

1. Appendix to Capital.

Our objective in the management of Group capital is to maintain appropriate levels of capital to support our business strategy and meet our regulatory requirements.

Capital highlights

· Core tier 1 capital ratio 12.7%, up from 12.3% at year-end 2012, as a result of capital generation and management actions.

· Our end point CET1 ratio 10.1%, up from 9.5% at year-end 2012, as a result of similar drivers.

Capital overview

In the first half of 2013, there were no material changes to our capital management policies.

Capital ratios

	At	At	At
	30 Jun	30 Jun	31 Dec
	2013	2012	2012
	%	%	%
Current regime
Core tier 1 ratio ........	12.7	11.3	12.3
Tier 1 ratio ...............	13.6	12.7	13.4
Total capital ratio .....	16.6	15.1	16.1

CRD IV
Common equity tier 1 ratio¹......................	10.1	n/a	9.5

For footnote, see page 191.

In March 2013, the Financial Policy Committee ('FPC') directed the Prudential Regulation Authority ('PRA') to ensure that by December 2013 major UK banks hold capital resources equivalent to at least 7% of their risk-weighted assets, using a Basel III definition of Common Equity Tier 1 ('CET1') but after taking deductions to reflect the FPC's assessment of expected future losses and future costs of conduct redress, and adjusting for a more prudent calculation of risk weights.

The PRA has now established a forward-looking Basel III end point CET1 target post-FPC adjustments for the Group. This effectively replaces the Capital Resources Floor that was set by the FSA towards the end of 2012.

Important elements of the new capital framework are yet to be clarified. There remains continued uncertainty around the precise amount of capital that banks will be required to hold. These
include the quantification and interaction of capital buffers and additional regulatory adjustments. Furthermore, there are a significant number of national discretions within the legislation which the UK has yet to implement, and a number of unpublished EBA technical and implementation standards.

We currently manage our capital position to meet an internal target CET1 ratio of greater than 10% on a Basel III end point basis and continue to keep this under review.

Our approach to managing Group capital is designed to ensure that we exceed current regulatory requirements, and are well placed to meet those expected in the future.

A summary of our policies and practices regarding capital management, measurement and allocation is provided in the Appendix to Capital on page 192.

Risk-weighted assets

RWAs by risk type

	At	At	At
	30 Jun	30 Jun	31 Dec
	2013	2012	2012
	US$m	US$m	US$m

Credit risk .................	867,014	931,724	898,416
Standardised approach ...............................	346,089	389,142	374,469
IRB foundation approach ...............	10,700	8,822	10,265
IRB advanced approach ...............	510,225	533,760	513,682

Counterparty credit risk ........................	48,581	49,535	48,319
Standardised approach².	3,460	2,880	2,645
IRB approach ............	45,121	46,655	45,674

Market risk ...............	70,906	54,281	54,944
Operational risk ........	118,263	124,356	122,264

Total .........................	1,104,764	1,159,896	1,123,943

Of which:
- run-off portfolios ...........................	120,314	170,023	145,689
- legacy credit in GB&M ...............	33,406	47,730	38,587
- US CML and Other .................	86,908	122,293	107,102
- Card and Retail Services³ ............	2,858	9,917	6,858

For footnotes, see page 191.

RWAs reduced by US$19bn to US$1,105bn in the first half of 2013, due to a number of management actions, partially offset by external and internal regulatory updates and business growth.

Market risk RWAs

	At	At	At
	30 Jun	30 Jun	31 Dec
	2013	2012	2012
	US$m	US$m	US$m

VAR ..........................	5,743	8,201	7,616
Stressed VAR .............	6,936	11,466	11,048
Incremental risk charge ...............................	24,142	4,613	11,062
Comprehensive risk measure .................	3,063	5,354	3,387
Other VAR and stressed VAR ..........	19,597	11,167	11,355

Internal model based ..	59,481	40,801	44,468
PRA standard rules ....	11,425	13,480	10,476

	70,906	54,281	54,944

RWAs by global businesses

	At	At	At
	30 Jun	30 Jun	31 Dec
	2013	2012	2012
	US$bn	US$bn	US$bn

Retail Banking and Wealth Management ..........	243.4	298.7	276.6
Commercial Banking .	385.9	397.8	397.0
Global Banking and Markets ...............................	429.2	412.9	403.1
Global Private Banking ...............................	21.8	21.8	21.7
Other ........................	24.5	28.7	25.5

	1,104.8	1,159.9	1,123.9

RWAs by geographical regions⁴

	At	At	At
	30 Jun	30 Jun	31 Dec
	2013	2012	2012
	US$bn	US$bn	US$bn

Total .........................	1,104.8	1,159.9	1,123.9

Europe ......................	305.4	329.5	314.7
Hong Kong ................	128.1	108.0	111.9
Rest of Asia-Pacific ...	285.0	303.2	302.2
MENA ......................	64.2	63.0	62.2
North America ..........	236.4	279.2	253.0
Latin America ...........	96.7	99.8	97.9

For footnote, see page 191.

Credit risk RWAs

Credit risk RWAs are calculated using three approaches as permitted by the PRA. For consolidated Group reporting we have adopted the advanced IRB approach for the majority of our business, with a small proportion on the foundation IRB approach and the remaining portfolios being on the standardised approach.

For portfolios treated under the standardised approach, credit risk RWAs reduced by US$28bn of which US$5bn was due to foreign exchange movements. The reduction was primarily due to the reclassification of Industrial Bank from an associate to a financial investment. As a result, the holding was removed from the regulatory consolidation for RWAs and the investment was deducted from capital, resulting in a reduction in RWAs of US$38.1bn. The reduction was partially offset by loan growth in BoCom, increasing RWAs by US$12bn.

Credit risk RWA movements by key driver for portfolios treated under the IRB approach are set out in the table below. For the basis of preparation, see the Appendix to Capital on page 197. The net reduction in IRB RWAs of US$3.0bn comprised a decrease of US$11.7bn due to foreign exchange movements partially offset by a combination of the factors outlined below.

· The Group implemented the PRA-determined 45% loss-given-default floor on sovereign exposures under the IRB approach, resulting in an RWA increase of US$19bn from external regulatory updates, affecting most regions.

· In Hong Kong and Rest of Asia-Pacific, corporate exposures were identified which did not meet the full modelling requirements and these were subsequently moved temporarily to the standardised approach, reducing RWAs on the IRB approach by US$3.7bn and US$1.6bn respectively, with a corresponding increase in standardised RWAs. This is shown under internal regulatory updates below.

· Disposals were a significant contributor to the reduction in RWAs during the period. In North America, in line with our objective to accelerate the run-off of the US CML portfolio, we completed the sale of a tranche of non-real estate and personal home-owner loans, reducing RWAs by US$8.2bn.

· Book growth was the key driver of RWA increases in Hong Kong and Rest of Asia-Pacific, with higher term lending and trade finance business. In North America, the book reductions were due to the continuing run-off of the US CML portfolio, partially offset by growth in commercial lending.

· Regulatory approval for a new exposure-at-default model for corporate customers in France reduced RWAs in Europe by US$1.8bn through lower credit conversion factors that are more reflective of historical experience.

· Book quality remained stable overall, with offsetting effects in different regions. In North America, changes in retail customer behaviour and characteristics in the US CML portfolio resulted in a reduction in RWAs, while further reductions were due to a favourable shift in corporate portfolio quality from targeting new business with higher quality customers. In Europe, a US$5.3bn management overlay was applied for corporate exposures, increasing RWAs in response to increased loss rates and in advance of model recalibration. This was partially offset by securitisation downgrades, moving exposures from RWAs to capital deductions.

RWA movement by key driver - credit risk - IRB only

	Europe	Hong Kong	Rest of Asia- Pacific	MENA	North America	Latin America	Total
	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn

RWAs at 1 January 2013 .......	150.7	70.2	92.1	12.6	187.1	11.2	523.9

Foreign exchange movement .	(6.0)	(0.1)	(3.1)	(0.4)	(1.6)	(0.5)	(11.7)
Acquisitions and disposals .......	(1.6)	-	-	-	(8.2)	-	(9.8)
Book size ...............................	2.0	5.6	4.8	0.1	(5.5)	(0.4)	6.6
Book quality ..........................	2.4	2.8	0.9	1.5	(7.1)	0.1	0.6
Model updates ........................	(1.8)	-	-	0.1	(0.2)	-	(1.9)
- portfolios moving onto IRB approach .................	-	-	-	-	-	-	-
- new/updated models ........	(1.8)	-	-	0.1	(0.2)	-	(1.9)

Methodology and policy ........	2.7	0.1	0.3	-	10.0	0.1	13.2
- internal regulatory updates .......................................	0.2	(3.8)	(2.2)	-	(0.2)	0.1	(5.9)
- external regulatory updates .......................................	2.5	3.9	2.5	-	10.2	-	19.1


Total RWA movement ..........	(2.3)	8.4	2.9	1.3	(12.6)	(0.7)	(3.0)

RWAs at 30 June 2013 ..........	148.4	78.6	95.0	13.9	174.5	10.5	520.9

Counterparty credit risk and market risk RWAs

Trading portfolio movements for the modelled approaches to market risk and counterparty credit risk ('CCR') RWAs are outlined in the tables below.

RWA movement by key driver - counterparty credit risk - IRB only

	US$bn

RWAs at 1 January 2013 ......................	45.7

Book size ..............................................	1.0
Book quality .........................................	(1.0)
Model updates .......................................	-
Methodology and policy .......................	(0.6)
- internal regulatory updates ............	(0.6)
- external regulatory updates ............	-


Total RWA movement .........................	(0.6)

RWAs at 30 June 2013 .........................	45.1

CCR RWAs remained stable during the first half of 2013, as the increases caused by large business volumes and higher fair values were substantially offset by improved portfolio quality.

Market risk RWAs increased by US$16bn during the first half of 2013 primarily due to model
and methodology changes in relation to the incremental risk charge ('IRC').

The IRC model was updated as part of an annual review, taking account of regulatory hypothetical portfolio exercise results. This led to the use of a stressed period for calibration of key input parameters along with an increase in granularity. These changes will capture the risk profile more accurately in a stressed environment. This has resulted in a one-time increase in IRC which is reflected in the current period. In order to reflect the changes in market condition we will continue to do periodic re-calibration as part of our model maintenance. In addition, there has been a methodology change in the basis of consolidation further increasing the IRC charge as a result of clarification of regulatory rules. The effect of these changes was partially offset by a reduction in VAR and stressed VAR due to a reduction in positions and changes in the shape of the trading portfolio.

Market risk RWA movements for portfolios not within scope of modelled approaches showed an increase of US$1.0bn. This was due to a number of small movements across multiple portfolios.

RWA movement by key driver - market risk -

internal model based

	US$bn

RWAs at 1 January 2013 ......................	44.5

Foreign exchange movement and other .	-
Movement in risk levels ........................	(4.6)
Model updates .......................................	17.6
Methodology and policy .......................	2.0
- internal regulatory updates ............	2.0
- external regulatory updates ............	-


Total RWA movement .........................	15.0

RWAs at 30 June 2013 .........................	59.5

Operational risk RWAs

The reduction during the first half of 2013 was due to the acceleration of the amortisation of the operational risk RWAs for the US CRS portfolio disposed of in May 2012.

Movement in total regulatory capital in the first half of 2013

Source and application of total regulatory capital

	Half-year to
	30 June 2013 US$m	30 June 2012 US$m	31 December 2012 US$m
Movement in total regulatory capital
Opening core tier 1 capital ...........................................................................	138,789	122,496	130,669
Contribution to core tier 1 capital from profit for the period ...................	10,297	10,011	7,816
- consolidated profits attributable to shareholders of the parent company	10,284	8,438	5,589
- removal of own credit spread net of tax .................................................	13	1,573	2,227

Net dividends ................................................................................................	(4,780)	(3,447)	(2,166)
- dividends ................................................................................................	(5,487)	(4,454)	(3,588)
- add back: shares issued in lieu of dividends ..............................................	707	1,007	1,422

Decrease in goodwill and intangible assets deducted .......................................	739	769	917
Ordinary shares issued ...................................................................................	169	263	331
Foreign currency translation differences .......................................................	(4,387)	(364)	1,353
Other, including regulatory adjustments ........................................................	63	941	(131)

Closing core tier 1 capital .......................................................................	140,890	130,669	138,789

Opening other tier 1 capital .........................................................................	12,259	17,094	16,265
Hybrid capital securities redeemed .............................................................	(1,239)	(776)	-
Unconsolidated investments .....................................................................	(1,519)	43	(4,163)
Other, including regulatory adjustments ....................................................	(249)	(96)	157

Closing tier 1 capital ................................................................................	150,142	146,934	151,048

Opening other tier 2 capital .........................................................................	29,758	30,744	28,790
Unconsolidated investments .....................................................................	6,932	34	230
Redeemed capital ......................................................................................	(457)	(877)	(606)
Other, including regulatory adjustments ....................................................	(2,925)	(1,111)	1,344

Closing total regulatory capital ..............................................................	183,450	175,724	180,806

We complied with the UK regulatory capital adequacy requirements throughout 2012 and the first half of 2013. Internal capital generation contributed US$5.5bn to core tier 1 capital, being profits
attributable to shareholders of the parent company after regulatory adjustment for own credit spread and net of dividends.

Capital structure

Composition of regulatory capital

	At 30 June	At 30 June	At 31 December
	2013	2012	2012
	US$m	US$m	US$m
Tier 1 capital
Shareholders' equity ...................................................................................	165,816	160,606	167,360
- shareholders' equity per balance sheet⁵ ...............................................	174,070	165,845	175,242
- preference share premium ..................................................................	(1,405)	(1,405)	(1,405)
- other equity instruments .....................................................................	(5,851)	(5,851)	(5,851)
- deconsolidation of special purpose entities⁶ ........................................	(998)	2,017	(626)

Non-controlling interests ...........................................................................	4,754	4,451	4,348
- non-controlling interests per balance sheet .........................................	8,291	7,921	7,887
- preference share non-controlling interests ..........................................	(2,395)	(2,412)	(2,428)
- non-controlling interests transferred to tier 2 capital .........................	(490)	(496)	(501)
- non-controlling interests in deconsolidated subsidiaries .......................	(652)	(562)	(610)

Regulatory adjustments to the accounting basis ..........................................	178	(3,308)	(2,437)
- unrealised losses on available-for-sale debt securities⁷ ..........................	2,354	1,208	1,223
- own credit spread ................................................................................	137	(2,115)	112
- defined benefit pension fund adjustment⁸ ............................................	70	(116)	(469)
- reserves arising from revaluation of property and unrealised gains on available-for-sale equities ....................................................................	(2,567)	(2,387)	(3,290)
- cash flow hedging reserve ...................................................................	184	102	(13)

Deductions .................................................................................................	(29,858)	(31,080)	(30,482)
- goodwill capitalised and intangible assets .............................................	(24,994)	(26,650)	(25,733)
- 50% of securitisation positions ...........................................................	(1,722)	(1,364)	(1,776)
- 50% of tax credit adjustment for expected losses ................................	134	145	111
- 50% of excess of expected losses over impairment allowances ...........	(3,276)	(3,211)	(3,084)

Core tier 1 capital ..................................................................................	140,890	130,669	138,789

Other tier 1 capital before deductions .........................................................	15,790	17,110	17,301
- preference share premium ..................................................................	1,405	1,405	1,405
- preference share non-controlling interests ..........................................	2,395	2,412	2,428
- hybrid capital securities ......................................................................	11,990	13,293	13,468

Deductions .................................................................................................	(6,538)	(845)	(5,042)
- unconsolidated investments⁹ ...............................................................	(6,672)	(990)	(5,153)
- 50% of tax credit adjustment for expected losses ................................	134	145	111


Tier 1 capital ...........................................................................................	150,142	146,934	151,048

Tier 2 capital
Total qualifying tier 2 capital before deductions .........................................	45,009	47,205	48,231
- reserves arising from revaluation of property and unrealised gains on available-for-sale equities ....................................................................	2,567	2,387	3,290
- collective impairment allowances .......................................................	2,799	2,551	2,717
- perpetual subordinated debt .................................................................	2,777	2,778	2,778
- term subordinated debt ........................................................................	36,566	39,189	39,146
- non-controlling interests in tier 2 capital ...........................................	300	300	300

Total deductions other than from tier 1 capital ..........................................	(11,701)	(18,415)	(18,473)
- unconsolidated investments⁹ ...............................................................	(6,672)	(13,834)	(13,604)
- 50% of securitisation positions ...........................................................	(1,722)	(1,364)	(1,776)
- 50% of excess of expected losses over impairment allowances ...........	(3,276)	(3,211)	(3,084)
- other deductions .................................................................................	(31)	(6)	(9)


Total regulatory capital .........................................................................	183,450	175,724	180,806

For footnotes, see page 191.

Regulatory impact of management actions

	At 31 December 2012
	Risk- weighted assets	Core tier 1 capital	Tier 1 capital	Total regulatory capital

Reported capital ratios before management actions ..............................		12.3%	13.4%	16.1%

Reported totals (US$m) .........................	1,123,943	138,789	151,048	180,806
Management actions completed in 2013 (US$m)
- dilution of our shareholding in Industrial Bank and the subsequent change in accounting treatment .......................................	(38,073)	981	(423)	(1,827)
- completion of the second tranche of the sale of Ping An .........................	-	553	4,637	7,984

Estimated total after management actions completed in 2013 (US$m)	1,085,870	140,323	155,262	186,963

Estimated capital ratios after management actions completed in 2013.		12.9%	14.3%	17.2%

Basel III and CRD IV

In June 2013, the European Commission published the final Regulation and Directive, known collectively as CRD IV, to give effect to the Basel III framework in the EU. This will come into effect on 1 January 2014.

In October 2012, the PRA wrote to large UK firms describing the disclosures it required them to make for capital resources on a first year transitional basis and for the leverage ratio on an end point basis under CRD IV. At 31 December 2012, our disclosures were based on the July 2011 draft version of the CRD IV text. In July 2013, the PRA provided updated instructions to prepare the 30 June 2013 disclosures based on the final CRD IV rules. Our disclosures may be found on our website, www.hsbc.com, as a Supplementary Regulatory Disclosure under Investor Relations.

Following publication of the final CRD IV rules and the PRA's setting of a forward-looking CET1 capital target, in order to manage our transition to Basel III under CRD IV, we set out information for investors on the possible effects of these rules on our capital position in the table overleaf: 'Estimated effect of CRD IV end point rules'. This table quantifies the known capital and RWA impacts at this time; however, these are subject to change. The PRA are consulting on the UK implementation of CRD IV and this should consider more than 50 national discretions, the quantification and interaction of capital buffers and other regulatory adjustments.

In addition, more than 100 Regulatory Technical Standards ('RTS') and Implementing Technical Standards ('ITS') have been issued by the EBA in draft form for consultation or are pending publication. This provides further uncertainty as to the precise capital and RWA requirements under CRD IV. The effects of these draft standards are not captured in our numbers. Consequently, there could be additional, potentially significant impacts on our capital position and RWAs.

The table overleaf presents a reconciliation of our reported core tier 1 capital and RWAs to the estimated CET1 end point capital and estimated RWAs at 30 June 2013, based on our interpretation of the final CRD IV regulation, as supplemented by PRA guidance. The position at 30 June 2013 is presented in comparison with that at 31 December 2012, where the estimated effect was based on the July 2011 draft CRD IV text.

The presentation of the 31 December 2012 position has changed from the presentation in the 2012 Annual Report and Accounts. Future planned management actions to mitigate the effect of capital deductions for non-significant (or 'immaterial') holdings of financial sector entities, as outlined in our 31 December 2012 disclosures, have been taken into account at 30 June 2013.

These management actions would eliminate the deduction for non-significant holdings in financial sector entities of US$3.9bn (2012: US$6bn), which is therefore no longer in the table. The effect of this would also increase the 10% and 15% thresholds for the items included in the 'deductions under threshold approach' and the deductions for 31 December 2012 are accordingly re-presented on that basis.

The extent of permissible netting of holdings in financial sector entities remains subject to clarification by regulators and may reduce the extent of management actions necessary. If additional netting were to be recognised in full, the residual management action could be reduced from US$3.9bn to around US$0.4bn.

Although CRD IV final rules have now been published, there remains substantial regulatory uncertainty around the application of the rules for deductions of holdings in the capital of financial sector entities (including those for immaterial holdings). The EBA recently launched a

consultation on the draft RTS for Own Funds - Part III', which introduces fundamentally new concepts in this area and has the potential to significantly increase the level of the capital deduction. This RTS is still in draft. We have responded to the consultation and are engaging in dialogue with regulators regarding its proposals.
Dependent upon the final standard, we will further consider what, if any, management actions will be possible to mitigate its effect, which may not be possible to achieve in full.

For the detailed basis of preparation, see the Appendix to Capital, page 197.

Estimated effect of CRD IV end point rules

	Final CRR at 30 June 2013		July 2011 text at 31 December 2012
	RWAs US$m	Capital US$m	RWAs US$m	Capital US$m

Reported core tier 1 capital under the current regime .............................		140,890		138,789

Regulatory adjustments applied to core tier 1 in respect of amounts subject to CRD IV treatment
Deconsolidation of insurance undertakings in reserves ........................		(6,042)		-
Investments in own shares through the holding of composite products of which HSBC is a component (exchange traded funds, derivatives, and index stock) .............................................................................		(844)		(1,322)
Surplus non-controlling interest disallowed in CET1 ...........................		(1,269)		(2,299)
Removal of filters under current regime:
- unrealised gains/(losses) on available-for-sale debt securities ............		(2,354)		(1,223)
- unrealised gains on available-for-sale equities...................................		1,283		2,088
- reserves arising from revaluation of property .................................		1,284		1,202
- defined benefit pension fund liabilities ............................................		(1,268)		(1,596)
Unrealised (gains) on available-for-sale exposures to central governments ......................................................................................		(1,509)		-
Excess of expected losses over impairment allowances deducted 100% from CET1 ............................................................		(3,276)		(3,084)
Removal of 50% of tax credit adjustment for expected losses .............		(134)		(111)
Securitisations positions risk-weighted under CRD IV ..........................		1,722		1,776
Deferred tax liabilities on intangibles ..................................................		274		267
Deferred tax assets that rely on future profitability (excluding those arising from temporary differences) ...............................................		(389)		(456)
Additional valuation adjustment (referred to as PVA) .........................		(2,260)		(1,720)
Debit valuation adjustment .................................................................		(683)		(372)
Deductions under threshold approach
Amount exceeding the 10% threshold:
- significant investments in CET1 capital of banks, financial institutions and insurance ............................................................		-		(6,097)
Amount in aggregate exceeding the 15% threshold:
- significant investments in CET1 capital of banks, financial institutions and insurance ............................................................		-		(2,029)
- deferred tax assets ......................................................................		-		(1,310)

Estimated CET1 capital under CRD IV .............................................		125,425		122,503

Reported total RWAs .............................................................................	1,104,764		1,123,943

Changes to capital requirements introduced by CRD IV
Credit valuation adjustment ................................................................	38,339		60,360
Counterparty credit risk (other than credit valuation adjustment) .......	25,769		25,682
Amounts in aggregate below 15% threshold and therefore subject to 250% risk weight .......................................................................	36,775		45,940
Securitisation positions and free deliveries risk-weighted under CRD IV ...........................................................................................................	43,438		44,513
Investments in commercial entities now risk-weighted .......................	405		393
Deferred tax assets moved to threshold deduction under CRD IV ........	(8,187)		(8,976)

Estimated total RWAs under CRD IV ..............................................	1,241,303		1,291,855

Estimated CET1 ratio ..........................................................................		10.1%		9.5%

Estimated regulatory impact of management actions
Management actions completed in 2013:
Dilution of our shareholding in Industrial Bank and the subsequent change in accounting treatment ......................................................	-	-	(38,880)	(2,150)
Completion of the second tranche of the disposal of Ping An ............	-	-	3,522	9,393

Estimated total after management actions completed in 2013 ...............	1,241,303	125,425	1,256,497	129,746

Estimated CET1 ratio after management actions completed in 2013 ...............................................................................................................		10.1%		10.3%

For footnote, see page 191.

In addition to the presentation of holdings in non-significant financial sector entities, there are changes to the following key items as a result of evolving interpretation of the CRD IV final rules.

· To effect the deduction of significant investments in insurance companies from CET1, we have removed from the Group consolidated reserves the contribution of our insurance business and calculated the amount of the insurance holding deduction, subject to threshold conditions, at cost. The regulatory treatment of insurance holdings is subject to on-going regulatory consideration.

· The amount of surplus non-controlling interests disallowed from CET1 capital of US$1.3bn has been estimated using our interpretation of CRD IV final rules.

· For available‑for‑sale debt instruments issued by central governments, we have derecognised unrealised gains of US$1.5bn from capital in the calculation of the end point capital position.

· On the capital requirements, the notable change compared with our 31 December 2012 estimates relates to the CVA risk charge, which has reduced to US$38.3bn mainly as a result of the introduction of exemptions under the final CRD IV rules.

For a detailed description of the items above, see the Appendix to Capital, page 197.

Future developments

Systemically important banks

In parallel with the Basel III proposals, the Basel Committee issued a consultative document in July 2011, 'Global systemically important banks: assessment methodology and the additional loss absorbency requirement'. In November 2011, it published its rules and the Financial Stability Board ('FSB') issued the initial list of global systemically important banks ('G-SIB's). This list, which included HSBC and 28 other major banks from around the world, will be re-assessed periodically through annual re-scoring of the individual banks and a triennial review of the methodology.

The requirements, initially for those banks identified in November 2014 as G-SIBs, will be phased in from 1 January 2016, becoming fully effective on 1 January 2019. National regulators have discretion to introduce higher thresholds than the minima. In November 2012, the FSB published a revised list of G-SIBs and their current assessment of the appropriate capital charge. HSBC was assigned an add-on of 2.5%.

UK regulatory update

In March 2013, the interim FPC announced a number of policy recommendations related to regulatory capital and risk-weighted assets, including that the PRA should ensure major UK banks hold capital resources equivalent to at least 7% CET1 post-FPC adjustments to reflect the FPC's estimate of expected future losses, an assessment of future costs of conduct redress and a more prudent calculation of risk-weights.

Relative to the above, the PRA, in June 2013, published that five of eight major UK banks and building societies had an aggregate shortfall in capital of approximately £27bn. However, HSBC met and exceeded this targeted requirement.

The PRA has now established a forward- looking Basel III end point CET1 target post-FPC adjustments for the Group. This is expressed as a minimum target CET1 ratio calculated on a Basel III end point basis, taking into account adjustments identified by the FPC.

Regulatory capital buffers

CRD IV, in addition to giving effect to the Basel Committee's surcharge for G-SIBs in the form of a Global Systemically Important Institution Buffer ('G-SIIB'), requires banks to maintain a number of additional capital buffers to be met by CET1 capital. These new capital requirements include a Capital Conservation Buffer designed to ensure banks build up capital outside periods of stress that can be drawn down when losses are incurred, currently set at 2.5%, and an institution specific Countercyclical Capital Buffer ('CCB'), to protect against future losses where unsustainable levels of leverage, debt or credit growth pose a systemic threat. Should a CCB be required, it is expected to be set in the range of 0‑2.5%. Additionally, CRD IV set out a Systemic Risk Buffer ('SRB') for the banking system as a whole to mitigate structural macro-prudential risk. If applicable, the SRB will be set at a minimum of 1%. The Capital Conservation Buffer and the CCB are to be phased in from 1 January 2016, becoming fully effective from 1 January 2019.

The capital buffer rules are subject to national transposition in the UK. The designated UK authority will have discretion to set the precise buffer rates above the CRD IV minima and to accelerate the timetable for their implementation. In the UK, the regulatory framework gives the FPC

directive powers over the CCB. However, it is not known if the FPC will be the authority responsible for setting the SRB and the G-SIIB. Until the requirements are transposed into national law and guidance is issued, there remains uncertainty on the interplay between these buffers, the exact buffer rate requirement and the ultimate impact on the Group.

Potential effect of regulatory proposals on HSBC's capital requirements

Given the above, it is uncertain what HSBC's final capital requirement will be. However, the Pillar 1 capital requirements that are quantified with some certainty to date are as follows:

CET1 requirements from 1 January 2019

Minimum CET1 4.5%

Capital conservation buffer 2.5%

G-SIIB buffer 2.5%

In December 2011, against the backdrop of eurozone instability, the EBA recommended that banks aim to reach a 9% EBA defined core tier 1 ratio by the end of June 2012. In July 2013, the EBA replaced the 2011 recapitalisation recommendation with a new measure on capital preservation. This requires banks to maintain a core tier 1 capital floor corresponding to a nominal level of 9% of RWAs at the end of June 2012. This equates for HSBC to US$104bn, compared with actual core tier 1 capital held of US$141bn at 30 June 2013. To monitor this on an on-going basis, banks will be required to submit additional reporting and capital plans in November 2013 to demonstrate that appropriate levels of capital are being preserved. The EBA have indicated they will review this recommendation by 31 December 2014.

We also hold additional capital in respect of Pillar 2, the process of internal capital adequacy assessment and supervisory review which leads to a final determination by the PRA of individual capital guidance and any capital planning buffer that may be required.

RWA integrity

In February 2013, the EBA published interim results of its investigation into RWAs in the banking book, aimed at identifying any material difference in RWA outcomes between banks and understanding the sources of such differences.

The report concluded that half of the differences between banks stem mainly from the approach for computing RWAs in use (standardised versus internal ratings based ('IRB') approaches), partly from the composition of each bank's loan portfolio. The remaining half stem from the IRB risk parameters applied, reflecting each bank's specific portfolio and risk management practices.

In July 2013, the Basel Committee published its findings on the 'Analysis of risk-weighted assets for credit risk in the banking book', reporting that while the majority of RWA variability arises from the underlying credit quality of a portfolio, differences also arise from banks' choices under the IRB approach. One of its recommendations to counteract this variance is the introduction of new or increased capital floors.

In parallel with the above and as part the review of the Basel capital framework, also in July 2013, the Basel Committee published a discussion paper on its findings, 'The regulatory framework: balancing risk sensitivity, simplicity and comparability'. The report recommended that banks disclose the results of applying their models to standardised hypothetical portfolios and that they disclose both modelled and standardised RWA calculations. Moreover, the Basel Committee again proposed additional floors as a potential tool to constrain the effect of variation in RWAs derived from internal model outputs, to provide additional comfort that banks' risks are adequately capitalised and to make capital ratios more comparable.

We are reviewing the merits of these proposals and have implemented additional measures to restore confidence in our RWA metrics. To this end, we fully support the recommendations of the FSB's Enhanced Disclosure Task Force that aims to assist greater understanding of the output of internal models through enhanced risk disclosures, which we have implemented.

Leverage ratio

The leverage ratio was introduced into the Basel III framework as a non-risk-based backstop limit, to supplement risk-based capital requirements. It aims to constrain the build-up of excess leverage in the banking sector, introducing additional safeguards against model risk and measurement errors. The ratio is a volume-based measure calculated as Basel III tier 1 capital divided by total on- and off-balance sheet exposures.

Basel III provided for a transitional period for the introduction of this ratio, comprising a supervisory monitoring period to start in 2011 and a parallel run period from January 2013 to January 2017. The parallel run will be used to assess whether the proposed ratio of 3% is appropriate, with a view to migrating to a Pillar 1 requirement from 1 January 2018.

In June 2013, the Basel Committee published its consultation paper on a revised Basel III leverage ratio framework, which sets out detailed public disclosure requirements with effect from 1 January 2015.

Under CRD IV, the final calibration and legislative proposal are expected to be determined on the basis of the EBA's assessment of the impact and effectiveness of the leverage ratio during a monitoring period from 1 January 2014 until 30 June 2016. The disclosure requirements will be developed and submitted to the European Commission by 30 June 2014.

Monitoring of leverage has been part of HSBC's regulatory reporting since December 2010. From 2012 year end, ahead of the Basel III disclosure timeline, UK banks were required by the PRA to disclose an estimated leverage ratio at year-end and mid-year, using a hybrid of Basel III and CRD IV rules. This may be found on our website, www.hsbc.com, as a Supplementary Regulatory Disclosure under Investor Relations.

Structural banking reform

In September 2011, the Independent Commission on Banking ('ICB') recommended heightened capital requirements for UK banking groups. The recommendations were scrutinised by the Parliamentary Commission on Banking Standards ('PCBS') which, in a report published in December 2012, gave effect to many of the ICB's recommendations. The UK government largely accepted the PCBS' recommendations with the exception of the higher leverage ratio; the government will continue with the Basel III minimum of 3% of total assets to avoid penalising lower risk assets in the ring-fenced bank.

On 19 June 2013, the PCBS published its final report setting out further recommendations on banking standards, including requesting the UK government reconsider setting the leverage ratio higher than the current 3% and giving the FPC responsibility for determining the ratio. On 8 July 2013, the UK government published its initial response to the final report accepting the PCBS's principal recommendations. Its position on a Basel III basis leverage ratio of 3% remained unchanged.

The government intends to enact the legislation by the end of this parliament in 2015 and to have reforms in place by 2019.

In May 2013, the European Commission issued their consultation on structural reform of the European banking sector. The consultation concentrates on the key attributes of the structural reform including recommendations on ring-fencing, focusing on isolating trading activities, rather than retail business as in the ICB recommendations.

We are monitoring all these proposals and their interaction as they develop.

Footnotes to Capital

1 The CET1 ratio presented for 31 December 2012 has changed from the presentation in the Annual Report and Accounts 2012 and is shown post future management action to mitigate capital deductions for non-significant holdings of financial sector entities.

2 The value represents marked-to-market method only.

3 Operational risk RWAs, under the standardised approach, are calculated using an average of the last three years' revenues. For business disposals, the operational risk RWAs are not removed immediately on disposal, but diminish over a period of time. The RWAs for the CRS business represent the remaining operational risk RWAs for the business.

4 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

5 Includes externally verified profits for the half-year to 30 June 2013.

6 Mainly comprises unrealised gains/losses on available-for-sale debt securities related to SPEs.

7 Under PRA rules, unrealised gains/losses on debt securities net of tax must be excluded from capital resources.

8 Under PRA rules, any defined benefit asset is derecognised and a defined benefit liability may be substituted with the additional funding that will be paid into the relevant schemes over the following five-year period.

9 Mainly comprise investments in insurance entities. Due to the expiry of the transitional provision, with effect from 1 January 2013, material insurance holding companies acquired prior to 20 July 2006 are deducted 50% from tier 1 and 50% from total capital for June 2013.

Appendix to Capital

Capital management and capital measurement and allocation

Capital management

Approach and policy

Our approach to capital management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment in which we operate. Pre-tax return on risk-weighted assets ('RoRWA') is an operational metric by which the global businesses are managed on a day-to-day basis. The metric combines return on equity and regulatory capital efficiency objectives. It is our objective to maintain a strong capital base to support the risks inherent in our business and invest in accordance with our six filters framework, exceeding both consolidated and local regulatory capital requirements at all times.

Our policy on capital management is underpinned by a capital management framework which enables us to manage our capital in a consistent manner. The framework, which is approved by the GMB annually, incorporates a number of different capital measures including market capitalisation, invested capital, economic capital and regulatory capital. Following the PRA setting a forward-looking CET1 target as a Basel III ratio, whilst also monitoring capital at a Group level on a Basel II basis, we set our internal target on an end point Basel III CET1 basis.

Capital measures

· market capitalisation is the stock market value of HSBC;

· invested capital is the equity capital invested in HSBC by our shareholders, adjusted for certain reserves and goodwill previously amortised or written off;

· economic capital is the internally calculated capital requirement which we deem necessary to support the risks to which we are exposed; and

· regulatory capital is the capital which we are required to hold in accordance with the rules established by the PRA for the consolidated Group and by our local regulators for individual Group companies.

Our assessment of capital adequacy is aligned to our assessment of risks, including: credit, market, operational, interest rate risk in the banking book, pension fund, insurance, structural foreign exchange risk and residual risks.

Stress testing

We incorporate stress testing in capital plans because it helps us to understand how sensitive the core assumptions in our capital plans are to the adverse effect of extreme but plausible events. Stress testing allows us to formulate our response and mitigate risk in advance of conditions exhibiting the identified stress scenarios. The actual market stresses which occurred throughout the financial system in recent years have been used to inform our capital planning process and enhance the stress scenarios we employ. In addition to our internal stress tests, others are undertaken, both at the request of regulators and by the regulators themselves using their prescribed assumptions. We take into account the results of all such regulatory stress testing when assessing our internal capital requirements.

Risks to capital

Outside the stress-testing framework, a list of top and emerging risks is regularly evaluated for their effect on the core tier 1 capital ratio. In addition, there are risks identified that are technically not within the scope of this list, but which still have the potential to affect our RWAs and/or capital position. These risks are also included in the evaluation of risks to capital. The downside or upside scenarios are assessed against our capital management objectives and mitigating actions are assigned as necessary. The responsibility for global capital allocation principles and decisions rests with the GMB. Through our internal governance processes, we seek to maintain discipline over our investment and capital allocation decisions and seek to ensure that returns on investment are adequate after taking into account capital costs. Our strategy is to allocate capital to businesses and entities on the basis of their ability to achieve established RoRWA objectives and their regulatory and economic capital requirements.

Risk-weighted asset targets

Top-down RWA targets are established for the global business lines, in accordance with the Group's strategic direction and risk appetite. As these targets are deployed to lower levels of management, action plans for implementation are developed. These may include growth strategies; active portfolio management; restructuring; business and/or customer-level reviews; RWA efficiency and optimisation initiatives and risk-mitigation. Our capital management process is articulated in the annual Group capital plan which is approved by the Board.

RWA targets are approved by the GMB on an annual basis and business performance against them is monitored through regular reporting to the Group ALCO. The management of capital deductions is also addressed in the RWA monitoring framework through additional notional charges for these items.

A range of analysis is employed in the RWA monitoring framework to identify the key drivers of movements in the position, such as book size and book quality. Particular attention is paid to identifying and segmenting items within the day-to-day control of the business and those items that are driven by changes in risk models or regulatory methodology.

Capital generation

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' own capital issuance and profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investment in subsidiaries.

Capital measurement and allocation

The PRA supervises HSBC on a consolidated basis and therefore 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 capital adequacy requirements. In 2013, we calculated capital at a Group level using the current Basel II framework as amended for CRD III, commonly known as Basel 2.5, and on an end-point Basel III basis.

Our policy and practice in capital measurement and allocation at Group level is underpinned by the Basel II rules and the Basel III proposals. However, local regulators are at different stages of implementation and some local reporting, notably in the US, is still on a Basel I basis. In most jurisdictions, non-banking financial subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.

Basel II is structured around three 'pillars': minimum capital requirements, supervisory review process and market discipline. The CRD implemented Basel II in the EU and, in the UK, the predecessor to the PRA then gave effect to the CRD by including the latter's requirements in its own rulebooks.

Regulatory capital

For regulatory purposes, our capital base is divided into three main categories, namely core tier 1, other tier 1 and tier 2, depending on the degree of permanency and loss absorbency exhibited.

· core tier 1 capital comprises shareholders' equity and related non-controlling interests. The book values of goodwill and intangible assets are deducted from core tier 1 capital and other regulatory adjustments are made for items reflected in shareholders' equity which are treated differently for the purposes of capital adequacy;

· qualifying capital instruments such as non-cumulative perpetual preference shares and hybrid capital securities are included in other tier 1 capital; and

· tier 2 capital comprises qualifying subordinated loan capital, related non-controlling interests, allowable collective impairment allowances and unrealised gains arising on the fair valuation of equity instruments held as available for sale. Tier 2 capital also includes reserves arising from the revaluation of properties.

To ensure the overall quality of the capital base, the PRA's rules set restrictions on the amount of hybrid capital instruments that can be included in tier 1 capital relative to core tier 1 capital, and limits overall tier 2 capital to no more than tier 1 capital.

Pillar 1 capital requirements

Pillar 1 covers the capital resources requirements for credit risk, market risk and operational risk. Credit risk includes counterparty credit risk and securitisation requirements. These requirements are expressed in terms of RWAs.

Credit risk capital requirements

Basel II applies three approaches of increasing sophistication to the calculation of Pillar 1 credit risk capital requirements. The most basic, the standardised approach, requires banks to use external credit ratings to determine the risk weightings applied to rated counterparties. Other counterparties are grouped into broad categories and standardised risk weightings are applied to these categories. The next level, the internal ratings-based ('IRB') foundation approach, allows banks to calculate their credit risk capital requirements on the basis of their internal assessment of a counterparty's probability of default ('PD'), but their estimates of exposure at default ('EAD') and loss given default ('LGD') are subject to standard supervisory parameters. Finally, the IRB advanced approach allows banks to use their own internal assessment in both determining PD and quantifying EAD and LGD.

The capital resources requirement, which is intended to cover unexpected losses, is derived from a formula specified in the regulatory rules which incorporates PD, LGD, EAD and other variables such as maturity and correlation. Expected losses under the IRB approaches are calculated by multiplying PD by EAD and LGD. Expected losses are deducted from capital to the extent that they exceed total accounting impairment allowances.

For credit risk we have adopted the IRB advanced approach for the majority of our portfolios, with the remainder on either IRB foundation or standardised approaches.

Under our Basel II rollout plans, a number of our Group companies and portfolios are in transition to advanced IRB approaches. In the first half of 2013, portfolios in most of Europe, Hong Kong, Rest of Asia-Pacific and North America were on advanced IRB approaches. Others remain on the standardised or foundation approaches under Basel II, pending definition of local regulations or model approval, or under exemptions from IRB treatment.

· Counterparty credit risk

CCR arises for OTC derivatives and securities financing transactions. It is calculated in both the trading and non-trading books and is the risk that the counterparty to a transaction may default before completing the satisfactory settlement of the transaction. Three approaches to calculating CCR and determining exposure values are defined by Basel II: standardised, mark-to-market and internal model method. These exposure values are used to determine capital requirements under one of the credit risk approaches: standardised, IRB foundation and IRB advanced.

We use the mark-to-market and internal model method approaches for CCR. Our longer-term aim is to migrate more positions from the mark-to-market to the internal model method approach.

· Securitisation

Securitisation positions are held in both the trading and non-trading books. For non-trading book securitisation positions, Basel II specifies two methods for calculating credit risk requirements, the standardised and the IRB approaches. Both rely on the mapping of rating agency credit ratings to risk weights, which range from 7% to 1,250%. Positions that would otherwise be weighted at 1,250% are deducted from capital.

Within the IRB approach, we use the ratings-based method for the majority of our non-trading book securitisation positions, and the internal assessment approach for unrated liquidity facilities and programme-wide enhancements for asset-backed securitisations.

The majority of securitisation positions in the trading book are treated for capital purposes as if they are held in the non-trading book under the standardised or IRB approaches. Other traded securitisation positions, known as correlation trading, are treated under an internal model approach approved by the PRA.

Market risk capital requirement

The market risk capital requirement is measured using internal market risk models where approved by the PRA, or the PRA's standard rules. Our internal market risk models comprise VAR, stressed VAR, incremental risk charge and correlation trading under the comprehensive risk measure.

Operational risk capital requirement

Basel II includes a capital requirement for operational risk, again utilising three levels of sophistication. The capital required under the basic indicator approach is a simple percentage of gross revenues, whereas under the standardised approach it is one of three different percentages of total operating income less insurance premiums allocated to each of eight defined business lines. Both these approaches use an average of the last three financial years' revenues. Finally, the advanced measurement approach uses banks' own statistical analysis and modelling of operational risk data to determine capital requirements. We have adopted the standardised approach in determining our operational risk capital requirements.

Pillar 2 capital requirements

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. A range of stress tests are applied to our base capital plan. These, coupled with our economic capital framework and other risk management practices, are used to assess our internal capital adequacy requirements.

The ICAAP is examined by the PRA as part of its supervisory review and evaluation process, which occurs periodically to enable the regulator to define the individual capital guidance or minimum capital requirements for HSBC and our capital planning buffer where required.

Pillar 3 disclosure requirements

Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make firms more transparent by requiring them to publish, at least annually, wide-ranging information on their risks and capital, and how these are managed. Our Pillar 3 Disclosures 2012 are published on our website, www.hsbc.com, under Investor Relations.

RWA movement by key driver - basis of preparation and supporting notes

Credit risk and counterparty credit risk drivers - definitions and quantification

Our business analysis of RWA movements splits the total movement in IRB RWAs into six drivers, described below. The first four relate to specific, identifiable and measurable changes. The remaining two, book size and book quality, are derived after accounting for movements in the first four specific drivers.

1. Foreign exchange movements

This is the movement in RWAs as a result of changes in the exchange rate between the functional currency of the HSBC company owning each portfolio and US dollars, being our presentation currency for consolidated reporting. 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.

2. Acquisitions and disposals

This is the movement in RWAs as a result of the disposal or acquisition of business operations. This can be whole businesses or parts of a business. The movement in RWAs is quantified on the basis of the credit risk exposures as at the end of the month preceding a disposal or following an acquisition.

3. Model updates

New/updated models

RWA movements arising from the implementation of new models and from changes to existing parameter models are allocated to this driver. This figure will also include changes which arise following review of modelling assumptions. Where a model recalibration reflects an update to more recent performance data, the resulting RWA changes are not assigned here, but instead reported under book quality.

RWA changes are estimated based on the impact assessments made in the testing phase prior to implementation. These values are used to simulate the effect of new or updated models on the portfolio at the point of implementation, assuming there were no major changes in the portfolio from the testing phase to implementation phase.

Portfolios moving onto IRB approach

Where a portfolio moves from the standardised approach to the IRB approach, the RWA movement by key driver statement shows the increase in IRB RWAs, but does not show the corresponding reduction in standardised approach RWAs as its scope is limited to IRB only.

The movement in RWAs is quantified at the date at which the IRB approach is applied, and not during the testing phase as with a new/updated model.

4. Methodology and policy

Internal regulatory updates

This captures the effect on RWAs resulting from changing the internal treatment of exposures. This may include, but is not limited to, identification of netting and credit risk mitigation.

External regulatory updates

This specifies the effect of additional or changing regulatory requirements. It includes, but is not limited to, regulatory-prescribed changes to the RWA calculation. The movement in RWAs is quantified by comparing the RWAs calculated for that portfolio under the old and the new requirements.

5. Book size

RWA movements attributed to this driver are those we would expect to experience for the given movement in exposure, as measured by EAD, assuming a stable risk profile. These RWA movements arise in the normal course of business, such as growth in credit exposures or reduction in book size from run-offs and write-offs.

The RWA movement is quantified as follows:

· RWA and EAD changes captured in the four drivers above are excluded from the total movements to create an adjusted movement in EAD and RWA for the period; and

· the average RWA to EAD percentage is calculated for the opening position and is applied to the adjusted movement in EAD. This results in an estimated book size RWA movement based on the assumption that the EAD to RWA percentage is constant throughout the period.

As the calculation relies on averaging, the output is dependent upon the degree of portfolio aggregation and the number of discrete time periods for which the calculation is undertaken. For each quarter in the period this calculation was performed for each HSBC company with an IRB portfolio, split by the main Basel categories of credit exposures, as described in the table below:

Basel categories of IRB credit exposures within HSBC
Central governments and central banks	Corporate foundation IRB	Qualifying revolving retail exposures
Institutions	Other advanced IRB	Retail SMEs
Corporate advanced IRB	Retail mortgages	Other retail

The total of the results is shown in book size within the RWA movement by key driver table.

6. Book quality

This represents RWA movements resulting from changes in the underlying credit quality of customers. These are caused by changes to IRB risk parameters which arise from actions such as, but not limited to, model recalibration, change in counterparty external rating, or the influence of new lending on the average quality of the book. The change in RWAs attributable to book quality is calculated as the balance of RWA movements after taking account of all the drivers described above.

The RWA movement by key driver statement includes only movements which are calculated under the IRB approach. Certain classes of credit risk exposure are treated as capital deductions and therefore reductions are not shown in this statement. If the treatment of a credit risk exposure changes from RWA to capital deduction in the period, then only the reduction in RWAs would appear in the RWA movement by key driver tables. In this instance, a reduction in RWAs does not necessarily indicate an improvement in the capital position.

Market risk drivers - definitions and quantification

The RWA movement by key driver for market risk combines the credit risk drivers 5 and 6 into a single driver called 'Movements in risk levels'. The market risk RWA driver called 'Foreign exchange movements and other' includes foreign exchange movements and additional items which cannot be reasonably assigned to any of the other drivers.

Basis of preparation of the estimated effect of the CRD IV end point applied to the 30 June 2013 position

The table on page 188 presents a reconciliation of our reported core tier 1 and RWA position at 30 June 2013 to the pro-forma estimated CET1 and estimated RWAs based on the Group's interpretation of the final CRD IV legislation supplemented by guidance provided by the PRA, as applicable. At 31 December 2012, we estimated the impact based on the July 2011 draft CRD IV text.

CRD IV was finalised in June 2013 and comes into effect on 1 January 2014. The final text of the legislation still contains material areas of uncertainty, as well as significant provisions for national discretion lending uncertainty to the PRA's ultimate interpretation and transposition of the rules in the UK. In addition, formal Regulatory Technical Standards ('RTS') and Implementing Technical Standards ('ITS') due for issue by the EBA are still to be drafted and finalised, leaving the CRD IV rules subject to significant interpretation.

Notwithstanding the uncertainty around a number of areas in the rules, our disclosures are based on our interpretation of the final CRD IV text. In relation to material areas of national discretion and following PRA guidance, we have applied the treatment that would lead to the lower capital ratio, as further detailed below.

As the transposition of the CRD IV rules in the UK is pending, we have not upgraded our models and systems used to calculate capital numbers in a CRD IV environment and as a consequence, the latter are subject to change.

Given the above, the final CRD IV impact on the Group's CET1 and RWAs may differ from our current estimates.

The detailed basis of preparation is described below for items that are different from our current treatment under Basel II. We have also outlined where the basis of preparation has changed from our 31 December 2012 disclosures.

We have changed the basis of presentation for individual non-significant holdings in financial sector entities that are, in aggregate, above 10% of the Group's CET1 capital, to take into account future management actions to mitigate the impact of such capital deductions. The EBA's publication on 23 May 2013 of their consultation on 'Regulatory Technical Standards for Own Funds - Part III' has a potentially significant impact on the amount of deductions categorised as indirect and synthetic holdings of financial sector entities (including own capital instruments) and the extent of the mitigation we will be able to undertake is uncertain at this stage.

Regulatory adjustments applied to core tier 1 in respect of amounts subject to CRD IV treatment

Deconsolidation of insurance undertakings in reserves: under current rules, the Group consolidated reserves include the post-acquisition reserves of our unconsolidated insurance businesses, which is then reflected in the value of the current deduction from Tier 1 and Tier 2 capital. The CRD IV rules do not consider such treatment and, pending further guidance, we have excluded the post acquisition reserves from both reserves and the deduction, leaving the investment to be deducted from CET1 valued at cost.

Investments in own shares through the holding of composite products of which HSBC is a component (exchange traded funds, derivatives, and index stock): the value of our holdings of own CET1 instruments, where it is not already deducted under IFRSs, is deducted from CET1. Under CRD IV, this deduction comprises not only direct but also indirect and synthetic, actual and contingent, banking and trading book gross long positions. Trading book positions are calculated net of short positions only where there is no counterparty credit risk on these short positions (this restriction does not apply to short index positions being offset against other index positions).

We have not recognised the benefit of non-index short positions, even where they are executed with central counterparties or are fully collateralised.

Under current rules, there is no regulatory adjustment made to the amounts already deducted under IFRS rules.

The EBA's publication of their consultation on 'Regulatory Technical Standards for Own Funds - Part III' on 23 May 2013 has a potentially significant impact on the amount of deductions categorised as 'holdings of own common equity instruments'. Given the stage of the consultation process and its ambiguous scope, it has not been possible to estimate the effect of the draft proposals on our capital position. However, we have responded to the consultation and are engaging in dialogue with regulators regarding these proposals.

Surplus non-controlling interest disallowed in CET1: non-controlling interests arising from the issue of common shares by our banking subsidiaries receive limited recognition. The excess over the minimum capital requirements of the relevant subsidiary including any additional requirements imposed under Pillar 2, calculated on the basis of its local reporting as well as its contribution to the parent consolidated requirements, is not allowable in the Group's CET1 to the extent it is attributable to minority shareholders.

The final rules require a calculation of the surplus to be undertaken at the sub-consolidated level for each relevant subsidiary. In addition, the calculation of the minimum requirements of the subsidiary changed to include any additional capital requirements imposed by the local regulations, to the extent those are to be met by CET1 capital.

In our estimates we have assumed that minority interests originated in subsidiaries outside the EU are treated on the same basis as those within the EU.

Under current rules, there is no regulatory restriction applied to these items.

On 23 May 2013, the EBA published their consultation on 'Regulatory Technical Standards for Own Funds - Part III' which could materially change the amount of this deduction. Given the stage of the consultation process we have not been able to reliably estimate the effect of these draft proposals on our capital position and they have not been included.

Unrealised gains/(losses) on available-for-sale debt securities: under CRD IV, there is no adjustment to remove from CET1 capital unrealised gains and losses on available-for-sale debt securities. The final CRD IV text includes a national discretion for competent authorities to retain a prudential filter for those unrealised gains or losses on exposures to central governments. The PRA has requested banks to include the impact of the most conservative approach where material. As of 30 June 2013, this would translate into a negative capital impact corresponding to the derecognition of unrealised gains of US$1.5bn.

Under current PRA rules, both unrealised gains and losses are removed from capital (net of tax).

Unrealised gains on available-for-sale equities and reserves arising from revaluation of property: there is no adjustment for unrealised gains and losses on reserves arising from the revaluation of property and on available-for-sale equities. Under current PRA rules, unrealised net gains on these items are included in tier 2 capital (net of deferred tax) and net losses are deducted from tier 1 capital.

Defined benefit pension fund liabilities: in line with current rules, the amount of retirement benefit assets as reported on the balance sheet is to be deducted from CET1. At 31 December 2012, the amount of retirement benefit liabilities as reported on the balance sheet was fully recognised in CET1.

Excess of expected losses over impairment allowances deducted 100% from CET1: the amount of excess of expected losses over impairment allowances is deducted 100% from CET1. Under current PRA rules, this amount is deducted 50% from core tier 1 and 50% from total capital.

Removal of 50% of tax credit adjustment for expected losses: the amount of expected losses in excess of impairment allowances that is deducted from CET1 capital is not reduced for any related tax effects. Under current PRA rules, any related tax credit offset is recognised 50% in core tier 1 and 50% in tier 1 capital.

Securitisation positions risk-weighted under CRD IV: securitisation positions that were deducted from core tier 1 under current rules have been included in RWAs at 1,250%.

Deferred tax liabilities on intangibles: the amount of intangible assets deducted from CET1 has been reduced by the related deferred tax liability. Under current rules, the goodwill and intangibles are deducted at their accounting value.

Deferred tax assets that rely on future profitability (excluding those arising from temporary differences): the deferred tax assets that rely on future profitability and do not arise from temporary differences are deducted 100% from CET1. The deferred tax assets that rely on future profitability and arise from temporary differences are subject to the separate threshold deduction approach detailed separately. Under current rules, these items receive a risk weighting of 100%.

Additional valuation adjustment (referred to as prudent valuation adjustment or 'PVA'): under current PRA rules, banks are required to comply with requirements for prudent and reliable valuation of any balance sheet position measured at market or fair value. Under CRD IV, all assets and derivatives measured at fair value are subject to specified standards for prudent valuation, covering uncertainty around the input factors into the fair value valuation models - namely, uncertainty around the mark-to-market of positions, model risk, valuation of less liquid positions and credit valuation adjustments.

Where the accounting fair value calculated under IFRSs is higher than the valuation amount resulting from the application of the prudential adjustments, this would result in an additional valuation adjustment or PVA deduction from CET1 capital.

Following PRA direction, we have included an estimate of the impact of PVA, on a tax-effected basis, although there is guidance outstanding following on-going consultation on related EBA draft regulatory technical standards. A new consultation paper was issued by EBA on 10 July 2013 and a Quantitative Impact Study was launched on 22 July 2013 to assess the effect of the proposals. Further clarity on the requirements following finalisation of the EBA process and discussions with our regulator could potentially change this figure.

Debit valuation adjustment ('DVA'): the amount of all fair value gains and losses on OTC derivative liabilities that results from changes to our own credit spread are derecognised from CET1.

Individually non-significant holdings in CET1 capital of financial sector entities in aggregate above 10% of HSBC CET1: under CRD IV, the investments in CET1 instruments of financial sector entities, where we have a holding of not more than 10% of the CET1 instruments issued by those entities, are deducted from CET1 to the extent the aggregate amount of such holdings exceeds 10% of our CET1 (calculated before any threshold deductions).

The estimated deduction shown at 31 December 2012 of US$6bn followed a strict interpretation of the draft July 2011 CRD IV rules and guidance provided by the PRA. This imposed a restriction on the netting of long and short positions held in the trading book, whereby the maturity of the short positions has to match the maturity of the long position, or have a residual maturity of no less than a year. At 30 June 2013, however we have been able to more precisely match our long and short positions under 1 year maturity and recognise the offset of short positions under one year which mature on exactly the same day as the long position. Consistent with our disclosure at 31 December 2012, we have taken the contractual maturity of derivative positions (without reflecting any early termination rights) and used the delta equivalent value for options.

Future management actions to mitigate the impact of capital deductions have also been taken into account as at June 2013.

The presentation has therefore changed from the Annual Report and Accounts 2012. The estimated impact of CRD IV takes into account future management actions to mitigate the impact of capital deductions in respect of non‑significant (or 'immaterial') holdings in CET1 capital of financial sector entities in aggregate above 10% of our CET1 (including the resulting separate effects on the items capture as 'deductions under threshold approach'). At 31 December 2012, the mitigation was presented as a separate line item.

Final CRD IV rules include new provisions in relation to the offsetting of short index holdings of capital instruments which under our interpretation would allow for increased offsetting of positions. The extent of permissible netting of holdings in financial sector entities remains however subject to clarification by regulators. If additional netting is recognised in full, the residual management action could be reduced from US$3.9bn to US$0.4bn.

The uncertainty in the rules has been increased by the publication of the EBA consultation paper 'Regulatory Technical Standards for Own Funds - Part III' on 23 May 2013. The extent of the application of those proposals is unclear and has the potential to very significantly change the amount of this deduction. Given the stage of the consultation process and its ambiguous scope, it has not been possible to estimate the effect of the draft proposals on our capital position. However, we have responded to the consultation and are engaging with regulators regarding its proposals.

Deductions under threshold approach: under CRD IV, where we have a holding of more than 10% of the CET1 instruments issued by banks, financial institutions and insurance entities which is not part of our regulatory consolidation, that holding is subject to a threshold deduction approach. Under current rules, these exposures are deducted 50% from tier 1 capital and 50% from total capital, except for certain insurance holdings that met the requirements under the transitional provision of the current rules and until 31 December 2012 that were allowed to be deducted 100% from total capital.

Deferred tax assets that rely on the future profitability of the bank to be realised and which arise from temporary differences are also subject to this threshold deduction approach. Under current rules, these assets would be subject to 100% risk weighting.

Under CRD IV, the amount of such deferred tax assets and significant investments which individually and in aggregate exceed 10% and 15%, respectively, of our CET1 are fully deducted from CET1 capital. Amounts falling below the 10% and 15% thresholds are risk-weighted at 250%.

Changes to capital requirements introduced by CRD IV

Credit valuation adjustment ('CVA') risk: introduced as a new requirement under CRD IV rules, this is a capital charge to cover the risk of mark-to-market losses on expected counterparty risk, and is referred to as a regulatory CVA risk capital charge.

Where we have both specific risk VAR approval and internal model method 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. We have estimated our regulatory CVA risk capital charge calculated on a full range of OTC derivative counterparties on the basis of the final CRD IV text, which exempts from the calculation of the CVA risk capital charge certain corporates, intra-Group transactions, retirement benefits pension funds and specific sovereign bodies. At 31 December 2012, we estimated our regulatory CVA risk capital charge based on the draft July 2011 CRD IV text, without any exemptions.

We have now identified the counterparties falling under this exemption on a best-endeavours basis. We have included certain corporate counterparties that we believe will be above the clearing threshold although the process for confirming the status of these companies is yet to be concluded. We have also exempted applicable sovereigns.

Counterparty credit risk (other than credit valuation adjustment): the additional requirements introduced by CRD IV and included in the CCR charge include the increase in the asset value correlation multiplier for financial counterparties, additional requirements for collateralised counterparties, margin period of risk and new requirements for exposures to central clearing counterparties ('CCPs').

In estimating the capital requirements for exposures to CCPs, we have assumed that our CCPs in major jurisdictions are 'qualifying' under the requirements of CRD IV, although this will ultimately depend on confirmation from the competent regulatory authority. Where we do not have full data disclosed for a given CCP, we have assumed full deduction of default fund exposures.

Amounts in aggregate below 15% threshold and therefore subject to 250% risk weight: as explained above, items that fall under the threshold approach treatment under CRD IV, and which are below the 10% and 15% thresholds, are risk-weighted at 250%.

Securitisation positions and free deliveries risk-weighted under CRD IV: securitisation positions which were deducted 50% from core tier 1 and 50% from total capital, and free deliveries that were deducted from total capital under current rules, are now included in RWAs at 1,250%.

Investment in commercial entities now risk-weighted: under CRD IV, investments in commercial entities that are non-qualifying holdings are risk-weighted. These were deducted under the current rules.

Deferred tax assets moved to threshold approach or deduction under CRD IV: deferred tax assets, which were risk-weighted at 100% under the standardised approach under current rules, are treated as a capital deduction from CET1 to the extent they rely on the future profitability of the bank to be realised. Those that do not rely on future profitability continue to be risk-weighted.

This information is provided by RNS

The company news service from the London Stock Exchange

END

IR NKADPBBKDPFD

Companies

HSBC Holdings (HSBA)

Friday, 10th May 2024

COMPANIES COVERED:

RMV MTC SFOR

Rightmove slumps as high mortgage costs continue to drag on sentiment, Mothercare falls amidst slowing sales but S4 Capital jumps higher despite market woes as promises of a better second half lend support.

Full Archive

UK 100

Latest directors dealings

14 hours ago Mattioli Woods
15 hours ago Morgan Advanced Materials
15 hours ago Capita
15 hours ago Judges Scientific
15 hours ago Me Group International

All directors dealings today