HSBC 2006 Annual Report Download - page 245

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Capital management and allocation
Capital management
(Audited)
It is HSBC’s policy to maintain a strong capital base
to support the development of its business and to
meet regulatory capital requirements at all times. In
addition, the level of capital held by HSBC Holdings
and other major subsidiaries, particularly HSBC
Finance, is determined by its rating targets. HSBC
currently uses a benchmark minimum tier 1 capital
ratio of 8.25 per cent for the purposes of its long-
term capital planning. HSBC recognises the impact
on shareholder returns of the level of equity capital
employed within HSBC and seeks to maintain a
prudent balance between the advantages and
flexibility afforded by a strong capital position and
the higher returns on equity possible with greater
leverage.
An annual Group capital plan is prepared and
approved by the Board with the objective of
maintaining both the optimal amount of capital and
the mix between the different components of capital.
The Group’s policy is to hold capital in a range of
different forms and from diverse sources and all
capital raising is agreed with major subsidiaries as
part of their individual and the Group’s capital
management process. Major subsidiaries would
usually raise their own non-equity tier 1 capital and
subordinated debt in accordance with the Group’s
guidelines regarding market and investor
concentration, cost, market conditions, timing and
maturity profile. The subordinated debt requirements
of other HSBC companies are met internally.
Each subsidiary manages its own capital within
the context of the approved annual Group capital
plan, which determines levels of risk-weighted asset
growth and the optimal amount and mix of capital
required to support planned business growth. As part
of HSBC’s capital management policy, capital
generated in excess of planned requirements is
returned to HSBC Holdings, normally by way of
dividends.
HSBC Holdings is primarily a provider of
equity capital to its subsidiaries. These investments
are substantially funded by HSBC Holdings’ own
capital issuance and profit retentions. HSBC
Holdings seeks to maintain a prudent balance
between the composition of its capital and that of its
investment in subsidiaries.
The principal forms of capital are included in
the following balances on the consolidated balance
sheet: called up share capital, share premium
account, other reserves, retained earnings, and
subordinated liabilities. Capital also includes the
collective impairment allowances held in respect of
loans and advances.
Capital measurement and allocation
(Audited)
The FSA supervises HSBC on a consolidated basis
and, as such, receives information on the capital
adequacy of, and sets capital requirements for,
HSBC as a whole. Individual banking subsidiaries
are directly regulated by their local banking
supervisors, who set and monitor their capital
adequacy requirements. In most jurisdictions, non-
banking financial subsidiaries are also subject to the
supervision and capital requirements of local
regulatory authorities. Since 1988, when the
governors of the Group of Ten central banks agreed
to guidelines for the international convergence of
capital measurement and standards, known as the
Basel Capital Accord (Basel I), the banking
supervisors of HSBC’s major banking subsidiaries
have exercised capital adequacy supervision within a
broadly similar framework.
In implementing the EU’s Banking
Consolidation Directive, the FSA requires each bank
and banking group to maintain an individually
prescribed ratio of total capital to risk-weighted
assets taking into account both balance sheet assets
and off-balance sheet transactions. Under the EU’s
Capital Adequacy Directive, the FSA allows banks
to calculate capital requirements for market risk in
the trading book using VAR techniques. HSBC
complied with the FSA’s capital adequacy
requirements throughout 2006 and 2005.
HSBC’s capital is divided into two tiers:
• Tier 1 capital comprises shareholders’ funds,
innovative tier 1 securities and minority
interests in tier 1 capital, after adjusting for
items reflected in shareholders’ funds which are
treated differently for the purposes of capital
adequacy. The book values of goodwill and
intangible assets are deducted in arriving at
tier 1 capital.
• Tier 2 capital comprises qualifying subordinated
loan capital, collective impairment allowances,
minority and other interests in tier 2 capital 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.
Various limits are applied to elements of the
capital base. The amount of innovative tier 1
securities cannot exceed 15 per cent of overall tier 1
capital, qualifying tier 2 capital cannot exceed tier 1