HSBC 2008 Annual Report Download - page 277

275
extended to 10 per cent.
HSBC’s capital management process continues
to stress the advantages and flexibility afforded by a
strong capital position and, through its policies,
seeks to maintain a conservative stance with regard
to equity leverage.
The Capital Management Framework covers the
different capital measures within which HSBC
manages its capital in a consistent and aligned
manner. These include market capitalisation,
invested capital, economic capital and regulatory
capital. HSBC defines invested capital as the equity
capital invested in HSBC by its shareholders.
Economic capital is the capital requirement
calculated internally by HSBC deemed necessary to
support the risks to which it is exposed, and is set at
a confidence level consistent with a target credit
rating of AA. Regulatory capital is the capital which
HSBC is required to hold as determined by the rules
established by the FSA for the consolidated Group
and by HSBC’s local regulators for individual Group
companies.
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 processes. HSBC Holdings and its
major subsidiaries raise non-equity tier 1 capital and
subordinated debt in accordance with the Group’s
guidelines on market and investor concentration,
cost, market conditions, timing, effect on
composition and maturity profile.
Each subsidiary manages its own capital
required to support planned business growth and
meet local regulatory requirements within the
context of the approved annual Group capital plan.
As part of HSBC’s Capital Management Framework,
capital generated in excess of planned requirements
is returned to HSBC Holdings, normally by way of
dividends.
HSBC Holdings is primarily the 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.
Capital measurement and allocation
(Audited)
In June 2006, the Basel Committee on Banking
Supervision published ‘International Convergence of
Capital Measurement and Capital Standards’, known
as Basel II. Basel II is structured around three
‘pillars’: minimum capital requirements, supervisory
review process and market discipline. The Capital
Requirements Directive (‘CRD’) implements Basel
II in the EU and the FSA then gives effect to the
CRD by including the requirements of the CRD in
its own rulebooks.
The FSA supervises HSBC on a consolidated
basis and therefore 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. Although HSBC
calculates capital at a Group level using the Basel II
framework, local regulators are at different stages of
implementation and local rules may still be on a
Basel I basis, notably in the US. In most
jurisdictions, non-banking financial subsidiaries are
also subject to the supervision and capital
requirements of local regulatory authorities.
HSBC’s capital is divided into two tiers:
• Tier 1 capital comprises core equity tier 1
capital, non-innovative preference shares and
innovative tier 1 securities. Core equity tier 1
capital comprises shareholders’ funds 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 core equity tier 1 capital.
• Tier 2 capital comprises qualifying subordinated
loan capital, allowable 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 capital, and qualifying term subordinated loan
capital cannot exceed 50 per cent of tier 1 capital.