HSBC 2012 Annual Report Download - page 293

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Future developments
Systemically important banks
(Unaudited)
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 reform
(Unaudited)
The FSA supervises HSBC on a consolidated basis.
However, the UK financial services regulatory
structure is currently in the process of substantial
reform. Legislation has been passed to abolish the
FSA and establish three new regulatory bodies from
1 April 2013.
The three new bodies will comprise the
Financial Policy Committee (‘FPC’) of the Bank
of England, the Prudential Regulation Authority
(‘PRA’) and the Financial Conduct Authority
(‘FCA’). The FPC will not directly supervise firms,
being responsible for macro-prudential regulation
and considering systemic risk affecting economic
and financial stability. The PRA and the FCA will
inherit the majority of the FSA’s existing functions
as the micro-prudential supervisors. Some
subsidiaries such as HSBC Bank will be ‘dual-
regulated’ firms, subject to prudential regulation
by the PRA and to conduct regulation by the FCA.
These reforms will endow the new regulatory bodies
with additional powers. For example, under certain
circumstances the PRA and FCA will be able to
issue directions to unregulated qualifying parent
undertakings such as HSBC Holdings.
In the case of the FPC, its January 2013 Draft
Policy Statement, ‘The Financial Policy Committee’s
power to supplement capital requirements’, states that
it will have two main powers: the first is to make
recommendations, and the second is a power to direct
the FCA and the PRA to adjust specific macro-
prudential tools, namely the countercyclical capital
buffer (‘CCB’) and sectoral capital requirements
(‘SCR’s’). The UK Government is proposing to make
the FPC responsible for setting the CCB, a Basel III
global requirement applied to certain financial
institutions in the UK. The CCB is a macro-
prudential tool at the disposal of national authorities
that can be deployed to protect the banking sector
from future potential losses when the FPC judges
that threats to financial stability have arisen in the
UK which increase system-wide risk. Should a CCB
be required, it is expected to be set in the range of
0-2.5%.
It is also planned under the new legislation to
give the FPC ‘direction power’, over SCR’s. The
SCR tool is more targeted and would allow the FPC
to change capital requirements above minimum
regulatory standards for exposures to three broad
sectors judged to pose a risk to the system as a whole
(residential property, including mortgages;
commercial property; and other parts of the financial
sector). However, on occasion this may be applied to
more granular sub-sectors (for example, to
mortgages with high loan to value or loan to income
ratios at origination). This will include both banking
book and trading book exposures and be irrespective
of the domicile of the ultimate borrower.
The CCB and SCR tools are described as broad
tools designed to reduce the likelihood and severity
of financial crises, their primary purpose being to
tackle cyclical risks. They provide the FPC with the
means to increase the amount of capital that banks
must hold when threats to financial stability are
judged to be emerging. However, the scale of capital
add-ons in respect of SCR has not been quantified.
There is also a proposal for a systemic risk
buffer for the banking system as a whole (or a subset
thereof) to mitigate structural macro-prudential risk.
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, quantified
Pillar 1 capital requirements are as follows:
CET1 requirements from 1 January 2019
Minimum CET1 4.5%
Capital conservation buffer 2.5%
G-SIB buffer 2.5%
Against the backdrop of eurozone instability,
on a temporary basis, the EBA recommended that