HSBC 2012 Annual Report Download - page 298

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Capital > Appendix to Capital > RWA movement by key driver
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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 FSA 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 capital planning buffer where required.
Pillar 3 disclosure requirements
Pillar 3 of Basel II is related to market discipline and aims to make firms more transparent by requiring them to
publish specific, prescribed details of their risks, capital and risk management under the Basel II framework at least
annually. Our Pillar 3 Disclosures 2012 report is published on the HSBC website, www.hsbc.com.
RWA movement by key driver - basis of preparation and supporting notes
(Unaudited)
Credit risk and counterparty credit risk drivers – definitions and quantification
The causal 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 based on 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 impact of new or updated models on the portfolio at the point of