HSBC 2012 Annual Report Download - page 301

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
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
FSA rules, any related tax credit offset is recognised 50% in CT1 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 FSA
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 (‘CVA’).
Where the accounting fair value calculated under IFRS 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 common equity tier 1 capital.
Following FSA direction, we have included an estimate of the impact of PVA, although there is guidance outstanding
following a recent consultation on a related EBA draft regulatory technical standard issued on 13 November 2012.
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 gains and losses on OTC derivative liabilities that results from
changes to our own credit spread are derecognised from CET1.
Individually immaterial holdings in CET1 capital of banks, financial institutions and insurance in aggregate
above 10% of HSBC CET1: under CRD IV, the investments in CET1 instruments of banks, financial institutions
and insurance 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 follows the draft July 2011 CRD IV rules and guidance provided by the FSA, which impose
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.
While rules are in draft and this aspect is still being debated, we have disclosed the impact of the rules as written.
However, a range of management actions from adjustment to the hedging strategy, curtailment or closure of the
business could be applied to mitigate the capital deduction.
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 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.