HSBC 2011 Annual Report Download - page 217

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Appendix to Capital
Capital management and capital measurement and allocation
Capital management
(Audited)
Our policy on capital management is underpinned by a capital management framework, which enables us to
manage our capital in a consistent manner. The framework, which is approved by the GMB annually, incorporates
a number of different capital measures including market capitalisation, invested capital, economic capital and
regulatory capital.
Capital measures
• market capitalisation is the stock market value of the company;
• invested capital is the equity capital invested in HSBC by our shareholders, adjusted for certain reserves and goodwill previously
amortised or written off;
• economic capital is the internally calculated capital requirement which we deem necessary to support the risks to which we are exposed;
and
• regulatory capital is the capital which we are required to hold in accordance with the rules established by the FSA for the consolidated
Group and by our local regulators for individual Group companies.
The following risks managed through the capital management framework have been identified as material: credit,
market, operational, interest rate risk in the banking book, pension fund, insurance and residual risks.
We incorporate stress testing in the capital management framework, because it is important in understanding the
sensitivities of the core assumptions in our capital plans to the adverse effect of extreme but plausible events. Stress
testing allows us to formulate our response, including risk mitigation actions, in advance of conditions starting to
exhibit the stress scenarios identified. The actual market stresses which occurred throughout the financial system
during recent years have been used to inform our capital planning process and further develop the stress scenarios we
employ. In addition to our internal stress tests, others are carried out, both at the request of regulators and by the
regulators themselves using their prescribed assumptions. We take into account the results of all such regulatory
stress testing when undertaking our internal capital management assessment.
The responsibility for global capital allocation principles and decisions rests with the GMB. Through our structured
internal governance processes, we maintain discipline over our investment and capital allocation decisions and seek
to ensure that returns on investment are adequate after taking account of capital costs. Our strategy is to allocate
capital to businesses on the basis of their economic profit generation, regulatory and economic capital requirements.
Our capital management process is articulated in the annual Group capital plan which is approved by the Board. The
plan is drawn up with the objective of maintaining both an appropriate amount of capital and an optimal mix between
the different components of capital. HSBC Holdings and its major subsidiaries raise non-equity tier 1 capital and
subordinated debt in accordance with our guidelines on market and investor concentration, cost, market conditions,
timing, capital composition and maturity profile. Each of our subsidiaries manages its own capital to support its
planned business growth and meet its local regulatory requirements within the context of the approved annual Group
capital plan. In accordance with our capital management framework, capital generated by subsidiaries in excess of
planned requirements is returned to HSBC Holdings, normally by way of dividends.
HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides non-equity capital to
subsidiaries where necessary. These investments are substantially funded by HSBC Holdings’ own capital issuance
and profit retention. As part of its capital management process, 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
(Unaudited)
Our policy and practice in capital measurement and allocation at Group level is underpinned by the Basel II
framework. However, local regulators are at different stages of implementation and local reporting 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.