HSBC 2013 Annual Report Download - page 54

HSBC BANK CANADA
52
Management’s Discussion and Analysis (continued)
Capital
(Certain information within this section, except where indicated, forms an integral part of the audited consolidated
financial statements)
Our objective in the management of capital is to
maintain appropriate levels of capital to support our
business strategy and meet our regulatory requirements.
Capital management
The bank manages its capital in accordance with the
principles contained within its capital management
policy and its annual capital plan, which includes the
results of its Internal Capital Adequacy Assessment
Process (‘ICAAP’). The bank determines an optimal
amount and composition of regulatory and working
capital required to support planned business growth,
taking into consideration economic capital and the costs
of capital, accepted market practices and the volatility of
capital and business levels in its annual operating plan.
The bank maintains a capital position commensurate
with its overall risk profile and control environment as
determined by the ICAAP. The ICAAP supports capital
management and ensures that the bank carries sufficient
capital to meet regulatory requirements and internal targets
to cover current and future risks; and, survive periods of
severe economic downturn (stressed scenarios). The key
elements of the bank’s ICAAP process include: a risk
appetite framework; the identification and assessment of
the risks the bank is exposed to; and, an assessment of
capital adequacy against regulatory requirements as well
as under stressed scenarios.
Management has established appropriate governance
structures and internal control to ensure the ICAAP
remains effective in supporting the bank’s capital
management objectives.
The bank remained within its required regulatory
capital limits throughout 2013.
Adoption of Basel III capital and liquidity rules
Effective 1 January 2013, the bank assesses capital
adequacy against standards established in guidelines
issued by the Office of the Superintendent of Financial
Institutions Canada (‘OSFI’) in accordance with the
Basel II and Basel III capital adequacy frameworks.
Comparative information is presented using guidelines
issued by OSFI in accordance with the Basel II capital
adequacy framework and therefore is not comparable.
The Basel III capital adequacy framework
significantly revises the definitions of regulatory capital
and introduces the requirement that all regulatory
capital must be able to absorb losses in a failed financial
institution. Capital instruments issued prior to adoption
that do not meet the new requirements are being phased
out as regulatory capital over a ten year period from
2013 to 2022.
The framework emphasizes common equity as the
predominant component of tier 1 capital by adding a
minimum common equity tier 1 (‘CET1’) capital ratio.
In addition, for the purposes of calculating CET1
capital, certain other regulatory adjustments including
those relating to goodwill, intangible assets, pension
assets and deferred tax assets are being phased in over a
five year period from 2014 to 2018. The Basel III rules
also require institutions to hold capital buffers designed
to avoid breaches of minimum regulatory requirements
during periods of stress.
OSFI has announced that the leverage requirement it
imposes on banks – the assets-to-capital multiple – will
be replaced effective January 2015 with a leverage ratio
that is consistent with the leverage requirement being
implemented under the Basel III framework.
In guidance issued in December 2012, OSFI
established “all-in” capital targets (including capital
conservation buffer) that all institutions are expected to
attain or exceed early in the transition period, as follows:
CET1 capital ratio of 7.0% by the first quarter of 2013,
and tier 1 capital ratio of 8.5% and total capital ratio of
10.5% by the first quarter of 2014.