HSBC 2015 Annual Report Download - page 243

HSBC HOLDINGS PLC
241
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Pillar 2B, from 1 January 2016. This is to be met in the form
of CET1 capital.
The statement sets out that the PRA buffer is intended to
avoid duplication with CRD IV buffers and will be set for a
particular firm depending on its vulnerability in a stress
scenario. In order to address significant weaknesses in risk
management and governance, a scalar may be applied to
firms’ CET1 Pillar 1 and Pillar 2A capital requirements. This
will also form part of the PRA Buffer.
Where the PRA considers there is overlap between the CRD
IV buffers and the PRA buffer assessment, the PRA buffer
will be set as the excess capital required over and above
the CRD IV combined buffer. From 1 January 2016, the CCB
and the systemic buffers are permitted to offset against the
PRA buffer with the exception of any risk management and
governance scalar where applicable. The use of the PRA
buffer will not result in automatic restrictions
to distributions.
Regulatory stress testing
The Group is subject to supervisory stress testing in
many jurisdictions. These requirements are increasing
in frequency and granularity. As such, stress testing
represents a key focus for the Group.
The Bank of England published the results of the 2015 UK
stress test in December 2015 confirming that these tests
did not reveal any capital inadequacies for HSBC. At the
European level, the EBA did not undertake a stress testing
exercise in 2015 but instead carried out a transparency
exercise, the results of which were published in November
2015.
In July 2015, the EBA also disclosed a timeline for the 2016
EU wide stress test exercise. The EBA expects to publish the
2016 stress test scenario and methodology in the first
quarter of 2016, with results published in the third quarter
of 2016.
In October 2015, the Bank of England published its
approach to stress testing in the UK. This set out that the
outcome of the UK stress testing exercise will be considered
by the FPC when determining the UK CCyB rate, and will
also inform the PRA buffer. Furthermore, from 2016, the
applicable hurdle rate which is the amount of capital that
banks are expected to maintain under a stress, is to include
Pillar 1, Pillar 2A and G-SII buffer requirements.
In 2015, Group entities also participated in regional stress
testing exercises. For further details on stress testing
exercises, see page 116.
RWA developments
Throughout 2015, UK, EU and international regulators
issued a series of consultations designed to revise the
various components of the RWA regime and increase
related reporting and disclosures. In particular, the Basel
Committee on Banking Supervision (‘the Basel Committee’)
published proposals relating to certain Pillar 1 risk types to
update standardised, non-modelled approaches for
calculating capital requirements. Details of the most
significant consultations are set out below.
In December 2015 the Basel Committee published its
second consultation paper on a revised standardised
approach for credit risk. This included proposals to
reintroduce external credit ratings, moderated by internal
due diligence, as the basis for calculating risk weights for
banks and corporates. The risk weights for other assets are
to be determined by a variety of treatments tailored for
each exposure class, which are designed to increase risk
sensitivity and comparability.
In January 2016, the Basel Committee published the final
rules arising from the Fundamental Review of the Trading
Book, with implementation planned for 2019. The new
regime includes amendments to the trading book boundary
and new market risk capital calculations for both the
modelled and standardised approaches. The Basel
Committee acknowledges that there is considerable
ongoing work which could require further revisions to the
framework.
The final changes to the CVA capital charge are expected
to be published in 2016. Following the finalisation of
the CVA capital regime, the EU is expected to review
the exemptions to the CVA charge currently applied to
corporates, sovereigns and intragroup exposures. In the
interim, the EU has consulted upon a methodology for
calculating a Pillar 2 charge for excessive CVA risk resulting
from exempted transactions.
The revised consultations for standardised operational risk
and the design and calibration of a capital floor based on
the standardised approaches, are expected by the end
of 2016.
All of the Basel Committee’s consultations will need to be
transposed into EU law before coming into effect. This
includes the finalised changes that relate to the
counterparty risk and securitisation regimes.
UK leverage ratio framework
Following consultations in 2014, secondary legislation
came into force in April 2015 to provide the FPC with
direction powers in relation to the UK leverage ratio
framework. In July 2015, the FPC published its final policy
statement setting out its intention to use its new powers of
direction. As a result the PRA issued a consultation paper
to introduce requirements for the UK leverage ratio
framework. This established a minimum tier 1 leverage
ratio of 3%, an additional leverage ratio buffer (‘ALRB’) for
G-SIIs and a countercyclical leverage ratio buffer (‘CCLB’),
and was implemented on 1 January 2016. The ALRB and
CCLB are to be met entirely with CET1 capital and will be
set at 35% of the relevant buffers in the risk-weighted
capital framework. At 1 January 2016, our minimum
leverage ratio requirement of 3% was supplemented with
an ALRB of 0.2% and a CCLB which rounds to 0%. We
comfortably exceed these leverage requirements.