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| Name | Symbol | Market | Type |
|---|---|---|---|
| Hsbc Uk Bk 20 | LSE:62YN | London | Medium Term Loan |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
From Apr 2019 to Apr 2024
TIDM62YN
RNS Number : 3482D
HSBC UK Bank PLC
18 February 2020
HSBC UK Bank plc
Pillar 3 2019
Hot Features
Premium
Contents
Page
Introduction
Key metrics 3
Pillar 3 disclosures 4
Regulatory developments 5
Risk management 5
Linkage to the Annual Report
and Accounts 2019 7
Capital and Leverage 9
Capital management 9
Overview of regulatory capital
framework 9
Leverage ratio 11
Pillar 1 12
Pillar 2 and ICAAP 13
Credit risk 14
Counterparty credit risk 40
Securitisation 42
Market risk 45
Non-financial risk 45
Other risks 45
Remuneration 46
-------------------------------- ----
Appendices
Page
I Abbreviations 49
II Countercyclical capital buffer 50
---- -------------------------------- ----
Presentation of information
This document comprises the 2019 Pillar 3 disclosures for HSBC UK Bank plc ('the bank') and its subsidiaries (together 'HSBC UK' or 'the group'). 'We', 'us' and 'our' refer to HSBC UK Bank plc together with its subsidiaries. References to 'HSBC Group' or 'the Group' within this document mean HSBC Holdings plc together with its subsidiaries.
When used in the terms 'shareholders' equity' and 'total shareholders' equity', 'shareholders' means holders of HSBC UK ordinary shares and capital securities issued by HSBC UK classified as equity.
The abbreviations 'GBPm' and 'GBPbn' represent millions and billions (thousands of millions) of GB pounds respectively.
Cautionary statement regarding forward- looking statement
The Pillar 3 disclosures at 31 December 2019 contain certain forward-looking statements with respect to HSBC UK's financial condition, strategy, plans, current goals, results of operations and business, including strategic priorities and financial, investment and capital targets described herein.
Statements that are not historical facts, including statements about the group's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC UK Bank plc makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statement.
Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement.
Tables
Ref Page
Comparison of own funds,
capital and leverage ratios,
with and without the application
of transitional arrangements
for IFRS 9
1 (IFRS9-FL) a 3
Reconciliation of capital
with and without IFRS 9
transitional arrangements
2 applied 4
3 Pillar 1 overview 4
4 RWAs by global business 4
Reconciliation of balance
sheets - financial accounting
5 to regulatory scope of consolidation 7
Outline of the differences
in the scopes of consolidation
6 (entity by entity) (LI3) 8
7 Own funds disclosure 10
Summary reconciliation of
accounting assets and leverage
8 ratio exposures (LRSum) b 11
Leverage ratio common disclosure
9 (LRCom) b 11
Leverage ratio - Split of
on-balance sheet exposures
(excluding derivatives,
SFTs and exempted exposures)
10 (LRSpl) a 12
11 UK Leverage ratio 12
12 Overview of RWAs (OV1) 14
Credit risk exposure - summary
13 (CRB-B) a 14
Credit quality of exposures
by exposure classes and
14 instruments (CR1-A) 16
Credit quality of exposures
by industry or counterparty
15 types (CR1-B) 16
Credit quality of exposures
16 by geography (CR1-C) 16
Amount of past due, impaired
exposures and related allowances
by industry sector and by
17 geographical region 17
Movement in specific credit
risk adjustments by industry
sector and by geographical
18 region 17
IRB expected loss and CRA
- by exposure class and
19 by region 19
Changes in stock of general
and specific credit risk
20 adjustments (CR2-A) 18
Changes in stock of defaulted
loans and debt securities
21 (CR2-B) 18
Standardised approach -
credit conversion factor
('CCF') and credit risk
mitigation ('CRM') effects
22 (CR4) 21
Credit risk mitigation techniques
23 - IRB and Standardised (CR3) 20
24 Asset encumbrance A - Assets 22
Asset encumbrance B - Collateral
25 received 22
Asset encumbrance C - Encumbered
assets/collateral received
26 and associated liabilities 21
Credit quality of forborne
27 exposures 23
Credit quality of performing
and non-performing exposures
28 by past due days 24
Collateral obtained by taking
possession and execution
29 processes 24
Performing and non-performing
30 exposures and related provisions 23
Geographical breakdown of
31 exposures (CRB-C) 26
Concentration of exposures
by industry or counterparty
32 types (CRB-D) (continued) 27
Maturity of on-balance sheet
33 exposures 29
Wholesale IRB credit risk
34 models 31
IRB models - estimated and
35 actual values (wholesale) b 31
Wholesale IRB exposure -
36 by obligor grade b 32
PD, LGD, RWA and exposure
37 by country/territory 32
IRB Advanced - Credit risk
exposures by portfolio and
38 PD range (CR6) a 34
IRB Foundation - Credit
risk exposures by portfolio
39 and PD range (CR6) 32
Specialised lending on slotting
40 approach (CR10) 35
Standardised exposure -
41 by credit quality step a 36
Material retail IRB risk
42 rating systems 37
IRB models - estimated and
43 actual values (retail) 35
Retail IRB exposure - by
44 internal PD band 38
IRB - Credit risk exposures
by portfolio and PD range
45 (CR6) a 39
Counterparty credit risk
- RWAs by exposure class
46 and product 40
Impact of netting and collateral
held on exposure values
47 (CCR5-A) 41
Securitisation exposure
48 - movement in the year 43
Securitisation - asset values
49 and impairments 43
Securitisation exposures
in the non-trading book
50 (SEC1) 39
Securitisation exposures
in the non-trading book
and associated capital requirements
- bank acting as originator
(under the new framework)
51 (SEC3) 44
Securitisation exposures
in the non-trading book
and associated capital requirements
- bank acting as investor
(under the pre-existing
52 framework) (SEC4) 44
Market risk under standardised
53 approach (MR1) 45
Operational risk RWAs and
54 capital required 45
Senior management remuneration
- fixed and variable amounts
55 (REM1) 46
Senior management guaranteed
bonus, sign-on and severance
56 payments (REM2) 46
Senior management deferred
57 remuneration (REM3) 42
Material risk takers' remuneration
58 by band 42
--- -------------------------------------- ---- -----
HSBC UK has adopted the European Union's ('EU') regulatory transitional arrangements for International Financial Reporting Standard ('IFRS') 9 Financial instruments. A number of the tables in this document report under this arrangement, as follows:
a. Some figures, indicated with ^, have been prepared on an IFRS9 transitional basis.
b. All figures within this table have been prepared on an IFRS 9 transitional basis.
All other tables report on the basis of full adoption of IFRS 9.
Introduction
Table 1: Comparison of own funds, capital and leverage ratios, with
and without the application of transitional arrangements for IFRS 9
(IFRS9-FL)
At 31 Dec
Footnotes 2019 2018
----- ------------------------------------------------------ ---------- --------- ---------
Ref* Available capital (GBPm) 1
1 Common equity tier 1 ('CET1') capital ^ 11,202 11,700
2 CET1 capital as if IFRS 9 transitional arrangements 11,186 11,687
had not been applied
------- ---------
3 Tier 1 capital ^ 13,453 13,896
----------
4 Tier 1 capital as if IFRS 9 transitional arrangements 13,437 13,883
had not been applied
5 Total regulatory capital ^ 16,462 16,826
6 Total capital as if IFRS 9 transitional arrangements 16,446 16,813
had not been applied
----- ------------------------------------------------------ ---------- ------- ---------
Risk-weighted assets ('RWAs') (GBPm)
7 Total RWAs ^ 85,881 91,839
8 Total RWAs as if IFRS 9 transitional arrangements 85,866 91,832
had not been applied
----- ------------------------------------------------------ ---------- ------- ---------
Capital ratios (%) 1
9 CET1 ^ 13.0 12.7
----------
10 CET1 as if IFRS 9 transitional arrangements had 13.0 12.7
not been applied
11 Total tier 1 ^ 15.7 15.1
----------
12 Tier 1 as if IFRS 9 transitional arrangements had 15.6 15.1
not been applied
----- ------------------------------------------------------ ---------- --------- ---------
13 Total capital ^ 19.2 18.3
----- ------------------------------------------------------ ---------- --------- ---------
14 Total capital as if IFRS 9 transitional arrangements 19.1 18.3
had not been applied
----- ------------------------------------------------------ ---------- --------- ---------
Additional CET1 buffer requirements as a percentage
of RWA (%)
----- ------------------------------------------------------ ---------- --------- ---------
Capital conservation buffer requirement 2.50 1.88
----- ------------------------------------------------------ ---------- ------- -------
Countercyclical buffer requirement 0.97 0.96
----- ------------------------------------------------------ ---------- ------- -------
Systemic risk buffer 1.00 0.00
----- ------------------------------------------------------ ---------- ------- -------
Total of bank CET1 specific buffer requirements 4.47 2.84
----- ------------------------------------------------------ ---------- ------- -------
Total capital requirement (%) 2
----- ------------------------------------------------------ ---------- --------- ---------
Total capital requirement (Pillar 1 + Pillar 2A) 12.2 12.7
----- ------------------------------------------------------ ---------- --------- ---------
CET1 available after meeting the bank's minimum
capital requirements 6.2 6.2
----- ------------------------------------------------------ ---------- --------- ---------
Leverage ratio 3
----- ------------------------------------------------------ ---------- --------- ---------
15 Total leverage ratio exposure measure (GBPm) 268,271 246,659
---------- --------- ---------
16 Leverage ratio (%) ^ 5.0 5.6
----- ------------------------------------------------------ ---------- --------- ---------
17 Leverage ratio as if IFRS 9 transitional arrangements 5.0 5.6
had not been applied (%)
----- ------------------------------------------------------ ---------- --------- ---------
* The references in this and subsequent tables identify the lines prescribed in the European Banking Authority ('EBA') templates where applicable and where there is a value.
^ Figures have been prepared on an IFRS 9 transitional basis.
1 The capital figures and ratios are calculated in accordance with the revised Capital Requirements Regulation and Directive as implemented
('CRR II'). Prior period capital figures and ratios are reported on a Capital Requirements Regulation and Directive ('CRD IV') transitional basis.
2 Total capital requirement is defined as the sum of Pillar 1 and Pillar 2A capital requirements set by the Prudential Regulation Authority ('PRA'). Our Pillar 2A requirement at 31 December 2019, as per the PRA's Individual Capital Guidance based on a point in time assessment, was 4.19% of RWAs, of which 2.35% was met by CET1.
3 The leverage ratio is calculated using the CRR II end point basis for capital. Prior period leverage ratios are calculated on the CRD IV end point basis for capital.
We have adopted the regulatory transitional arrangements, including paragraph four within article 473a of the Capital Requirements Regulation, published by the EU on 27 December 2017 for IFRS 9 'Financial Instruments'. These permit banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances during the first five years of use. The proportion that banks may add back started at 95% in 2018, and reduces to 25% by 2022. The impact of IFRS 9 on loan loss allowances is defined as:
-- the increase in loan loss allowances on day one of IFRS 9 adoption; and
-- any subsequent increase in expected credit losses ('ECL') in the non-credit-impaired book thereafter.
The impact is calculated separately for portfolios using the standardised ('STD') and internal ratings based ('IRB') approaches and, for IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses.
Any add-back must be tax affected and accompanied by a recalculation of capital deduction thresholds, exposure and RWAs.
In the current period, the add-back to the capital base amounted to GBP16m under the STD approach.
Table 2: Reconciliation of capital with and without IFRS 9 transitional
arrangements applied
CET1 T1 Total
own funds
GBPm GBPm GBPm
Reported balance using IFRS 9 transitional arrangements 11,202 13,453 16,462
ECL reversed under transitional arrangements for
IFRS 9 16 16 16
- Standardised approach 16 16 16
- IRB approach - - -
Reported balance excluding IFRS 9 transitional
arrangements at 31 December 2019 11,186 13,437 16,446
--------------------------------------------------------- ------ ------ ----------
Reported balance using IFRS 9 transitional arrangements 11,700 13,896 16,826
ECL reversed under transitional arrangements for
IFRS 9 13 13 13
- Standardised approach 8 8 8
- IRB approach 5 5 5
Reported balance excluding IFRS 9 transitional
arrangements at 31 December 2018 11,687 13,883 16,813
--------------------------------------------------------- ------ ------ ----------
Table 3: Pillar 1 overview
--------- --------------
At 31 December At 31 December
2019 2018
Capital Capital
RWAs required(1) RWAs required(1)
GBPm GBPm GBPm GBPm
--------- --------------
Credit risk 75,353 6,028 81,135 6,491
Counterparty credit risk 198 16 66 5
--------- ------------ --------- ------------
Market risk 27 2 38 3
-------------------------- --------- ------------ --------- ------------
Operational risk 10,303 824 10,600 848
--------- ------------ --------- ------------
Total 85,881 6,870 91,839 7,347
-------------------------- --------- ------------ --------- ------------
1 'Capital required', here and in all tables where the term is used, represents the minimum total capital charge set at 8% of RWAs by article 92 of the Capital Requirements Regulation.
Table 4: RWAs by global business (1)
At 31 December At 31 December
2019 2018
Capital Capital
RWAs required RWAs required
GBPm GBPm GBPm GBPm
--------- -----------
Retail Banking and Wealth Management ('RBWM') 22,067 1,765 21,370 1,710
Commercial Banking ('CMB') 59,677 4,774 66,009 5,281
Global Banking and Markets 365 29 60 5
----------------------------------------------- --------- --------- --------- ---------
Global Private Banking 1,793 143 1,924 154
----------------------------------------------- --------- --------- --------- ---------
Corporate Centre 1,979 158 2,476 198
--------- --------- --------- ---------
At 31 Dec 85,881 6,870 91,839 7,347
----------------------------------------------- --------- --------- --------- ---------
1 Please refer to page 3 of our Annual Report and Accounts 2019 for a description of the activities of our global businesses.
Pillar 3 disclosures
Regulatory framework for disclosures
We are supervised on a consolidated basis in the UK by the PRA.
We have calculated capital for prudential regulatory reporting purposes using the Basel III framework of the Basel Committee on Banking Supervision ('Basel') as implemented by the EU in CRR II.
The Basel framework is structured around three 'pillars': Pillar 1 minimum capital requirements and Pillar 2 supervisory review process are complemented by Pillar 3 market discipline. The aim of Pillar 3 is to produce disclosures that allow market participants to assess the scope of application by banks of the Basel framework and the rules in their jurisdiction, their capital condition, risk exposures and risk management processes, and hence their capital adequacy.
Our Pillar 3 Disclosures at 31 December 2019 comprises both quantitative and qualitative information required under Pillar 3. They are made in accordance with Part Eight of CRR II and the EBA guidelines on disclosure requirements.
These disclosures are supplemented by specific additional requirements of the PRA and discretionary disclosures on our part.
Comparatives
To give insight into movements during the year, we provide comparative figures for the previous year or period. The references in tables identify the lines prescribed in the relevant EBA template where applicable and where there is a value.
Where disclosures have been enhanced, or are new, we do not generally restate nor provide prior year comparatives. Wherever specific rows and columns in the tables prescribed by the EBA or Basel are not applicable or are immaterial to our activities, we omit them and follow the same approach for comparative disclosures.
Frequency and location
We publish comprehensive Pillar 3 disclosures annually on the Group website www.hsbc.com, concurrently with the release of our Annual Report and Accounts, and summarised Pillar 3 disclosures at the half year in the HSBC UK Bank Interim Report.
Pillar 3 requirements may be met by inclusion in other disclosure media. Where we adopt this approach, references are provided to the relevant pages of our Annual Report and Accounts 2019 or other locations. We continue to engage in the work of the UK authorities and industry associations to improve the transparency and comparability of our disclosures.
Material risks
Pillar 3 requires all material risks to be disclosed to provide a comprehensive view of a bank's risk profile. In addition to the
disclosure in this document, other information on material risks can be found in our Annual Report and Accounts 2019.
Capital buffers
The geographical breakdown and institution specific countercyclical buffer disclosure is provided in Appendix II. The HSBC Group G-SIB indicators disclosure is published annually on the HSBC website www.hsbc.com.
Regulatory developments
The UK's withdrawal from the EU
As a result of the decision of the referendum on 23 June 2016, the UK left the EU on 31 January 2020. In order to smooth the transition, the UK remains subject to EU law during an implementation period, which is currently expected to end on
31 December 2020. This implementation period may be extended by a further two years, subject to political agreement.
In preparation for the UK leaving without an agreement, a series of statutory instruments were made to transpose into UK law all of the EU laws and regulations that were directly applicable to UK firms on exit day. Although these statutory instruments were prepared for the UK leaving without a deal, it is anticipated that they will form the basis of the UK's regulation after the implementation period has ended; however, these may be subject to change to reflect the introduction of new EU law during the implementation period and the terms of any trade deal between the UK and the EU.
The Basel Committee
In December 2017, the Basel Committee on Banking Supervision published the Basel III Reforms. The package aims for a
1 January 2022 implementation, with a five-year transitional provision for the output floor. This floor ensures that, at the end of the transitional period, banks' total RWAs are no lower than 72.5% of those generated by the standardised approaches. The final standards will need to be transposed into the relevant local law before coming into effect.
The Capital Requirements Regulation amendments
In June 2019, the EU enacted the final rules amending the Capital Requirements Regulation, known as the CRR II. This was the EU's implementation of the Financial Stability Board's ('FSB') requirements for Total Loss Absorbing Capacity ('TLAC'), known in Europe as the Minimum Requirements for Own Funds and Eligible Liabilities ('MREL'). Furthermore, it also included changes to the own funds regime.
The CRR II will also implement the first tranche of changes to the EU's legislation to reflect the Basel III Reforms, including the revisions to the new leverage ratio rules. The CRR II rules will follow a phased implementation with significant elements entering into force in 2021, in advance of Basel's timeline.
In the UK, only the parts of the CRR II that are in force at the end of the Brexit implementation period will be transposed into UK law. As a result, any elements that are scheduled to enter into force after the end of the implementation period will need to be implemented separately by the UK.
The EU's implementation of the Basel III Reforms
The remaining elements of the Basel III Reforms will be implemented in the EU by a further set of amendments to the Capital Requirements Regulation ('CRR III'). In 2019, the European Commission ('EC') began consulting on the implementation of the CRR III, which will include reforms to credit risk, operational risk, and the output floor. The EC is expected to produce a draft CRR III text in the second quarter of 2020. The EU implementation will then be subject to an extensive negotiation process with the EU Council and Parliament. As a result, the final form of the rules remains unclear.
It is expected that the Brexit implementation period will have been completed before the CRR III enters into EU law. As a result, the UK will have to implement the remaining Basel III Reforms independently under UK law.
Other developments
In December 2019, the UK's Financial Policy Committee ('FPC') issued the latest Financial Stability Report. In the report, the FPC announced that it will increase the UK's countercyclical buffer from 1% to 2% on 16 December 2020, in order to give the UK more flexibility in times of future stress. It considers that the UK remains in a standard risk environment and as a result, the total loss absorbing capacity in the banking system should remain unchanged, notwithstanding the buffer increase. To this end, the PRA will consult in 2020 on proposals to reduce Pillar 2A requirements to reflect the additional resilience associated with a higher buffer.
The FPC also announced a review of IFRS 9 and stress testing to ensure that there is a permanent solution to avoid unwarranted capital increases as a result of the interaction between the two. This may result in amendments to minimum capital requirements and TLAC.
In June 2017, the PRA published its final policy statement setting out revisions to the way that firms model probability of default ('PD') and loss given default ('LGD') for residential mortgage exposures. To mitigate cyclicality, banks must replace pure 'Through the Cycle' and 'Point in Time' models with a hybrid approach. The changes will need to be implemented by the end of 2020.
In July 2019, the Bank of England ('BoE') published its Resolvability Assessment Framework ('RAF'), which requires firms to develop capabilities to address eight identified barriers to resolvability. Banks are required to assess their resolvability in accordance with the BoE's criteria, submit this assessment by October 2020 and publish a summary by June 2021. Contemporaneously, the BoE will disclose its assessment of each firm's resolvability. The deadline for full compliance with the RAF framework is 1 January 2022.
In April 2019, the PRA issued statements setting out its expectations of how firms should manage the financial risks from climate change, focusing on governance, risk management, scenario analysis and disclosure areas. In particular, there is a requirement that the risk associated with climate change should be assessed and captured in firms' Pillar 2 assessments. The PRA also announced in December 2019 that the effects of climate change will be included in its 2021 stress test and are currently consulting on the form it might take.
Risk management
Our risk management framework
We use an enterprise-wide risk management framework across the organisation and across all risk types.
The framework fosters continuous monitoring of the risk environment, and promotes risk awareness and sound operational and strategic decision making. It also ensures we have a consistent approach to monitoring, managing and mitigating the risks we accept and incur in our activities.
Further information on our risk management framework, and the management and mitigation is set out from page 17 of our Annual Report and Accounts 2019.
Risk culture
We recognise the importance of a strong risk culture, the fostering of which is a key responsibility of senior executives. Our risk culture is reinforced by our values and the Global Standards programme. It is instrumental in aligning the behaviours of individuals with our attitude to assuming and managing risk, which helps to ensure that our risk profile remains in line with our risk appetite.
Our risk culture is further reinforced by our approach to remuneration. Individual awards, including those for senior executives, are based on compliance with the Group Values and the achievement of financial and non-financial objectives that are aligned to our risk appetite and strategy.
Risk governance
Our Board has ultimate responsibility for the effective management of risk and approves HSBC UK's risk appetite. It is advised on risk-related matters by the Risk Committee. The Risk Committee met formally eight times during 2019.
The activities of the Risk Committee are set out from page 56 of our Annual Report and Accounts 2019.
Executive accountability for the ongoing monitoring, assessment and management of the risk environment, and the effectiveness of the risk management framework resides with HSBC UK's Chief Risk Officer ('CRO'). He is supported by the Risk Management Meeting ('RMM') of HSBC UK's Executive Committee. The HSBC UK RMM is chaired by the HSBC UK CRO and membership includes the Chief Executive Officer ('CEO'), the Business heads of CMB, RBWM and Private Bank and senior executives from Risk, Finance, Audit and Regulatory Compliance.
Regular Financial Crime Risk Management meetings of the Executive Committee, chaired by the CEO, are held to ensure effective enterprise wide management of financial crime risk within HSBC UK and to support the CEO in discharging these financial crime responsibilities.
Day-to-day responsibility for risk management is delegated to senior managers with individual accountability for decision making. These senior managers are supported by global functions. All employees have a role to play in risk management. These roles are defined using the three lines of defence model, which delineates management accountabilities and responsibilities for risk management and the control environment.
Our executive risk governance structures ensure appropriate oversight and accountability for risk, which facilitates the reporting and escalation to the RMM.
Risk appetite
Risk appetite is a key component of our management of risk. It describes the type and quantum of risk that HSBC UK is willing to accept in achieving its medium and long-term strategic goals. In HSBC UK, risk appetite is managed through a risk appetite framework and articulated in a risk appetite statement ('RAS'), which is approved annually by the Board on the advice of the Risk Committee.
HSBC UK's risk appetite informs our strategic and financial planning process, defining our desired forward-looking risk profile. It is also integrated within other risk management tools, such as the top and emerging risks report and stress testing, to ensure consistency in risk management.
Further information about our risk appetite is set out on page 18 of our Annual Report and Accounts 2019.
Stress testing
HSBC UK operates a wide-ranging stress testing programme that supports our risk management and capital planning. It includes execution of stress tests mandated by our regulators. Our stress testing is supported by dedicated teams and infrastructure.
Our testing programme assesses our capital strength and our resilience to external shocks. It also helps us understand and mitigate risks, and informs our decision about capital levels. As well as taking part in regulatory driven stress tests, we conduct our own internal stress tests.
Our stress testing programme is overseen by the Risk Committee, and results are reported, where appropriate, to the RMM and Risk Committee.
Further information about stress testing and details of HSBC UK's regulatory stress test results are set out from page 18 of our Annual Report and Accounts 2019.
HSBC UK Risk function
We have a dedicated Risk function, headed by the CRO, which is responsible for our risk management framework. This includes establishing policy, monitoring risk profiles, and forward-looking risk identification and management. HSBC UK Risk is structured to ensure appropriate coverage across our operations. It is independent from the global businesses, including sales and trading functions, helping to ensure balance in risk/ return decisions. Our Risk function operates in line with the three lines of defence model.
Risk management and internal control systems
The Board of Directors are responsible for providing entrepreneurial leadership of the bank within a framework of prudent and effective controls which enables risks to be assessed and managed. This includes providing ongoing assurance that the risk management systems put in place within HSBC UK are appropriate to match its risk profile and strategy. On behalf of the Board, the Audit Committee has responsibility for oversight of internal controls over financial reporting, and the Risk Committee has responsibility for oversight of risk management and internal controls other than for financial reporting.
Further information on our key risk management and internal control procedures is set out on page 56 of our Annual Report and Accounts 2019, where the Report of the Directors on the effectiveness of internal controls can also be found.
Risk measurement and reporting systems
The risk measurement and reporting systems used within HSBC UK are designed to help ensure that risks are comprehensively captured with all the attributes necessary to support well-founded decisions, that those attributes are accurately assessed, and that information is delivered in a timely manner for those risks to be successfully managed and mitigated.
Risk measurement and reporting systems used within HSBC UK are also subject to a governance framework designed to ensure that their build and implementation are fit for purpose and functioning appropriately.
Risk information systems development is a key responsibility of the Group's Global Risk function, while the development and operation of risk rating and management systems and processes are ultimately subject to the oversight of the Group's Board.
The Group continues to invest significant resources in IT systems and processes in order to maintain and improve its risk management capabilities. A number of key initiatives and projects to enhance consistent data aggregation, reporting and management, and work towards meeting the Group's Basel Committee data obligations are in progress. Group standards govern the procurement and operation of systems used in its subsidiaries including HSBC UK, to process risk information within business lines and risk functions.
Risk measurement and reporting structures deployed at Group level are applied throughout global businesses and major operating subsidiaries including HSBC UK, through a common operating model for integrated risk management and control. This model sets out the respective responsibilities of Group, global business, region and country level risk functions in respect of risk governance and oversight, compliance risks, approval authorities and lending guidelines, global and local scorecards, management information and reporting, and relations with third parties such as regulators, rating agencies and auditors.
Risk analytics and model governance
HSBC UK Risk, in conjunction with HSBC Global Risk, manages a number of analytics disciplines supporting the development and management of models, including those for risk rating, scoring, economic capital and stress testing covering different risk types and business segments. The analytics functions formulate technical responses to industry developments and regulatory policy in the field of risk analytics, develop risk models, and oversee model development and use toward our implementation targets for IRB approaches.
The RMM provides and governance on the management of models and is the primary committee responsible for the oversight of model risk within HSBC UK. The RMM is an essential element of the governance structure for model risk management and identifies emerging risks for all aspects of the risk rating system. The RMM formally advises HSBC UK's Risk Committee on any material model related issues.
Models are also subject to an independent validation process and governance oversight by the Model Risk Management team within Risk. The team provides robust challenge to the modelling approaches used. It also ensures that the performance of those models is transparent and that their limitations are visible to key stakeholders.
Linkage to the Annual Report and Accounts 2019
Structure of the regulatory group
Participating interests in banking associates / joint ventures are proportionally consolidated for regulatory purposes by including our share of assets, liabilities, profit and loss, and RWAs in accordance with the PRA's application of EU legislation.
Table 5: Reconciliation of balance sheets - financial accounting to
regulatory scope of consolidation
Consolidation
of banking
Accounting Deconsolidation associates Regulatory
balance of securitisation / joint balance
sheet entities ventures sheet
Ref GBPm GBPm GBPm GBPm
----------------------------------------------------------- ----- ------------ ----------------- --------------- ------------
Assets
----------------------------------------------------------- ----- ------------ ----------------- --------------- ------------
Cash and balances at central banks 37,030 - 72 37,102
Items in the course of collection
from other banks 504 - - 504
Financial assets designated and
otherwise mandatorily measured
at fair value through profit or
loss 66 - - 66
Derivatives 121 - - 121
Loans and advances to banks 1,389 - - 1,389
Loans and advances to customers 183,056 - - 183,056
- of which: expected credit losses
on IRB portfolios f (1,664) - - (1,664)
----------------------------------------------------------- ----- -------- --------- ------ -------- ----- --------
Reverse repurchase agreements -
non-trading 3,014 - - 3,014
Financial investments 19,737 - - 19,737
Prepayments, accrued income and
other assets 8,203 - 15 8,218
- of which: retirement benefit
assets g 5,836 - - 5,836
Interests in joint ventures 9 - (9) -
Goodwill and intangible assets d 3,973 - - 3,973
----------------------------------------------------------- ----- -------- --------- ------ -------- ----- --------
Total assets at 31 Dec 2019 257,102 - 78 257,180
------------------------------------------------------------------ -------- --------- ------ -------- ----- --------
Liabilities and equity
----------------------------------------------------------- ----- ------------ ----------------- --------------- ------------
Liabilities
----------------------------------------------------------- ----- ------------ ----------------- --------------- ------------
Deposits by banks 529 - 70 599
Customer accounts 216,214 225 - 216,439
Repurchase agreements - non-trading 98 - - 98
Items in the course of transmission
to other banks 343 - - 343
Derivatives 201 - - 201
-------- --------- ------ -------- ----- --------
Debt securities in issue 3,142 (225) - 2,917
Accruals, deferred income and other
liabilities 1,834 - 8 1,842
Current tax liabilities 410 - - 410
Provisions 1,325 - - 1,325
* of which: credit-related contingent liabilities and
contractual commitments on IRB portfolios f 75 - - 75
----------------------------------------------------------- ----- -------- --------- ------ -------- ----- --------
Deferred tax liabilities 1,222 - - 1,222
------------------------------------------------------------------ -------- --------- ------ -------- ----- --------
Subordinated liabilities 9,533 - - 9,533
- of which: included in tier 2 k 3,009 - - 3,009
Total liabilities at 31 Dec 2019 234,851 - 78 234,929
------------------------------------------------------------------ -------- --------- ------ -------- ----- --------
Equity
----------------------------------------------------------- ----- ------------ ----------------- --------------- ------------
Share premium account a 9,015 - - 9,015
-------- --------- ------ -------- ----- --------
Other equity instruments h 2,196 - - 2,196
b,
c,
Other reserves e 7,688 - - 7,688
b,
Retained earnings c 3,292 - - 3,292
Total shareholders' equity 22,191 - - 22,191
------------------------------------------------------------------ -------- --------- ------ -------- ----- --------
Non-controlling interests i 60 - - 60
-----
Total equity at 31 Dec 2019 22,251 - - 22,251
------------------------------------------------------------------ -------- --------- ------ -------- ----- --------
Total liabilities and equity at
31 Dec 2019 257,102 - 78 257,180
------------------------------------------------------------------ -------- --------- ------ -------- ----- --------
The references (a) - (k) identify balance sheet components that are used in the calculation of regulatory capital in table 7.
Measurement of regulatory exposures
This section sets out the main reasons why the measurement of regulatory exposures is not directly comparable with the financial information presented in our Annual Report and Accounts 2019.
The Pillar 3 Disclosures at 31 December 2019 are prepared in accordance with regulatory capital adequacy concepts and rules, while the Annual Report and Accounts 2019 are prepared in accordance with International Financial Reporting Standards ('IFRSs'). The purpose of the regulatory balance sheet is to provide a point-in-time ('PIT') value of all on-balance sheet assets.
The regulatory exposure value includes an estimation of risk, and is expressed as the amount expected to be outstanding if or when the counterparty defaults.
Moreover, regulatory exposure classes are based on different criteria from accounting asset types and are therefore not comparable on a line by line basis.
Table 6 shows the difference between the accounting and regulatory scope of consolidation.
The regulatory consolidation also excludes special purpose entities ('SPEs') where significant risk has been transferred to third parties. Exposures to these SPEs are risk-weighted as securitisation positions for regulatory purposes.
Participating interests in banking associates / joint ventures are proportionally consolidated for regulatory purposes by including our share of assets, liabilities, profit and loss, and RWAs in accordance with the PRA's application of EU legislation.
A full list of entities included in the scope of consolidation is set out on page 118 of our Annual Report and Accounts 2019.
Table 6: Outline of the differences in the scopes of consolidation
(entity by entity) (LI3)
At 31 Dec 2019
------------------------------------------------------------
Method of regulatory consolidation
Deducted
Method Neither from capital
Principal of accounting Fully Proportional consolidated subject
activities consolidation consolidated consolidation nor deducted to thresholds
-------------- ------------- --------------
Associates
Cash management
Vaultex UK Limited services Equity l
SPEs excluded from the
regulatory
consolidation
Neon Portfolio Securitisation Fully
Distribution consolidated
DAC l
----------------------- --------------- -------------- ------------- -------------- ------------- --------------
Capital and Leverage
Capital management
Approach and policy
HSBC UK's objective in managing capital is to maintain appropriate levels of capital to support our business strategy and meet regulatory and stress testing related requirements.
HSBC UK manages its capital to ensure that it exceeds current and expected future requirements. Throughout 2019, the group complied with the PRA's regulatory capital adequacy requirements, including those relating to stress testing.
The policy on capital management is underpinned by the capital management framework and the internal capital adequacy assessment process ('ICAAP'), which enable the group to manage its capital in a consistent manner. The framework incorporates a number of different capital measures that govern the management and allocation of capital within HSBC Group. These capital measures are defined as follows:
-- invested capital is the equity capital provided to the group by HSBC Group;
-- economic capital is the internally calculated capital requirement that is deemed necessary by the group to support the risks to which it is exposed; and
-- regulatory capital is the minimum level of capital that the group is required to hold in accordance with the rules established by the PRA.
The following risks managed through the capital management framework have been identified as material: credit, market, operational, interest rate risk in the banking book, pensions and residual risks.
Stress testing
Stress testing is incorporated into the capital management framework, and is an important component of understanding the sensitivity of the core assumptions in the group's capital plans to the adverse effect of extreme, but plausible, events. Stress testing allows senior management to formulate its response, including risk mitigating actions, in advance of conditions starting to reflect the stress scenarios identified.
Actual market stresses in the past and prevailing economic and political risks have been used to inform the capital planning process and further develop the scenarios employed by the group in its internal stress tests.
Other stress tests are also carried out, both at the request of regulators and by the regulators themselves, using their prescribed assumptions. The group takes into account the results of all such regulatory stress testing when assessing its internal capital requirements.
Risks to capital
Outside the stress testing framework, a list of principal risks is regularly evaluated for their effect on our capital ratios. In addition, other risks may be identified that have the potential to affect our RWAs and/or capital position. The downside or upside scenarios are assessed against our capital management objectives and mitigating actions are assigned as necessary.
The group's approach to managing its capital position has been to ensure the bank, its regulated subsidiaries and the group exceed current regulatory requirements, and that it is well placed to meet expected future capital requirements.
Risk-weighted asset targets
We establish RWA targets for our business lines through our annual planning process in accordance with HSBC Group's strategic direction and risk appetite. As these targets are deployed to lower levels of management, action plans for implementation are developed. These may include growth strategies, active
portfolio management, restructuring, business and/or customer-level reviews, RWA accuracy and allocation initiatives and risk mitigation.
Business performance against RWA targets is monitored through regular reporting to the Asset and Liability Management Committee ('ALCO').
Capital generation
HSBC UK Holdings Limited, a 100% subsidiary of HSBC Holdings plc, is the sole primary provider of equity capital to the group and provides non-equity capital where necessary. Capital generated in excess of planned requirements is returned to the shareholder in the form of dividends.
Overview of regulatory capital framework
Main features of CET1, AT1 and T2 instruments issued by HSBC UK
All capital securities included in the regulatory capital base of the group have been issued as fully compliant CRD IV securities. For regulatory purposes, the group's capital base is divided into three main categories, namely Common Equity Tier 1, Additional Tier 1 and Tier 2, depending on the degree of permanence and loss absorbency exhibited. The main features of capital securities issued by the group are described below.
Tier 1 capital ('T1')
Tier 1 capital comprises shareholders' equity, related non-controlling interests (subject to limits) and qualifying capital instruments, after certain regulatory adjustments.
Common Equity Tier 1 ('CET1')
Called up ordinary shares issued by the bank to its parent are fully paid up and the proceeds of issuance are immediately and fully available. There is no obligation to pay a coupon or dividend to the shareholder arising from this type of capital. The share capital is available for unrestricted and immediate use to cover any risks and losses.
Additional Tier 1 capital ('AT1')
Qualifying AT1 instruments are perpetual securities on which there is no obligation to apply a coupon and, if not paid, the coupon is not cumulative. Such securities do not carry voting rights but rank higher than ordinary shares for coupon payments and in the event of a winding up. Fully compliant CRD IV AT1 instruments issued by the group include a provision whereby the instrument will be written down in whole in the event that either the bank's or group's CET1 ratio falls below 7.00%.
These instruments are accounted for as equity. Further details of qualifying CRR II AT1 instruments can be found in Note 23 - Called up share capital and other equity instruments of the Notes on the Financial Statements on page 112 of our Annual Report and Accounts 2019.
Tier 2 capital ('T2')
Tier 2 capital comprises eligible capital securities and other qualifying Tier 2 capital securities subject to limits.
Perpetual and term subordinated debt
Tier 2 capital securities are either perpetual subordinated securities or dated securities on which there is an obligation to pay coupons.
These instruments or subordinated loans comprise dated loan capital repayable at par on maturity and must have an original maturity of at least five years. Some subordinated loan capital may be called and redeemed by the issuer subject to prior consent from the PRA. If not redeemed, interest coupons payable may step up or become floating rate related to interbank offered rates. For regulatory purposes, it is a requirement that Tier 2 instruments are amortised on a straight-line basis in their final five years to maturity, thus reducing the amount of capital that is recognised for regulatory purposes.
Further details of these instruments can be found in Note 20 - Subordinated Liabilities of the Notes on the Financial Statements on page 105 of the our Annual Report and Accounts 2019.
A list of the main features of our capital instruments in accordance with Annex III of the Commission Implementing Regulation 1423/2013 is published on the HSBC Group website, www.hsbc.com with reference to our balance sheet on
31 December 2019.
Table 7: Own funds disclosure
----------
At
31 Dec 31 Dec
2019 2018
Ref* Ref GBPm GBPm
---------- ----------
Common equity tier 1 ('CET1') capital: instruments
and reserves
----- ----------------------------------------------------------- ---- ---------- ----------
Capital instruments and the related share premium
1 accounts 9,015 9,015
* ordinary shares a 9,015 9,015
2 Retained earnings b 10,978 10,713
3 Accumulated other comprehensive income (and other
reserves) c (211) (399)
5a Independently reviewed interim net profits net of
any foreseeable charge or dividend b 161 562
----
6 Common equity tier 1 capital before regulatory adjustments 19,943 19,891
----- ----------------------------------------------------------- ---- ---------- ----------
Common equity tier 1 capital: regulatory adjustments
----- ----------------------------------------------------------- ---- ---------- ----------
7 Additional value adjustments(1) (5) (8)
----
8 Intangible assets (net of related deferred tax liability) d (3,972) (3,808)
----
11 Fair value reserves related to gains or losses on
cash flow hedges e 14 31
----
12 Negative amounts resulting from the calculation
of expected loss amounts f (401) (25)
----
15 Defined benefit pension fund assets (net of related
deferred tax liability) g (4,377) (4,381)
----
28 Total regulatory adjustments to common equity tier
1 (8,741) (8,191)
29 Common equity tier 1 capital 11,202 11,700
----- ----------------------------------------------------------- ---- ---------- ----------
Additional tier 1 ('AT1') capital: instruments
----- ----------------------------------------------------------- ---- ---------- ----------
30 Capital instruments and the related share premium
accounts 2,196 2,196
----
31 * classified as equity under IFRSs h 2,196 2,196
----
34 Qualifying tier 1 capital included in consolidated
AT1 capital (including minority interests not included
in CET1) issued by subsidiaries and held by third
parties i 55 -
---- ---------- ------
36 Additional tier 1 capital before regulatory adjustments 2,251 2,196
----- ----------------------------------------------------------- ---- ---------- ----------
44 Additional tier 1 capital 2,251 2,196
----
45 Tier 1 capital (T1 = CET1 + AT1) 13,453 13,896
Tier 2 capital: instruments and provisions
46 Capital instruments and the related share premium
accounts 2,935 2,930
48 Qualifying own funds instruments included in consolidated
T2 capital (including minority interests and AT1
instruments not included in CET1 or AT1) issued
by subsidiaries and held by third parties 74 -
51 Tier 2 capital before regulatory adjustments k 3,009 2,930
----- ----------------------------------------------------------- ---- ---------- ----------
58 Tier 2 capital 3,009 2,930
----- ----------------------------------------------------------- ---- ---------- ----------
59 Total capital (TC = T1 + T2) 16,462 16,826
----- ----------------------------------------------------------- ---- ---------- ----------
60 Total risk-weighted assets 85,881 91,839
----- ----------------------------------------------------------- ---- ---------- ----------
Capital ratios and buffers
----- ----------------------------------------------------------- ---- ---------- ----------
61 Common equity tier 1 13.0% 12.7%
62 Tier 1 15.7% 15.1%
63 Total capital 19.2% 18.3%
----- ----------------------------------------------------------- ---- ------ ------
64 Institution specific buffer requirement 4.47% 2.84%
----- ----------------------------------------------------------- ----
65 - Capital conservation buffer requirement 2.50% 1.88%
----------------------------------------------------------- ----
66 - Countercyclical buffer requirement 0.97% 0.96%
----- ----------------------------------------------------------- ----
67 - Systemic risk buffer 1.00% -%
----- ----------------------------------------------------------- ---- ------ ------
68 Common equity tier 1 available to meet buffers 8.5 % 8.2 %
Amounts below the threshold for deduction (before
risk weighting)
----- ----------------------------------------------------------- ---- ---------- ----------
75 Deferred tax assets arising from temporary differences
(amount below 10% threshold, net of related tax
liability) 231 255
Applicable caps on the inclusion of provisions in
tier 2
----- ----------------------------------------------------------- ---- ---------- ----------
77 Cap on inclusion of credit risk adjustments in T2
under standardised approach 25 26
79 Cap for inclusion of credit risk adjustments in
T2 under internal ratings-based approach 430 465
----- ----------------------------------------------------------- ---- ---------- ----------
* The references identify the lines prescribed in the EBA template that are applicable and where there is a value.
The references (a) - (k) identify balance sheet components in table 5 that are used in the calculation of regulatory capital.
1 Additional value adjustments are calculated on all assets measured at fair value and subsequently deducted from CET1.
Leverage ratio
The leverage ratio was introduced into the Basel III framework
as a non-risk-based limit, to supplement risk-based capital requirements. It aims to constrain the build-up of excess leverage in the banking sector, introducing additional safeguards against model risk and measurement errors. This ratio has been implemented in the EU for reporting and disclosure purposes but, at this stage, has not been set as a binding requirement.
The PRA's leverage ratio requirement applies from 1 January 2019 to UK ring-fenced banks.
The risk of excess leverage is managed as part of the global risk appetite framework and monitored using a leverage ratio metric within the RAS. The RAS articulates the aggregate level and types of risk that HSBC UK is willing to accept in its business activities in order to achieve its strategic business objectives. The RAS is monitored via the risk appetite profile report, which includes comparisons of actual performance against the risk appetite and tolerance thresholds assigned to each metric, to ensure that any excessive risk is highlighted, assessed and mitigated appropriately. The risk appetite profile report is presented monthly to the RMM.
Our leverage ratio calculated in accordance with the Capital Requirements Regulation was 5.0% at 31 December 2019, down from 5.6% at 31 December 2018. The decrease was largely due to growth in the balance sheet.
At 31 December 2019, our leverage ratio measured under the PRA's UK leverage framework was 5.8%. This measure excludes qualifying central bank balances from the calculation of exposure. At 31 December 2019, our UK minimum leverage ratio requirement of 3.25% under the PRA's UK leverage framework was supplemented by an additional leverage ratio buffer of 0.4% and a countercyclical leverage ratio buffer of 0.3%. These additional buffers translated into capital values of GBP812m and GBP788m respectively. We exceeded these leverage requirements.
Table 8: Summary reconciliation of accounting assets and leverage
ratio exposures (LRSum)
----------
At
31 Dec 31 Dec
2019 2018
Ref* GBPm GBPm
1 Total assets as per published financial statements 257,102 238,939
----- ----------------------------------------------------- ------- -------
Adjustments for:
2 - consolidation of banking associates/joint ventures 78 86
4 - derivative financial instruments 81 222
5 - securities financing transactions ('SFT') 383 4
6 - off-balance sheet items (i.e. conversion to credit
equivalent amounts of off-balance sheet exposures) 18,003 13,589
7 - other (7,376) (6,181)
----- ----------------------------------------------------- ------- -------
8 Total leverage ratio exposure 268,271 246,659
----- ----------------------------------------------------- ------- -------
* The references identify the lines prescribed in the EBA template. Lines represented in this table are those lines which are applicable and where there is a value.
Table 9: Leverage ratio common disclosure (LRCom)
At
31 Dec 31 Dec
2019 2018
Ref* GBPm GBPm
------ ------------------- --------------
On-balance sheet exposures (excluding derivatives
and SFTs)
------ --------------------------------------------------------- ------------------- --------------
On-balance sheet items (excluding derivatives, SFTs
1 and fiduciary assets, but including collateral) 255,420 237,571
2 (Asset amounts deducted in determining Tier 1 capital) (8,751) (8,214)
--------------------------------------------------------- --------------- -----------
Total on-balance sheet exposures (excluding derivatives,
3 SFTs and fiduciary assets) 246,669 229,357
------ --------------------------------------------------------- --------------- -----------
Derivative exposures
Replacement cost associated with all derivatives
transactions (i.e. net of eligible cash variation
4 margin) 38 13
5 Add-on amounts for potential future exposure associated
with all derivatives transactions (mark-to-market
method) 164 133
Gross-up for derivatives collateral provided where
deducted from the balance sheet assets pursuant
6 to IFRSs 168 141
(Deductions of receivables assets for cash variation
7 margin provided in derivatives transactions) (168) -
11 Total derivative exposures 202 287
------ --------------------------------------------------------- --------------- -----------
Securities financing transaction exposures
Gross SFT assets (with no recognition of netting),
12 after adjusting for sales accounting transactions 3,697 3,422
(Netted amounts of cash payables and cash receivables
13 of gross SFT assets) (683) -
14 Counterparty credit risk exposure for SFT assets 383 4
--------------------------------------------------------- --------------- -----------
16 Total securities financing transaction exposures 3,397 3,426
------ --------------------------------------------------------- --------------- -----------
Other off-balance sheet exposures
17 Off-balance sheet exposures at gross notional amount 71,815 73,311
(Adjustments for conversion to credit equivalent
18 amounts) (53,812) (59,722)
--------------------------------------------------------- --------------- -----------
19 Total off-balance sheet exposures 18,003 13,589
------ --------------------------------------------------------- --------------- -----------
Capital and total exposures
20 Tier 1 capital 13,454 13,896
21 Total leverage ratio exposure 268,271 246,659
------ --------------------------------------------------------- --------------- -----------
22 Leverage ratio (%) 5.0 5.6
------
Choice of transitional arrangements for the definition Fully phased-in Fully
EU-23 of the capital measure phased-in
------ --------------------------------------------------------- ------------------- --------------
* The references identify the lines prescribed in the EBA template. Lines represented in this table are those lines which are applicable and where there is a value.
Table 10: Leverage ratio - Split of on-balance sheet exposures (excluding
derivatives, SFTs and exempted exposures) (LRSpl)
At
---------
31 Dec
2019
Ref(*) GBPm
Total on-balance sheet exposures (excluding derivatives,
EU-1 SFTs and exempted exposures) 255,252
EU-2 Trading book exposures -
EU-3 Banking book exposures 255,252
Of which:
EU-5 exposures treated as sovereigns 56,171
EU-7 institutions 1,660
EU-8 secured by mortgage of immovable property 102,265
EU-9 retail exposures 16,688
EU-10 corporate 60,908
EU-11 exposures in default 2,188
--------- ------------------------------------------------------------
other exposures (e.g. equity, securitisations and other
EU-12 non-credit obligation assets) 15,372
--------- ------------------------------------------------------------ -------
* The references identify the lines prescribed in the EBA template. Lines represented in this table are those lines which are applicable and where there is a value.
Table 11: UK Leverage ratio
-------- ---------
For the period
ending
31 Dec 30 Sep
2019 2019
GBPm GBPm
-------- ---------
UK leverage ratio exposure - quarterly average 230,376 228,687
------------------------------------------------ -------- -------
% %
UK leverage ratio - quarterly average 5.8 5.9
------------------------------------------------ -------- -------
UK leverage ratio - quarter end 5.8 5.8
------------------------------------------------ -------- -------
Pillar 1
Pillar 1 covers the capital resources requirements for credit risk, market risk and operational risk. Credit risk includes Counterparty credit risk ('CCR') and securitisation requirements. These requirements are expressed in terms of RWAs. The table provides information on the scope of permissible approaches and our adopted approach by risk type.
Credit risk The Basel framework applies three HSBC UK has adopted the
approaches advanced IRB approach
of increasing sophistication to the for the majority of its
calculation of Pillar 1 credit risk business.
capital requirements. The most basic Some portfolios remain
level, the standardised approach, on the standardised or
requires foundation IRB approaches:
banks to use external credit ratings * pending the issuance of local regulations or model
to determine the risk weightings applied approval;
to rated counterparties. Other
counterparties
are grouped into broad categories and * following the supervisory prescription of a
standardised risk weightings are applied non-advanced approach; or
to these categories. The next level,
the foundation IRB ('FIRB') approach,
allows banks to calculate their credit * under exemptions from IRB treatment.
risk capital requirements on the basis
of their internal assessment of a
counterparty's On 1 January 2020, exposures
PD, but subjects their quantified subject to the UK corporate
estimates loss-given-default model
of exposure at default ('EAD') and LGD moved from the advanced
to standard supervisory parameters. to the foundation approach.
Finally, the advanced IRB ('AIRB')
approach
allows banks to use their own internal
assessment in both determining PD and
quantifying EAD and LGD.
------------------------------------------ ---------------------------------------------------------
Counterparty Four approaches to calculating CCR and HSBC UK uses the mark-to-market
credit risk determining exposure values are defined approach for CCR.
by the Basel framework: mark-to-market,
original exposure, standardised and
Internal Model Method. These exposure
values are used to determine capital
requirements under one of the credit
risk approaches: standardised, FIRB
or AIRB.
------------------------------------------ ---------------------------------------------------------
Equity For the non-trading book, equity For HSBC UK, all equity
exposures exposures are assessed
can be assessed under standardised or under the standardised
IRB approaches. approach.
------------------------------------------ ---------------------------------------------------------
Securitisation The Basel Framework specifies two methods For the positions in
for calculating credit risk requirements the securitisation non-trading
for securitisation positions in the book, HSBC UK uses the
non-trading book: the standardised IRB approach, and within
approach this the Ratings Based
and the IRB approach, which incorporates Method.
the Ratings Based Method, the Internal
Assessment Approach and the Supervisory
Formula Method. Securitisation positions
in the trading book are treated within
market risk, using the CRD IV standard
rules.
------------------------------------------ ---------------------------------------------------------
Market risk Market risk capital requirements can For HSBC UK, the market
be determined under either the standard risk capital requirement
rules or the Internal Models Approach. is measured using the
The latter involves the use of internal standardised rules.
Value at Risk models to measure market
risks and determine the appropriate
capital requirement.
--------------- ------------------------------------------ ---------------------------------------------------------
Operational The Basel framework allows firms to HSBC UK uses the standardised
risk calculate their operational risk capital approach in determining
requirement under the basic indicator operational risk capital
approach, the standardised approach requirement.
or the advanced measurement approach.
--------------- ------------------------------------------ ---------------------------------------------------------
Pillar 2 and ICAAP
Pillar 2
We conduct an 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. Our base capital plan undergoes stress testing. This, coupled with our economic capital framework and other risk management practices, is used to assess our internal capital adequacy requirements and inform our view of our internal capital planning buffer. The ICAAP is formally approved by the HSBC UK Board of Directors ('Board'), which has the ultimate responsibility for the effective management of risk and approval of our risk appetite.
The ICAAP is reviewed by the PRA as part of its supervisory review and evaluation process, which occurs periodically to enable the regulator to define the total capital requirement ('TCR') or minimum capital requirements for the group, and to define the PRA buffer, where required. Under the PRA's revised Pillar 2 regime, the capital planning buffer has been replaced with a PRA buffer. This is not intended to duplicate the CRD IV buffers and, where necessary will be set according to the vulnerability of a bank in a stress scenario, as assessed through the annual PRA stress testing exercise.
The processes of internal capital adequacy assessment and supervisory review lead to a final determination by the PRA of TCR and any PRA buffer that may be required.
Within Pillar 2, Pillar 2A considers, in addition to the minimum capital requirements for Pillar 1 risks described above, any supplementary requirements for those risks and any requirements for risk categories not captured by Pillar 1. The risk categories to be covered under Pillar 2A depend on the specific circumstances of a firm and the nature and scale of its business.
Pillar 2B consists of guidance from the PRA on the capital buffer a firm would require in order to remain above its TCR in adverse circumstances that may be largely outside the firm's normal and direct control, for example during a period of severe but plausible downturn stress, when asset values and the firm's capital surplus may become strained. This is quantified via any PRA buffer requirement the PRA may consider necessary. The assessment of this is informed by stress tests and a rounded judgement of a firm's business model, also taking into account the PRA's view of a firm's options and capacity to protect its capital position under stress, for instance through capital generation. Where the PRA assesses a firm's risk management and governance to be significantly weak, it may also increase the PRA buffer to cover the risks posed by those weaknesses until they are addressed. The PRA buffer is intended to be drawn upon in times of stress, and its use is not of itself a breach of capital requirements that would trigger automatic restrictions on distributions. In specific circumstances, the PRA should agree a plan with a firm for its restoration over an agreed timescale.
Internal capital adequacy assessment
The Board approves the group ICAAP, and together with RMM, it examines the group's risk profile from both regulatory and economic capital viewpoints, aiming to ensure that capital resources:
-- remain sufficient to support our risk profile and outstanding commitments;
-- exceed current regulatory requirements, and that the group is well placed to meet those expected in the future;
-- allow the group to remain adequately capitalised in the event of a severe economic downturn stress scenario; and
-- remain consistent with our strategic and operational goals, and our shareholder and investor expectations.
The minimum regulatory capital that we are required to hold is determined by the rules and guidance established by the PRA. These capital requirements are a primary influence shaping the business planning process, in which RWA targets are established for the global businesses in accordance with the group's strategic direction and risk appetite.
The economic capital assessment is a more risk-sensitive measure than the regulatory minimum, as it covers a wide range of risks accruing from our operations. Both the regulatory and the economic capital assessments rely upon the use of models that are integrated into our management of risk. Our economic capital models are calibrated to quantify the level of capital that is sufficient to absorb potential losses over a one-year time horizon to a 99.95% level of confidence for our banking and trading activities, and to a 99.5% level of confidence for our pension risks.
The ICAAP and its constituent economic capital calculations are examined by the PRA as part of its supervisory review and evaluation process. This examination informs the regulator's view of our Pillar 2 capital requirements.
Preserving our strong capital position remains a priority, and the level of integration of our risk and capital management helps to optimise our response to business demand for regulatory and economic capital. Risks that are explicitly assessed through economic capital are credit risk, including CCR, market and operational risk, non-trading book interest rate risk, pension risk, residual risk and structural foreign exchange risk.
Credit risk Overview
Credit risk is the risk of financial loss if a customer or counterparty fails to meet a payment obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also from off-balance sheet products, such as guarantees and credit derivatives, and from the group's holdings of debt and other securities.
The tables below set out details of the credit risk exposures by exposure class and approach.
Further explanation of the group's approach to managing credit risk (including details of past due and impaired exposures, and its approach to credit risk impairment) can be found from page 24 of our Annual Report and Accounts 2019;
Table 12: Overview of RWAs (OV1)
----------- -----------
At 31 Dec 2019
RWAs Capital
required
GBPm GBPm
----------- -----------
1 Credit risk (excluding counterparty credit risk) 74,220 5,937
---- ----------------------------------------------------------- ---------
2 - standardised approach 1,376 110
3 - foundation IRB approach 5,665 453
----
4 - advanced IRB approach 67,179 5,374
---- -----------------------------------------------------------
6 Counterparty credit risk 198 16
---- ----------------------------------------------------------- ---------
7 - mark-to-market 60 5
---- -----------------------------------------------------------
8 - original exposure 84 7
---- -----------------------------------------------------------
- risk exposure amount for contributions to the default
11 fund of a central counterparty 31 2
---- -----------------------------------------------------------
12 - credit valuation adjustment 23 2
---- ----------------------------------------------------------- --------- ---------
14 Securitisation exposures in the non-trading book 596 48
---- ----------------------------------------------------------- ---------
15 - IRB ratings based method 76 6
---- -----------------------------------------------------------
14a - exposures subject to the new securitisation framework(1) 520 42
---- ----------------------------------------------------------- --------- ---------
19 Market risk 27 2
---- ----------------------------------------------------------- ---------
20 - standardised approach 27 2
---- -----------------------------------------------------------
23 Operational risk 10,303 824
---- ----------------------------------------------------------- --------- ---------
25 - standardised approach 10,303 824
---- -----------------------------------------------------------
Amounts below the thresholds for deduction (subject
27 to 250% risk weight) 537 43
---- ----------------------------------------------------------- --------- ---------
Total 85,881 6,870
---- ----------------------------------------------------------- --------- ---------
1 On 1 January 2019, a new securitisation framework came into force in the EU for new transactions. Existing positions are subject to 'grandfathering' provisions and will transfer to the new framework on 1 January 2020.
Further information on the movement in RWAs can be found on page 53 of our Annual Report and Accounts 2019.
Table 13: Credit risk exposure - summary (CRB-B)
At 31 December 2019 At 31 December 2018
Average Average
Net net Net net
carrying carrying Capital RWA carrying carrying Capital RWA
value values RWAs^ required^ Density value values RWAs^ required^ Density
Footnotes GBPm GBPm GBPm GBPm % GBPm GBPm GBPm GBPm %
------- -------- -------- ------ --------- ---------
IRB advanced
approach 245,612 240,215 65,900 5,272 30 244,482 239,490 72,618 5,809 33
-------- -------- ------ --------- ------- -------- -------- ------ --------- ---------
Central
governments
and central
banks 6,596 6,817 683 55 10 6,161 4,763 640 51 10
----------------
Institutions 1,007 981 134 11 14 683 756 167 13 25
Corporates 1 78,988 80,236 45,008 3,600 68 83,005 82,106 52,636 4,211 76
Total retail 159,021 152,181 20,075 1,606 13 154,633 151,865 19,175 1,534 13
Secured by
mortgages
on immovable
property
- small and
medium
sized
enterprises
('SME') 1,714 1,673 830 66 54 1,755 1,700 1,029 82 66
---------------- ----------
Secured by
mortgages
on immovable
property
non-SME 107,495 101,543 5,404 433 5 102,104 100,266 4,886 391 5
Qualifying
revolving
retail 38,625 38,313 5,708 457 22 40,169 39,182 5,577 446 21
Other SME 4,055 3,985 2,905 232 96 4,140 4,338 3,004 240 97
Other non-SME 7,132 6,667 5,228 418 71 6,465 6,379 4,679 375 71
---------------- ---------- -------- -------- ------ --------- ------- -------- -------- ------ --------- ---------
IRB
securitisation
positions 3,177 1,398 596 48 19 1,053 1,108 153 12 15
----------------
IRB non-credit
obligation
assets 2,011 2,025 1,279 102 64 2,147 2,324 1,386 111 65
----------------
IRB foundation
approach 11,415 10,105 5,665 453 61 9,533 9,259 4,931 394 65
-------- -------- ------ --------- ------- -------- -------- ------ --------- ---------
Corporates 11,415 10,105 5,665 453 61 9,533 9,259 4,931 394 65
---------------- ---------- -------- -------- ------ --------- ------- -------- -------- ------ --------- ---------
Standardised
approach 53,212 45,000 1,913 153 4 43,052 44,401 2,047 165 5
---------------- ---------- -------- -------- ------ --------- ------- -------- -------- ------ --------- ---------
Central
governments
and central
banks 48,245 40,463 537 43 1 38,605 40,772 637 51 2
----------------
Regional
government
or local
authorities 256 210 - - - 182 120 - - -
---------------- ----------
Public sector
entities 1,023 1,051 - - - 832 598 - - -
Institutions 776 739 163 13 21 989 522 233 19 24
Corporates 476 510 294 24 78 614 379 494 40 98
Retail 865 837 340 27 70 848 863 320 26 71
Secured by
mortgages
on immovable
property 977 447 353 28 37 294 258 123 10 47
----------------
Exposures in
default 72 64 101 8 142 63 64 94 7 144
Items
associated
with
particularly
high risk 8 8 12 1 150 8 8 12 1 150
----------------
Other items 514 671 113 9 22 617 817 134 11 22
Total 315,427 298,743 75,353 6,028 26 300,267 296,582 81,135 6,491 30
---------------- ---------- -------- -------- ------ --------- ------- -------- -------- ------ --------- ---------
1 Corporates includes specialised lending exposures which are reported in more detail in Table 40.
Credit quality
The following tables present information on the credit quality of exposures by exposure class and by industry.
Table 14: Credit quality of exposures by exposure classes and instruments(1)
(CR1-A)
Gross carrying
values of
Credit
risk
Specific adjustment
credit Write-offs charges Net
Defaulted Non-defaulted risk in the of the carrying
exposures exposures adjustments year period values
GBPm GBPm GBPm GBPm GBPm GBPm
----------- --------------- ------------- ------------ ------------ ----------
Central governments and
1 central banks - 6,596 - - - 6,596
2 Institutions - 1,008 1 - 1 1,007
3 Corporates 1,961 89,292 850 190 216 90,403
--- -------------------------------------------------- --------- ------------- ----------- ---------- ------ ---- --------
4 * of which: specialised lending 581 11,327 194 - 26 11,714
-------------------------------------------------- --------- ------------- ----------- ---------- ------ ---- --------
6 * of which: Others 1,380 77,954 656 190 190 78,678
--------------------------------------------------
7 Retail 1,194 158,715 888 278 458 159,021
8 * Secured by real estate property - SME 35 1,691 12 - (6) 1,714
--------------------------------------------------
9
* Secured by real estate property - Non-SME 733 106,874 112 2 7 107,495
--------------------------------------------------
10 * Qualifying revolving retail 219 38,814 408 126 226 38,625
--------------------------------------------------
11 * Other retail 207 11,336 356 150 231 11,187
--------------------------------------------------
12 * of which SME 122 4,088 155 85 113 4,055
-------------------------------------------------- --------- ------------- ----------- ---------- ------ ---- --------
13 * of which Non-SME 85 7,248 201 65 118 7,132
-------------------------------------------------- --------- ------------- ----------- ---------- ------ ---- --------
15 Total IRB approach 3,155 255,611 1,739 468 675 257,027
--- -------------------------------------------------- --------- ------------- ----------- ---------- ------ ---- --------
Central governments and
16 central banks - 48,245 - - - 48,245
Regional governments or
17 local authorities - 256 - - - 256
18 Public sector entities - 1,023 - - - 1,023
21 Institutions - 776 - - - 776
22 Corporates - 486 10 - 7 476
24 Retail - 868 3 - (1) 865
25 - of which: SMEs - 157 - - - 157
Secured by mortgages on
26 immovable property - 977 - - - 977
28 Exposures in default 72 3 3 3 4 72
Items associated with particularly
29 high risk 8 - - 1 1 8
34 Other exposures - 514 - - - 514
35 Total standardised approach 80 53,148 16 4 11 53,212
--- -------------------------------------------------- --------- ------------- ----------- ---------- ------ ---- --------
36 Total at 31 Dec 2019 3,235 308,759 1,755 472 686 310,239
--- -------------------------------------------------- --------- ------------- ----------- ---------- ------ ---- --------
- of which: loans 2,960 218,866 1,696 472 696 220,130
- of which: debt securities - 19,445 1 - - 19,444
- of which: off-balance
sheet exposures 275 69,672 58 - (10) 69,889
--- -------------------------------------------------- --------- ------------- ----------- ---------- ------ --- --------
1 Securitisation positions and non-credit obligation assets are not included in this table.
Table 15: Credit quality of exposures by industry or counterparty types(1)
(CR1-B)
Gross carrying
values of
Credit
Specific risk adjustment
credit Write-offs charges
Defaulted Non-defaulted risk in the of the Net carrying
exposures exposures adjustments year period values
GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ------------- ------------- ------------------ --------------
1 Agriculture 91 4,130 16 2 (8) 4,205
Mining & oil
2 extraction 2 1,635 7 - (6) 1,630
3 Manufacturing 177 13,604 260 71 139 13,521
4 Utilities 77 762 14 - 3 825
5 Water supply - 524 - - - 524
6 Construction 253 3,341 127 2 12 3,467
Wholesale &
7 retail trade 304 16,214 131 9 19 16,387
Transportation &
8 storage 89 2,572 42 - 27 2,619
Accommodation &
9 food services 98 7,943 38 87 62 8,003
Information &
10 communication 9 570 5 - 1 574
Financial &
11 insurance 6 43,127 4 - (1) 43,129
----------------- ---------- ------------- ----------- ----------- ------------ --- ------------
12 Real estate 603 18,006 170 18 48 18,439
Professional
13 activities 45 5,909 34 - (33) 5,920
Administrative
14 service 131 8,794 75 - (25) 8,850
Public admin &
15 defence - 16,819 1 - 21 16,818
16 Education 9 1,367 10 - (6) 1,366
Human health &
17 social work 102 1,828 28 - (7) 1,902
Arts &
18 entertainment 18 1,921 11 39 42 1,928
19 Other services 11 1,039 8 - - 1,042
20 Personal 1,210 157,907 774 244 398 158,343
Extraterritorial
21 bodies - 747 - - - 747
----------------- ---------- ------------- ----------- ----------- ------------ ---- ------------
Total at 31
22 December 2019 3,235 308,759 1,755 472 686 310,239
---- ----------------- ---------- ------------- ----------- ----------- ------------ ---- ------------
1 Securitisation positions and non-credit obligation assets are not included in this table.
Table 16: Credit quality of exposures by geography(1, 2) (CR1-C)
Gross carrying
values of
Credit
Specific risk adjustment
credit Write-offs charges
Defaulted Non-defaulted risk in the of the Net carrying
exposures exposures adjustments year(3) period(3) values
GBPm GBPm GBPm GBPm GBPm GBPm
United Kingdom 3,079 289,403 1,715 472 687 290,767
Other Europe 108 9,549 30 - 7 9,627
---------- ------------- --------------- ------------ ------------ ---- ------------
United States
of America 7 6,835 5 - (1) 6,837
---------- ------------- --------------- ------------ ------------ --- ------------
Other 41 2,972 5 - (7) 3,008
---------- ------------- --------------- ------------ ------------ --- ------------
Total at 31
December 2019 3,235 308,759 1,755 472 686 310,239
---------------- ---------- ------------- --------------- ------------ ------------ ---- ------------
1 Amounts shown by geographical region and country/territory in this table are based on the country/territory of residence of the counterparty.
2 Securitisation positions and non-credit obligation assets are not included in this table. 3 Presented on a year-to-date basis.
Past due unimpaired and credit-impaired exposures
The table below analyses past due unimpaired and credit-impaired exposures on a regulatory consolidation basis using accounting values. There are no material differences between the regulatory and accounting scope of consolidation.
All amounts past due more than 90 days are considered credit impaired even where regulatory rules deem default as 180 days past due.
Table 17: Amount of past due, impaired exposures and related allowances
by industry sector and by geographical region
At 31 December
2019 2018
-----------
United United
Kingdom(1) Kingdom(1)
GBPm GBPm
----------------------------------------------------------- -----------
Past due but not impaired exposures 575 505
------------------------------------------------------------
* personal 391 391
* corporate and commercial 184 114
---------- ----------
Impaired exposures 3,626 3,048
------------------------------------------------------------
* personal 1,282 1,230
* corporate and commercial 2,315 1,728
* financial 29 90
---------- ----------
Impairment allowances and other credit risk provisions (1,755) (1,544)
------------------------------------------------------------
* personal (744) (569)
* corporate and commercial (994) (941)
* financial (17) (34)
------------------------------------------------------------ ---------- ----------
1 Amounts shown by geographical region in this table are based on the country of the lender.
Table 18: Movement in specific credit risk adjustments by industry
sector and by geographical region
2019 2018
United United
Kingdom(1) Kingdom(1,2)
GBPm GBPm
----------- ---------------
Specific credit risk adjustments at 1 January 1,544 -
--------------------------------------------------------
Amounts transferred from HSBC Bank plc - 1,404
-------------------------------------------------------- ---------- -----------
Amounts written off (472) (233)
--------------------------------------------------------
* personal (199) (131)
* corporate and commercial (272) (102)
* financial (1) -
---------- -----------
Recoveries of amounts written off in previous years 78 52
--------------------------------------------------------
* personal 66 44
* corporate and commercial 12 8
---------- -----------
Charge to income statement 686 362
--------------------------------------------------------
* personal 374 231
* corporate and commercial 310 130
* financial 2 1
---------- -----------
Exchange and other movements (81) (41)
Specific credit risk adjustments at 31 December 1,755 1,544
-------------------------------------------------------- ---------- -----------
1 Amounts shown by geographical region in this table are based on the country of the lender.
2 Figures represent the 6 month period from the date of legal separation (1 July 2018) to 31 December 2018.
Expected loss ('EL') and credit risk adjustments ('CRAs')
We analyse credit loss experience in order to assess the performance of our risk measurement and control processes, and to inform our understanding of the implications for risk and capital management of dynamic changes occurring in the risk profile of our exposures.
When comparing EL with measures of expected credit losses ('ECL') under IFRS 9, it is necessary to take into account differences in the definition and scope of each. Below are examples of matters that can give rise to material differences in the way economic, business and methodological drivers are reflected quantitatively in the accounting and regulatory measures of loss.
In general, HSBC UK calculates ECL using three main components, a PD, an EAD and an LGD.
ECL includes impairment allowances (or provision in the case of commitments and guarantees) for the 12-month ECL and lifetime ECL, and on financial assets that are considered to be in default or otherwise credit impaired.
ECL resulting from default events that are possible within the next 12 months are recognised for financial instruments in stage 1.
An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument.
Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when 30 days past due.
ECL resulting from default events that are possible beyond 12 months ('Lifetime ECL') are recognised for financial instruments in stages 2 & 3.
Changes in ECL and other credit impairment charges represent the movement in the ECL during the year including write-offs, recoveries and foreign exchange. EL represents the one-year regulatory expected loss accumulated in the book at the balance sheet date.
CRAs encompass the impairment allowances or provisions balances, and changes in expected credit losses and other credit impairment charges.
Table 19 sets out for IRB credit exposures the EL, CRA balances and actual loss experience reflected in the charges for CRAs.
The group leverages the Basel IRB framework where possible, with re-calibration to meet the differing IFRS 9 requirements as follows:
PD
* Through the cycle (represents long-run average PD * Point in time (based on current conditions, adjusted
throughout a full economic cycle) to take into account estimates of future conditions
that will impact PD)
* The definition of default includes a backstop of 90+
days past due, although this has been modified to * Default backstop of 90+ days past due for all
180+ days past due for some portfolios, particularly portfolios
UK mortgages
------------------------------------------------------------
EAD
* Represents the current balance including any interest * Amortisation captured for term products
accrued to date plus the expected balance not
currently utilised (off-balance sheet amount) that
would be utilised at the time of default and
appropriate for an economic downturn
------ ------------------------------------------------------------ ------------------------------------------------------------
LGD
* Downturn LGD (consistent losses expected to be * Expected LGD (based on estimate of loss given default
suffered during a severe but plausible economic including the expected impact of future economic
downturn) conditions such as changes in value of collateral)
* Regulatory floors may apply to mitigate risk of * No floors
underestimating downturn LGD due to lack of
historical data
* Discounted using the original effective interest rate
of the loan
* Discounted using cost of capital
* Only costs associated with obtaining/selling
* All collection costs included collateral included
------ ------------------------------------------------------------ ------------------------------------------------------------
Other
* Discounted back from point of default to balance
sheet date
------ ------------------------------------------------------------ ------------------------------------------------------------
Table 19: IRB expected loss and CRA - by exposure class and by region
At 31 December 2019 At 31 December 2018
CRA(1) CRA(1)
Charge Charge
Expected for Expected for
loss(1) Balances the year loss(1) Balances the year
GBPm GBPm GBPm GBPm GBPm GBPm
IRB exposure classes
----------------------------------------- --------- -------- ----------- ---------- -------- -----------
Institutions - 1 1 - - -
Corporates 1,309 850 216 905 826 135
Retail 799 888 458 651 710 218
----------------------------------------- --------- -------- ------- ---------- -------- -------
- secured by mortgages on immovable
property SME 27 12 (6) 21 18 (1)
- secured by mortgages on immovable
property non-SME 64 112 7 65 108 (12)
- qualifying revolving retail 333 408 226 263 307 101
- other SME 205 155 113 176 130 43
- other non-SME 170 201 118 126 147 87
--------- -------- ------- ---------- -------- -------
Total 2,108 1,739 675 1,556 1,536 353
----------------------------------------- --------- -------- ------- ---------- -------- -------
1 Excludes securitisation exposures because EL is not calculated for this exposure class.
Based on the country of the lender, amounts shown in the above table are in the UK.
Table 20: Changes in stock of general and specific
credit risk adjustments (CR2-A)
------------------- -------------------
12 months to 31
December 2019
Accumulated Accumulated
specific general
credit credit
risk adjustments risk adjustments
Footnotes GBPm GBPm
---- ---------------------------------------------------- ----------- ------------------- -------------------
1 Opening balance at the beginning of the period 1,544 -
-----------------------------------------------------------------
Increases due to amounts set aside for estimated
2 loan losses during the period 1 836 -
---- -----------
Decreases due to amounts reversed for estimated
3 loan losses during the period 1 (153 ) -
---- -----------
Decreases due to amounts taken against accumulated
4 credit risk adjustments (472 ) -
----
9 Closing balance at the end of the period 1,755 -
--------------- -----------------
Recoveries on credit risk adjustments recorded
10 directly to the statement of profit or loss 78 -
---- ----------------------------------------------------------------- --------------- -----------------
1 Following adoption of IFRS 9 'Financial Instruments', the movement due to amounts set aside for estimated loan losses during the period has been reported on a net basis.
Table 21: Changes in stock of defaulted loans and debt securities (CR2-B)
2019
Gross carrying
value
GBPm
Defaulted loans and debt securities at the beginning of
1 the period 2,604
-----------------------------------------------------------------
2 Loans and debt securities that have defaulted since the
last reporting period 1,785
3 Returned to non-defaulted status (416)
------------
4 Amounts written off (472)
7 Repayments (295)
--- ----------------------------------------------------------------- ------------
6 Defaulted loans and debt securities at the end of the period 3,206
--- ----------------------------------------------------------------- ------------
Risk mitigation
Our approach when granting credit facilities is to do so on the basis of capacity to repay, rather than placing primary reliance on credit risk mitigants. Depending on a customer's standing and the type of product, facilities may be provided unsecured.
Mitigation of credit risk is a key aspect of effective risk management and takes many forms. Our general policy is to promote the use of credit risk mitigation, justified by commercial prudence and capital efficiency. Detailed policies cover the acceptability, structuring and terms with regard to the availability of credit risk mitigation, such as in the form of collateral security. These policies, together with the setting of suitable valuation parameters, are subject to regular review to ensure that they are supported by empirical evidence and continue to fulfil their intended purpose.
Collateral
The most common method of mitigating credit risk is to take collateral. In our retail residential and commercial real estate ('CRE') businesses, a mortgage over the property is usually taken to help secure claims. Physical collateral is also taken in various forms of specialised lending and leasing transactions where income from the physical assets that are financed is also the principal source of facility repayment. In the commercial and industrial sectors, charges are created over business assets such as premises, stock and debtors. Loans to private banking clients may be made against a pledge of eligible marketable securities, cash or real estate. Facilities to SMEs are commonly granted against guarantees given by their owners and/or directors.
Further information regarding charges held over residential and commercial property can be found from page 40 of our Annual Report and Accounts 2019.
Financial collateral
HSBC UK provides customers with working capital management products. Some of these products have loans and advances to customers and customer accounts where we have rights of offset, and comply with the regulatory requirements for on-balance sheet netting. Under on-balance sheet netting, the customer accounts are treated as cash collateral and the effects of this collateral are incorporated in our LGD estimates. For risk management purposes, the net exposures are subject to limits that are
monitored, and the relevant customer agreements are subject to review and update, as necessary, to ensure the legal right of offset remains appropriate.
Other forms of credit risk mitigation
Facilities to SMEs are commonly granted against guarantees given by their owners and/or directors. Guarantees may be taken from third parties where the group extends facilities without the benefit of any alternative form of security, e.g. where it issues a bid or performance bond in favour of a non-customer at the request of another bank.
In our corporate lending, we also take guarantees from corporates and export credit agencies. Corporates normally provide guarantees as part of a parent/subsidiary or common parent relationship and span a number of credit grades. Export credit agencies will normally be investment grade.
Policy and procedures
Policies and procedures govern the protection of our position
from the outset of a customer relationship; for instance, in requiring standard terms and conditions or specifically agreed documentation permitting the offset of credit balances against debt obligations, and through controls over the integrity, current valuation and, if necessary, realisation of collateral security.
Valuing collateral
Valuation strategies are established to monitor collateral mitigants to ensure that they continue to provide the anticipated secure secondary repayment source. In the residential mortgage business, HSBC UK policy prescribes revaluation at intervals of up to three years, or more frequently where market conditions are subject to significant change. Residential property collateral values are determined through a combination of professional appraisals, house price indices or statistical analysis.
Local market conditions determine the frequency of valuation for CRE. Revaluations are sought where, for example, as part of the regular credit assessment of the obligor, material concerns arise in relation to the performance of the collateral. CRE revaluation also commonly occurs where a decline in the obligor's credit quality gives cause for concern that the principal payment source may not fully meet the obligation.
Recognition of risk mitigation under the
IRB approach
Within an IRB approach, risk mitigants are considered in two broad categories: first, those that reduce the intrinsic PD of an obligor; and second, those that affect the estimated recoverability of obligations and thus LGD.
The first typically include full parental guarantees - where one obligor within a group of companies guarantees another. This is usually factored into the estimate of the latter's PD, as it is expected that the guarantor will intervene to prevent a default. PD estimates are also subject to a 'sovereign ceiling', constraining the risk ratings assigned to obligors in higher risk countries if only partial parental support exists. In certain jurisdictions, typically those on the Foundation IRB approach, certain types of third-party guarantee are also recognised through substitution of the obligor's PD by the guarantor's PD.
In the second category, LGD estimates are affected by a wider range of collateral, including cash, charges over real estate property, fixed assets, trade goods, receivables and floating charges such as mortgage debentures. Unfunded mitigants, such as third-party guarantees, are also taken into consideration in LGD estimates where there is evidence that they reduce loss expectation.
The main providers of guarantees are banks, other financial institutions and corporates, the latter typically in support of subsidiaries of their company group. The nature of such customers and transactions is very diverse and the creditworthiness of guarantors accordingly spans a wide spectrum. The creditworthiness of providers of unfunded credit risk mitigation is taken into consideration as part of the guarantor's risk profile when; for example, assessing the risk of other exposures such as direct lending to the guarantor. Internal limits for such contingent exposure are approved in the same way as direct exposures.
EAD and LGD values, in the case of individually assessed exposures, are determined by reference to internal risk parameters based on the nature of the exposure. For retail portfolios, credit risk mitigation data is incorporated into the internal risk parameters for exposures and feeds into the calculation of the EL band value summarising both customer delinquency and product or facility risk. Credit and credit risk mitigation data form inputs submitted by all HSBC UK offices to centralised databases. A range of collateral recognition approaches are applied to IRB capital treatments:
-- unfunded protection, which includes credit derivatives and guarantees, is reflected through adjustment or determination of PD or LGD;
-- eligible financial collateral is taken into account in LGD models (under Advanced IRB) or by adjusting regulatory LGD values (under Foundation IRB). The adjustment to LGD for the latter is based on the degree to which the exposure value would be adjusted if the Financial Collateral Comprehensive Method were applied; and
-- for all other types of collateral, including real estate, the LGD for exposures calculated under the IRB advanced approach is calculated by models. For IRB foundation, base regulatory LGDs are adjusted depending on the value and type of the asset taken as collateral relative to the exposure. The types of eligible mitigant recognised under the IRB foundation approach are more limited.
Recognition of risk mitigation under the standardised approach
Where credit risk mitigation is available in the form of an eligible guarantee, non-financial collateral or credit derivatives, the exposure is divided into covered and uncovered portions. The covered portion, which is determined after applying an appropriate 'haircut' for currency and maturity mismatches (and for omission of restructuring clauses for credit derivatives, where appropriate) to the amount of the protection provided, attracts the risk weight of the protection provider. The uncovered portion attracts the risk weight of the obligor. For exposures fully or partially covered by eligible financial collateral, the value of the exposure is adjusted under the financial collateral comprehensive method using supervisory volatility adjustments, including those arising from currency mismatch, which are determined by the specific type of collateral (and, in the case of eligible debt securities, their credit quality) and its liquidation period. The adjusted exposure value is subject to the risk weight of the obligor.
Table 22: Standardised approach - credit conversion factor ('CCF')
and credit risk mitigation ('CRM') effects (CR4)
Exposures before
CCF Exposures post-CCF RWAs and RWA
and CRM and CRM density
On-balance Off-balance On-balance Off-balance
sheet sheet sheet sheet
amount amount amount amount RWAs RWA density
GBPm GBPm GBPm GBPm GBPm %
----- -------------- --------------- ------------- ----------------- ------------- -------------- -------------
Asset
classes(1)
----- --------------
Central
governments
or
1 central banks 48,244 1 48,244 1 537 1
--------------
Regional
governments
or
local
2 authorities 257 - 257 - - -
-----------
Public sector
3 entities 1,023 - 1,023 - - -
-----------
6 Institutions 776 - 776 - 163 21
7 Corporates 286 191 286 91 294 78
8 Retail 485 379 485 - 340 70
Secured by
mortgage on
immovable
9 property 957 20 957 4 353 37
Exposures in
10 default 71 - 71 - 101 142
Higher-risk
11 categories 8 - 8 - 12 150
16 Other items 516 - 516 - 113 22
At 31
17 December 2019 52,623 591 52,623 96 1,913 4
----- -------------- ------------- ----------- --------------- ----------- ------------ -------------
1 Securitisation positions are not included in this table.
Table 23: Credit risk mitigation techniques - IRB and Standardised
(CR3)
31 December 2019
Secured by:
Exposures Exposures
unsecured: secured:
carrying carrying financial credit
amount amount collateral guarantees derivatives
Footnotes GBPm GBPm GBPm GBPm GBPm
--------- ---------- ----------- --------------
Exposures under the IRB approach 1,2
--------------------------------- ---------- ----------- --------- ---------- ----------- --------------
Central governments and central
banks 6,596 - - - -
--------------------------------- ------------
Institutions 986 21 21 - -
------------
Corporates 44,797 45,605 43,216 2,389 -
Retail 48,530 110,492 110,394 98 -
------------
Total 100,909 156,118 153,631 2,487 -
--------------------------------- ---------- ----------- --------- ---------- ----------- ------------
Exposures under the STD approach 1,2
--------------------------------- ---------- --------------
Central governments and central
banks 3 48,030 - - - -
--------------------------------- ------------
Institutions 775 - - - -
--------------------------------- ------------
Corporates 366 110 8 102 -
--------------------------------- ------------
Retail 862 3 3 - -
--------------------------------- ------------
Secured by mortgages on
immovable
property 963 14 14 - -
--------------------------------- ------------
Exposures in default 66 6 6 - -
--------------------------------- ------------
Items associated with
particularly
high risk 4 - 8 8 - -
--------------------------------- ---------- ----------- --------- ---------- ----------- ------------
Regional governments or local
authorities 257 - - - -
--------------------------------- ------------
Public sector entities 1,023 - - - -
--------------------------------- ---------- ----------- --------- ---------- ----------- ------------
Total 52,342 141 39 102 -
--------------------------------- ---------- ----------- --------- ---------- ----------- ------------
1 This table includes both on and off-balance sheet exposures.
2 Securitisation positions are not included in this table.
3 Deferred tax assets are excluded from the exposure.
4 Equities are excluded from the exposure.
Asset encumbrance
The following tables disclose on-balance sheet encumbered and unencumbered assets and off-balance sheet collateral (represented by median values of monthly data points in
2019
), as required by Commission Delegated Regulation (EU) 2017/2295.
Table 24: Asset encumbrance A - Assets
At 31 December 2019
Carrying
Carrying amount Fair value amount of Fair value
of encumbered of encumbered unencumbered of unencumbered
assets assets assets assets
Of which: Of which:
notionally notionally Of which: Of which:
eligible eligible EHQLA EHQLA
EHQLA EHQLA and and
Total and HQLA Total and HQLA Total HQLA Total HQLA
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets of the
reporting
010 institution 3,043 2,444 248,125 45,938
Loans on
020 demand - - 34,159 32,107
Equity
030 instruments - - 8 -
Debt
040 securities 2,854 2,444 2,854 2,444 14,820 13,197 14,820 13,197
of which:
-
asset-backed
060 securities 263 - 263 690 - 690
- issued by
general
070 governments 2,229 2,229 2,229 2,229 11,434 11,434 11,434 11,434
- issued by
financial
080 corporations 621 215 620 215 2,997 1,763 2,997 1,763
- issued by
non-financial
090 corporations 4 - 4 - 360 - 360 -
Loans and
advances
other
than loans on
100 demand - - - - 186,162 - 186,162 -
of which:
mortgage
110 loans - - - - 124,868 - 124,868 -
---- -------------- -------- ---------- -------- ---------- -------- --------- -------- ---------
120 Other assets 189 - 12,976 634
---- -------------- -------- ---------- ---------- ------------ -------- --------- ---------- -----------
Table 25: Asset encumbrance B - Collateral received
At 31 December 2019
Fair value of encumbered Fair value of collateral
collateral received received or own debt
or own debt securities securities issued
issued available for encumbrance
Of which: notionally
eligible EHQLA Of which: EHQLA
Total and HQLA Total and HQLA
GBPm GBPm GBPm GBPm
---------------------- ---------------- -----------------
Assets of the reporting
130 institution - - 6,372 4,821
-------------------- -------------- ---------------
160 Debt securities - - 4,989 4,821
of which:
---- ----------------------------------
190 - issued by general governments - - 3,085 2,918
---- ---------------------------------- ------------- -------------------- -------------- ---------------
- issued by financial
200 corporations - - 1,898 1,898
---- ---------------------------------- ------------- -------------------- -------------- ---------------
- issued by non-financial
210 corporations - - 6 5
---- ---------------------------------- ------------- -------------------- -------------- ---------------
230 Other collateral received - - 1,383 -
---- ---------------------------------- ------------- -------------------- -------------- ---------------
Total assets, collateral received
250 and own debt securities issued 3,043 2,444
---- ---------------------------------- ------------- -------------------- ---------------- -----------------
Table 26: Asset encumbrance C - Encumbered assets/collateral received
and associated liabilities
At 31 December 2019
Assets, collateral
received and own debt
Matching liabilities, securities issued
contingent liabilities other than covered
or securities lent bonds and ABSs encumbered
GBPm GBPm
Carrying amount of selected
010 financial liabilities 716 1,295
---- ---------------------------- ----------------------- --------------------------
Importance of encumbrance
We are a deposit-led bank and hence the majority of our funding is from customer current accounts and customer savings deposits payable on demand or at short notice. Given this structural unsecured funding position, we have less requirement to fund ourselves in secured markets, and therefore our overall low level of encumbrance reflects this position. There is monitoring against a limit on the level of asset encumbrance.
Non-performing and forborne exposures
The following tables are presented in accordance with the EBA's 'Final guidelines on disclosure of non-performing and forborne exposures'.
The EBA defines non-performing exposures as exposures with material amounts that are more than 90 days past due or exposures where the debtor is assessed as unlikely to pay its credit obligations in full without the realisation of collateral, regardless of the existence of any past due amounts or number days past due. Any debtors that are in default for regulatory purposes or impaired under the applicable accounting framework are always considered as non-preforming exposures. The Annual Report and Accounts 2019 does not define non-performing exposures, however the definition of credit impaired (stage 3) is aligned to the EBA's definition of non-performing exposures.
The EBA defines forborne exposures as exposures where the bank has made concessions toward a debtor that is experiencing or about to experience financial difficulties in meeting its financial commitments. In our Annual Report and Accounts 2019, forborne exposures are reported as 'renegotiated loans'. This term is aligned to the EBA definition of forborne exposure except in its treatment of 'cures'.
Under the EBA definition, exposures cease to be reported as forborne if they pass three tests:
-- the forborne exposure must have been considered to be performing for a 'probation period' of at least two years;
-- regular payments of more than an insignificant aggregate amount of principal or interest have been made during at least half of the probation period; and
-- no exposure to the debtor is more than 30 days past due at the end of the probation period.
In our Annual Report and Accounts 2019, renegotiated loans retain this classification until maturity or de-recognition.
Table 27: Credit quality of forborne exposures
At 31 December 2019
Accumulated impairment,
accumulated negative Collateral received
changes in fair and financial
Gross carrying amount/nominal value due to credit guarantees received
amount risk and provisions on forborne exposures
------------------------------- ---------------------------
Performing Non-performing
forborne forborne
On Of which
On performing non-performing forborne
Of which: Of which: forborne forborne non-performing
Total defaulted impaired exposures exposures Total exposures
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------------ -------- ----------- ---------- ------------- ---------------- --------- ----------------
Loans and
1 advances 522 1,408 1,408 1,408 (19) (364) 968 735
Other
financial
5 corporations - 2 2 2 (19) (277) 2 2
--------------
Non-financial
6 corporations 522 934 934 934 - (87) 653 420
7 Households - 472 472 472 - - 313 313
---------- ------ --------- -------- ------- ---- --------- ----- ------- --------------
10 Total 522 1,408 1,408 1,408 (19) (364) 968 735
--- -------------- ---------- ------ --------- -------- ------- --- --------- ---- ------- --------------
The following table presents an analysis of performing and non-performing exposures by days past due. The gross non-performing loan ratio at 31 December 2019 was 1.4%.
Table 28: Credit quality of performing and non-performing exposures
by past due days
At 31 December 2019
--------------------------------------------------------------------------------------------------------------------
Gross carrying amount/nominal amount
Performing exposures Non-performing exposures
Unlikely
to pay
but
Not not
past Past past Past Past Past Past Past
due due due due due due due due
or past > 30 or past > 90 > 180 > 1 > 2 > 5 Past
due days due days days year years years due
<= 30 <= 90 <= 90 <= 180 <= 1 <= 2 <= 5 <= > 7 Of which:
Total days days Total days days year years years 7 years years defaulted
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--- ------------------ --------- --------- ------ ------- ---------- ------ ------ ------- ------- ------- ------- -----------
Loans and
1 advances 222,316 222,105 211 3,206 2,288 326 251 100 220 16 5 3,206
------- ---- ----- -------- ---- ---- ----- ----- ----- ----- ---------
2 Central banks 36,936 36,936 - - - - - - - - - -
General
3 governments 5 5 - - - - - - - - - -
--- ------------------
Credit
4 institutions 1,140 1,140 - - - - - - - - - -
---
Other financial
5 corporations 5,664 5,664 - 20 13 - 4 2 1 - - 20
------------------
Non-financial
6 corporations 62,104 62,042 62 1,984 1,659 131 53 42 97 2 - 1,984
7 of which: SMEs 248 248 - 4 - - - - 3 - 1 4
8 Households 116,467 116,318 149 1,202 616 195 194 56 122 14 5 1,202
--- ------------------ ------- ------- ---- ----- -------- ---- ---- ----- ----- ----- ----- ---------
9 Debt securities 20,269 20,269 - - - - - - - - - -
10 Central banks 531 531 - - - - - - - - - -
--- ------------------
General
11 governments 17,058 17,058 - - - - - - - - - -
Credit
12 institutions 2,311 2,311 - - - - - - - - - -
Other financial
13 corporations 369 369 - - - - - - - - - -
Off-balance-sheet
15 exposures 66,875 N/A N/A 410 N/A N/A N/A N/A N/A N/A N/A 410
---------
Credit
18 institutions 31 N/A N/A - N/A N/A N/A N/A N/A N/A N/A -
Other financial
19 corporations 1,212 N/A N/A 1 N/A N/A N/A N/A N/A N/A N/A 1
Non-financial
20 corporations 28,263 N/A N/A 330 N/A N/A N/A N/A N/A N/A N/A 330
21 Households 37,369 N/A N/A 79 N/A N/A N/A N/A N/A N/A N/A 79
--------- ------ ---------- ------ ------ ------- ------- ------- ------- ---------
22 Total 309,460 242,374 211 3,616 2,288 326 251 100 220 16 5 3,616
--- ------------------ ------- ------- ---- ----- -------- ---- ---- ----- ----- ----- ----- ---------
The following table provides information on the instruments that were cancelled in exchange for collateral obtained by taking possession and on the value of the collateral obtained by taking possession. The value at initial recognition represents the gross carrying amount of the collateral obtained by taking possession at initial recognition on the balance sheet. Accumulated negative changes is the accumulated impairment or negative change on the initial recognition value of the collateral obtained by taking possession including amortisation in the case of property, plant and equipment and investment properties.
Table 29: Collateral obtained by taking possession and execution processes
At 31 December
2019
--------------------------------------
Collateral obtained
by taking possession
Value at Accumulated
initial negative
recognition changes
GBPm GBPm
---- --------------------------------------------------------------------- ----------------------- -------------
1 Property, plant and equipment - -
---------------------------------------------------------------------
2 Other than Property, plant and equipment 3 -
---------------------------------------------------------------------
3 - residential immovable property 3 -
---------------------------------------------------------------------
8 Total 3 -
---- ---------------------------------------------------------------------
The following table provides information on the gross carrying amount of exposures and related impairment with further detail on the IFRS 9 stage, accumulated partial write off and collateral. The IFRS 9 stages have the following characteristics:
-- stage 1: unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL is recognised;
-- stage 2: a significant increase in credit risk has been experienced since initial recognition on which a lifetime ECL is recognised;
-- stage 3: objective evidence of impairment, and are therefore considered to be in default or otherwise credit impaired on which a lifetime ECL is recognised. Purchased or originated credit-impaired exposures are included in stage 3.
Refer to the section 'EL and credit risk adjustments' on page 17 for further information on IFRS 9.
Credit-impaired (stage 3) exposures are disclosed on page 37 of our Annual Report and Accounts 2019.
Table 30: Performing and non-performing exposures and related provisions
31 December 2019
Accumulated impairment, Collaterals
accumulated negative and financial
changes in fair value guarantees
Gross carrying amount/nominal due to credit risk received
amount and provisions
Performing exposures Non-performing Performing Non-performing
exposures exposures exposures
of of of of of of of On On
of which: which: which: which: which: which: which: which: Accumulated perfor-ming non-perfor-ming
stage stage stage stage stage stage stage stage partial expo- expo-
1 2 2 3 1 2 2 3 write-off sures sures
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------- ------------- -----------------
Loans and
1 advances 222,316 209,137 13,179 3,206 - 3,206 (842) (216) (626) (839) - (839) (45) 134,937 1,419
Central
2 banks 36,936 36,936 - - - - - - - - - - - - -
General
3 governments 5 5 - - - - - - - - - - - - -
Credit
4 institutions 1,140 1,140 - - - - (1) (1) - - - - - - -
Other financial
5 corporations 5,664 5,266 398 20 - 20 (6) (3) (3) (1) - (1) - 3,901 10
Non-financial
6 corporations 62,104 53,391 8,713 1,984 - 1,984 (373) (135) (238) (561) - (561) (45) 29,736 715
Of which:
7 SMEs 248 - - 4 - 4 (1) - (1) - - - - - 3
8 Households 116,467 112,399 4,068 1,202 - 1,202 (462) (77) (385) (277) - (277) - 101,300 694
------- ------ ----- ----------- ---------------
9 Debt securities 20,269 20,269 - - - - - - - - - - - - -
Central
10 banks 531 531 - - - - - - - - - - - - -
General
11 governments 17,058 17,058 - - - - - - - - - - - - -
Credit
12 institutions 2,311 2,311 - - - - - - - - - - - - -
Other financial
13 corporations 369 369 - - - - - - - - - - - - -
Off-balance-sheet
15 exposures 66,875 62,068 2,609 410 - 384 (48) (28) (20) (20) - (20) - 10,834 18
Credit
18 institutions 31 29 - - - - - - - - - - - - -
Other financial
19 corporations 1,212 1,073 101 1 - 1 - - - - - - - 61 -
Non-financial
20 corporations 28,263 23,968 2,138 330 - 304 (42) (22) (20) (20) - (20) - 5,965 14
21 Households 37,369 36,998 370 79 - 79 (6) (6) - - - - - 4,808 4
22 Total 309,460 291,474 15,788 3,616 - 3,590 (890) (244) (646) (859) - (859) (45) 145,771 1,437
------- ------- ------ ---- ----------- ---------------
Concentration risk
Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic characteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas or industry sectors so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions.
We use a number of controls and measures to minimise undue concentration of exposure in our portfolios across industries. These include portfolio and counterparty limits, approval and review controls, and stress testing. The following tables present information on the concentration of exposures by geography and industry.
Table 31: Geographical breakdown of exposures (CRB-C)
Net carrying values(1,2)
United Other
Other States geographical
UK Europe of America areas Total
GBPm GBPm GBPm GBPm GBPm
--------- ------------- --------------- ---------
IRB approach exposure classes
Central governments and central
1 banks 102 - 5,630 864 6,596
2 Institutions 838 95 - 74 1,007
3 Corporates 84,579 3,564 918 1,342 90,403
4 Retail 158,366 212 114 329 159,021
6 Total IRB approach 243,885 3,871 6,662 2,609 257,027
--- ------- ------- ----------- ------------- -------
Standardised approach exposure
classes
Central governments and central
7 banks 43,831 4,414 - - 48,245
8 Regional governments or local authorities - 256 - - 256
9 Public sector entities - 1,023 - - 1,023
12 Institutions 210 19 173 374 776
13 Corporates 416 44 2 14 476
14 Retail 855 - - 10 865
Secured by mortgages on immovable
15 property 976 - - 1 977
16 Exposures in default 72 - - - 72
Items associated with particularly
17 high risk 8 - - - 8
22 Other items 514 - - - 514
23 Total standardised approach 46,882 5,756 175 399 53,212
--- ------- ------- ----------- ------------- -------
At 31 Dec 2019 290,767 9,627 6,837 3,008 310,239
--- ------- ------- ----------- ------------- -------
IRB approach exposure classes
Central governments and central
1 banks - - 4,423 1,738 6,161
2 Institutions 471 204 - 8 683
3 Corporates 86,272 3,700 1,175 1,391 92,538
---
4 Retail 154,132 162 118 221 154,633
---
6 Total IRB approach 240,875 4,066 5,716 3,358 254,015
---
Standardised approach exposure
classes
Central governments and central
7 banks 36,295 2,310 - - 38,605
---
8 Regional governments or local authorities - 182 - - 182
9 Public sector entities - 832 - - 832
12 Institutions 467 8 214 300 989
13 Corporates 447 146 2 19 614
14 Retail 847 - - 1 848
Secured by mortgages on immovable
15 property 292 1 - 1 294
16 Exposures in default 60 3 - - 63
Items associated with particularly
17 high risk 8 - - - 8
22 Other items 617 - - - 617
23 Total standardised approach 39,033 3,482 216 321 43,052
---
At 31 Dec 2018 279,908 7,548 5,932 3,679 297,067
---
1 Amounts shown by geographical region in this table are based on the country of residence of the counterparty.
2 Securitisation positions and non-credit obligation assets are not included in this table.
Table 32: Concentration of exposures by industry or counterparty types
(CRB-D) (continued)
Mining
and Wholesale Accom-modation
oil Water & retail Transpor-tation & food Infor-mation Financial
Agriculture extraction Manu-facturing Utilities supply Construction trade & storage services & commun-ication & insurance
Net carrying
values(1) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- -------- -------------- ----------- ----------------- ---------------- ---------------- -----------
IRB approach
Central
governments
and central
1 banks - - - - - - - - - - 140
2 Institutions - - - - - - - - - - 935
3 Corporates 3,463 1,623 12,956 816 522 3,384 15,817 2,552 7,763 564 2,091
4 Retail 728 6 375 9 2 76 444 46 218 9 81
Total IRB
6 approach 4,191 1,629 13,331 825 524 3,460 16,261 2,598 7,981 573 3,247
--- -------------- ------------ --------- --------------- -------------- -------------- ---------
STD approach
Central
governments
and central
7 banks - - - - - - - - - - 37,896
Regional
governments
or local
8 authorities - - - - - - - - - - 38
Public sector
9 entities - - - - - - - - - - 581
Multilateral
development
10 banks - - - - - - - - - - -
International
11 organisations - - - - - - - - - - -
12 Institutions - - - - - - - - - - 776
13 Corporates 10 - 138 - - 3 86 2 20 1 77
14 Retail 4 1 52 - - 4 40 19 2 - -
Secured by
mortgages
on immovable
15 property - - - - - - - - - - -
Exposures
16 in default - - - - - - - - - - -
Items
associated
with
particularly
17 high risk - - - - - - - - - - -
18 Covered bonds - - - - - - - - - - -
Claims on
institutions
and
corporates
with a
short-term
credit
19 assessment - - - - - - - - - - -
Collective
investment
20 undertakings - - - - - - - - - - -
Equity
21 exposures - - - - - - - - - - -
Other
22 exposures - - - - - - - - - - 514
Total STD
23 approach 14 1 190 - - 7 126 21 22 1 39,882
--- -------------- ------------ --------- --------------- -------------- -------------- ---------
At 31 Dec
24 2019 4,205 1,630 13,521 825 524 3,467 16,387 2,619 8,003 574 43,129
---
Human
Public health
Real Professional Administ-rative admin & social Arts Other Extra-territorial
estate activities service & defence Education work & entertain-ment services Personal bodies Total
Net carrying
values(1) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------- --------- -------- ---------------- ---------- ------------------- ---------
IRB approach
Central
governments
and central
1 banks - - - 5,784 - - - - - 672 6,596
2 Institutions - - - - - - - - - 72 1,007
3 Corporates 18,295 5,912 8,825 24 1,177 1,790 1,853 973 - 3 90,403
4 Retail - - - 2 189 110 71 65 156,590 - 159,021
Total IRB
6 approach 18,295 5,912 8,825 5,810 1,366 1,900 1,924 1,038 156,590 747 257,027
--- ------- -------
STD approach
Central
governments
and central
7 banks - - - 10,348 - - 1 - - - 48,245
Regional
governments
or local
8 authorities - - - 218 - - - - - - 256
Public
sector
9 entities - - - 442 - - - - - - 1,023
12 Institutions - - - - - - - - - - 776
13 Corporates 132 1 3 - - 1 1 1 - - 476
14 Retail - 7 22 - - 1 2 3 708 - 865
Secured by
mortgages
on immovable
15 property - - - - - - - - 977 - 977
Exposures
16 in default 12 - - - - - - - 60 - 72
Items
associated
with
particularly
17 high risk - - - - - - - - 8 - 8
Other
22 exposures - - - - - - - - - - 514
Total STD
23 approach 144 8 25 11,008 - 2 4 4 1,753 - 53,212
--- ------- -------
At 31 Dec
24 2019 18,439 5,920 8,850 16,818 1,366 1,902 1,928 1,042 158,343 747 310,239
-------
Table 32: Concentration of exposures by industry or counterparty types
(CRB-D) (continued)
Mining
and Wholesale Accom-modation
oil Water & retail Transpor-tation & food Infor-mation Financial
Agriculture extraction Manufac-turing Utilities supply Construction trade & storage services & commun-ication & insurance
Net carrying
values(1) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- -------------- -----------
IRB approach
exposure
classes
Central
governments
and central
1 banks - - - - - - - - - - 232
2 Institutions - - - - - - - - - - 683
3 Corporates 3,486 1,680 14,007 788 638 3,935 15,394 2,628 7,841 510 2,083
4 Retail 728 6 283 9 1 76 469 63 230 8 89
Total IRB
6 approach 4,214 1,686 14,290 797 639 4,011 15,863 2,691 8,071 518 3,087
Standardised
approach
exposure
classes
Central
governments
and central
7 banks - - - - - - - - - - 33,352
Regional
governments
or local
8 authorities - - - - - - - - - - -
Public
sector
9 entities - - - - - - - - - - 832
12 Institutions - - - - - - - - - - 989
13 Corporates 7 - 56 - - 2 69 2 29 - 166
14 Retail 4 - 34 - - 4 27 16 3 1 -
Secured by
mortgages
on immovable
15 property - - - - - - - - - - 9
Exposures
16 in default - - 3 - - - 5 - - - -
Items
associated
with
particularly
17 high risk - - - - - - - - - - -
Other
22 exposures - - - - - - - - - - 617
Total STD
23 approach 11 - 93 - - 6 101 18 32 1 35,965
At 31 Dec
24 2018 4,225 1,686 14,383 797 639 4,017 15,964 2,709 8,103 519 39,052
Human
Public health
Real Professional Administ-rative admin & social Arts Other Extra-territorial
estate activities service & defence Education work & entertain-ment services Personal bodies Total
Net carrying GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
values(1)
IRB approach
exposure
classes
Central
governments
and central
1 banks - - - 5,379 - - - - - 550 6,161
2 Institutions - - - - - - - - - - 683
3 Corporates 17,967 5,652 9,602 17 1,228 1,890 2,368 823 - 1 92,538
4 Retail 167 4 4 1 43 114 81 67 152,190 - 154,633
Total IRB
6 approach 18,134 5,656 9,606 5,397 1,271 2,004 2,449 890 152,190 551 254,015
---
STD approach
exposure
classes
Central
governments
and central
7 banks - - - 5,252 - - 1 - - - 38,605
Regional
governments
or local
8 authorities - - - 182 - - - - - - 182
Public
sector
9 entities - - - - - - - - - - 832
12 Institutions - - - - - - - - - - 989
13 Corporates 16 96 155 - 1 13 1 1 - - 614
14 Retail - 6 10 - - - 1 4 738 - 848
Secured by
mortgages
on immovable
15 property - - - - - - - - 285 - 294
Exposures
16 in default - - - - - - - - 55 - 63
Items
associated
with
particularly
17 high risk - - - - - - - - 8 - 8
Other
22 exposures - - - - - - - - - - 617
Total STD
23 approach 16 102 165 5,434 1 13 3 5 1,086 - 43,052
---
At 31 Dec
24 2018 18,150 5,758 9,771 10,831 1,272 2,017 2,452 895 153,276 551 297,067
---
1 Securitisation positions and non-credit obligation assets are not included in this table.
Table 33: Maturity of on-balance sheet exposures
Net carrying values(1)
Between
Less than 1 and More than
On demand 1 year 5 years 5 years Undated Total
GBPm GBPm GBPm GBPm GBPm
IRB approach
Central governments and
1 central banks - 186 4,587 1,823 - 6,596
2 Institutions 123 53 680 28 - 884
3 Corporates 9,239 12,072 31,970 8,614 - 61,895
4 Retail 8,451 1,139 8,242 100,519 - 118,351
6 Total IRB approach 17,813 13,450 45,479 110,984 - 187,726
--- --------- -------
Standardised approach
Central governments and
7 central banks 33,735 7,961 2,004 4,329 215 48,244
Regional government or
8 local authorities - 38 218 - - 256
9 Public sector entities - 170 853 - - 1,023
12 Institutions - 776 - - - 776
13 Corporates 10 188 71 17 - 286
14 Retail 69 105 291 21 - 486
Secured by mortgages
15 on immovable property - 23 5 930 - 958
16 Exposures in default 3 18 43 7 - 71
Items associated with
17 particularly high risk - 8 - - - 8
22 Other items - 504 10 - 2 516
--- --------- -------
23 Total standardised approach 33,817 9,791 3,495 5,304 217 52,624
24 At 31 Dec 2019 51,630 23,241 48,974 116,288 217 240,350
IRB approach
Central governments and
1 central banks - 821 4,742 598 - 6,161
2 Institutions 131 85 407 - - 623
3 Corporates 10,108 11,801 32,353 8,771 - 63,033
4 Retail 8,550 1,047 8,072 94,427 - 112,096
6 Total IRB approach 18,789 13,754 45,574 103,796 - 181,913
---
Standardised approach
Central governments and
7 central banks 32,472 1,553 1,869 2,456 254 38,604
Regional government or
8 local authorities - 106 76 - - 182
9 Public sector entities - 133 662 37 - 832
12 Institutions - 989 - - - 989
13 Corporates 105 105 316 13 - 539
14 Retail 80 58 293 13 - 444
Secured by mortgages
15 on immovable property - 29 23 200 - 252
16 Exposures in default 3 7 46 7 - 63
Items associated with
17 particularly high risk - 8 - - - 8
22 Other items - 603 11 - 3 617
---
23 Total standardised approach 32,660 3,591 3,296 2,726 257 42,530
24 At 31 Dec 2018 51,449 17,345 48,870 106,522 257 224,443
1 Securitisation positions and non-credit obligation assets are not included in this table.
Qualitative disclosures on banks'
use of
external credit ratings under the
standardised
approach for credit risk
The standardised approach is applied where exposures do not qualify for use of an IRB approach and/or where an exemption from IRB has been granted. The standardised approach requires banks to use risk assessments prepared by external credit assessment institutions ('ECAIs') or ECAs to determine the risk weightings applied to rated counterparties.
ECAI risk assessments are used within the group as part of the determination of risk weightings for the following classes of exposure:
-- central governments and central banks; -- regional governments and local authorities; -- institutions; -- corporates; -- securitisation positions; and -- short-term claims on institutions and corporates.
We have nominated three ECAIs for this purpose - Moody's Investor Service ('Moody's'), Standard and Poor's rating agency ('S&P') and Fitch Ratings ('Fitch'). In addition to this, we use
Dominion Bond Rating Service ('DBRS') specifically for securitisation positions.
We have not nominated ECAs.
Data files of external ratings from the nominated ECAIs are matched with customer records in our centralised credit database.
When calculating the risk-weighted value of an exposure using ECAI risk assessments, risk systems identify the customer in question and look up the available ratings in the central database according to the rating selection rules. The systems then apply the prescribed credit quality step mapping to derive the relevant risk weight. All other exposure classes are assigned risk weightings as prescribed in the PRA's Rulebook.
Credit
quality Moody's S&P's Fitch's
step assessment assessment assessment DBRS assessment
1 Aaa to AAA to AAA to AAA to
Aa3 AA- AA- AAL
2 A1 to A+ to A+ to AH to
A3 A- A- AL
3 Baa1 to BBB+ to BBB+ to BBBH to
Baa3 BBB- BBB- BBBL
4 Ba1 to BB+ to BB+ to BBH to
Ba3 BB- BB- BBL
5 B1 to B+ to B+ to BH to
B3 B- B- BL
6 Caa1 and CCC+ and CCC+ and CCCH and
below below below below
Exposures to, or guaranteed by, central governments and central banks of European Economic Area ('EEA') states and denominated in local currency are risk-weighted at 0% using the standardised approach, provided they would be eligible under that approach for a 0% risk weighting.
Table 41 provides further detail on the risk weighting of our standardised non-counterparty credit exposures.
Application of the IRB Approach
Our IRB credit risk rating framework incorporates obligor likelihood to default expressed in PD, and loss severity in the event of default expressed in EAD and LGD. These measures are used to calculate regulatory EL and capital requirements. They are also used with other inputs to inform rating assessments for the purposes of credit approval and many other purposes, for example:
-- credit approval and monitoring: IRB models are used in the assessment of customer and portfolio risk in lending decisions;
-- risk appetite: IRB measures are an important element in identifying risk exposure at facility, customer, sector and portfolio level;
-- pricing: IRB parameters are used in pricing tools for new transactions and reviews; and
-- economic capital and portfolio management: IRB parameters are used in the economic capital model that has been implemented across the HSBC Group.
Credit risk models governance
All new or materially changed IRB capital models require the PRA's approval, and throughout the group such models fall directly under the remit of the global functional Model Oversight Committee ('MOC'), operating in line with HSBC UK's model risk policy, and under the oversight of the Global MOC. Additionally, the global functional MOCs are responsible for the approval of stress testing models used for regulatory stress testing exercises such as those carried out by the EBA and the BoE.
Both the Wholesale and RBWM MOCs require all credit risk models for which they are responsible to be approved by delegated senior managers with notification to the committees that retain the responsibility for oversight.
Global Risk sets internal standards for the development, validation, independent review, approval, implementation and performance monitoring of credit risk rating models. Independent reviews of our models are performed by our Independent Model Review function which is separate from our Risk Analytics functions that are responsible for the development of models.
Compliance with Group standards is subject to examination by Risk oversight and review from within the Risk function itself, and by Internal Audit.
Roll-out of the IRB approach
At 31 December 2019, 79% of the exposures were treated under AIRB, 4% under FIRB and 17% under the standardised approach.
Dilution risk
Dilution risk is the risk that an amount receivable is reduced through cash or non-cash credit to the obligor, and arises mainly from factoring and invoice discounting transactions.
Where there is recourse to the seller, we treat these transactions as loans secured by the collateral of the debts purchased and do not report dilution risk for them. For our non-recourse portfolio, we do not report any dilution risk as we obtain an indemnity from the seller that indemnifies us against this risk. Moreover, factoring transactions involve lending at a discount to the face value of the receivables that provides protection against dilution risk.
Wholesale risk
The wholesale risk rating system
This section describes how we operate our credit risk analytical models and use IRB metrics in the wholesale customer business.
PDs for wholesale customer segments (that is central governments and central banks, financial institutions and corporate customers) and for certain individually assessed personal customers are derived from a Customer Risk Rating '(CRR') master scale of 23 grades. Of these, 21 are non-default grades representing varying degrees of strength of financial condition, and two are default grades. Each CRR has a PD range associated with it as well as a mid-point PD.
The score generated by a credit risk rating model for the obligor is mapped to a corresponding PD and master-scale CRR. The CRR is then reviewed by a credit approver who, taking into account information such as the most recent events and market data, makes the final decision on the rating. The rating assigned reflects the approver's overall view of the obligor's credit standing.
The mid-point PD associated with the finally assigned CRR is then used in the regulatory capital calculation.
Relationship managers may propose a different CRR from that indicated through an override process which must be approved by the Credit function. Overrides for each model are recorded and monitored as part of the model management process.
The CRR is assigned at an obligor level, which means that separate exposures to the same obligor are generally subject to a single, consistent rating. Unfunded credit risk mitigants, such as guarantees, may also influence the final assignment of a CRR to an obligor. The effect of unfunded risk mitigants is considered for IRB and standardised approaches in table 23.
If an obligor is in default on any material credit obligation to the group, all of the obligor's facilities from the group are considered to be in default.
Under the IRB approach, obligors are grouped into grades that have similar PD or anticipated default frequency. The anticipated default frequency may be estimated using all relevant information at the relevant date (PIT rating system) or be free of the effects of the credit cycle (TTC rating system).
We generally utilise a hybrid approach of PIT and through the cycle ('TTC'). That is, while models are calibrated to long-run default rates, obligor ratings are reviewed annually, or more frequently if necessary, to reflect changes in their circumstances and/or their economic operating environment.
Our policy requires approvers to downgrade ratings on expectations, but to upgrade them only on performance. This leads to expected defaults typically exceeding actual defaults.
For EAD and LGD estimation, operating entities are permitted, subject to overview by Risk, to use our own modelling approaches to suit conditions in their jurisdictions. Risk provides co-ordination, benchmarks, and promotion of best practice on EAD and LGD estimation.
EAD is estimated to a 12-month forward time horizon and represents the current exposure, plus an estimate for future increases in exposure and the realisation of contingent exposures post-default.
LGD is based on the effects of facility and collateral structure on outcomes post-default. This includes such factors as the type of client, the facility seniority, the type and value of collateral, past recovery experience and priority under law. It is expressed as a percentage of EAD.
Wholesale models
To determine credit ratings for the different types of wholesale obligor, multiple models and scorecards are used for PD, LGD, and EAD. These models may be differentiated by customer segment and/or customer size. For example, PD models are differentiated
for all of our key customer segments, including large, medium and small-sized corporates.
The two major drivers of model methodology are the nature of the portfolio and the availability of internal or external data on historical defaults and risk factors. For some historically low-default portfolios, e.g. sovereign and financial institutions, a model will rely more heavily on external data and/or the input of an expert panel. Where sufficient data is available, models are built on a statistical basis, although the input of expert judgement may still form an important part of the overall model development methodology.
Our approach to EAD and LGD encompasses global models for central governments and central banks, and for institutions, as exposures to these customer types are managed centrally by Global Risk. The PRA requires all firms to apply an LGD floor of 45% for senior unsecured exposure to sovereign entities. This floor was applied to reflect the relatively few loss observations across all firms in relation to these obligors. This floor is applied for the purposes of regulatory capital reporting.
In the same guidance, the PRA also indicated that it considered income-producing real estate to be an asset class that would be difficult to model. As a result, RWAs for our UK CRE portfolio are calculated using the supervisory slotting approach. Under the supervisory slotting approach the bank allocates exposures to one of five categories. Each category then has fixed pre-determined RWA and EL percentages.
None of the EAD models currently require a calibration for a downturn, as analysis shows that utilisation decreases during a downturn because credit stress is accompanied by more intensive limit monitoring and facility reduction.
Table 34 sets out the key characteristics of the significant wholesale credit risk models that drive the capital calculation split by regulatory wholesale asset class, with their associated RWAs, including the number of models for each component, the model method or approach and the number of years of loss data used.
Table 34: Wholesale IRB credit risk models
A statistical model built on
15 years of data. The model
Large uses financial information,
corporates macroeconomic information and
(HSBC market-driven data, and is
Group-wide Corporates, complemented by a qualitative
Model) institutions 45.3 PD 1 assessment. 15 PD >0.03%
UK corporates PD 3Corporates that fall below >10 PD >0.03%
the global large corporate
threshold are rated through
UK PD models, which reflect
UK country specific circumstances
and cover Mid-sized and Small
Corporates. These models use
financial information, behavioural
data and qualitative information
to derive a statistically built
PD.
All corporates LGD 2UK statistical models covering >7 Floored at
all corporates, including global foundation
large corporates, developed IRB LGD value
using historical loss/recovery
data and various data inputs,
including collateral information,
customer type and geography.
EAD 1UK statistical models covering >7 EAD must
all corporates, including global be at least
large corporates, developed equal to
using historical utilisation the current
information and various data utilisation
inputs, including product type of the balance
and geography. at account
level
1 Excludes specialised lending exposures subject to supervisory slotting approach (see table 40).
The UK corporate models are used by all UK subsidiaries of HSBC Group (incl. HSBC UK Bank plc and HSBC Bank plc) and therefore information provided in the following table is on this basis.
Table 35: IRB models - estimated and actual values (wholesale)(1)
At 31 December 2019
PD(2) LGD(3) EAD(4)
Estimated Actuals Estimated(5) Actuals(5) Estimated Actuals
Footnotes % % % % % %
Corporates models 6 1.54 1.49 29.63 24.87 1.18 0.78
-------------
1 Data represents an annual view, analysed at 30 September.
2 Estimated PD for all models is average PD calculated on the number of obligors covered by the model(s).
3 Estimated and actual LGD represent defaulted populations. Average LGD values are EAD-weighted.
4 Expressed as a percentage of total EAD, which includes all defaulted and non-defaulted exposures for the relevant population.
5 For corporates models, estimated and actual LGD represent the average LGD for customers who have defaulted and been resolved in the period.
6 Covers the combined populations of the global large corporates model, all UK IRB models for large, medium and small corporates, and non-bank financial institutions. The estimated and observed PDs were calculated only for unique obligors.
The following table sets out IRB exposures by obligor grade for central governments and central banks, institutions and corporates, all of which are assessed using our 23-grade CRR master scale. We benchmark the master scale against the ratings of external rating agencies. Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by the average of issuer-weighted historical default rates. The correspondence between the agency long-run default rates and the PD ranges of our master scale is obtained by matching a smoothed curve based on those default rates with our master scale reference PDs. This association between internal and external ratings is indicative and may vary over time. In these tables, the ratings of S&P are cited for illustration purposes, although we also benchmark against other agencies' ratings in an equivalent manner.
Table 36: Wholesale IRB exposure - by obligor grade
Central governments
and central banks Institutions Corporates(2)
Default CRR PD Average Average Average
risk range net Undrawn Mapped net Undrawn Mapped net Undrawn Mapped
carrying commit- external carrying commit- external carrying commit- external
values(1) ments rating values(1) ments rating values(1) ments rating
% GBPm GBPm GBPm GBPm GBPm GBPm
Default
risk
0.000
to
Minimal 0.1 0.010 6,219 - AAA 95 - AAA - - AAA
0.011
to AA+ to AA+ to AA+ to
1.1 0.028 598 - AA 190 21 AA 84 1 AA
0.029
to AA- to AA- to AA- to
1.2 0.053 - - A+ 178 49 A+ 1,025 458 A+
0.054
to
Low 2.1 0.095 - - A 87 - A 2,860 2,360 A
0.096
to
2.2 0.169 - - A- 408 51 A- 8,270 4,295 A-
0.170
to
Satisfactory 3.1 0.285 - - BBB+ 17 - BBB+ 12,704 5,009 BBB+
0.286
to
3.2 0.483 - - BBB 2 - BBB 11,568 3,331 BBB
0.484
to
3.3 0.740 - - BBB- - - BBB- 8,749 2,901 BBB-
0.741
to
Fair 4.1 1.022 - - BB+ - - BB+ 7,655 1,388 BB+
1.023
to
4.2 1.407 - - BB 2 2 BB 6,454 1,466 BB
1.408
to
4.3 1.927 - - BB- - - BB- 5,394 1,522 BB-
1.928
to
Moderate 5.1 2.620 - - BB- - - BB- 4,356 1,369 BB-
2.621
to
5.2 3.579 - - B+ - - B+ 3,438 1,087 B+
3.580
to
5.3 4.914 - - B - - B 2,674 828 B
4.915
to
Significant 6.1 6.718 - - B - - B 1,321 366 B
6.719
to
6.2 8.860 - - B- 2 - B- 798 134 B-
8.861
to
High 7.1 11.402 - - CCC+ - - CCC+ 477 73 CCC+
11.403
to
7.2 15.000 - - CCC+ - - CCC+ 190 34 CCC+
15.001
Special to
Management 8.1 22.000 - - CCC+ - - CCC+ 165 40 CCC+
22.001
to
8.2 50.000 - - CCC+ - - CCC+ 56 28 CCC+
50.001
to CCC to CCC to CCC to
8.3 99.999 - - C - - C 45 8 C
Default 9/10 100.000 - - Default - - Default 997 185 Default
At 31 December 2019 6,817 - 981 123 79,280 26,883
1 Average net carrying value are calculated by aggregating the net carrying values of the last five quarters and dividing by five.
2 Corporates excludes specialised lending exposures subject to supervisory slotting approach.
PD, LGD, RWA and exposure by country/territory
The following tables analyse the exposure-weighted average PD, exposure-weighted average LGD, RWAs and exposure by location of the lending subsidiary or branch. They exclude specialised lending exposures subject to the supervisory slotting approach, securitisation exposures and non-credit obligations.
All exposures are reported as UK, based on the location of the lender.
Table 37: PD, LGD, RWA and exposure by country/territory
At 31 December 2019
Exposure-weighted Exposure-weighted Exposure
average PD average LGD value RWAs
% % GBPm GBPm
Wholesale IRB Advanced approach
All asset classes 3.00 38.1 63,434 39,784
Central governments and central
banks 0.01 45.0 6,596 683
Institutions 0.07 27.4 938 134
Corporates 3.40 37.5 55,900 38,967
Wholesale IRB Foundation approach
All asset classes 2.83 39.5 9,280 5,665
Corporates 2.83 39.5 9,280 5,665
Retail IRB approach
All asset classes 1.35 31.3 149,241 20,075
Retail secured by mortgages on
immovable property SME 4.25 36.8 1,528 830
Retail secured by mortgages on
immovable property Non-SME 0.94 15.4 111,175 5,404
Retail QRRE 1.69 79.3 26,185 5,708
Other SME 8.10 81.3 3,028 2,905
Other non-SME 2.99 79.5 7,325 5,228
Table 38: IRB Advanced - Credit risk exposures by portfolio and PD
range (CR6)
Original
on-balance Off-balance EAD Value
sheet sheet post-CRM Number adjustments
gross exposures Average and Average of Average Average RWA Expected and
exposure pre-CCF CCF post-CCF PD obligors LGD maturity RWAs density loss provisions
PD scale GBPm GBPm % GBPm % % years GBPm % GBPm GBPm
-------- -------- -------- --------
AIRB -
Central
government
and central
banks
0.00 to <0.15 6,596 - 24.6 6,596 0.01 17 45.0 3.57 683 10 - -
0.15 to <0.25 - - - - - - - - - - - -
0.25 to <0.50 - - - - - - - - - - - -
0.50 to <0.75 - - - - - - - - - - - -
0.75 to <2.50 - - - - 1.20 1 45.0 1.00 - 96 - -
2.50 to
<10.00 - - - - - - - - - - - -
10.00 to
<100.00 - - - - - - - - - - - -
100.00
(Default) - - - - - - - - - - - -
Sub-total 6,596 - 24.6 6,596 0.01 18 45.0 3.57 683 10 - -
-------- -------- --------
AIRB -
Institutions
0.00 to <0.15 884 122 43.4 937 0.07 281 27.4 2.15 133 14 - 1
0.15 to <0.25 - - 57.0 - 0.22 3 47.1 1.00 - 40 - -
0.25 to <0.50 - - 50.0 - 0.37 5 45.0 5.00 - 93 - -
0.50 to <0.75 - - - - 0.63 3 45.0 1.00 - 71 - -
0.75 to <2.50 - 2 7.1 1 1.20 5 44.9 1.96 1 110 - -
2.50 to
<10.00 - - - - 3.05 1 45.0 1.00 - 133 - -
10.00 to
<100.00 - - - - - - - - - - - -
100.00
(Default) - - - - - - - - - - - -
Sub-total 884 124 43.0 938 0.07 298 27.4 2.15 134 14 - 1
-------- -------- --------
AIRB -
Corporate
- Specialised
Lending
(excluding
Slotting)(1)
0.00 to <0.15 7 6 57.0 10 0.13 1 18.0 1.82 1 12 - -
0.15 to <0.25 158 59 4.5 161 0.22 3 27.6 4.68 70 43 - -
0.25 to <0.50 57 75 42.8 89 0.37 1 35.0 2.81 38 42 - -
0.50 to <0.75 104 6 24.9 105 0.63 6 18.4 4.32 45 43 - -
0.75 to <2.50 30 73 54.2 69 1.52 3 37.9 4.94 80 116 1 1
2.50 to
<10.00 - - - - - - - - - - - -
10.00 to
<100.00 - - - - - - - - - - - -
100.00
(Default) - - - - - - - - - - - -
Sub-total 356 219 36.2 434 0.56 14 28.3 4.18 234 54 1 1
-------- -------- --------
AIRB -
Corporate
- Other
-------- -------- -------- --------
0.00 to <0.15 5,673 6,962 53.3 9,407 0.11 2,900 37.7 2.57 2,807 30 5 4
0.15 to <0.25 6,935 4,656 49.7 9,289 0.22 4,596 39.0 2.70 4,425 48 10 8
0.25 to <0.50 5,847 2,944 47.9 7,251 0.37 4,749 36.5 2.60 4,084 56 12 11
0.50 to <0.75 4,101 1,982 46.2 4,969 0.63 3,486 37.9 2.60 3,524 71 14 11
0.75 to <2.50 13,704 5,184 47.0 16,148 1.41 18,115 37.0 2.57 14,537 90 97 107
2.50 to
<10.00 5,409 2,293 45.8 6,442 4.65 4,278 35.5 2.27 7,509 117 110 89
10.00 to
<100.00 747 174 45.0 825 18.01 798 40.9 2.35 1,587 192 71 54
100.00
(Default) 1,060 170 43.9 1,135 100.00 1,218 46.6 2.16 260 23 559 284
Sub-total 43,476 24,365 49.2 55,466 3.42 40,140 37.5 2.55 38,733 70 878 568
-------- -------- --------
Wholesale
AIRB
- Total at
31 Dec
2019(2) 51,312 24,708 49.1 63,434 3.00 40,470 38.1 2.66 39,784 63 879 570
1 Slotting exposures are disclosed in Table 40: Specialised lending on slotting approach (CR10).
2 The Wholesale AIRB Total includes non-credit obligation assets amounting to GBP2,011m of original exposure and EAD, and GBP1,279m of RWAs.
Table 39: IRB Foundation - Credit risk exposures by portfolio and PD
range (CR6)
Original
on-balance Off-balance EAD Value
sheet sheet post-CRM Number adjust-ments
gross exposures Average and Average of Average Average RWA Expected and
exposure pre-CCF CCF post-CCF PD obligors LGD maturity RWAs density loss provisions(^)
PD scale GBPm GBPm % GBPm % % years GBPm % GBPm GBPm
FIRB -
Corporate
- Other
0.00 to
<0.15 1,238 147 18.9 1,296 0.09 254 43.7 1.99 321 25 1 1
0.15 to
<0.25 1,149 295 0.7 1,148 0.22 792 39.6 1.22 388 34 1 1
0.25 to
<0.50 1,526 311 8.1 1,544 0.37 947 38.1 1.12 691 45 3 2
0.50 to
<0.75 1,322 913 1.9 1,332 0.63 659 39.2 0.97 760 57 4 2
0.75 to
<2.50 2,686 487 1.7 2,681 1.38 2,707 38.8 0.98 2,065 77 18 13
2.50 to
<10.00 953 122 4.6 959 4.46 464 38.7 0.83 1,124 117 19 11
10.00 to
<100.00 185 9 1.9 185 16.06 111 37.8 0.75 316 171 14 6
100.00
(Default) 135 15 - 135 100.00 116 40.2 1.59 - - 55 41
Sub-total 9,194 2,299 3.7 9,280 2.83 6,050 39.5 1.16 5,665 61 115 77
FIRB -
Total
at 31 Dec
2019 9,194 2,299 3.7 9,280 2.83 6,050 39.5 1.16 5,665 61 115 77
^ Figures have been prepared on an IFRS 9 transitional basis.
Table 40: Specialised lending on slotting approach (CR10)
On-balance Off-balance
sheet sheet Exposure Expected
amount amount Risk weight amount RWAs loss
Regulatory
categories Remaining maturity GBPm GBPm % GBPm GBPm GBPm
Category 1 Less than 2.5
- Strong years 4,836 807 50 5,231 2,615 -
Equal to or more
than 2.5 years 2,988 729 70 3,320 2,314 14
Category 2 Less than 2.5
- Good years 690 64 70 721 503 3
Equal to or more
than 2.5 years 372 58 90 391 347 3
Category 3 Less than 2.5
- Satisfactory years 95 6 115 97 103 3
Equal to or more
than 2.5 years 53 2 115 54 55 2
Category 4 Less than 2.5
- Weak years 40 1 250 41 97 3
Equal to or more
than 2.5 years 3 - 250 3 7 -
Category 5 Less than 2.5
- Default years 371 9 - 549 - 274
Equal to or more
than 2.5 years 15 - - 27 - 13
Less than 2.5
At 31 Dec 2019 years 6,032 887 6,639 3,318 283
Equal to or more
than 2.5 years 3,431 789 3,795 2,723 32
Category 1 Less than 2.5
- Strong years 4,130 912 50 4,539 2,261 -
Equal to or more
than 2.5 years 4,001 750 70 4,236 2,950 16
Category 2 Less than 2.5
- Good years 648 78 70 669 467 3
Equal to or more
than 2.5 years 351 31 90 359 318 3
Category 3 Less than 2.5
- Satisfactory years 121 17 115 128 140 3
Equal to or more
than 2.5 years 206 4 115 208 227 6
Category 4 Less than 2.5
- Weak years 43 1 250 45 103 4
Equal to or more
than 2.5 years 17 1 250 19 43 2
Category 5 Less than 2.5
- Default years 175 8 - 313 - 156
Equal to or more
than 2.5 years 41 - - 50 - 25
Less than 2.5
At 31 Dec 2018 years 5,117 1,016 5,694 2,971 166
Equal to or more
than 2.5 years 4,616 786 4,872 3,538 52
Table 41: Standardised exposure - by credit quality step
At 31 Dec 2019
Original Exposure
exposure(1) value RWAs^
GBPm GBPm GBPm
-------- -------
Central governments and central banks
Credit quality step 1 48,024 48,024 -
Credit quality step unrated 220 220 537
Total 48,244 48,244 537
------------ -------- -----
Institutions
Credit quality step unrated 776 776 163
Total 776 776 163
------------ -------- -----
Corporates
Credit quality step 1 - 97 19
Credit quality step unrated 476 280 275
Total 476 377 294
------------ -------- -----
1 Figures presented are based on the credit quality step of the immediate borrower.
^ Figures have been prepared on an IFRS 9 transitional basis.
Retail risk
Retail risk rating systems
The most material risk rating systems for which we disclose details of modelling methodology and performance data represent RWAs of GBP13.0m or 65% of the total retail IRB RWA.
PD models are developed using statistical estimation based on a minimum of five years of historical data. Where models are developed based on a PIT approach, the model outputs become effectively TTC through the application of buffer or model adjustments as agreed with the PRA.
EAD models are also developed using at least five years of historical observations and typically adopt one of two approaches:
-- For closed-end products without the facility for additional drawdowns, EAD is estimated as the outstanding balance of accounts at the time of observation.
-- For products with the facility for additional drawdowns, EAD is estimated as the outstanding balance of accounts at the time of observation plus a credit conversion factor applied to the undrawn portion of the facility.
LGD estimates have more variation, particularly in respect of the time period that is used to quantify economic downturn assumptions.
Table 42: Material retail IRB risk rating systems
Statistical model built on
internal behavioural data and
credit bureau information.
Underlying PiT model is calibrated
to the latest observed PD.
Retail An adjustment is then applied
- secured to generate the long run PD
by mortgages based on a combination of historically
UK HSBC on immovable observed misalignment of the
residential property underlying model and expert PD floor
mortgages non-SME 4.06 PD 1 judgement. 7-10 of 0.03%
LGD 1Statistical estimates of loss > 10 LGD floor
and probability of possession of 10%
in combination with the workout at portfolio
process and using the 1990's level
recession in benchmarking the
downturn LGD.
Logical model that uses the EAD must
sum of the balance at observation at least
plus further unpaid interest be equal
that could accrue before default to current
EAD 1 (up to 6 payments). 7-10 balance
Retail Underlying PiT PD model is
- secured a segmented scorecard. An adjustment
UK First by mortgages is then applied based on observed
Direct on immovable misalignment in the underlying
residential property model (with some additional PD floor
mortgages non-SME 0.60 PD 2 conservatism applied). 7-10 of 0.03%
LGD 1Underlying model is component > 10 LGD floor
based (LGD, forced sale haircut of 10%
and the time between default at portfolio
and property sale). A downturn level
adjustment is applied through
a 30% drop from peak house
price plus adjustments to the
other components in the model,
including a 10% forced sale.
There are two separate EAD EAD must
models - one for standard capital at least
repayment mortgages and one be equal
for offset mortgages which to current
EAD 2 offers a revolving loan facility. 7-10 balance
Statistical model built on
internal behavioural data and
credit bureau information.
Underlying PiT model is calibrated
to latest observed PD. An adjustment
is then applied to generate
UK HSBC Retail the long run PD based on historically
credit - qualifying observed misalignment of the PD floor
cards revolving 2.28 PD 1 underlying model. 7-10 of 0.03%
Statistical model based on
forecasting the amount of expected
future recoveries and segmented
LGD 1 by default status 7-10
Statistical model which directly EAD must
estimates the EAD for different at least
segments of the portfolio using be equal
either balance or limit as to current
EAD 1 key input. 7-10 balance
Statistical model built on
internal behavioural data and
credit bureau information.
Underlying PiT model is calibrated
to latest observed PD. An adjustment
is then applied to generate
UK HSBC Retail the long run PD based on historic
personal - other observed misalignment of the PD floor
loans non-SME 3.60 PD 1 underlying model. 7-10 of 0.03%
Statistical model based on
forecasting the amount of expected
future recoveries and segmented
LGD 1 by default status. 7-10
EAD must
at least
EAD = Current Balance, as this be equal
has been shown to provide suitable to current
EAD 1 conservatism and accuracy 7-10 balance
Statistical model built on
internal behavioural data and
credit bureau information.
Underlying PiT model is calibrated
to latest observed PD. An adjustment
is then applied to generate
Retail the long run PD based on historically
UK business - other observed misalignment of the PD floor
banking SME 2.48 PD 1 underlying model. 7-10 of 0.03%
Two sets of models - one for
secured and another for unsecured
exposures. The secured model
uses the value to loan as a
key component for estimation,
while the unsecured model estimates
the amount of future recoveries
LGD 2 and undrawn portion. 7-10
EAD must
Statistical model using segmentation at least
according to limit and utilisation be equal
and estimation of the undrawn to current
EAD 1 exposure. 7-10 balance
Retail credit models
We disclose information on our most material models. The actual and estimated values are derived from model monitoring and calibration processes. Our analytics teams adopt back-testing criteria specific to local conditions in order to assess the accuracy of their models.
The following table presents estimated and actual values from the back-testing of our material IRB models.
The PD presented here is expressed on an obligor count basis consisting of non-defaulted obligors at the time of observation. The LGD and EAD refer to observations for the defaulted population, being the appropriate focus of an assessment of these models' performance. The LGD values represent the amount of loss as a percentage of EAD, and are calculated based on defaulted accounts that were fully resolved or have completed the modelled recovery outcome period at the reporting date. The EAD values of the defaulted exposures are presented as a percentage of the total EAD, which includes all defaulted and non-defaulted exposures for the relevant population. The regulatory PD and LGD floors (0.03% and 10% respectively) are only applied during final capital calculation and are not reflected in the estimates below.
For our residential mortgage portfolios, the estimates include required regulatory downturn adjustments. In conducting the back-testing, our residential mortgage LGD models consider repossession rates over a 36-month period starting at the date of default. For both our HSBC UK and First Direct branded residential mortgages, LGD estimates and LGD actual values remained low and stable in 2019.
Table 43: IRB models - estimated and actual values (retail)(1)
At 31 December 2019
PD LGD EAD
Estimated Actuals Estimated Actuals Estimated Actuals
% % % % % %
UK
- HSBC residential mortgage 0.33 0.29 9.17 0.32 0.29 0.28
- FD residential mortgages 0.42 0.34 7.42 1.85 0.93 0.74
- HSBC credit card 1.06 1.05 91.29 88.58 1.51 1.48
- HSBC personal loans 2.54 2.19 83.61 61.79 2.26 2.10
- Business Banking (Retail SME) 2.95 2.92 78.23 55.48 2.54 2.31
1 Data represents an annual view, analysed at September 2019
Table 44: Retail IRB exposure - by internal PD band
At 31 December 2019
Average net
PD range carrying values(1) Undrawn commitments
% GBPm GBPm
Retail SME exposure secured by mortgages
on immovable property 1,673 314
Band 1 0.000 to 0.483 363 93
Band 2 0.484 to 1.022 440 99
Band 3 1.023 to 4.914 715 101
Band 4 4.915 to 8.860 81 15
Band 5 8.861 to 15.000 32 3
15.001 to
Band 6 50.000 7 1
50.001 to
Band 7 100.000 35 2
Retail non-SME exposure secured by
mortgages on immovable property 101,543 6,919
Band 1 0.000 to 0.483 95,923 6,420
Band 2 0.484 to 1.022 2,356 226
Band 3 1.023 to 4.914 1,832 222
Band 4 4.915 to 8.860 280 21
Band 5 8.861 to 15.000 145 3
15.001 to
Band 6 50.000 300 8
50.001 to
Band 7 100.000 707 19
Qualifying revolving retail exposure 38,313 31,065
Band 1 0.000 to 0.483 30,913 28,168
Band 2 0.484 to 1.022 3,460 1,847
Band 3 1.023 to 4.914 3,230 876
Band 4 4.915 to 8.860 333 70
Band 5 8.861 to 15.000 126 31
15.001 to
Band 6 50.000 108 32
50.001 to
Band 7 100.000 143 41
Other retail SME exposure 3,985 2,225
Band 1 0.000 to 0.483 818 753
Band 2 0.484 to 1.022 604 482
Band 3 1.023 to 4.914 1,883 793
Band 4 4.915 to 8.860 324 85
Band 5 8.861 to 15.000 150 38
15.001 to
Band 6 50.000 151 43
50.001 to
Band 7 100.000 55 31
Other retail non-SME exposure 6,667 148
Band 1 0.000 to 0.483 3,515 130
Band 2 0.484 to 1.022 1,210 5
Band 3 1.023 to 4.914 1,623 11
Band 4 4.915 to 8.860 175 -
Band 5 8.861 to 15.000 55 -
15.001 to
Band 6 50.000 25 -
50.001 to
Band 7 100.000 64 2
Total retail exposure 152,181 40,671
Band 1 0.000 to 0.483 131,532 35,564
Band 2 0.484 to 1.022 8,070 2,659
Band 3 1.023 to 4.914 9,283 2,003
Band 4 4.915 to 8.860 1,193 191
Band 5 8.861 to 15.000 508 75
15.001 to
Band 6 50.000 591 84
50.001 to
Band 7 100.000 1,004 95
1 Average net carrying values are calculated by aggregating the net carrying values of the last five quarters and dividing by five.
Table 45: IRB - Credit risk exposures by portfolio and PD range (CR6)
Original
on-balance Off-balance EAD Value
sheet sheet post-CRM Number adjustments
gross exposures Average and Average of Average Average RWA Expected and
exposure pre-CCF CCF post-CCF PD obligors LGD maturity RWAs density loss provisions^
PD scale GBPm GBPm % GBPm % % years GBPm % GBPm GBPm
---------- -------- ------- -------- ------ --------
AIRB - Secured by mortgages on immovable property SME
0.00 to
<0.15 5 1 19.0 6 0.13 174 35.6 - 1 9 - -
0.15 to
<0.25 85 27 36.3 94 0.22 2,217 35.8 - 13 14 - -
0.25 to
<0.50 189 65 41.6 216 0.37 4,869 36.7 - 46 21 - -
0.50 to
<0.75 205 59 37.4 227 0.63 5,294 36.6 - 70 31 1 -
0.75 to
<2.50 577 113 36.8 620 1.44 12,706 36.7 - 326 53 4 2
2.50 to
<10.00 278 43 33.1 292 4.33 5,523 37.0 - 297 102 6 4
10.00 to
<100.00 38 5 35.4 39 18.12 902 36.9 - 65 165 3 1
100.00
(Default) 33 2 34.8 34 100.00 713 39.3 - 12 35 13 4
---------- -------- --------
Sub-total 1,410 315 37.3 1,528 4.25 32,398 36.8 - 830 54 27 11
AIRB - Secured by mortgages on immovable property non-SME
0.00 to
<0.15 86,480 5,270 103.1 94,884 0.06 793,380 15.7 - 2,602 3 10 11
0.15 to
<0.25 5,840 840 103.1 6,885 0.23 43,472 14.9 - 469 7 2 3
0.25 to
<0.50 3,072 309 103.2 3,486 0.38 23,372 14.0 - 322 9 2 2
0.50 to
<0.75 1,486 149 103.2 1,682 0.62 11,216 11.9 - 185 11 1 2
0.75 to
<2.50 1,925 229 103.2 2,210 1.37 15,186 10.6 - 368 17 3 4
2.50 to
<10.00 683 91 103.2 797 4.67 7,210 7.6 - 205 26 3 4
10.00 to
<100.00 488 11 102.6 513 31.12 5,842 9.6 - 256 50 15 12
100.00
(Default) 714 19 90.4 719 100.00 8,828 8.0 - 996 138 28 73
---------- -------- --------
Sub-total 100,688 6,918 103.1 111,176 0.94 908,506 15.3 - 5,403 5 64 111
AIRB - Qualifying revolving retail exposures
0.00 to
<0.15 2,318 22,312 58.4 15,357 0.06 9,407,351 77.4 - 605 4 11 32
0.15 to
<0.25 476 2,786 62.2 2,209 0.22 1,554,487 81.4 - 253 11 5 4
0.25 to
<0.50 694 3,079 52.3 2,304 0.35 1,268,072 82.6 - 419 18 7 8
0.50 to
<0.75 1,037 1,412 50.4 1,698 0.64 659,689 84.5 - 482 28 10 12
0.75 to
<2.50 1,980 1,072 78.1 2,817 1.46 1,173,986 82.4 - 1,462 52 37 86
2.50 to
<10.00 975 300 91.1 1,249 4.51 526,167 78.6 - 1,370 110 49 98
10.00 to
<100.00 285 76 90.7 354 32.61 228,596 80.1 - 725 205 102 76
100.00
(Default) 193 27 26.9 197 100.00 150,172 77.5 - 392 199 112 81
---------- -------- --------
Sub-total 7,958 31,064 58.8 26,185 1.69 14,968,520 79.3 - 5,708 22 333 397
AIRB -
Other
SME
0.00 to
<0.15 49 260 36.6 141 0.09 98,846 90.6 - 23 16 - -
0.15 to
<0.25 33 173 44.0 108 0.23 75,913 85.7 - 34 31 - -
0.25 to
<0.50 67 321 50.6 226 0.38 134,189 87.3 - 103 45 1 1
0.50 to
<0.75 61 261 56.4 205 0.61 124,095 87.1 - 119 58 1 1
0.75 to
<2.50 546 706 49.1 881 1.52 319,158 81.3 - 728 83 12 9
2.50 to
<10.00 880 392 45.0 1,048 4.68 169,295 78.8 - 1,138 109 49 37
10.00 to
<100.00 255 83 59.6 300 20.59 74,165 83.6 - 463 154 58 48
100.00
(Default) 93 28 98.3 118 100.00 15,854 60.8 - 298 251 84 56
---------- -------- --------
Sub-total 1,984 2,224 48.6 3,027 8.10 1,011,515 81.3 - 2,906 96 205 152
AIRB -
Other
non-SME
0.00 to
<0.15 1,131 108 100.0 1,237 0.11 138,546 68.3 - 325 26 2 10
0.15 to
<0.25 1,082 15 100.0 1,097 0.22 147,462 79.0 - 450 41 3 4
0.25 to
<0.50 1,418 8 100.0 1,426 0.37 155,085 79.6 - 758 53 5 7
0.50 to
<0.75 694 3 100.0 698 0.61 69,156 84.8 - 499 72 4 7
0.75 to
<2.50 2,061 8 92.9 2,069 1.32 249,918 82.8 - 2,002 97 24 25
2.50 to
<10.00 524 5 65.9 527 4.67 74,888 86.0 - 702 133 21 40
10.00 to
<100.00 186 - 100.0 186 37.17 27,951 86.2 - 315 169 59 44
100.00
(Default) 83 2 99.7 85 100.00 9,913 66.1 - 177 208 52 59
Sub-total 7,179 149 98.4 7,325 2.99 872,919 79.5 - 5,228 71 170 196
---------- -------- --------
Retail
AIRB
- Total
at
31 Dec
2019 119,219 40,670 65.8 149,241 1.35 17,793,858 31.2 - 20,075 13 799 867
^ Figures have been prepared on an IFRS 9 transitional basis.
Model performance
Model validation is subject to global internal standards designed to support a comprehensive quantitative and qualitative process within a cycle of model monitoring and validation that includes:
-- investigation of model stability; -- model performance measured through testing the model's outputs against actual outcomes; and
-- model use within the business, e.g. user input data quality, override activity and the assessment of results from key controls around the usage of the rating system as a whole within the overall credit process.
Models are validated against a series of metrics and triggers approved by the appropriate governance committee. Model performance metrics, and any remedial actions in the event of a trigger breach, are reported at the Wholesale and RBWM MOCs that are responsible for overseeing the models used within HSBC UK.
Counterparty credit risk Overview
Counterparty credit risk ('CCR') is the risk that the counterparty to a transaction may default before completing the satisfactory settlement of the transaction. It arises on derivatives, securities financing transactions and exposures to central counterparties ('CCP') in both the trading and non-trading books.
Four approaches may be used under CRD IV to calculate exposure values for CCR: mark-to-market, original exposure, standardised and Internal Model Method ('IMM'). HSBC UK uses the mark-to-market approach to determine CCR exposures. Under this approach, EAD is calculated as current exposure plus regulatory add-ons.
Table 46: Counterparty credit risk - RWAs by exposure class and product
At 31 December
2019 2018
EAD pre Capital EAD pre Capital
CRM RWAs required CRM RWAs required
GBPm GBPm GBPm GBPm GBPm GBPm
By exposure class
----- ---------
IRB advanced approach 89 44 4 72 31 2
---------
Standardised approach 388 78 6 34 7 1
---------
- institutions 388 78 6 34 7 1
---------
Credit Valuation Adjustment ('CVA')
standardised - 23 2 - 23 2
---------
CCP standardised 1,079 53 4 240 5 -
---------
Total 1,556 198 16 346 66 5
---------
By Product
- derivatives 710 60 5 178 40 3
- SFTs 846 84 7 168 3 -
- CVA standardised - 23 2 - 23 2
- CCP default funds - 31 2 - - -
---------
Total 1,556 198 16 346 66 5
---------
Credit valuation adjustment
CVA represent the risk of loss as a result of adverse changes to the credit quality of counterparties in derivative transactions. HSBC UK applies the standardised approach for CVA. Certain counterparty exposures are exempt from CVA, such as non-financial counterparties and sovereigns.
Collateral arrangements
Our policy is to revalue all traded transactions and associated collateral positions on a daily basis. An independent collateral management function manages the collateral process, including pledging and receiving collateral and investigating disputes and non-receipts.
Table 47: Impact of netting and collateral held on exposure values
(CCR5-A)
Gross positive
fair value
or net carrying Netting Netted current Collateral Net credit
amount benefits credit exposure held exposure
GBPm GBPm GBPm GBPm GBPm
1 Derivatives 1,575 865 710 - 710
2 SFTs 5,130 - 5,130 4,284 846
3 At 31 December 2019 6,705 865 5,840 4,284 1,556
--------- ----------
Credit rating downgrade
A credit rating downgrade clause in a Master Agreement or a credit rating downgrade threshold clause in a credit support annex ('CSA') is designed to trigger an action if the credit rating of the affected party falls below a specified level. These actions may include the requirement to pay or increase collateral, the termination of transactions by the non-affected party or the assignment of transactions by the affected party.
HSBC UK has no such clauses.
Wrong-way risk
Wrong-way risk occurs when a counterparty's exposures are adversely correlated with its credit quality.
There are two types of wrong-way risk:
-- General wrong-way risk occurs when the probability of counterparty default is positively correlated with general risk factors, for example, where a counterparty is resident and/or incorporated in a higher-risk country and seeks to sell a non-domestic currency in exchange for its home currency.
-- Specific wrong-way risk occurs in self-referencing transactions. These are transactions in which exposure is driven by capital or financing instruments issued by the counterparty and occurs where exposure from HSBC's perspective materially increases as the value of the counterparty's capital or financing instruments referenced in the contract decreases. It is our policy that specific wrong-way transactions are approved on a case-by-case basis.
We use a range of tools to monitor and control wrong-way risk, including requiring the business to obtain prior approval before undertaking wrong-way risk transactions outside pre-agreed guidelines.
Securitisation Securitisation strategy
HSBC UK acts as originator and liquidity provider to our own originated securitisations, as well as those of third parties. Our strategy is to use securitisation to meet our needs for aggregate funding or capital management, to the extent that market, regulatory treatments and other conditions are suitable, and for customer facilitation. We do not provide support to our originated securitisations, and it is not our policy to do so.
Securitisation activity
Our roles in the securitisation process are as follows:
-- originator: where we originate the assets being securitised, either directly or indirectly; and
-- investor: where we hold a legacy investment in a securitisation transaction.
HSBC UK as originator
We use SPEs to mitigate the capital absorbed by some of the customer loans and advances we have originated. Credit instruments are used to transfer the credit risk associated with such customer loans and advances to an SPE, using an approach commonly known as synthetic securitisation by which the SPE uses a financial guarantee as protection for HSBC UK.
HSBC UK as investor
We have legacy exposure to third-party residential mortgage backed securitisations. These were transferred from HSBC Bank plc as part of the legal separation on 1 July 2018.
Monitoring of securitisation positions
Securitisation positions are managed by a dedicated team that uses a combination of market standard systems and third-party data providers to monitor performance data and manage market and credit risks.
Liquidity risk of securitised assets is consistently managed as part of the group's liquidity and funding risk management framework.
Valuation of securitisation positions
The process of valuing our investments in securitisation exposures primarily focuses on quotations from third parties, observed trade levels and calibrated valuations from market standard models.
Our hedging and credit risk mitigation strategy, with regards to retained securitisation exposures, is to continually review our positions.
Securitisation accounting treatment
For accounting purposes, we consolidate structured entities (including SPEs) when the substance of the relationship indicates that we control them; that is, we are exposed, or have rights, to variable returns from our involvement with the structured entity and have the ability to affect those returns through our power over the entity.
Securitisation regulatory treatment
For regulatory purposes, any reduction in RWAs that would be achieved by our own originated securitisations must receive the PRA's permission and be justified by a commensurate transfer of credit risk to third parties. If achieved, the associated SPEs and underlying assets are not consolidated but exposures to them, including derivatives or liquidity facilities, are risk-weighted as securitisation positions.
We use the IRB approach for our non-trading book securitisation positions.
Analysis of securitisation exposures
Table 48: Securitisation exposure - movement in the year
Movement in year
Total Total
at at
1 Jan As originator As investor 31 Dec
GBPm GBPm GBPm GBPm
Aggregate amount of securitisation exposures
Residential mortgages 1,017 - (118) 899
Loans to corporates and SMEs - 2,278 - 2,278
------------- --------- -------
2019 1,017 2,278 (118) 3,177
------ ------------- --------- -------
Table 49: Securitisation - asset values and impairments
At 31 December 2019
Underlying assets
Impaired Securitisation
and past exposures
Total due impairment
GBPm GBPm GBPm
----------------- --------- ----------------
As originator 2,500 - -
----------------- --------- --------------
- loans to corporates and SMEs 2,500 - -
-----------------------------------------------
Total 2,500 - -
----------------------------------------------- ----------------- --------- --------------
Table 50: Securitisation exposures in the non-trading book (SEC1)
Bank acts as originator Bank acts as investor
Traditional Synthetic Sub-total Traditional Synthetic Sub-total
GBPm GBPm GBPm GBPm GBPm GBPm
1 Retail (total) - - - 899 - 899
2 * residential mortgage - - - 899 - 899
6 Wholesale (total) - 2,278 2,278 - - -
---
7 * loans to corporates - 2,278 2,278 - - -
Total at 31 Dec 2019 - 2,278 2,278 899 - 899
---
* of which:
securitisations under the
new framework - 2,278 2,278 - - -
---
securitisations under the
pre-existing framework - - - 899 - 899
The following table presents our exposure in the non-trading book and associated regulatory capital requirements where we act as originator.
Table 51: Securitisation exposures in the non-trading book and associated
capital requirements - bank acting as originator (under the new framework)
(SEC3)
Exposure values (by risk Exposure values (by regulatory
weight bands) approach)
>100%
>20% >50% to
<=20% to 50% to 100% 1,250% 1,250% SEC
RW RW RW RW RW SEC-IRBA SEC-ERBA IAA SEC-SA 1,250%
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Synthetic
9 securitisation 2,263 - - 2 13 2,265 - - - 13
------
10 Securitisation 2,263 - - 2 13 2,265 - - - 13
----- ------
12 - wholesale 2,263 - - 2 13 2,265 - - - 13
Total at 31
Dec
1 2019 2,263 - - 2 13 2,265 - - - 13
----- ------
RWAs (by regulatory approach) Capital charge after cap
SEC SEC
SEC-IRBA SEC-ERBA IAA SEC-SA 1,250% SEC-IRBA SEC-ERBA IAA SEC-SA 1,250%
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Synthetic
9 securitisation 364 - - - 156 29 - - - 13
--------
10 Securitisation 364 - - - 156 29 - - - 13
--------
12 - wholesale 364 - - - 156 29 - - - 13
Total at 31
Dec
1 2019 364 - - - 156 29 - - - 13
--- --------
The following table presents our exposure in the non-trading book and associated regulatory capital requirements where we act as an investor, firstly under the pre-existing framework followed by the revised framework.
Table 52: Securitisation exposures in the non-trading book and associated
capital requirements - bank acting as investor (under the pre-existing
framework) (SEC4)
Exposure values (by risk Exposure values (by
weight bands) regulatory approach)
IRB
>20% >50% >100% RBM
<=20% to 50% to 100% to 1,250% 1,250% (including IRB
RW RW RW RW RW IAA) SFA SA 1,250%
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Traditional
2 securitisation 887 12 - - - 899 - - -
---- --------- ----
3 Securitisation 887 12 - - - 899 - - -
--------- ----
- retail
4 underlying 887 12 - - - 899 - - -
Total at 31
1 Dec 2019 887 12 - - - 899 - - -
---- --------- ----
RWAs (by regulatory Capital charge after
approach) cap
IRB IRB
RBM RBM
(including IRB (including IRB
IAA) SFA SA 1,250% IAA) SFA SA 1,250%
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------
Traditional
2 securitisation 76 - - - 6 - - -
--------------------- ------
3 Securitisation 76 - - - 6 - - -
------
4 - retail underlying 76 - - - 6 - - -
1 Total at 31 Dec 2019 76 - - - 6 - - -
---------------------
Market risk
Overview
Market risk is the risk that movements in market risk factors, including foreign exchange rates, commodity prices, interest rates, credit spreads and equity prices, will reduce the group's income or the value of its portfolios. Market risk is measured using the standardised approach for position risk under CRD IV.
The table below sets out details of the group's market risk exposures by type and approach.
Further explanation of the group's approach to managing market risk can be found from page 46 of the HSBC UK Bank plc Annual Report and Accounts 2019.
Table 53: Market risk under standardised
approach (MR1)
At 31 December
2019 2018
Capital Capital
RWAs required RWAs required
GBPm GBPm GBPm GBPm
--------- ----------- ------
Outright products
Interest rate
risk (general
1 and specific) 2 - 1 -
Foreign exchange
3 risk 25 2 37 3
-------
9 Total 27 2 38 3
Non-Financial Risk
Overview
Non-Financial risk is the risk to achieving our strategy or objectives as a result of inadequate or failed internal processes, people and systems, or from external events.
Sound non-financial risk management is central to achieving good outcomes for our customers.
Non-Financial risk is relevant to every aspect of our business. and is managed through the operational risk management framework. It covers a wide spectrum of risks, such as resilience risk, financial crime and fraud, regulatory compliance, reporting and tax risk, legal risk, model risk, people risk and failure in other principle risk processing. Losses arising from breaches of regulation and law, unauthorised activities, error, omission, inefficiency, fraud, systems failure or external events all fall within the definition of non-financial risk.
Further explanation of the group's approach to managing non-financial risk is set out on page 17 of our Annual Report and Accounts 2019.
Operational risk is part of Non-Financial risk.
Table 54: Operational risk RWAs
and capital required
At 31 December
2019 2018
Capital Capital
RWAs required RWAs required
GBPm GBPm GBPm GBPm
Own funds requirement
for operational
risk - assessed
on the standardised
approach 10,303 824 10,600 848
Other risks
Interest rate risk in the banking
book
Interest Rate Risk in the Banking Book ('IRRBB') is the potential adverse impact of changes in interest rates on earnings and capital. The component of IRRBB that can be economically neutralised in the market is transferred to Balance Sheet Management ('BSM') to manage, in accordance with internal transfer pricing rules. In its management of IRRBB, the group aims to balance mitigating the impact of future interest rate movements against the cost of hedging. The monitoring of the projected net interest income and economic value of equity sensitivity under varying interest rate scenarios is a key part of this.
Further details of our IRRBB can be found on page 48 of our Annual Report and Accounts 2019.
Non-trading book exposures in equities
The implementation of IFRS 9 resulted in the removal of the available-for-sale category; equity exposures therein have been classified as mandatorily measured at fair value through profit and loss. These investments are only held as a result of historic debt: equity swaps after a lending write-off has been made with the subsequent granting of equity in the company going forward. We have no deliberate strategy of holding such positions.
At 31 December 2019, we held equity investments of GBP8.8m. Our opening position at 1 January 2019 was GBP6.5m, meaning GBP2.3m has been reflected through profit and loss for the year. No disposals of equities were made in the period.
Liquidity and funding risk
Strategies and processes
HSBC UK has an internal liquidity and funding risk management framework ('LFRF'), which aims to allow it to withstand very severe liquidity stresses. It is designed to be adaptable to changing business models, markets and regulations.
The key aspects of the internal LFRF which is used to ensure that we maintain an appropriate overall liquidity risk profile are:
-- liquidity and funding risk managed on a standalone basis without reliance on other members of the Group or central banks, unless pre-approved;
-- minimum liquidity coverage ratio ('LCR') requirement; and
-- minimum net stable funding ratio ('NSFR') requirement.
Structure and organisation
The Asset, Liability and Capital Management ('ALCM') team is responsible for the application of the LFRF within HSBC UK.
The elements of the LFRF are underpinned by a robust governance framework, the two major elements of which are:
-- Asset and Liability Committee ('ALCO'); and
-- Annual internal liquidity adequacy assessment ('ILAA') process used to validate risk tolerance and set risk appetite.
The final objective of the ILAA, approved by the Board of Directors, is to verify that the we have liquidity resources which are adequate in both amount and quality at all times, ensuring that there is no significant risk that our liabilities cannot be met as they fall due, maintaining a prudent funding profile.
Management of liquidity and funding risk
Liquidity coverage ratio
The LCR aims to ensure that a bank has sufficient unencumbered high-quality liquid assets ('HQLA') to meet its liquidity needs in a 30 calendar day liquidity stress scenario. For the calculation of the LCR, we follow the EU Regulation LCR Delegated Act 2015/61.
Net stable funding ratio
HSBC UK uses the NSFR as a basis for ensuring operating entities raise sufficient stable funding to support their business activities. The NSFR requires institutions to maintain a minimum amount of stable funding based on assumptions of asset liquidity.
Governance
ALCM apply the LFRF and are responsible for the implementation of Group-wide and local regulatory policy. BSM has responsibility for cash and liquidity management.
Liquidity Risk Management carry out independent review, challenge and assurance of the appropriateness of the risk management activities undertaken by ALCM and BSM. Their work includes setting control standards, advice on policy implementation, and review and challenge of reporting.
Internal Audit provide independent assurance that risk is managed effectively.
Structural foreign exchange exposures
Structural foreign exchange exposures represent the group's net investments in subsidiaries, branches and associates, the functional currencies of which are currencies other than sterling. An entity's functional currency is that of the primary economic environment in which the entity operates.
The group does not have investments in subsidiaries in non-sterling currencies.
Remuneration
As a wholly-owned subsidiary, HSBC UK is subject to the remuneration policy established by HSBC Group. Details of HSBC Group's remuneration policy, including details on the Remuneration Committee membership and its activities, the remuneration strategy, and remuneration structure of HSBC Identified Staff and Material Risk Takers ('MRT') are set out in the Remuneration Policy on the HSBC Group website (https://www.hsbc.com/our-approach/corporate-governance/remuneration) and in the Directors' Remuneration Report from page 184 of the HSBC Holdings plc
Annual Report and Accounts
2019
.
The following tables show the remuneration awards made to Identified Staff and MRTs in HSBC UK for 2019. Individuals have been identified as MRTs based on the qualitative and quantitative criteria set out in the Regulatory Technical Standard EU 604/2014. The tables below include the total remuneration of HSBC UK senior management and other individuals identified as HSBC UK MRTs based on their role and professional activities. This also includes certain individuals employed by the Group who have broader roles within HSBC, for example those with global roles.
Table 55: Senior management remuneration - fixed and variable amounts
(REM1)
Fixed (GBPm) Variable(2) (GBPm)
Number Of Of Of
of which: which: Other which: Total
MRTs Cash-based(1) Share-based Total Cash-based deferred Share-based(3) deferred forms(3) deferred Total (GBPm)
Executive
Directors 3 3.0 - 3.0 1.1 0.6 1.2 0.8 - - 2.3 5.3
Non-executive
Directors 8 1.8 - 1.8 - - - - - - - 1.8
Senior
management 15 6.8 - 6.8 2.3 1.0 2.4 1.2 - - 4.7 11.5
Retail banking 56 15.5 - 15.5 4.3 1.6 3.9 1.8 - - 8.2 23.7
Corporate
functions 10 2.1 - 2.1 0.8 0.2 0.6 0.3 - - 1.4 3.5
Independent
control
functions 15 3.1 - 3.1 0.8 0.2 0.4 0.2 - - 1.2 4.3
Total 107 32.3 - 32.3 9.3 3.6 8.5 4.3 - - 17.8 50.1
1 Cash-based fixed remuneration is paid immediately.
2 Variable pay awarded in respect of 2019. In accordance with HSBC Holdings plc shareholder approval received on 23 May 2014 (98% in favour), for each MRT the variable component of remuneration for any one year is limited to 200% of fixed component of the total remuneration.
3 Share-based awards are made in HSBC Holdings plc shares. Vested shares are subject to a retention period of up to one year.
Table 56: Senior management guaranteed bonus, sign-on and severance
payments (REM2)
Guaranteed bonus Severance payments(2)
and sign on
payments(1)
Highest
such award
Number Awarded Number to a single Number
Made during of during of person Paid during of
year (GBPm) beneficiaries year (GBPm) beneficiaries (GBPm) year (GBPm) beneficiaries
Senior
management - - 0.5 1 0.5 0.5 1
-----------
Retail
banking - - 0.1 1 0.1 0.1 1
----------- -------------
Corporate
functions - - 0.7 1 0.7 0.7 1
-----------
Total - - 1.3 3 - 1.3 3
----------- ----------- ------------- ------------ -------------
1 No sign-on payments were made in 2019. A guaranteed bonus is awarded in exceptional circumstances for new hires, and in the first year only. The circumstances where HSBC UK would offer a guaranteed bonus would typically involve a critical new-hire, and would also depend on factors such as the seniority of the individual, whether the new-hire candidate has any competing offers and the timing of the hire during the performance year.
2 Includes payments such as payment in lieu of notice, statutory severance, outplacement service, legal fees, ex-gratia payments and settlements (excludes pre-existing benefit entitlements triggered on terminations).
Table 57: Senior management deferred remuneration (REM3)
Of which:
total
outstanding
deferred
and retained Total amount Total amount
exposed of amendment of amendment
to ex post during the during the Total amount
explicit year due year due of deferred
and/or to ex post to ex post paid out
Total Of which: implicit implicit explicit in the financial
GBPm outstanding(2) unvested adjustment adjustment adjustment(3) year(4)
Cash
Executive
Directors 1.7 1.7 1.7 - - 0.3
Senior
management 1.9 1.9 1.9 - - 0.4
Retail banking 1.6 1.6 1.6 - - 0.6
Corporate
functions 0.1 0.1 0.1 - - -
Independent
control
functions 0.4 0.4 0.4 - - 0.1
Shares
Executive
Directors 2.1 1.8 2.1 (0.2) - 0.3
Senior
management 3.1 2.4 3.1 (0.3) - 0.6
Retail banking 3.3 2.9 3.3 (0.2) - 1.5
Corporate
functions 0.6 0.4 0.6 - - 0.3
Independent
control
functions 0.5 0.4 0.5 - - 0.3
1 This table provides details of balances and movements during performance year 2019. For details of variable pay awards granted for 2019, please refer to the remuneration tables above. Deferred remuneration is made in cash and/or shares. Share-based awards are made in HSBC Holdings plc shares.
2 Includes unvested deferred awards, and vested deferred awards subject to retention period as at 31 December 2019.
3 Includes any amendments due to malus or clawback.
4 Shares are considered as paid when they vest. Vested shares are valued using the sale price or the closing share price on the business day immediately preceding the vesting day.
Table 58: Material risk takers' remuneration by band
Management
body (2) All other Total
EUR0 - 1,000,000 8 88 96
EUR1,000,000 - 1,500,000 2 6 8
EUR1,500,000 - 2,000,000 - 2 2
EUR2,000,000 - 2,500,000 - - -
EUR2,500,000 - 3,000,000 - - -
EUR3,000,000 - 3,500,000 - - -
EUR3,500,000 - 4,000,000 1 - 1
---------- --------- -----
1 Table prepared in euros in accordance with Article 450 of the European Union Capital Requirements Regulation, using the exchange rates published by the European Commission for financial programming and budget for December of the reported year as published on its website.
2 Management body represents the Board of HSBC UK Bank plc. Appendix I Abbreviations
The following abbreviated terms are used throughout this document.
A
ABS(1) Asset-backed security
-----------------------------------
AIRB(1) Advanced internal ratings
based approach
ALCM Asset, Liability and Capital
Management
ALCO Asset and Liability Management
Committee
AT1 Additional tier 1 capital
-----------------------------------
B
Basel Basel Committee on Banking
Supervision
BoE Bank of England
BSM Balance Sheet Management
C
CCP Central counterparty
CCR(1) Counterparty credit risk
CEO Chief Executive Officer
-----------------------------------
CET1(1) Common equity tier 1
CMB Commercial Banking, a global
business
-----------------------------------
CRA(1) Credit risk adjustment
CRD IV(1) Capital Requirements Regulation
and Directive
CRE(1) Commercial real estate
CRM Credit risk mitigation/mitigant
-----------------------------------
CRO Chief Risk Officer
CRR(1) Customer risk rating
CRR II Revised Capital Requirements
Regulation and Directive
as implemented
CSA Credit support annex
CVA Credit valuation adjustment
D
DBRS Dominion Bond Rating Service
E
EAD(1) Exposure at default
EBA European Banking Authority
EC European Commission
-----------------------------------
ECAI External Credit Assessment
Institutions
ECL Expected Credit Losses
EEA European Economic Area
EL(1) Expected loss
EU European Union
EHQLA Extremely high-quality liquid
assets
-----------------------------------
EVE(1) Economic value of equity
F
FIRB(1) Foundation internal ratings
based approach
FPC(1) Financial Policy Committee
(UK)
H
HQLA High-Quality Liquid Assets
I
ICAAP(1) Internal Capital Adequacy
Assessment Process
IFRSs International Financial
Reporting Standards
ILAA Internal Liquidity Adequacy
Assessment
IMM(1) Internal Model Method
IRB(1) Internal ratings based approach
IRRBB Interest Rate Risk in the
Banking Book
L
LCR Liquidity Coverage Ratio
LFRF Liquidity and Funding Risk
Management Framework
LGD(1) Loss given default
M
MOC Model Oversight Committee
MREL Minimum requirements for
own funds and eligible liabilities
MRT Material Risk Taker
N
NSFR Net Stable Funding Ratio
P
PD(1) Probability of default
PiT Point-in-time
PRA(1) Prudential Regulation Authority
R
RAF Resolvability assessment
framework
RAS Risk appetite statement
RBWM Retail Bank and Wealth Management,
a global business
RMM Risk Management Meeting
of HSBC UK
RWA(1) Risk-weighted asset
S
S&P Standard and Poor's rating
agency
SPE Special purpose entity
STD(1) Standardised approach
SFT(1) Securities Financing Transactions
SME Small- and medium-sized
enterprise
T
TCR Total Capital Requirement
TLAC(1) Total Loss Absorbing Capacity
TTC(1) Through-the-cycle
T1 Tier 1 capital
T2 Tier 2 capital
U
UK United Kingdom
1 Full definition included in Glossary on the HSBC Group website www.hsbc.com.
Appendix II
Countercyclical capital buffer
The table below discloses the geographical distribution of credit exposures relevant to the calculation of the countercyclical buffer under Article 440 of the Regulation (EU) 575/2013.
General credit Trading book Securitisation
exposures exposures exposures Own funds requirements
of Share
Sum of of which: which: of total
long/short General General of which: own
positions Internal credit trading Securitis-ation funds CCyB
SA IRB for SA models SA IRB exposures book exposures Total require-ments rate
Country GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % %
Australia - 52 - - - - 3 - - 3 - -
Canada - 8 - - - - - - - - - -
Cayman
Islands - 19 - - - - 2 - - 2 - -
China - 85 - - - - 2 - - 2 - -
Czech
Republic - 9 - - - - - - - - - 1.5
Egypt - 5 - - - - - - - - - -
France - 62 - - - - 4 - - 4 - 0.3
Germany - 90 - - - - 3 - - 3 - -
Hong Kong - 162 - - - - 12 - - 12 - 2.0
Iceland - - - - - - - - - - - 1.8
India - 6 - - - - - - - - - -
Lithuania - - - - - - - - - - - 1.0
Luxembourg - 272 - - - - 13 - - 13 - -
Malaysia - 7 - - - - - - - - - -
Malta - 1 - - - - - - - - - -
Mexico - 1 - - - - - - - - - -
Netherlands - 547 - - - - 20 - - 20 - -
Norway - 122 - - - - 14 - - 14 - 2.5
Saudi Arabia - 136 - - - - 4 - - 4 - -
Singapore - 74 - - - - 5 - - 5 - -
Slovakia - 7 - - - - - - - - - 1.5
Sweden - 59 - - - - 5 - - 5 - 2.5
Turkey - 23 - - - - 1 - - 1 - -
United Arab
Emirates 4 75 - - - - 3 - - 3 - -
United
Kingdom 2,364 221,725 - - - 3,177 5,601 - 48 5,649 - 1.0
United
States 1 810 - - - - 50 - - 50 - -
Other
countries 48 2,826 - - - - 119 - - 119 - 2.5
Total 2,417 227,183 - - - 3,177 5,861 - 48 5,909 - 16.5
2019
Total Risk Exposure Amount (GBPm) 85,881
Institution specific countercyclical capital buffer rate 0.97%
Institution specific countercyclical capital buffer requirement
(GBPm) 833
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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