Document



Contents
	Page
Introduction	3
Key metrics	3
Regulatory framework for disclosures	3
Pillar 3 disclosures	3
Regulatory developments	3
Risk management	4
Linkage to the Annual Report and Accounts 2017	6
Capital and RWAs	13
Capital management	13
Own funds	14
Leverage ratio	15
Pillar 1 capital requirements and RWA flow	17
Pillar 2 and ICAAP	19
Credit risk	20
Overview and responsibilities	20
Credit risk management	20
Credit risk models governance	20
Credit quality of assets	21
Risk mitigation	30
Global risk	34
Wholesale risk	35
Retail risk	41
Counterparty credit risk	50
Counterparty credit risk management	50
Securitisation	53
HSBC securitisation strategy	53
HSBC securitisation activity	53
Monitoring of securitisation positions	54
Securitisation accounting treatment	54
Securitisation regulatory treatment	54
Analysis of securitisation exposures	54
Market risk	56
Overview of market risk in global businesses	56
Market risk governance	57
Market risk measures	57
Market risk capital models	59
Prudent valuation adjustment	60
Structural foreign exchange exposures	61
Interest rate risk in the banking book	61
Operational risk	61
Overview and objectives	61
Organisation and responsibilities	62
Measurement and monitoring	62
Other risks	63
Pension risk	63
Non-trading book exposures in equities	63
Risk management of insurance operations	63
Liquidity and funding risk	63
Reputational risk	69
Sustainability risk	69
Business risk	69
Dilution risk	69
Remuneration	69



Appendices
		Page
I	Additional tables	70
II	Asset encumbrance	110
III	Summary of disclosures withheld	111



Other Information
Abbreviations	112
Cautionary statement regarding forward-looking statements	114
Contacts	114

Certain defined terms

Unless the context requires otherwise, ‘HSBC Holdings’ means HSBC Holdings plc and ‘HSBC’, the ‘Group’, ‘we’, ‘us’ and ‘our’ refer to HSBC Holdings together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People’s Republic of China is referred to as ‘Hong Kong’. When used in the terms ‘shareholders’ equity’ and ‘total shareholders’ equity’, ‘shareholders’ means holders of HSBC Holdings ordinary shares and those preference shares and capital securities issued by HSBC Holdings classified as equity. The abbreviations ‘$m’ and ‘$bn’ represent millions and billions (thousands of millions) of US dollars respectively.



		Page
1	Key metrics	3
2	Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation	6
3	Principal entities with a different regulatory and accounting scope of consolidation	9
4	Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories	10
5	Main sources of differences between regulatory exposure amounts and carrying values in financial statements	12
6	Own funds disclosure	14
7	Summary reconciliation of accounting assets and leverage ratio exposures	16
8	Leverage ratio common disclosure	16
9	Leverage ratio – Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures)	16
10	Overview of RWAs	18
11	RWA flow statements of credit risk exposures under the IRB approach	18
12	RWA flow statements of CCR exposures under IMM	19
13	RWA flow statements of market risk exposures under IMA	19
14	Credit quality of exposures by exposure classes and instruments	21
15	Credit quality of exposures by industry or counterparty types	22
16	Credit quality of exposures by geography¹	22
17	Ageing of past-due unimpaired and impaired exposures	23
18	Non-performing and forborne exposures	23
19	Credit risk exposure – summary	24
20	Geographical breakdown of exposures	25
21	Concentration of exposures by industry or counterparty types	26
22	Maturity of on-balance sheet exposures	28
23	Amount of impaired exposures and related allowances, broken down by geographical region	29
24	Movement in specific credit risk adjustments by industry and geographical region	29
25	Credit risk mitigation techniques – overview¹	31
26	Standardised approach – credit conversion factor (‘CCF’) and credit risk mitigation (‘CRM’) effects	32
27	Standardised approach – exposures by asset class and risk weight	33
28	IRB – Effect on RWA of credit derivatives used as CRM techniques	33
29	Credit derivatives exposures	34
30	Wholesale IRB credit risk models	37
31	IRB models – estimated and actual values (wholesale)¹	38
32	IRB models – corporate PD models – performance by CRR grade	38
33	Material retail IRB risk rating systems	41
34	IRB models – estimated and actual values (retail)	44
35	Wholesale IRB exposure – back-testing of probability of default (PD) per portfolio¹	46



		Page
36	Retail IRB exposure – back-testing of probability of default (PD) per portfolio¹	48
37	Counterparty credit risk exposure – by exposure class, product and geographical region	51
38	Counterparty credit risk – RWAs by exposure class, product and geographical region	52
39	Securitisation exposure – movement in the year	55
40	Securitisation – asset values and impairments	55
41	Market risk under standardised approach	56
42	Market risk under IMA	56
43	IMA values for trading portfolios	59
44	Prudential valuation adjustments	60
45	Operational risk RWAs	61
46	Non-trading book equity investments	63
47	Level and components of HSBC Group Consolidated Liquidity Coverage Ratio	66
48	Analysis of on-balance sheet encumbered and unencumbered assets	67
49	Wholesale IRB exposure – by obligor grade	70
50	PD, LGD, RWA and exposure by country	72
51	Retail IRB exposure – by internal PD band	86
52	IRB expected loss and CRAs – by exposure class	87
53	Credit risk exposure – by geographical region	88
54	Credit risk RWAs – by geographical region	90
55	IRB exposure – credit risk mitigation	91
56	Standardised exposure – credit risk mitigation	92
57	Standardised exposure – by credit quality step	92
58	Changes in stock of general and specific credit risk adjustments	93
59	Changes in stock of defaulted loans and debt securities	93
60	IRB – Credit risk exposures by portfolio and PD range	94
61	Specialised lending on slotting approach¹	100
62	Analysis of counterparty credit risk (CCR) exposure by approach (excluding centrally cleared exposures)	100
63	Credit valuation adjustment (CVA) capital charge	100
64	Standardised approach – CCR exposures by regulatory portfolio and risk weights	101
65	IRB – CCR exposures by portfolio and PD scale	102
66	Impact of netting and collateral held on exposure values	104
67	Composition of collateral for CCR exposure	104
68	Exposures to central counterparties	104
69	Securitisation exposures in the non-trading book	105
70	Securitisation exposures in the trading book	105
71	Securitisation exposures in the non-trading book and associated capital requirements – bank acting as originator or sponsor	106
72	Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor	108
73	Asset encumbrance	110

Introduction



Table 1: Key metrics
			At 31 Dec
		Footnotes	2017
	Available capital ($bn)	1
1	Common equity tier 1 (‘CET1’) capital		126.1
2	Tier 1 capital		151.0
3	Total regulatory capital		182.4
	Risk-weighted assets (‘RWAs’) ($bn)
4	Total RWAs		871.3
	Capital ratios (%)
5	CET1		14.5
6	Total tier 1		17.3
7	Total capital		20.9
	Additional CET1 buffer requirements as a percentage of RWA (%)
8	Capital conservation buffer requirement		1.25
9	Countercyclical buffer requirement		0.22
10	Bank G-SIB and/or D-SIB additional requirements		1.25
11	Total of bank CET1 specific buffer requirements		2.72
12	CET1 available after meeting the bank’s minimum capital requirements		8.0
	Leverage ratio
13	Total leverage ratio exposure measure ($bn)		2,557.1
14	Leverage ratio (%)	2	5.6
	Liquidity Coverage Ratio (‘LCR’)
15	Total high-quality liquid assets ($bn)		512.6
16	Total net cash outflow ($bn)		359.9
17	LCR ratio (%)	3	142.2


1	Capital figures are reported on a transitional basis.


2	Leverage ratio is calculated on a fully phased-in basis.


3	LCR ratio is calculated as at 31 December 2017.

Regulatory framework for disclosures

HSBC is supervised on a consolidated basis in the United Kingdom (‘UK’) by the Prudential Regulation Authority (‘PRA’), which receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. Individual banking subsidiaries are directly regulated by their local banking supervisors, who set and monitor their local capital adequacy requirements. In most jurisdictions, non-banking financial subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.

At a consolidated group level, we calculated capital for prudential regulatory reporting purposes throughout 2017 using the Basel III framework of the Basel Committee (‘Basel’) as implemented by the European Union (‘EU’) in the amended Capital Requirements Directive and Regulation (‘CRD IV’), and in the PRA’s Rulebook for the UK banking industry. The regulators of Group banking entities outside the EU are at varying stages of implementation of the Basel Committee’s framework, so local regulation in 2017 may have been on the basis of Basel I, II or III.

The Basel Committee’s framework is structured around three ‘pillars’: the 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 Committee’s framework and the rules in their jurisdiction, their capital condition, risk exposures and risk management processes, and hence their capital adequacy.

Pillar 3 requires all material risks to be disclosed to provide a comprehensive view of a bank’s risk profile.

The PRA’s final rules adopted national discretions in order to accelerate significantly the transition timetable to full ‘end point’ CRD IV compliance.

Pillar 3 disclosures

HSBC’s Pillar 3 disclosures at December 2017 comprise all information required under Pillar 3, both quantitative and qualitative. They are made in accordance with Part 8 of the Capital Requirements Regulation within CRD IV and the European Banking Authority’s (‘EBA’) final standards on revised Pillar 3 disclosures issued in December 2016. These disclosures are supplemented by specific additional requirements of the PRA and discretionary disclosures on our part.

The Pillar 3 disclosures are governed by the Group’s disclosure policy framework as approved by the Group Audit Committee (‘GAC’). Information relating to the rationale for withholding certain disclosures is provided in Appendix III.

In our disclosures, to give insight into movements during the year, we provide comparative figures for the previous year, analytical review of variances and ‘flow’ tables for capital requirements.

Key ratios and figures are reflected throughout the Pillar 3 disclosures at December 2017 and a summary is presented in Table 1. Where disclosures have been enhanced, or are new, we do not generally restate or provide prior year comparatives. The capital resources tables track the position from a CRD IV transitional to an end point basis.

We publish comprehensive Pillar 3 disclosures annually on the HSBC website www.hsbc.com, concurrently with the release of our Annual Report and Accounts 2017. A separate Pillar 3 document is also published at half-year following our Interim Report disclosure. Quarterly earnings releases also include regulatory information in line with the new requirements on the frequency of regulatory disclosures.

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 the Annual Report and Accounts 2017 or other locations.

We continue to engage in the work of the UK authorities and industry associations to improve the transparency and comparability of UK banks’ Pillar 3 disclosures.

Regulatory developments

Basel Committee

In December, the Basel Committee (‘Basel’) published the revisions to the Basel III framework (sometimes referred to as ‘Basel IV’). The final package includes:


•	widespread changes to the risk weights under the standardised approach to credit risk;


•	a change in the scope of application of the internal ratings based (‘IRB’) approach to credit risk, together with changes to the IRB methodology;


•	the replacement of the operational risk approaches with a single methodology;


•	an amended set of rules for the credit valuation adjustment (‘CVA’) capital framework;


•	an aggregate output capital floor that ensures that banks’ total risk-weighted assets are no lower than 72.5% of those generated by the standardised approaches; and


•	changes to the exposure measure for the leverage ratio, together with the imposition of a leverage ratio buffer for global systemically important institutions (‘G-SIB’). This will take the form of a tier 1 capital buffer set at 50% of the G-SIB’s RWAs capital buffer.

Basel has announced that the package will be implemented on 1 January 2022, with a five-year transitional provision for the output floor from that date, commencing at a rate of 50%.

HSBC is currently evaluating the final package. Given that the package contains a significant number of national discretions and that Basel has committed to re-calibrate the market risk elements

of the final framework during 2018, significant uncertainty remains as to the impact.

In all instances, the final standards will have to be transposed into the relevant local law before coming into effect. In addition, during 2017, Basel proposed other revisions to the regulatory capital framework. In particular, it published:


•	a discussion paper on the treatment of sovereign exposures;


•	the final guidelines regarding the identification and management of step-in risk;


•	the interim regulatory treatment and transitional requirements for International Financial Reporting Standard 9, Financial Instruments (‘IFRS 9’) provisions;


•	the final phase 2 Pillar 3 standards; and


•	proposals to revise the G-SIB assessment framework.

Financial Stability Board

In July, the Financial Stability Board (‘FSB’) expanded its resolution reform policy framework with the publication of its ‘Guiding Principles on the Internal Total Loss-absorbing Capacity of G-SIBs (‘Internal TLAC’)’. These guidelines supplement the FSB’s TLAC standard published in November 2015. In addition, the FSB published consultations on other outstanding issues related to its resolution framework. Again, these need to be incorporated into the relevant local law before coming into effect.

European Union

In the EU, elements of Basel’s and the FSB’s reforms are being implemented through revisions to the Capital Requirements Regulation and Capital Requirements Directive (collectively referred to as ‘CRR2’) and the EU resolution framework. The key components of CRR2 include changes to the market risk framework under the Fundamental Review of the Trading Book, changes to the counterparty credit risk framework and a binding leverage ratio. It also includes details of the minimum requirements for TLAC, which in the EU is known as the ‘Minimum Requirements for own funds and Eligible Liabilities’ (‘MREL’). The CRR2 changes are expected to be finalised in 2018 and apply from 1 January 2021, although certain elements, such as MREL, are expected to apply from 1 January 2019.

In December, the EU’s IFRS 9 transitional capital arrangements were published formally and the EBA published its final guidelines on the IFRS 9 disclosures. Separately, the final changes to the capital rules on securitisation were also published formally by the EU with implementation expected on 1 January 2019 for new transactions and on 1 January 2020 for existing positions. In addition, during 2017, the EBA published a consultation on the methods of prudential consolidation under the EU’s rules.

Also in December, in line with the EU’s rules, the requirement to have a Basel I floor lapsed and the PRA confirmed that its application is no longer required. A new output floor will be implemented as part of the Basel IV amendments.

Bank of England

In March, HSBC received from the Bank of England (‘BoE’) its indicative MREL requirement applicable to HSBC Holdings plc and its European Resolution Group (comprised of HSBC Bank plc and its subsidiaries). This includes interim MREL requirements effective from 1 January 2019 and final requirements effective from 1 January 2022. The BoE also confirmed formally that ‘multiple-point-of-entry’ (‘MPE’) is the preferred resolution strategy for HSBC. In May, the BoE published the quantum of MREL requirements for major UK banks.

In addition, during 2017, the BoE and the PRA proposed other revisions to the regulatory capital and MREL frameworks. In particular, they published proposals and/or final rules setting out:


•	the approach to setting internal MREL and the setting of MREL for MPE groups;


•	the interaction of MREL with both the capital and leverage ratio buffers;


•	changes to the groups and double leverage policy;


•	the policy refining the PRA’s Pillar 2A capital requirements and disclosure; and


•	the policy to ensure that valuation processes do not impede resolvability.

The PRA also published its final rules on the exclusion of claims on central banks from the UK leverage ratio framework and the re-calibration of the minimum leverage ratio for HSBC from 3% to 3.25% of tier 1 capital. These changes took effect in October 2017.

Lastly, in June, the Financial Policy Committee raised the countercyclical buffer rate for UK exposures to 0.5%, to apply from June 2018 and in November, increased it further to 1% with binding effect from November 2018.

Risk management

Our risk management framework

We use an enterprise-wide, risk management framework across the organisation and across all risk types. It is underpinned by our risk culture and is reinforced by the HSBC Values and our Global Standards programme.

The framework fosters continuous monitoring of the risk environment, and an integrated evaluation of risks and their interactions. 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 is set out on page 106 of the Annual Report and Accounts 2017. The management and mitigation of principal risks facing the Group is described in our top and emerging risks on page 95 of the Annual Report and Accounts 2017.

Commentary on hedging strategies and associated processes can be found in the Market risk and Securitisation sections of this document. Additionally, a comprehensive overview of this topic can be found in Note 1.2(e) on page 227 of the Annual Report and Accounts 2017.

Risk culture

HSBC has long recognised the importance of a strong risk culture, the fostering of which is a key responsibility of senior executives. Our risk culture is reinforced by the HSBC Values and our 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 HSBC Values and the achievement of financial and non-financial objectives that are aligned to our risk appetite and strategy.

Further information on risk and remuneration is set out on pages 95 and 203 of the Annual Report and Accounts 2017.

Risk governance

The Board has ultimate responsibility for the effective management of risk and approves HSBC’s risk appetite. It is advised on risk-related matters by the Group Risk Committee (‘GRC’), the Financial System Vulnerabilities Committee (‘FSVC’) and the Conduct and Values Committee (‘CVC’). The activities of the GRC, FSVC and CVC are set out on pages 175 to 177 of the Annual Report and Accounts 2017.

Executive accountability for the ongoing monitoring, assessment and management of the risk environment and the effectiveness of the risk management framework resides with the Group Chief Risk Officer. He is supported by the Risk Management Meeting (‘RMM’) of the Group Management Board.

The management of financial crime risk resides with the Group Head of Financial Crime Risk. He is supported by the Financial Crime Risk Management Meeting, as described on page 118 of the Annual Report and Accounts 2017.

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 takes into account the Group’s business and functional structures (see page 107 of the Annual Report and Accounts 2017).

Our executive risk governance structures ensure appropriate oversight and accountability for risk, which facilitates the reporting and escalation to the RMM (see page 107 of the Annual Report and Accounts 2017).

Risk appetite

Risk appetite is a key component of our management of risk. It describes the aggregate level and risk types that we are willing to accept in achieving our medium to long-term business objectives. In HSBC, risk appetite is managed through a global risk appetite framework and articulated in a risk appetite statement (‘RAS’), which is approved biannually by the Board on the advice of the GRC.

The Group‘s risk appetite informs our strategic and financial planning process, defining the desired forward-looking risk profile of the Group. 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. Information on our risk management tools is set out on page 107 of the Annual Report and Accounts 2017. Details on the Group’s overarching risk appetite are set out on page 95 of the Annual Report and Accounts 2017.

Stress testing

HSBC operates a comprehensive 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 enhances 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.

The Group stress testing programme is overseen by the GRC, and results are reported, where appropriate, to the RMM and GRC.

Further information on stress testing and details of the Group’s regulatory stress test results are set out on page 109 of the Annual Report and Accounts 2017.

Global Risk function

We have a dedicated Global Risk function, headed by the Group Chief Risk Officer, which is responsible for the Group‘s risk management framework. This includes establishing global policy, monitoring risk profiles, and forward-looking risk identification and management. Global Risk is made up of sub-functions covering all risks to our operations. It is independent from the global businesses, including sales and trading functions, helping to ensure balance in risk/return decisions. The Global Risk function operates in line with the three lines of defence model (see page 107 of the Annual Report and Accounts 2017).

Risk management and internal control systems

The Directors are responsible for maintaining and reviewing the effectiveness of risk management and internal control systems, and for determining the aggregate level and risk types they are willing to accept in achieving the Group’s business objectives. On behalf of the Board, the GAC has responsibility for oversight of risk management and internal controls over financial reporting, and the GRC has responsibility for oversight of risk management and internal controls other than for financial reporting.

The Directors, through the GRC and the GAC, conduct an annual review of the effectiveness of our system of risk management and internal control. The GRC and the GAC received confirmation that executive management has taken or is taking the necessary actions to remedy any failings or weaknesses identified through the operation of our framework of controls.

HSBC’s key risk management and internal control procedures are described on page 178 of the Annual Report and Accounts 2017, where the Directors’ Report on the effectiveness of internal controls can also be found.

Risk measurement and reporting systems

Our risk measurement and reporting systems 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 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 Global Risk function, while the development and operation of risk rating and management systems and processes are ultimately subject to the oversight of the Board.

We continue to invest significant resources in IT systems and processes in order to maintain and improve our risk management capabilities. A number of key initiatives and projects to enhance consistent data aggregation, reporting and management, and work towards meeting our Basel Committee data obligations are in progress. Group policy promotes the deployment of preferred technology where practicable. Group standards govern the procurement and operation of systems used in our subsidiaries 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 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 such matters as risk governance and oversight, compliance risks, approval authorities and lending guidelines, global and local scorecards, management information and reporting, and relations with third parties, including regulators, rating agencies and auditors.

Risk analytics and model governance

The Global Risk function manages a number of analytics disciplines supporting model development and management, including rating, scoring, economic capital and stress testing models for different risk types and business segments. It formulates technical responses to industry developments and regulatory policy in the field of risk analytics, develops HSBC’s global risk models, and oversees local model development and use around the Group toward our implementation targets for IRB approaches.

Model governance is under the general oversight of the Global Model Oversight Committee (‘MOC’). The Global MOC is supported by specific global functional MOCs for wholesale credit risk, market risk, Retail Banking and Wealth Management (‘RBWM’), Global Private Banking (‘GPB’), Finance, regulatory compliance, operational risk, fraud risk and financial intelligence, pensions risk and financial crime risk, and has functional and/or regional and entity-level counterparts with comparable terms of reference where required.

The Global MOC meets regularly and reports to RMM. It is chaired by the Global Risk function, and its membership is drawn from Risk, Finance and global businesses. Its primary responsibilities are to oversee the framework for the management of model risk, bring a strategic approach to model-related issues across the Group, and to oversee the governance of our risk rating models, their consistency and approval, within the regulatory framework. Through its oversight of the functional MOCs, it identifies emerging risks for all aspects of the risk rating system, ensuring that model risk is managed within our risk appetite statement, and formally advises RMM on any material model-related issues.

Models are also subject to an independent model review and validation process led by the Independent Model Review team within Global Risk. The Independent Model Review team provides robust challenge to the modelling approaches used across the Group, and ensures that the performance of those models is transparent and that their limitations are visible to key stakeholders.

The development and use of data and models to meet local requirements are the responsibility of global businesses or functions, as well as regional and/or local entities under the governance of their own management, subject to overall Group policy and oversight.

Linkage to the Annual Report and Accounts

2017

Structure of the regulatory group

Subsidiaries engaged in insurance activities are excluded from the regulatory consolidation by excluding assets, liabilities and post-acquisition reserves. The Group’s investments in these insurance subsidiaries are recorded at cost and deducted from CET1 capital (subject to thresholds).

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 are proportionally consolidated for regulatory purposes by including our share of assets, liabilities, profit and loss, and risk-weighted assets in accordance with the PRA’s application of EU legislation. Non-participating significant investments, along with non-financial associates, are deducted from capital (subject to thresholds).



Table 2: Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation
		Accounting balance sheet		Deconsolidation of insurance/ other entities		Consolidation of banking associates		Regulatory balance sheet
	Ref †	$m		$m		$m		$m
Assets
Cash and balances at central banks		180,624		(38	)	1,174		181,760
Items in the course of collection from other banks		6,628		—		2		6,630
Hong Kong Government certificates of indebtedness		34,186		—		—		34,186
Trading assets		287,995		(359	)	1		287,637
Financial assets designated at fair value		29,464		(28,674	)	—		790
Derivatives		219,818		(128	)	57		219,747
Loans and advances to banks		90,393		(2,024	)	1,421		89,790
Loans and advances to customers		962,964		(3,633	)	12,835		972,166
– of which: impairment allowances on IRB portfolios	h	(5,004	)	—		—		(5,004	)
Reverse repurchase agreements – non-trading		201,553		—		1,854		203,407
Financial investments		389,076		(61,480	)	3,325		330,921
Capital invested in insurance and other entities		—		2,430		—		2,430
Prepayments, accrued income and other assets		67,191		(4,202	)	267		63,256
– of which: retirement benefit assets	i	8,752		—		—		8,752
Current tax assets		1,006		(5	)	—		1,001
Interests in associates and joint ventures		22,744		(370	)	(4,064	)	18,310
– of which: positive goodwill on acquisition	e	521		(14	)	(1	)	506
Goodwill and intangible assets	e	23,453		(6,937	)	—		16,516
Deferred tax assets	f	4,676		170		—		4,846
Total assets at 31 Dec 2017		2,521,771		(105,250	)	16,872		2,433,393



		Accounting balance sheet	Deconsolidation of insurance/ other entities		Consolidation of banking associates	Regulatory balance sheet
	Ref †	$m	$m		$m	$m
Liabilities and equity
Liabilities
Hong Kong currency notes in circulation		34,186	—		—	34,186
Deposits by banks		69,922	(86	)	695	70,531
Customer accounts		1,364,462	(64	)	14,961	1,379,359
Repurchase agreements – non-trading		130,002	—		—	130,002
Items in course of transmission to other banks		6,850	—		—	6,850
Trading liabilities		184,361	867		—	185,228
Financial liabilities designated at fair value		94,429	(5,622	)	—	88,807
– of which:
included in tier 1	m	459	—		—	459
included in tier 2	n, q	23,831	—		—	23,831
Derivatives		216,821	69		51	216,941
Debt securities in issue		64,546	(2,974	)	320	61,892
Accruals, deferred income and other liabilities		45,907	(211	)	622	46,318
Current tax liabilities		928	(81	)	—	847
Liabilities under insurance contracts		85,667	(85,667	)	—	—
Provisions		4,011	(17	)	223	4,217
– of which: credit-related contingent liabilities and contractual commitments on IRB portfolios	h	220	—		—	220
Deferred tax liabilities		1,982	(1,085	)	—	897
Subordinated liabilities		19,826	1		—	19,827
– of which:
included in tier 1	k, m	1,838	—		—	1,838
included in tier 2	n, o, q	17,561	—		—	17,561
Total liabilities at 31 Dec 2017		2,323,900	(94,870	)	16,872	2,245,902
Equity
Called up share capital	a	10,160	—		—	10,160
Share premium account	a, k	10,177	—		—	10,177
Other equity instruments	j, k	22,250	—		—	22,250
Other reserves	c, g	7,664	1,236		—	8,900
Retained earnings	b, c	139,999	(10,824	)	—	129,175
Total shareholders’ equity		190,250	(9,588	)	—	180,662
Non-controlling interests	d, l, m, p	7,621	(792	)	—	6,829
– of which: non-cumulative preference shares issued by subsidiaries included in tier 1 capital	m	—	—		—	—
Total equity at 31 Dec 2017		197,871	(10,380	)	—	187,491
Total liabilities and equity at 31 Dec 2017		2,521,771	(105,250	)	16,872	2,433,393



Table 2: Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation (continued)
		Accounting balance sheet		Deconsolidation of insurance/ other entities		Consolidation of banking associates		Regulatory balance sheet
	Ref †	$m		$m		$m		$m
Assets
Cash and balances at central banks		128,009		(27	)	1,197		129,179
Items in the course of collection from other banks		5,003		—		26		5,029
Hong Kong Government certificates of indebtedness		31,228		—		—		31,228
Trading assets		235,125		(198	)	1		234,928
Financial assets designated at fair value		24,756		(24,481	)	—		275
Derivatives		290,872		(145	)	77		290,804
Loans and advances to banks		88,126		(1,845	)	922		87,203
Loans and advances to customers		861,504		(3,307	)	12,897		871,094
– of which: impairment allowances on IRB portfolios	h	(5,096	)	—		—		(5,096	)
Reverse repurchase agreements – non-trading		160,974		344		1,444		162,762
Financial investments		436,797		(54,904	)	3,500		385,393
Capital invested in insurance and other entities		—		2,214		—		2,214
Prepayments, accrued income and other assets		63,909		(3,073	)	306		61,142
– of which: retirement benefit assets	i	4,714		—		—		4,714
Current tax assets		1,145		(118	)	—		1,027
Interests in associates and joint ventures		20,029		—		(4,195	)	15,834
– of which: positive goodwill on acquisition	e	488		—		(475	)	13
Goodwill and intangible assets	e	21,346		(6,651	)	481		15,176
Deferred tax assets	f	6,163		176		5		6,344
Total assets at 31 Dec 2016		2,374,986		(92,015	)	16,661		2,299,632



		Accounting balance sheet		Deconsolidation of insurance/ other entities		Consolidation of banking associates	Regulatory balance sheet
	Ref †	$m		$m		$m	$m
Liabilities and equity
Liabilities
Hong Kong currency notes in circulation		31,228		—		—	31,228
Deposits by banks		59,939		(50	)	441	60,330
Customer accounts		1,272,386		(44	)	14,997	1,287,339
Repurchase agreements – non-trading		88,958		—		—	88,958
Items in course of transmission to other banks		5,977		—		—	5,977
Trading liabilities		153,691		643		1	154,335
Financial liabilities designated at fair value		86,832		(6,012	)	—	80,820
– of which:
included in tier 1	m	411		—		—	411
included in tier 2	n, q	23,172		—		—	23,172
Derivatives		279,819		193		64	280,076
Debt securities in issue		65,915		(3,547	)	662	63,030
Accruals, deferred income and other liabilities		44,291		1,810		495	46,596
Current tax liabilities		719		(26	)	—	693
Liabilities under insurance contracts		75,273		(75,273	)	—	—
Provisions		4,773		(18	)	—	4,755
– of which: credit-related contingent liabilities and contractual commitments on IRB portfolios	h	267		—		—	267
Deferred tax liabilities		1,623		(981	)	1	643
Subordinated liabilities		20,984		1		—	20,985
– of which:
included in tier 1	k, m	1,754		—		—	1,754
included in tier 2	n, o, q	18,652		—		—	18,652
Total liabilities at 31 Dec 2016		2,192,408		(83,304	)	16,661	2,125,765
Equity
Called up share capital	a	10,096		—		—	10,096
Share premium account	a, k	12,619		—		—	12,619
Other equity instruments	j, k	17,110		—		—	17,110
Other reserves	c, g	(1,234	)	1,735		—	501
Retained earnings	b, c	136,795		(9,442	)	—	127,353
Total shareholders’ equity		175,386		(7,707	)	—	167,679
Non-controlling interests	d, l, m, p	7,192		(1,004	)	—	6,188
– of which: non-cumulative preference shares issued by subsidiaries included in tier 1 capital	m	260		—		—	260
Total equity at 31 Dec 2016		182,578		(8,711	)	—	173,867
Total liabilities and equity at 31 Dec 2016		2,374,986		(92,015	)	16,661	2,299,632



Table 3: Principal entities with a different regulatory and accounting scope of consolidation
					At 31 Dec 2017		At 31 Dec 2016
	Principal activities	Method of accounting consolidation	Method of regulatory consolidation		Total assets	Total equity	Total assets	Total equity
	Principal activities	Method of accounting consolidation	Method of regulatory consolidation	Footnote	$m	$m	$m	$m
Principal associates
The Saudi British Bank	Banking services	Equity	Proportional consolidation		50,417	8,752	49,784	8,202
Principal insurance entities excluded from the regulatory consolidation
HSBC Life (International) Ltd	Life insurance manufacturing	Fully consolidated	N/A		45,083	3,679	39,346	2,838
HSBC Assurances Vie (France)	Life insurance manufacturing	Fully consolidated	N/A		27,713	843	23,418	721
Hang Seng Insurance Company Ltd	Life insurance manufacturing	Fully consolidated	N/A		16,411	1,403	15,225	1,107
HSBC Insurance (Singapore) Pte Ltd	Life insurance manufacturing	Fully consolidated	N/A		4,425	706	3,589	360
HSBC Life (UK) Ltd	Life insurance manufacturing	Fully consolidated	N/A		2,115	196	1,678	158
HSBC Life Assurance (Malta) Ltd	Life insurance manufacturing	Fully consolidated	N/A		1,681	61	1,747	54
HSBC Life Insurance Company Ltd	Life insurance manufacturing	Fully consolidated	N/A		1,113	87	864	85
HSBC Seguros S.A. (Mexico)	Life insurance manufacturing	Fully consolidated	N/A		785	120	716	118
Principal SPEs excluded from the regulatory consolidation				1
Regency Assets Ltd	Securitisation	Fully consolidated	N/A		7,466	—	7,380	—
Mazarin Funding Ltd	Securitisation	Fully consolidated	N/A		852	48	1,117	12
Barion Funding Ltd	Securitisation	Fully consolidated	N/A		424	78	653	56
Metrix Portfolio Distribution Plc	Securitisation	Fully consolidated	N/A		326	—	333	—

Table 3 also presents the total assets and total equity, on a stand-alone IFRS basis, of the entities which are included in the Group consolidation on different bases for accounting and regulatory purposes. The figures shown therefore include intra-Group balances. For associates, table 3 shows the total assets and total equity of the entity as a whole rather than HSBC’s share in the entities’ balance sheets.

For insurance entities, the present value of the in-force long-term insurance business asset of $6.6bn and the related deferred tax liability are only recognised on consolidation in financial reporting, and are therefore not included in the asset or equity positions for the stand-alone entities presented in table 3. In addition, these figures exclude any deferred acquisition cost assets that may be recognised in the entities’ stand-alone financial reporting.

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 the Annual Report and Accounts 2017.

The Pillar 3 Disclosures at December 2017 are prepared in accordance with regulatory capital adequacy concepts and rules, while the Annual Report and Accounts 2017 are prepared in accordance with 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 and 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.

The following tables show in two steps how the accounting values in the regulatory balance sheet link to regulatory exposure at default (‘EAD’).

In a first step, table 4 shows the difference between the accounting and regulatory scope of consolidation, and a breakdown of the accounting balances into the risk types that form the basis for regulatory capital requirements. Table 5 then shows the main differences between the accounting balances and regulatory exposures by regulatory risk type.



Table 4: Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories
			Carrying value of items
	Carrying values as reported in published financial statements	Carrying values under scope of regulatory consolidation¹	Subject to the credit risk framework	Subject to the counter-party credit risk framework²	Subject to the securitisation framework³	Subject to the market risk framework	Subject to deduction from capital or not subject to regulatory capital requirements
	$bn	$bn	$bn	$bn	$bn	$bn	$bn
Assets
Cash and balances at central banks	180.6	181.8	164.7	—	—	—	—
Items in the course of collection from other banks	6.6	6.6	6.6	—	—	—	—
Hong Kong Government certificates of indebtedness	34.2	34.2	34.2	—	—	—	—
Trading assets	288.0	287.6	2.0	17.1	—	270.4	15.2
Financial assets designated at fair value	29.5	0.8	0.8	—	—	—	—
Derivatives	219.8	219.7	—	218.5	1.2	219.7	—
Loans and advances to banks	90.4	89.8	98.6	6.6	0.6	—	1.1
Loans and advances to customers	963.0	972.2	943.7	10.4	13.1	—	5.0
Reverse repurchase agreements – non-trading	201.6	203.4	—	203.4	—	—	—
Financial investments	389.1	330.9	324.1	—	6.5	—	0.3
Capital invested in insurance and other entities	—	2.4	1.6	—	—	—	0.8
Current tax assets	1.0	1.0	1.0	—	—	—	—
Prepayments, accrued income and other assets	67.1	63.4	42.0	3.8	0.1	13.3	6.0
Interests in associates and joint ventures	22.7	18.3	12.9	—	—	—	5.4
Goodwill and intangible assets	23.5	16.5	—	—	—	—	16.4
Deferred tax assets	4.7	4.8	6.3	—	—	—	(1.5	)
Total assets at 31 Dec 2017	2,521.8	2,433.4	1,638.5	459.8	21.5	503.4	48.7

Liabilities
Hong Kong currency notes in circulation	34.2	34.2	—	—	—	—	34.2
Deposits by banks	69.9	70.5	—	—	—	—	70.5
Customer accounts	1,364.5	1,379.4	—	—	—	—	1,379.4
Repurchase agreements – non trading	130.0	130.0	—	130.0	—	—	—
Items in course of transmission to other banks	6.9	6.9	—	—	—	—	6.9
Trading liabilities	184.4	185.2	—	10.6	—	172.2	13.0
Financial liabilities designated at FV	94.4	88.8	—	—	—	—	88.8
Derivatives	216.8	216.9	—	216.9	—	216.9	—
Debt securities in issue	64.5	61.9	—	—	—	—	61.9
Current tax liabilities	0.9	0.8	—	—	—	—	0.8
Liabilities under insurance contract	85.7	—	—	—	—	—	—
Accruals, deferred income, and other liabilities	45.9	46.3	—	—	—	—	46.3
Provisions	4.0	4.2	0.3	—	—	—	3.9
Deferred tax liabilities	2.0	0.9	1.3	—	—	—	1.7
Subordinated liabilities	19.8	19.9	—	—	—	—	19.9
Total liabilities at 31 Dec 2017	2,323.9	2,245.9	1.6	357.5	—	389.1	1,727.3



Table 4: Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories (continued)
			Carrying value of items
	Carrying values as reported in published financial statements	Carrying values under scope of regulatory consolidation¹	Subject to the credit risk framework	Subject to the counter-party credit risk framework²	Subject to the securitisation framework³	Subject to the market risk framework	Subject to deduction from capital or not subject to regulatory capital requirements
	$bn	$bn	$bn	$bn	$bn	$bn	$bn
Assets
Cash and balances at central banks	128.0	129.2	129.2	—	—	—	—
Items in the course of collection from other banks	5.0	5.0	5.0	—	—	—	—
Hong Kong Government certificates of indebtedness	31.2	31.2	31.2	—	—	—	—
Trading assets	235.1	234.9	8.4	11.3	—	208.7	17.6
Financial assets designated at fair value	24.8	0.3	0.3	—	—	—	—
Derivatives	290.9	290.8	—	289.9	0.9	290.8	—
Loans and advances to banks	88.1	87.2	76.3	2.0	1.2	—	7.7
Loans and advances to customers	861.5	871.1	847.4	8.9	10.8	—	4.0
Reverse repurchase agreements – non-trading	161.0	162.8	—	162.4	0.4	—	—
Financial investments	436.8	385.4	375.8	—	9.5	—	0.1
Capital invested in insurance and other entities	—	2.2	1.4	—	—	—	0.8
Current tax assets	1.1	1.0	1.0	—	—	—	—
Prepayments, accrued income and other assets	63.9	61.2	42.4	3.9	—	8.2	6.7
Interests in associates and joint ventures	20.0	15.8	10.3	—	—	—	5.5
Goodwill and intangible assets	21.3	15.2	—	—	—	—	15.2
Deferred tax assets	6.2	6.3	5.2	—	—	—	1.1
Total assets at 31 Dec 2016	2,374.9	2,299.6	1,533.9	478.4	22.8	507.7	58.7

Liabilities
Hong Kong currency notes in circulation	31.2	31.2	—	—	—	—	31.2
Deposits by banks	59.9	60.3	—	—	—	—	60.3
Customer accounts	1,272.4	1,287.3	—	—	—	—	1,287.3
Repurchase agreements – non trading	89.0	89.0	—	89.0	—	—	—
Items in course of transmission to other banks	6.0	6.0	—	—	—	—	6.0
Trading liabilities	153.7	154.3	—	5.1	—	139.1	15.2
Financial liabilities designated at FV	86.8	80.8	—	—	—	—	80.8
Derivatives	279.8	280.1	—	280.1	—	280.1	—
Debt securities in issue	65.9	63.0	—	—	—	—	63.0
Current tax liabilities	0.7	0.7	—	—	—	—	0.7
Liabilities under insurance contract	75.3	0.0	—	—	—	—	—
Accruals, deferred income, and other liabilities	44.3	46.7	—	—	—	—	46.7
Provisions	4.8	4.8	0.3	—	—	—	4.5
Deferred tax liabilities	1.6	0.6	0.6	—	—	—	—
Subordinated liabilities	21.0	21.0	—	—	—	—	21.0
Total liabilities at 31 Dec 2016	2,192.4	2,125.8	0.9	374.2	—	419.2	1,616.7

Explanations of differences between accounting and regulatory exposure amounts

Off-balance sheet amounts and potential future exposure for counterparty risk (CCR)

Off-balance sheet amounts subject to credit risk and securitisation regulatory frameworks include undrawn portions of committed facilities, various trade finance commitments and guarantees, by applying a credit conversion factor (‘CCF’) to these items and consideration of potential future exposures (‘PFE’) for counterparty risk.

Differences in netting rules

Under IFRS, netting is only permitted if legal right of set-off exists and the cash flows are intended to be settled on a net basis. Under the PRA’s regulatory rules, however, netting is applied for capital calculations if there is legal certainty and the positions are managed on a net collateralised basis. As a consequence, we recognise greater netting under the PRA’s rules, reflecting the close-out provisions that would take effect in the event of default of a counterparty rather than just those transactions that are actually settled net in the normal course of business.

Differences due to financial collateral

Exposure value under the standardised approach is calculated after deducting credit risk mitigation whereas accounting value is before such deductions.

Differences due to impairments

The carrying value of assets is net of credit risk adjustments. The regulatory exposure value under IRB approaches is before deducting credit risk adjustments.

Differences due to EAD modelling

The carrying value of assets is usually measured at amortised cost or fair value as at the balance sheet date. For certain IRB models, the exposure value used as EAD is the projected value one year hence.

Differences due to credit risk adjustments

In counterparty credit risk, differences arise between accounting carrying values and regulatory exposure as a result of the application of credit risk mitigation and the use of modelled exposures.

Explanation of differences between accounting fair value and regulatory prudent valuation

Fair value is defined as the best estimate of the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Some fair value adjustments already reflect valuation uncertainty to some degree. These are market data uncertainty, model uncertainty and concentration adjustments.

However, it is recognised that a variety of valuation techniques using stressed assumptions and combined with the range of plausible market parameters at a given point in time may still generate unexpected uncertainty beyond fair value.

A series of additional valuation adjustments (‘AVAs’) are therefore required to reach a specified degree of confidence (the ‘Prudent Value’) set by regulators that differs both in terms of scope and measurement from HSBC’s own quantification for disclosure purposes.

AVAs should consider at the minimum: market price uncertainty, bid/offer (close out) uncertainty, model risk, concentration, administrative cost, unearned credit spreads (‘CVA’) and investing and funding costs (‘FFVA’).

AVAs are not limited to level 3 exposures, for which a 95% uncertainty range is already computed and disclosed, but must also be calculated for any exposure for which the exit price cannot be determined with a high degree of certainty.

Capital and RWAs

Capital management

Approach and policy

Our approach to capital management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim to maintain a strong capital base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory capital requirements at all times.

Our capital management process culminates in the annual Group capital plan, which is approved by the Board. HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings’ issuance of equity and non-equity capital and by profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a balance between the composition of its capital and its investment in subsidiaries. Subject to the above, there is no current or foreseen impediment to HSBC Holdings’ ability to provide such investments.

Each subsidiary manages its own capital to support its planned business growth and meet its local regulatory requirements within the context of the Group capital plan. Capital generated by subsidiaries in excess of planned requirements is returned to HSBC Holdings, normally by way of dividends, in accordance with the Group’s capital plan.

During 2017, consistent with the Group’s capital plan, the Group’s subsidiaries did not experience any significant restrictions on

paying dividends or repaying loans and advances, and none are envisaged with regard to planned dividends or payments. However, the ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial and operating performance. None of our subsidiaries that are excluded from the regulatory consolidation have capital resources below their minimum regulatory requirement. HSBC Holdings has not entered into any Group Financial Support Agreements pursuant to the application of early intervention measures under the Bank Recovery and Resolution Directive.

All capital securities included in the capital base of HSBC have either been issued as fully compliant CRD IV securities (on an end point basis) or in accordance with the rules and guidance in the PRA’s previous General Prudential Sourcebook, which are included in the capital base by virtue of application of the CRD IV grandfathering provisions. The main features of capital securities issued by the Group, categorised as tier 1 (‘T1’) capital and tier 2 (‘T2’) capital, are set out on the HSBC website, www.hsbc.com.

The values disclosed are the IFRS balance sheet carrying amounts, not the amounts that these securities contribute to regulatory capital. For example, the IFRS accounting and the regulatory treatments differ in their approaches to issuance costs, regulatory amortisation and regulatory eligibility limits prescribed in the grandfathering provisions under CRD IV.

A list of the features of our capital instruments in accordance with Annex III of Commission Implementing Regulation 1423/2013 is also published on our website with reference to our balance sheet on 31 December 2017. This is in addition to the full terms and conditions of our securities, also available on our website.

For further details of our approach to capital management, please see page 162 of the Annual Report and Accounts 2017.



Table 6: Own funds disclosure
			At 31 Dec 2017		CRD IV prescribed residual amount		Final CRD IV text
Ref^*		Ref †	$m		$m		$m
	Common equity tier 1 (‘CET1’) capital: instruments and reserves
1	Capital instruments and the related share premium accounts		18,932				18,932
	– ordinary shares	a	18,932				18,932
2	Retained earnings	b	124,679				124,679
3	Accumulated other comprehensive income (and other reserves)	c	9,433				9,433
5	Minority interests (amount allowed in consolidated CET1)	d	4,905				4,905
5a	Independently reviewed interim net profits net of any foreseeable charge or dividend	b	608				608
6	Common equity tier 1 capital before regulatory adjustments		158,557				158,557
	Common equity tier 1 capital: regulatory adjustments
7	Additional value adjustments		(1,146	)			(1,146	)
8	Intangible assets (net of related deferred tax liability)	e	(16,872	)			(16,872	)
10	Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)	f	(1,181	)			(1,181	)
11	Fair value reserves related to gains or losses on cash flow hedges	g	208				208
12	Negative amounts resulting from the calculation of expected loss amounts	h	(2,820	)			(2,820	)
14	Gains or losses on liabilities valued at fair value resulting from changes in own credit standing		3,731				3,731
15	Defined benefit pension fund assets	i	(6,740	)			(6,740	)
16	Direct and indirect holdings of own CET1 instruments		(40	)			(40	)
19	Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions)		(7,553	)			(7,553	)
28	Total regulatory adjustments to common equity tier 1		(32,413	)	—		(32,413	)
29	Common equity tier 1 capital		126,144		—		126,144
	Additional tier 1 (‘AT1’) capital: instruments
30	Capital instruments and the related share premium accounts		16,399		—		16,399
31	– classified as equity under IFRSs	j	16,399		—		16,399
33	Amount of qualifying items and the related share premium accounts subject to phase out from AT1	k	6,622		(6,622	)	—
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	l, m	1,901		(1,709	)	192
35	– of which: instruments issued by subsidiaries subject to phase out	m	1,374		(1,374	)	—
36	Additional tier 1 capital before regulatory adjustments		24,922		(8,331	)	16,591
	Additional tier 1 capital: regulatory adjustments
37	Direct and indirect holdings of own AT1 instruments		(60	)			(60	)
41b	Residual amounts deducted from AT1 capital with regard to deduction from tier 2 (‘T2’) capital during the transitional period		(52	)	52		—
	– direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities		(52	)	52		—
43	Total regulatory adjustments to additional tier 1 capital		(112	)	52		(60	)
44	Additional tier 1 capital		24,810		(8,279	)	16,531
45	Tier 1 capital (T1 = CET1 + AT1)		150,954		(8,279	)	142,675
	Tier 2 capital: instruments and provisions
46	Capital instruments and the related share premium accounts	n	16,880				16,880
47	Amount of qualifying items and the related share premium accounts subject to phase out from T2	o	4,746		(4,746	)	—
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	p, q	10,306		(10,218	)	88
49	– of which: instruments issued by subsidiaries subject to phase out	q	10,236		(10,236	)	—
51	Tier 2 capital before regulatory adjustments		31,932		(14,964	)	16,968
	Tier 2 capital: regulatory adjustments
52	Direct and indirect holdings of own T2 instruments		(40	)			(40	)
55	Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions)		(463	)	(52	)	(515	)
57	Total regulatory adjustments to tier 2 capital		(503	)	(52	)	(555	)
58	Tier 2 capital		31,429		(15,016	)	16,413
59	Total capital (TC = T1 + T2)		182,383		(23,295	)	159,088



Table 6: Own funds disclosure (continued)
			At 31 Dec 2017	CRD IV prescribed residual amount	Final CRD IV text
Ref^*		Ref †	$m	$m	$m
60	Total risk-weighted assets		871,337	—	871,337
	Capital ratios and buffers
61	Common equity tier 1		14.5%		14.5%
62	Tier 1		17.3%		16.4%
63	Total capital		20.9%		18.3%
64	Institution specific buffer requirement		2.72%
65	– capital conservation buffer requirement		1.25%
66	– counter-cyclical buffer requirement		0.22%
67a	– Global Systemically Important Institution (‘G-SII’) buffer		1.25%
68	Common equity tier 1 available to meet buffers		8.0%
	Amounts below the threshold for deduction (before risk weighting)
72	Direct and indirect holdings of the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions)		4,473
73	Direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount below 10% threshold and net of eligible short positions)		13,370
75	Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability)		5,004
	Applicable caps on the inclusion of provisions in tier 2
77	Cap on inclusion of credit risk adjustments in T2 under standardised approach		2,193
79	Cap for inclusion of credit risk adjustments in T2 under internal ratings-based approach		3,150
	Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2013 and 1 Jan 2022)
82	Current cap on AT1 instruments subject to phase out arrangements		8,652
83	Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities)		1,526
84	Current cap on T2 instruments subject to phase out arrangements		14,982
85	Amount excluded from T2 due to cap (excess over cap after redemptions and maturities)		5,290

CET1 capital increased during the year by $9.5bn, due to:


•	$3.7bn of capital generated through profits, net of dividends and scrip;


•	$6.3bn of favourable foreign currency translation differences;


•	regulatory netting of $1.5bn;


•	a decrease of $1.3bn in the deduction for excess expected loss; and


•	an increase of $1.0bn in the value of minority interests allowed in CET1.

These increases were partly offset by:


•	the $3.0bn share buy-back; and


•	a $1.2bn decrease as a result of the change in US tax legislation; this change also reduces RWAs by $3.1bn.

Leverage ratio

Our leverage ratio calculated in accordance with CRD IV was 5.6% at 31 December 2017, up from 5.4% at 31 December 2016. Growth in tier 1 capital was partly offset by a rise in exposure, primarily due to growth in customer advances, balances at central banks and trading assets.

In October 2017, the PRA increased the minimum requirement of the UK leverage ratio from 3% to 3.25%.

At 31 December 2017, our UK minimum leverage ratio requirement of 3.25% was supplemented by an additional leverage ratio buffer of 0.4% and a countercyclical leverage ratio buffer of 0.1%.

These additional buffers translate into capital values of $10.3bn and $1.8bn respectively. We comfortably exceeded these leverage requirements.

The risk of excessive leverage is managed as part of HSBC’s global risk appetite framework and monitored using a leverage ratio metric within our risk appetite statement (‘RAS’). The RAS articulates the aggregate level and types of risk that HSBC 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 and the GRC. Our approach to risk appetite is described on page 95 of the Annual Report and Accounts 2017.



Table 8: Leverage ratio common disclosure
		At 31 Dec
		2017		2016
Ref*		$bn		$bn
	On-balance sheet exposures (excluding derivatives and SFT)
1	On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral)	1,998.7		1,844.4
2	(Asset amounts deducted in determining tier 1 capital)	(35.3	)	(34.4	)
3	Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets)	1,963.4		1,810.0
	Derivative exposures
4	Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)	29.0		43.7
5	Add-on amounts for potential future exposure (‘PFE’) associated with all derivatives transactions (mark-to-market method)	125.5		110.2
6	Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to IFRSs	5.2		5.9
7	(Deductions of receivables assets for cash variation margin provided in derivatives transactions)	(23.6	)	(30.6	)
8	(Exempted central counterparty (‘CCP’) leg of client-cleared trade exposures)	(14.0	)	(4.1	)
9	Adjusted effective notional amount of written credit derivatives	188.2		216.4
10	(Adjusted effective notional offsets and add-on deductions for written credit derivatives)	(181.6	)	(209.3	)
11	Total derivative exposures	128.7		132.2
	Securities financing transaction exposures
12	Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions	331.2		266.6
13	(Netted amounts of cash payables and cash receivables of gross SFT assets)	(105.8	)	(87.9	)
14	Counterparty credit risk exposure for SFT assets	12.2		10.4
16	Total securities financing transaction exposures	237.6		189.1
	Other off-balance sheet exposures
17	Off-balance sheet exposures at gross notional amount	801.7		757.7
18	(Adjustments for conversion to credit equivalent amounts)	(574.3	)	(534.6	)
19	Total off-balance sheet exposures	227.4		223.1
	Capital and total exposures
20	Tier 1 capital	142.7		127.3
21	Total leverage ratio exposure	2,557.1		2,354.4
22	Leverage ratio (%)	5.6		5.4
EU-23	Choice of transitional arrangements for the definition of the capital measure	Fully phased-in		Fully phased-in



Risk category	Scope of permissible approaches	Approach adopted by HSBC
Credit risk	The Basel Committee’s framework applies three approaches of increasing sophistication to the calculation of Pillar 1 credit risk capital requirements. The most basic level, the standardised approach, requires banks to use external credit ratings to determine the risk weightings applied to rated counterparties. Other counterparties are grouped into broad categories and standardised risk weightings are applied to these categories. The next level, the foundation IRB (‘FIRB’) approach, allows banks to calculate their credit risk capital requirements on the basis of their internal assessment of a counterparty’s probability of default (‘PD’), but subjects their quantified estimates of EAD and loss given default (‘LGD’) to standard supervisory parameters. Finally, the advanced IRB (‘AIRB’) approach allows banks to use their own internal assessment in determining PD and in quantifying EAD and LGD.	For consolidated Group reporting, we have adopted the advanced IRB approach for the majority of our business. Some portfolios remain on the standardised or foundation IRB approaches: • pending the issuance of local regulations or model approval; • following supervisory prescription of a non-advanced approach; or • under exemptions from IRB treatment.
Counterparty credit risk	Four approaches to calculating CCR and determining exposure values are defined by the Basel Committee: mark-to-market, original exposure, standardised and Internal Model Method (‘IMM’). These exposure values are used to determine capital requirements under one of the three approaches to credit risk: standardised, foundation IRB or advanced IRB.	We use the mark-to-market and IMM approaches for CCR. Details of the IMM permission we have received from the PRA can be found in the Financial Services Register on the PRA website. Our aim is to increase the proportion of positions on IMM over time.
Equity	For the non-trading book, equity exposures can be assessed under standardised or IRB approaches.	For Group reporting purposes, all non-trading book equity exposures are treated under the standardised approach.
Securitisation	Basel specifies two approaches for calculating credit risk requirements for securitisation positions in non-trading books: the standardised approach and the IRB approach, which incorporates the Ratings Based Method (‘RBM’), the Internal Assessment Approach (‘IAA’) and the Supervisory Formula Method (‘SFM’). Securitisation positions in the trading book are treated within the market risk framework, using the CRD IV standard rules.	For the majority of the non-trading book securitisation positions we use the IRB approach and, within this, principally the RBM with lesser amounts on the IAA and the SFM. We also use the standardised approach for an immaterial amount of non-trading book positions. We follow the CRD IV standard rules for securitisation positions in the trading book.
Market risk	Market risk capital requirements can be determined under either the standard rules or the Internal Models Approach (‘IMA’). The latter involves the use of internal value at risk (‘VaR’) models to measure market risks and determine the appropriate capital requirement. In addition to the VaR models, other internal models include stressed VaR (‘SVaR’), Incremental Risk Charge (‘IRC’) and Comprehensive Risk Measure.	The market risk capital requirement is measured using internal market risk models, where approved by the PRA, or under the standard rules. Our internal market risk models comprise VaR, stressed VaR and IRC. Non-proprietary details of the scope of our IMA permission are available in the Financial Services Register on the PRA website. We are in compliance with the requirements set out in Articles 104 and 105 of the Capital Requirements Regulation.
Operational risk	The Basel Committee allows firms to calculate their operational risk capital requirement under the basic indicator approach, the standardised approach or the advanced measurement approach.	We currently use the standardised approach in determining our operational risk capital requirement. We have in place an operational risk model that is used for economic capital calculation purposes.

RWAs decreased by $3.7bn due to:


•	savings of $4.3bn achieved from increased diversification; less


•	increased risk levels of $0.7bn, mainly as a result of rises in volatility.

Pillar 2 and ICAAP

Pillar 2

We conduct an Internal Capital Adequacy Assessment Process (‘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 Board, which has the ultimate responsibility for the effective management of risk and approval of HSBC’s risk appetite.

The ICAAP is reviewed by the PRA and by a college of EEA supervisors, as part of the Joint Risk Assessment and Decision process, during the supervisory review and evaluation process. This process occurs periodically to enable the regulator to define the Individual Capital Guidance (‘ICG’) or minimum capital requirements for HSBC, and the PRA to define the PRA buffer, where required. Under the revised Pillar 2 PRA regime, which came into effect from 1 January 2017, 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 vulnerability 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 the ICG 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 ICG 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 that a firm’s risk management and governance are 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 manages the Group ICAAP, and together with RMM and GRC, 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;


•	meet current regulatory requirements, and that HSBC is well placed to meet those expected in the future;


•	allow the bank 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 for the consolidated Group and by local regulators for individual Group companies. These capital requirements are a primary influence shaping the business planning process, in which RWA targets are established for our global businesses in accordance with the Group’s strategic direction and risk appetite.

Economic capital is the internally calculated capital requirement that we deem necessary to support the risks to which we are exposed. The economic capital assessment is a more risk-sensitive measure than the regulatory minimum, and takes account of the substantial diversification of risk 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, to a 99.5% level of confidence for our insurance activities and pension risks, and to a 99.9% level of confidence for our operating 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, interest rate risk in the banking book, insurance risk, pension risk, residual risk and structural foreign exchange risk.

Credit risk

Overview and responsibilities

Credit risk represents our largest regulatory capital requirement.

The principal objectives of our credit risk management function are:

•

to maintain across HSBC a strong culture of responsible lending and a robust credit risk policy and control framework;

•

to both partner and challenge our businesses in defining, implementing and continually re-evaluating our credit risk appetite under actual and stress scenario conditions; and

•

to ensure there is independent, expert scrutiny of credit risks, their costs and their mitigation.

The credit risk functions within Wholesale Credit and Market Risk and RBWM are the constituent parts of Global Risk that support the Group Chief Risk Officer in overseeing credit risks. Their major duties comprise undertaking independent reviews of large and high-risk credit proposals, overseeing large exposure policy and reporting on our wholesale and retail credit risk management disciplines, owning our credit policy and credit systems programmes, overseeing portfolio management and reporting on risk matters to senior executive management and to regulators.

These credit risk functions work closely with other parts of Global Risk; for example, with Operational Risk on the internal control framework and with Risk Strategy on the risk appetite process. In addition, they work jointly with Risk Strategy and Global Finance on stress testing.

The credit responsibilities of Global Risk are described on page 107 of the Annual Report and Accounts 2017.

Group-wide, the credit risk functions comprise a network of credit risk management offices reporting within regional risk functions. They fulfil an essential role as independent risk control units distinct from business line management in providing objective scrutiny of risk rating assessments, credit proposals for approval and other risk matters.

Credit risk operates through a hierarchy of personal credit limit approval authorities. Operating company chief executives, acting under authorities delegated by their boards and Group standards, are accountable for credit risk and other risks in their business. In turn, chief executives delegate authority to operating company chief risk officers and management teams on an individual basis. Each operating company is responsible for the quality and performance of its credit portfolios in accordance with Group standards. Above these thresholds of delegated personal credit limited approval authorities, approval must be sought from the regional and, as appropriate, global credit risk function.

Credit risk management

Our exposure to credit risk arises from a wide range of customer and product types, and the risk rating systems in place to measure and monitor these risks are correspondingly diverse. Senior management receives a variety of reports on our credit risk exposures including loan impairments, total exposures and RWAs,

as well as updates on specific portfolios that are considered to have heightened credit risk.

Credit risk exposures are generally measured and managed in portfolios of either customer types or product categories. Risk rating systems are designed to assess the default propensity of, and loss severity associated with, distinct customers who are typically managed as individual relationships or, in the case of retail business exposures, on a product portfolio basis.

Risk rating systems for retail exposures are generally quantitative in nature, applying techniques such as behavioural analysis across product portfolios comprising large numbers of homogeneous transactions. Rating systems for individually managed relationships typically use customer financial statements and market data analysis, but also qualitative elements and a final subjective overlay to better reflect any idiosyncratic elements of the customer’s risk profile. See ‘Application of the IRB Approach’ on page 34.

A fundamental principle of our policy and approach is that analytical risk rating systems and scorecards are all valuable tools at the disposal of management.

The credit process provides for at least an annual review of facility limits granted. Review may be more frequent, as required by circumstances such as the emergence of adverse risk factors.

We constantly seek to improve the quality of our risk management. Group IT systems that process credit risk data continue to be enhanced in order to deliver both comprehensive management information in support of business strategy and solutions to evolving regulatory reporting requirements.

Group standards govern the process through which risk rating systems are initially developed, judged fit for purpose, approved and implemented. They also govern the conditions under which analytical risk model outcomes can be overridden by decision-takers and the process of model performance monitoring and reporting. The emphasis is on an effective dialogue between business line and risk management, suitable independence of decision-takers, and a good understanding and robust challenge on the part of senior management.

Like other facets of risk management, analytical risk rating systems are not static; they are subject to review and modification in light of the changing environment, the greater availability and quality of data, and any deficiencies identified through internal and external regulatory review. Structured processes and metrics are in place to capture relevant data and feed this into continuous model improvement. See also the comments on ‘Model performance’ on page 46.

Credit risk models governance

All new or materially changed IRB capital models require the PRA’s approval, as set out in more detail on page 34, and throughout HSBC such models fall directly under the remit of the global functional MOCs, operating in line with HSBC’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 (IMR) 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.



Table 14: Credit quality of exposures by exposure classes and instruments
		Gross carrying values of		Specific credit risk adjustments	Write-offs in the year	Credit risk adjustment charges of the period	Net carrying values¹
		Defaulted exposures	Non-defaulted exposures	Specific credit risk adjustments	Write-offs in the year	Credit risk adjustment charges of the period	Net carrying values¹
		$bn	$bn	$bn	$bn	$bn	$bn
1	Central governments and central banks	—	308.1	—	—	—	308.1
2	Institutions	—	94.5	—	—	—	94.5
3	Corporates	8.1	987.5	4.2	1.0	0.7	991.4
	– of which:
4	specialised lending	1.2	47.5	0.3	—	—	48.4
6	Retail	3.6	465.0	1.0	0.7	0.3	467.6
7	– secured by real estate property	2.5	274.3	0.3	—	—	276.5
	– of which:
8	SMEs	—	1.5	—	—	—	1.5
9	Non-SMEs	2.5	272.8	0.3	—	—	275.0
10	– qualifying revolving retail	0.1	125.4	0.2	0.3	0.2	125.3
11	– other retail	1.0	65.3	0.5	0.4	0.1	65.8
	– of which:
12	SMEs	0.6	10.6	0.3	—	—	10.9
13	Non-SMEs	0.4	54.7	0.2	0.4	0.1	54.9
15	Total IRB approach	11.7	1,855.1	5.2	1.7	1.0	1,861.6
16	Central governments and central banks	—	198.1	—	—	—	198.1
17	Regional governments or local authorities	—	3.8	—	—	—	3.8
18	Public sector entities	—	0.4	—	—	—	0.4
19	Multilateral development banks	—	0.3	—	—	—	0.3
20	International organisations	—	2.2	—	—	—	2.2
21	Institutions	—	3.5	—	—	—	3.5
22	Corporates	—	172.8	0.5	—	0.1	172.3
23	– of which: SMEs	—	1.1	—	—	—	1.1
24	Retail	—	71.0	0.4	—	0.2	70.6
25	– of which: SMEs	—	1.7	—	—	—	1.7
26	Secured by mortgages on immovable property	—	29.0	—	—	—	29.0
27	– of which: SMEs	—	0.1	—	—	—	0.1
28	Exposures in default²	5.4	—	2.0	1.5	0.7	3.4
29	Items associated with particularly high risk	—	3.9	—	—	—	3.9
32	Collective investment undertakings (‘CIU’)	—	0.6	—	—	—	0.6
33	Equity exposures	—	16.0	—	—	—	16.0
34	Other exposures	—	11.9	—	—	—	11.9
35	Total standardised approach	5.4	513.5	2.9	1.5	1.0	516.0
36	Total at 31 Dec 2017	17.1	2,368.6	8.1	3.2	2.0	2,377.6
	– of which: loans	15.1	1,225.2	7.8	3.2	2.0	1,232.5
	– of which: debt securities	—	325.1	—	—	—	325.1
	– of which: off-balance sheet exposures	2.0	782.4	0.2	—	—	784.2

This table is presented based on the EBA definitions of ‘non-performing’ and ‘forborne’ exposures. Forborne exposures are referred to as Renegotiated Loans in the Annual Report and Accounts 2017. In the Annual Report and Accounts 2017 we classify and report loans on which concessions have been granted under conditions of credit distress as ‘renegotiated loans’ when their contractual payment terms have been modified because we have significant concerns about the borrowers’ ability to meet contractual payments when due. This is aligned to the EBA definitions of forborne exposures. The EBA and Annual Report and Accounts 2017 differ in the treatment of cures from the forborne/renegotiated status. Under the EBA definition, exposures are no longer considered forborne once the exposures have complied with the revised contractual obligations for a period of at least

three years and the exposures are no longer considered impaired or have any elements that are more than 30 days past due. Under the Annual Report and Accounts 2017 definition, renegotiated loans retain this classification until maturity or derecognition. The EBA definition of non-performing captures those exposures that have material exposures which are more than 90 days past due or the debtors 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. Any debtors that are in default for regulatory purposes or impaired under the applicable accounting framework are considered to be unlikely to pay. The Annual Report and Accounts 2017 does not have a non-performing exposure category however the definition of impaired loans is well aligned to the EBA non-performing definitions.



Table 19: Credit risk exposure – summary
		Net carrying values	Average net carrying values³	RWAs	Capital required
	Footnotes	$bn	$bn	$bn	$bn
IRB advanced approach		1,788.2	1,729.1	455.4	36.4
– central governments and central banks		308.1	320.9	33.9	2.7
– institutions		94.3	92.1	17.6	1.4
– corporates	1	918.2	870.6	338.2	27.0
– total retail		467.6	445.5	65.7	5.3
– of which:
secured by mortgages on immovable property SME		1.5	1.5	0.5	—
secured by mortgages on immovable property non-SME		275.0	260.5	33.2	2.7
qualifying revolving retail		125.3	120.2	16.0	1.3
other SME		10.9	10.2	5.9	0.5
other non-SME		54.9	53.1	10.1	0.8
IRB securitisation positions		32.8	33.9	13.7	1.1
IRB non-credit obligation assets		56.1	55.2	13.2	1.1
IRB foundation approach		73.4	71.2	28.4	2.3
– central governments and central banks		—	—	—	—
– institutions		0.2	0.2	0.1	—
– corporates		73.2	71.0	28.3	2.3
Standardised approach		518.0	483.1	174.5	13.9
– central governments and central banks		198.1	173.1	12.7	1.0
– institutions		3.5	2.9	1.2	0.1
– corporates		172.3	167.8	78.3	6.3
– retail		70.6	68.9	16.5	1.3
– secured by mortgages on immovable property		29.0	27.6	10.4	0.8
– exposures in default		3.4	3.6	3.9	0.3
– regional governments or local authorities		3.8	3.2	1.0	0.1
– public sector entities		0.4	0.2	0.1	—
– equity	2	16.0	15.9	36.1	2.9
– items associated with particularly high risk		3.9	3.9	5.7	0.5
– securitisation positions		2.0	1.3	1.6	0.1
– claims in the form of collective investment undertakings (‘CIU’)		0.6	0.5	0.6	—
– international organisations		2.2	2.5	—	—
– multilateral development banks		0.3	0.3	—	—
– other items		11.9	11.4	6.4	0.5
Total at 31 Dec 2017		2,468.5	2,372.5	685.2	54.8



Table 20: Geographical breakdown of exposures
		Net carrying values^1,2
		Europe:	United Kingdom	France	Other countries	Asia:	Hong Kong	China	Singapore	Other countries
		$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
	IRB approach exposure classes
1	Central governments and central banks	6.8	—	—	6.8	171.8	55.9	30.8	13.1	72.0
2	Institutions	23.9	11.1	1.8	11.0	48.0	9.0	18.6	3.7	16.7
3	Corporates	299.5	170.2	47.5	81.8	427.2	194.1	83.2	31.6	118.3
4	Retail	226.5	198.3	26.2	2.0	185.5	148.3	6.0	6.3	24.9
6	Total IRB approach	556.7	379.6	75.5	101.6	832.5	407.3	138.6	54.7	231.9
	Standardised approach exposure classes
7	Central governments and central banks	193.1	75.8	39.4	77.9	0.9	0.3	0.1	—	0.5
8	Regional governments or local authorities	—	—	—	—	—	—	—	—	—
9	Public sector entities	0.3	—	—	0.3	—	—	—	—	—
10	Multilateral development banks	—	—	—	—	—	—	—	—	—
11	International organisations	—	—	—	—	—	—	—	—	—
12	Institutions	1.1	—	0.8	0.3	0.1	0.1	—	—	—
13	Corporates	30.2	3.0	2.7	24.5	60.0	37.7	5.3	6.7	10.3
14	Retail	4.2	1.2	1.8	1.2	41.7	11.4	3.1	8.2	19.0
15	Secured by mortgages on immovable property SME	5.6	1.2	0.8	3.6	16.5	3.4	7.8	0.4	4.9
16	Exposures in default	1.0	0.1	0.1	0.8	0.5	0.1	—	—	0.4
17	Items associated with particularly high risk	2.4	1.3	0.4	0.7	—	—	—	—	—
20	Collective investment undertakings (‘CIU’)	0.6	0.6	—	—	—	—	—	—	—
21	Equity exposures	1.2	1.1	0.1	—	13.3	1.6	11.4	0.2	0.1
22	Other exposures	4.3	3.7	0.5	0.1	6.0	4.0	0.9	—	1.1
23	Total standardised approach	244.0	88.0	46.6	109.4	139.0	58.6	28.6	15.5	36.3
24	Total at 31 Dec 2017	800.7	467.6	122.1	211.0	971.5	465.9	167.2	70.2	268.2



Table 20: Geographical breakdown of exposures (continued)
		Net carrying values^1,2
		MEA	North America:	United States of America	Canada	Other countries	Latin America	Other	Total
		$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
	IRB approach exposure classes
1	Central governments and central banks	16.8	87.2	69.6	17.5	0.1	10.2	15.3	308.1
2	Institutions	5.5	15.2	7.9	7.3	—	1.4	0.5	94.5
3	Corporates	42.6	210.7	149.4	50.8	10.5	11.4	—	991.4
4	Retail	2.4	53.1	27.1	22.9	3.1	0.1	—	467.6
6	Total IRB approach	67.3	366.2	254.0	98.5	13.7	23.1	15.8	1,861.6
	Standardised approach exposure classes
7	Central governments and central banks	1.1	2.4	2.3	0.1	—	0.6	—	198.1
8	Regional governments or local authorities	3.1	—	—	—	—	0.7	—	3.8
9	Public sector entities	—	—	—	—	—	0.1	—	0.4
10	Multilateral development banks	—	—	—	—	—	—	0.3	0.3
11	International organisations	—	—	—	—	—	—	2.2	2.2
12	Institutions	2.2	—	—	—	—	0.1	—	3.5
13	Corporates	45.8	11.9	9.7	0.3	1.9	24.4	—	172.3
14	Retail	10.3	3.9	1.8	1.6	0.5	10.5	—	70.6
15	Secured by mortgages on immovable property SME	3.2	1.5	0.2	0.1	1.2	2.2	—	29.0
16	Exposures in default	1.3	0.2	—	—	0.2	0.4	—	3.4
17	Items associated with particularly high risk	0.2	1.2	0.5	—	0.7	0.1	—	3.9
20	Collective investment undertakings (‘CIU’)	—	—	—	—	—	—	—	0.6
21	Equity exposures	0.2	1.0	1.0	—	—	0.3	—	16.0
22	Other exposures	0.5	0.9	0.5	0.4	—	0.2	—	11.9
23	Total standardised approach	67.9	23.0	16.0	2.5	4.5	39.6	2.5	516.0
24	Total at 31 Dec 2017	135.2	389.2	270.0	101.0	18.2	62.7	18.3	2,377.6



Table 21: Concentration of exposures by industry or counterparty types
		Agriculture	Mining	Manufac-turing	Utilities	Water supply	Construction	Wholesale & retail trade	Transpor-tation & storage	Accom-modation & food services	Infor-mation & commun-ication	Financial & insurance
	Net carrying values¹	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
	IRB approach exposure classes
1	Central governments and central banks	—	—	—	—	—	—	—	—	—	—	141.0
2	Institutions	—	0.3	—	—	—	—	—	—	—	—	94.1
3	Corporates	7.3	38.9	226.8	29.3	2.8	31.8	174.0	47.9	21.0	7.7	126.0
4	Retail	1.0	—	0.7	—	—	0.3	1.7	0.3	0.4	—	0.1
6	Total IRB approach	8.3	39.2	227.5	29.3	2.8	32.1	175.7	48.2	21.4	7.7	361.2
	Standardised approach exposure classes
7	Central governments and central banks	—	—	—	—	—	—	—	—	—	—	153.6
8	Regional governments or local authorities	—	—	—	—	—	—	—	—	—	—	1.5
9	Public sector entities	—	—	—	—	—	—	—	—	—	—	—
10	Multilateral development banks	—	—	—	—	—	—	—	—	—	—	0.3
11	International organisations	—	—	—	—	—	—	—	—	—	—	—
12	Institutions	—	—	—	—	—	—	—	—	—	—	3.5
13	Corporates	1.3	3.8	26.6	4.8	0.2	7.4	28.0	4.3	3.6	1.9	18.8
14	Retail	0.1	—	0.2	—	—	—	0.5	—	—	—	1.6
15	Secured by mortgages on immovable property SME	—	—	—	—	—	0.1	—	—	—	—	—
16	Exposures in default	0.1	0.1	0.7	—	—	0.2	0.3	—	0.1	—	0.1
17	Items associated with particularly high risk	—	—	—	—	—	0.1	—	—	—	—	3.4
20	Collective investment undertakings (‘CIU’)	—	—	—	—	—	—	—	—	—	—	0.6
21	Equity exposures	—	—	0.1	—	—	—	—	—	—	0.5	1.8
22	Other exposures	—	—	0.2	—	—	—	—	—	—	—	6.2
23	Total standardised approach	1.5	3.9	27.8	4.8	0.2	7.8	28.8	4.3	3.7	2.4	191.4
24	Total at 31 Dec 2017	9.8	43.1	255.3	34.1	3.0	39.9	204.5	52.5	25.1	10.1	552.6



Table 21: Concentration of exposures by industry or counterparty types (continued)
		Real estate	Professional activities	Administ-rative service	Public admin & defence	Education	Human health & social work	Arts & entertain-ment	Other services	Personal	Extra-territorial bodies	Total
	Net carrying values¹	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
	IRB approach exposure classes
1	Central governments and central banks	—	—	—	139.6	—	0.1	0.1	—	—	27.3	308.1
2	Institutions	—	—	—	0.1	—	—	—	—	—	—	94.5
3	Corporates	180.0	18.0	53.0	0.8	3.2	6.1	8.3	8.5	—	—	991.4
4	Retail	0.7	—	0.7	—	0.1	0.3	0.1	0.4	460.8	—	467.6
6	Total IRB approach	180.7	18.0	53.7	140.5	3.3	6.5	8.5	8.9	460.8	27.3	1,861.6
	Standardised approach exposure classes
7	Central governments and central banks	—	—	—	29.2	—	—	—	—	—	10.3	193.1
8	Regional governments or local authorities	—	—	—	2.3	—	—	—	—	—	—	3.8
9	Public sector entities	—	—	—	0.4	—	—	—	—	—	—	0.4
10	Multilateral development banks	—	—	—	—	—	—	—	—	—	—	0.3
11	International organisations	—	—	—	0.3	—	—	—	—	—	1.9	2.2
12	Institutions	—	—	—	—	—	—	—	—	—	—	3.5
13	Corporates	38.7	1.3	27.0	0.4	0.4	1.3	0.5	1.4	0.6	—	172.3
14	Retail	0.6	0.1	0.4	—	—	—	—	0.1	67.0	—	70.6
15	Secured by mortgages on immovable property SME	0.8	—	—	—	—	—	—	—	28.1	—	29.0
16	Exposures in default	0.2	—	0.3	—	—	—	—	—	1.3	—	3.4
17	Items associated with particularly high risk	0.2	—	0.2	—	—	—	—	—	—	—	3.9
20	Collective investment undertakings (‘CIU’)	—	—	—	—	—	—	—	—	—	—	0.6
21	Equity exposures	—	—	0.1	—	—	—	—	0.1	—	—	2.6
22	Other exposures	—	—	0.1	—	—	—	—	—	—	—	6.5
23	Total standardised approach	40.5	1.4	28.1	32.6	0.4	1.3	0.5	1.6	97.0	12.2	492.2
24	Total at 31 Dec 2017	221.2	19.4	81.8	173.1	3.7	7.8	9.0	10.5	557.8	39.5	2,353.8



Table 22: Maturity of on-balance sheet exposures
			Net carrying values¹
			On demand	Less than 1 year	Between 1 and 5 years	More than 5 years	Undated	Total
		Footnotes	$bn	$bn	$bn	$bn	$bn	$bn
	IRB approach exposure classes
1	Central governments and central banks		38.8	139.9	82.2	44.9	—	305.8
2	Institutions		6.5	51.5	22.1	0.8	—	80.9
3	Corporates		60.6	163.7	214.3	62.6	—	501.2
4	Retail		21.1	10.0	38.8	254.1	—	324.0
6	Total IRB approach		127.0	365.1	357.4	362.4	—	1,211.9
	Standardised approach exposure classes
7	Central governments and central banks		41.7	99.2	40.1	10.9	5.0	196.9
8	Regional governments or local authorities		0.8	0.4	0.2	1.9	—	3.3
9	Public sector entities		—	0.1	—	0.1	—	0.2
10	Multilateral development banks		—	0.1	—	0.2	—	0.3
11	International organisations		—	0.4	1.3	0.5	—	2.2
12	Institutions		0.1	1.5	1.5	0.3	—	3.4
13	Corporates		3.8	53.3	23.6	7.9	—	88.6
14	Retail		7.7	3.5	9.5	3.1	—	23.8
15	Secured by mortgages on immovable property SME		—	2.0	4.9	20.9	—	27.8
16	Exposures in default		0.3	1.1	1.0	0.7	—	3.1
17	Items associated with particularly high risk		—	0.1	0.7	0.4	0.9	2.1
20	Collective investment undertakings (‘CIU’)		—	—	—	0.1	0.5	0.6
21	Equity exposures		—	—	—	—	16.0	16.0
22	Other exposures		—	0.1	—	0.2	10.8	11.1
23	Total standardised approach		54.4	161.8	82.8	47.2	33.2	379.4
24	Total at 31 Dec 2017		181.4	526.9	440.2	409.6	33.2	1,591.3

Past due but not impaired exposures, impaired exposures, renegotiated exposures and credit risk adjustments

Tables 23 and 24 analyse past due but not impaired exposures, impaired exposures, renegotiated exposures and impairment allowances and other credit risk provisions on a regulatory consolidation basis. These tables use accounting values. The main differences between the amounts presented here and those on a financial consolidation basis are: the proportional consolidation of associates in the regulatory consolidation; the regulatory consolidation excluding special purpose entities where significant risk has been transferred to third parties; and the exclusion of exposures treated under the securitisation approach.

Our approach for determining impairment allowances is explained on Note 1.2(d) of the Annual Report and Accounts 2017, and the Group’s definitions for accounting purposes of ‘past due’, ‘impaired’ and ‘renegotiated’ are set out on pages 125, 126 and 113 respectively. The accounting definition of impaired and the

regulatory definition of default are generally aligned. In certain jurisdictions, for certain retail exposures, regulatory default is identified at 180 days past due, while the exposures are identified as impaired at 90 days past due. In the retail portfolio in the US, for accounting purposes, a renegotiation would normally trigger identification as ‘impaired’, whereas for regulatory purposes, default is identified mainly based on the 180 days past due criterion.

Under the accounting standards currently adopted by HSBC, impairment allowances, value adjustments and credit-related provisions for off-balance sheet amounts are treated as specific credit risk adjustments (‘CRAs’).



Table 23: Amount of impaired exposures and related allowances, broken down by geographical region
	Europe		Asia		MENA		North America		Latin America		Total
At 31 Dec 2017	$bn		$bn		$bn		$bn		$bn		$bn
Past due but not impaired exposures	1.3		3.9		1.1		2.0		0.6		8.9
– personal	0.8		2.4		0.4		0.7		0.4		4.7
– corporate and commercial	0.5		1.2		0.6		1.1		0.2		3.6
– financial	–		0.3		0.1		0.2		–		0.6
Impaired exposures	8.1		2.3		2.1		2.6		0.7		15.8
– personal	2.0		0.7		0.4		1.6		0.3		5.0
– corporate and commercial	5.9		1.6		1.6		1.0		0.4		10.5
– financial	0.2		–		0.1		–		–		0.3
Impairment allowances and other credit risk provisions	(3.2	)	(1.6	)	(1.8	)	(0.9	)	(0.6	)	(8.1	)
– personal	(0.6	)	(0.3	)	(0.4	)	(0.2	)	(0.3	)	(1.8	)
– corporate and commercial	(2.4	)	(1.3	)	(1.1	)	(0.7	)	(0.3	)	(5.8	)
– financial	(0.2	)	–		(0.3	)	–		–		(0.5	)

At 31 Dec 2016
Past due but not impaired exposures	1.2		3.5		1.5		2.6		0.5		9.3
– personal	0.8		2.4		0.5		1.4		0.4		5.5
– corporate and commercial	0.4		1.1		0.9		0.8		0.1		3.3
– financial	–		–		0.1		0.4		–		0.5
Impaired exposures	8.2		2.6		2.4		5.9		0.6		19.7
– personal	2.0		0.6		0.5		4.2		0.3		7.6
– corporate and commercial	5.9		2.0		1.7		1.7		0.3		11.6
– financial	0.3		–		0.2		–		–		0.5
Impairment allowances and other credit risk provisions	(2.9	)	(1.6	)	(1.9	)	(1.7	)	(0.5	)	(8.6	)
– personal	(0.5	)	(0.3	)	(0.6	)	(0.6	)	(0.3	)	(2.3	)
– corporate and commercial	(2.2	)	(1.3	)	(1.1	)	(1.1	)	(0.2	)	(5.9	)
– financial	(0.2	)	–		(0.2	)	–		–		(0.4	)



Table 24: Movement in specific credit risk adjustments by industry and geographical region
	Europe		Asia		MENA		North America		Latin America		Total
	$bn		$bn		$bn		$bn		$bn		$bn
Specific credit risk adjustments at 1 Jan 2017	2.9		1.6		1.9		1.7		0.5		8.6
Amounts written off	(1.1	)	(0.7	)	(0.4	)	(0.4	)	(0.6	)	(3.2	)
– personal	(0.4	)	(0.4	)	(0.3	)	(0.1	)	(0.5	)	(1.7	)
– corporate and commercial	(0.6	)	(0.3	)	(0.1	)	(0.3	)	(0.1	)	(1.4	)
– financial	(0.1	)	–		–		–		–		(0.1	)
Recoveries of amounts written off in previous years	0.3		0.1		–		0.1		0.1		0.6
– personal	0.3		0.1		–		–		0.1		0.5
– corporate and commercial	–		–		–		0.1		–		0.1
– financial	–		–		–		–		–		–
Charge to income statement	0.8		0.6		0.3		(0.2	)	0.5		2.0
– personal	0.1		0.3		0.1		–		0.5		1.0
– corporate and commercial	0.6		0.3		0.2		(0.2	)	–		0.9
– financial	0.1		–		–		–		–		0.1
Exchange and other movements	0.3		–		–		(0.3	)	0.1		0.1
Specific credit risk adjustments at 31 Dec 2017	3.2		1.6		1.8		0.9		0.6		8.1

Specific credit risk adjustments at 1 Jan 2016	3.5		4.1		2.0		2.2		2.2		14.0
Amounts written off	(1.1	)	(0.7	)	(0.3	)	(0.7	)	(0.6	)	(3.4	)
– personal	(0.4	)	(0.4	)	(0.2	)	(0.3	)	(0.3	)	(1.6	)
– corporate and commercial	(0.7	)	(0.3	)	(0.1	)	(0.4	)	(0.3	)	(1.8	)
– financial	–		–		–		–		–		–
Recoveries of amounts written off in previous years	0.2		0.1		–		0.1		0.1		0.5
– personal	0.2		0.1		–		0.1		0.1		0.5
– corporate and commercial	–		–		–		–		–		–
– financial	–		–		–		–		–		–
Charge to income statement	0.6		0.7		0.3		0.8		1.1		3.5
– personal	0.2		0.3		0.2		0.2		0.8		1.7
– corporate and commercial	0.4		0.4		0.1		0.6		0.3		1.8
– financial	–		–		–		–		–		–
Exchange and other movements	(0.3	)	(2.6	)	(0.1	)	(0.7	)	(2.3	)	(6.0	)
Specific credit risk adjustments at 31 Dec 2016	2.9		1.6		1.9		1.7		0.5		8.6

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. Specifically, detailed policies cover the acceptability, structuring and terms with regard to the availability of credit risk mitigation; for example 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.

For credit risk mitigants comprising immovable property, the key determinant of concentration at Group level is geographic. Use of immovable property mitigants for risk management purposes is predominantly in Asia and Europe.

Further information regarding collateral held over CRE and residential property is provided on pages 132 and 137, respectively, of the Annual Report and Accounts 2017.

Financial collateral

In the institutional sector, trading facilities are supported by charges over financial instruments, such as cash, debt securities and equities. Financial collateral in the form of marketable securities is used in much of the Group’s derivatives activities and in securities financing transactions, such as repos, reverse repos, securities lending and borrowing. Netting is used extensively and is a prominent feature of market standard documentation.

Further information regarding collateral held for trading exposures is on page 115.

In the non-trading book, we provide 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 amounts of such exposures are subject to limits and the relevant customer agreements are subject to review to ensure the legal right of offset remains appropriate. At 31 December 2017, $33bn of customer accounts were treated as cash collateral, mainly in the UK.

Other forms of credit risk mitigation

Our Global Banking and Markets (‘GB&M’) business utilises credit risk mitigation to manage the credit risk of its portfolios, with the goal of reducing concentrations in individual names, sectors or portfolios. The techniques in use include credit default swap (‘CDS’) purchases, structured credit notes and securitisation structures. Buying credit protection creates credit exposure against the protection provider, which is monitored as part of the overall credit exposure to them. Where applicable, the transaction

is entered into directly with a central clearing house counterparty; otherwise our exposure to CDS protection providers is diversified among mainly banking counterparties with strong credit ratings. In our corporate lending, we also take guarantees from corporates and Export Credit Agencies (‘ECA’). Corporates would normally provide guarantees as part of a parent/subsidiary or common parent relationship and would span a number of credit grades. The ECAs 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 will continue to provide the anticipated secure secondary repayment source. Where collateral is subject to high volatility, valuation is frequent; where stable, less so. For market trading activities such as collateralised over-the-counter (‘OTC’) derivatives and SFTs, we typically carry out daily valuations. In the residential mortgage business, Group policy prescribes revaluation at intervals of up to three years, or more frequently as the need arises; for example, 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, material concerns arise in relation to the performance of the collateral. CRE revaluation also occurs commonly in circumstances where an obligor’s credit quality has declined sufficiently to cause 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:


•	those which reduce the intrinsic PD of an obligor and therefore operate as determinants of PD; and


•	those which affect the estimated recoverability of obligations and require adjustment of LGD or, in certain limited circumstances, EAD.

The first category typically includes full parental guarantees – where one obligor within a group guarantees another. It is assumed that the guarantor’s performance materially informs the PD of the guaranteed entity. PD estimates are also subject to a ‘sovereign ceiling’, constraining the risk ratings assigned to obligors in countries of higher risk, and where only partial parental support exists. In certain jurisdictions, certain types of third-party guarantee are recognised by substituting the obligor’s PD with that of the guarantor.

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 considered in LGD estimates where there is evidence that they reduce loss expectation.

The main types of provider of guarantees are banks, other financial institutions and corporates. The creditworthiness of providers of unfunded credit risk mitigation is taken into consideration as part of the guarantor’s risk profile. 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 regionally approved 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 expected loss (‘EL’) band value summarising both customer delinquency and product or facility risk. Credit and credit risk mitigation data form inputs submitted by all Group 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. Under the IRB advanced approach, recognition may be through PD or LGD;


•	eligible financial collateral under the IRB advanced approach is recognised in LGD models. Under the IRB foundation approach, regulatory LGD values are adjusted. The adjustment to LGD is based on the degree to which the exposure value would be adjusted notionally 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 are 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.

Table 55 in Appendix I sets out, for IRB exposures, the exposure value and the effective value of credit risk mitigation expressed as the exposure value covered by the credit risk mitigant. IRB credit risk mitigation reductions of EAD were immaterial at 31 December 2017.

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 26: Standardised approach – credit conversion factor (‘CCF’) and credit risk mitigation (‘CRM’) effects
		Exposures before CCF and CRM		Exposures post-CCF and CRM		RWAs and RWA density
		On-balance sheet amount	Off-balance sheet amount	On-balance sheet amount	Off-balance sheet amount	RWAs	RWA density
		$bn	$bn	$bn	$bn	$bn	%
	Asset classes¹
1	Central governments or central banks	196.9	1.2	203.4	0.8	12.7	6
2	Regional governments or local authorities	3.3	0.5	3.3	0.2	1.0	29
3	Public sector entities	0.2	0.2	0.1	—	0.1	79
4	Multilateral development banks	0.3	—	0.3	—	—	5
5	International organisations	2.2	—	2.2	—	—	—
6	Institutions	3.4	0.1	2.5	—	1.2	50
7	Corporates	88.6	83.7	71.8	11.8	78.3	94
8	Retail	23.8	46.8	21.9	0.3	16.5	74
9	Secured by mortgage on immovable property	27.8	1.2	27.9	0.2	10.4	37
10	Exposures in default	3.1	0.3	3.0	0.1	3.9	127
11	Higher-risk categories	2.1	1.8	2.0	1.8	5.7	150
14	Collective investment undertakings	0.6	—	0.5	—	0.6	100
15	Equity	16.0	—	16.0	—	36.1	225
16	Other items	11.1	0.8	11.2	0.8	6.4	54
17	Total at 31 Dec 2017	379.4	136.6	366.1	16.0	172.9	45

1	Central governments or central banks	161.9	1.5	166.2	1.1	14.7	9
2	Regional governments or local authorities	2.9	0.3	2.9	—	0.9	32
3	Public sector entities	—	—	—	—	—	—
4	Multilateral development banks	0.2	—	0.2	—	—	5
5	International organisations	2.7	—	2.7	—	—	—
6	Institutions	2.2	—	2.1	—	1.0	46
7	Corporates	80.2	79.9	66.3	12.1	75.0	96
8	Retail	22.7	44.2	21.6	0.4	16.3	74
9	Secured by mortgage on immovable property	25.5	0.8	25.5	0.2	9.3	36
10	Exposures in default	3.2	0.4	3.2	0.1	4.3	130
11	Higher-risk categories	2.1	1.4	2.1	1.3	5.1	150
14	Collective investment undertakings	0.5	—	0.5	—	0.5	100
15	Equity	15.2	—	15.2	—	33.6	221
16	Other items	9.5	—	9.5	—	4.7	50
17	Total at 31 Dec 2016	328.8	128.5	318.0	15.2	165.4	50



Table 27: Standardised approach – exposures by asset class and risk weight
	Risk weight (‘RW%’)	0%	2%	20%	35%	50%	70%	75%	100%	150%	250%	Deducted	Total credit exposure amount (post-CCF and CRM)	of which unrated
		$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
	Asset classes¹
1	Central governments or central banks	198.9	—	0.1	—	0.2	—	—	—	—	5.0	—	204.2	5.0
2	Regional governments or local authorities	—	—	2.6	—	0.7	—	—	0.2	—	—	—	3.5	0.6
3	Public sector entities	—	—	—	—	—	—	—	0.1	—	—	—	0.1	0.1
4	Multilateral development banks	0.2	—	0.1	—	—	—	—	—	—	—	—	0.3	0.3
5	International organisations	2.2	—	—	—	—	—	—	—	—	—	—	2.2	—
6	Institutions	—	0.1	0.4	—	1.7	—	—	0.3	—	—	—	2.5	0.3
7	Corporates	—	—	3.8	0.2	3.9	0.5	—	74.5	0.7	—	—	83.6	72.4
8	Retail	—	—	—	—	—	—	22.2	—	—	—	—	22.2	22.2
9	Secured by mortgage on immovable property	—	—	—	27.3	—	—	—	0.8	—	—	—	28.1	28.1
10	Exposures in default	—	—	—	—	—	—	—	1.5	1.6	—	—	3.1	3.1
11	Higher-risk categories	—	—	—	—	—	—	—	—	3.8	—	—	3.8	3.8
14	Collective investment undertakings	—	—	—	—	—	—	—	0.5	—	—	—	0.5	0.5
15	Equity	—	—	—	—	—	—	—	2.6	—	13.4	—	16.0	16.0
16	Other items	0.2	—	6.7	—	—	—	—	5.1	—	—	—	12.0	12.0
17	Total at 31 Dec 2017	201.5	0.1	13.7	27.5	6.5	0.5	22.2	85.6	6.1	18.4	—	382.1	164.4

1	Central governments or central banks	160.4	—	0.8	—	0.3	—	—	0.2	—	5.6	—	167.3	5.7
2	Regional governments or local authorities	0.2	—	1.8	—	0.7	—	—	0.2	—	—	—	2.9	0.3
3	Public sector entities	—	—	—	—	—	—	—	—	—	—	—	—	—
4	Multilateral development banks	0.1	—	0.1	—	—	—	—	—	—	—	—	0.2	0.2
5	International organisations	2.7	—		—	—	—	—	—	—	—	—	2.7	—
6	Institutions	—	0.1	0.8	—	0.7	—	—	0.5	—	—	—	2.1	0.3
7	Corporates	—	—	2.1	0.2	2.7	0.1	—	72.6	0.7	—	—	78.4	67.9
8	Retail	—	—	—	—	—	—	22.0	—	—	—	—	22.0	22.0
9	Secured by mortgage on immovable property	—	—	—	25.2	—	—	—	0.5	—	—	—	25.7	25.7
10	Exposures in default	—	—	—	—	—	—	—	1.3	2.0	—	—	3.3	3.3
11	Higher-risk categories	—	—	—	—	—	—	—	—	3.4	—	—	3.4	3.4
14	Collective investment undertakings	—	—	—	—	—	—	—	0.5	—	—	—	0.5	0.5
15	Equity	—	—	—	—	—	—	—	2.9	—	12.3	—	15.2	15.2
16	Other items	0.7	—	5.1	—	—	—	—	3.7	—	—	—	9.5	9.5
17	Total at 31 Dec 2016	164.1	0.1	10.7	25.4	4.4	0.1	22.0	82.4	6.1	17.9	—	333.2	154.0

The above table shows the credit derivative exposures that HSBC holds, split between those amounts due to client intermediation and those amounts booked as part of HSBC’s own credit portfolio. Where the credit derivative is used to hedge our own portfolio the resulting credit risk impact is seen in table 29 above and no counterparty credit risk capital requirement arises. For a discussion on hedging risk and monitoring the continuing effectiveness of hedges refer to Note 1.2(e) of the Annual Report and Accounts 2017.

Global risk

Application of the IRB approach

Our Group IRB credit risk rating framework incorporates obligor propensity 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 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 HSBC.

Roll-out of the IRB approach

With the PRA’s permission, we have adopted the advanced approach for the majority of our business. At the end of 2017, portfolios in much of Europe, Asia and North America were on advanced IRB approaches. Others remain on the standardised or foundation approaches pending the development of models for the PRA’s approval in line with our IRB roll-out plans where the primary focus is on corporate and retail exposures.

At 31 December 2017, 76% of the exposures were treated under AIRB, 3% under FIRB and 21% under the standardised approach.

EL and credit risk adjustments

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 credit losses under IFRSs, 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 2018, IFRS 9 changes the way credit losses are measured for accounting purposes. IFRS 9 is conceptually more aligned with the IRB measurement of expected loss and uses similar building blocks such as PD and LGD and EL. Significant differences between regulatory and accounting measures of expected loss will continue under IFRS 9 due to factors such as: the removal of regulatory conservatism and supervisory set parameters under IFRS, point-in-time and forward-looking measurements under IFRS compared to through-the-cycle measures under regulatory, 12-month expected losses under regulatory versus lifetime expected losses under IFRS.

Table 52 in Appendix I set out for IRB credit exposures the EL, CRA balances and actual loss experience reflected in the charges for CRAs.

CRA balances represent management’s best estimate of losses incurred in the loan portfolios at the balance sheet date. Charges for CRAs represent a movement in the CRA balance during the year, reflecting loss events that occurred during the financial year and changes in estimates of losses arising on events that occurred prior to the current year. EL represents the one-year regulatory expected loss accumulated in the book at the balance sheet date.

Examples of differences in definition and scope between EL and CRA balances:

•

Under IAS 39, our estimates of loss in impairment allowances are required to reflect the current circumstances and specific cash flow expectations of a customer. EL is based on modelled estimates and although the estimates may be individually assigned to specific exposures, the statistical nature of these models means that they are influenced by the behaviour of the overall portfolio.

•

EL is based on exposure values that incorporate expected future drawings of committed credit lines, while CRAs are recognised in respect of financial assets recognised on the balance sheet and in respect of committed credit lines where a loss is probable.

•

EL is generally based on through-the-cycle (‘TTC’) estimates of PD over a one-year future horizon, determined via statistical analysis of historical default experience. CRAs are recognised for losses that have been incurred at the balance sheet date.

•

In the majority of cases, EL is based on economic downturn estimates of LGD, while CRAs are measured using estimated future cash flows at the balance sheet date.

•

EL incorporates LGD, which may discount recoveries at a different rate from the effective interest rate employed in discounted cash flow analysis for CRAs.

•

LGDs typically include all costs associated with recovery, whereas the accounting measurement considers only the costs of obtaining and selling collateral.

•

In the foundation IRB approach, LGD and the conversion factors used to calculate EAD are set by regulations, and may differ significantly from the accounting assumptions about estimated cash flows.

•

For EL, certain exposures are subject to regulatory minimum thresholds for one or more parameters, whereas credit losses under IFRSs are determined using management’s judgement about estimated future cash flows.

•

In the case of EL, to meet regulatory prudential standards, HSBC’s model philosophy favours the incorporation of conservative estimation to accommodate uncertainty, for instance where modelling portfolios with limited data. Under IFRSs, uncertainty is considered when forming management’s estimates of future cash flows, using balanced and neutral judgement.

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;


•	institutions;


•	corporates;


•	securitisation positions;


•	short-term claims on institutions and corporates;


•	regional governments and local authorities; and


•	multilateral development banks.

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 DBRS ratings specifically for securitisation positions. We have not nominated any 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 from the rating the relevant risk weight.

All other exposure classes are assigned risk weightings as prescribed in the PRA’s Rulebook.



Credit quality step	Moody’s assessment	S&P’s assessment	Fitch’s assessment	DBRS assessment
1	Aaa to Aa3	AAA to AA–	AAA to AA–	AAA to AAL
2	A1 to A3	A+ to A–	A+ to A–	AH to AL
3	Baa1 to Baa3	BBB+ to BBB–	BBB+ to BBB–	BBBH to BBBL
4	Ba1 to Ba3	BB+ to BB–	BB+ to BB–	BBH to BBL
5	B1 to B3	B+ to B–	B+ to B–	BH to BL
6	Caa1 and below	CCC+ and below	CCC+ and below	CCCH and 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.

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 approaches in table 55 and for the standardised approach in table 56.

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 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 Group Risk, to use their own modelling approaches to suit conditions in their jurisdictions. Group 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 region, customer segment and/or customer size. For example, PD models are differentiated for all of our key customer segments, including sovereigns, financial institutions, and large-, medium- and small-sized corporates.

Global PD models have been developed for asset classes or clearly identifiable segments of asset classes where the customer relationship is managed globally; for example, sovereigns, financial institutions and the largest corporate clients that typically operate internationally.

Local PD models, specific to a particular country, region, or sector, are developed for other obligors. This includes corporate clients when they show distinct characteristics in common in a particular geography.

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.

Most LGD and EAD models are developed according to local circumstances, considering legal and procedural differences in the recovery and workout processes. Our approach to EAD and LGD also 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.

The PRA has published guidance on the appropriateness of LGD models for low default portfolios. It states there should be at least 20 defaults per country per collateral type for LGD models to be approved. Where there are insufficient defaults, an LGD floor will be applied. As a result, in 2017, we continued to apply LGD floors for our banks portfolio and some Asian corporate portfolios where there were insufficient loss observations.

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 and US income-producing 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 fixed pre-determined RWA and EL percentages.

Local models for the corporate exposure class are developed using various data inputs, including collateral information and geography (for LGD) and product type (for EAD). The most material corporate models are the UK and Asia models, all of which are developed using more than 10-years’ worth of data. The LGD models are calibrated to a period of credit stress or downturn in economic conditions.

None of the EAD models are calibrated 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 30 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 30: Wholesale IRB credit risk models
Regulatory asset classes measured	RWAs for associated asset class $bn	Component	Number of significant models	Model description and methodology	Number of years loss data	Regulatory Floors
Central governments and central banks	33.9	PD	1	A shadow rating approach that includes macroeconomic and political factors, constrained with expert judgement.	>10	No
		LGD	1	An unsecured model built on assessment of structural factors that influence the country’s long-term economic performance. For unsecured LGD, a floor of 45% is applied.	8	45%
		EAD	1	A cross-classification model that uses both internal data and expert judgement, as well as information on similar exposure types from other asset classes.	8	EAD must be at least equal to the current utilisation of the balance at account level
Institutions	17.7	PD	1	A statistical model that combines quantitative analysis on financial information with expert inputs and macroeconomic factors.	10	PD >0.03%
		LGD	1	A quantitative model that produces both downturn and expected LGD. Several securities types are included in the model to recognise collateral in the LGD calculation. For unsecured LGD, a floor of 45% is applied.	10	45%
		EAD	1	A quantitative model that assigns credit conversion factors (‘CCF’) taking into account product types and committed/uncommitted indicator to calculate EAD using current utilisation and available headroom.	10	EAD must be at least equal to the current utilisation of the balance at account level
Corporates¹	342.9
Global large corporates		PD	1	A statistical model built on 15 years of data. The model uses financial information, macroeconomic information and market-driven data, and is complemented by a qualitative assessment.	15	PD >0.03%
Other regional / local corporates		PD	11	Corporates that fall below the global large corporate threshold are rated through regional/local PD models, which reflect regional/local circumstances. These models use financial information, behavioural data and qualitative information to derive a statistically built PD.	>10
Non-bank financial institutions		PD	10	Predominantly statistical models that combines quantitative analysis on financial information with expert inputs.	10	PD >0.03%
All corporates		LGD	7	Regional/local statistical models covering all corporates, including global large corporates, developed using historical loss/recovery data and various data inputs, including collateral information, customer type and geography.	>7	UK 45%
		EAD	5	Regional/local statistical models covering all corporates, including global large corporates, developed using historical utilisation information and various data inputs, including product type and geography.	>7	EAD must be at least equal to the current utilisation of the balance at account level



Table 32: IRB models – corporate PD models – performance by CRR grade (continued)
		Corporates¹
		Facility²	Defaulted³	Estimated PD⁴	Actual PD⁵	Diff. in PD
	Footnotes	%	%	%	%	%
2016
CRR 0.1	6	—	—	0.01	—	0.01
CRR 1.1		3.88	—	0.02	—	0.02
CRR 1.2		6.05	—	0.04	—	0.04
CRR 2.1		17.51	—	0.07	—	0.07
CRR 2.2		15.05	0.01	0.13	0.03	0.10
CRR 3.1		11.22	1.03	0.22	0.25	(0.03	)
CRR 3.2		10.67	0.26	0.37	0.36	0.01
CRR 3.3		9.21	0.26	0.63	0.49	0.14
CRR 4.1		6.46	0.78	0.87	0.79	0.08
CRR 4.2		5.49	0.47	1.20	0.64	0.56
CRR 4.3		4.59	1.18	1.65	1.46	0.19
CRR 5.1		4.08	1.31	2.25	1.41	0.84
CRR 5.2		2.11	1.40	3.05	1.89	1.16
CRR 5.3		1.76	1.96	4.20	2.27	1.93
CRR 6.1		0.98	10.15	5.75	5.57	0.18
CRR 6.2		0.38	15.38	7.85	4.68	3.17
CRR 7.1		0.27	14.29	10.00	9.46	0.54
CRR 7.2		0.09	12.38	13.00	6.63	6.37
CRR 8.1		0.10	48.22	19.00	13.11	5.89
CRR 8.2		0.07	47.10	36.00	20.29	15.71
CRR 8.3		0.03	36.10	75.00	17.83	57.17
Total		100.00

2015
CRR 0.1	6	—	—	0.01	—	0.01
CRR 1.1		5.72	—	0.02	—	0.02
CRR 1.2		5.25	—	0.04	—	0.04
CRR 2.1		16.48	—	0.07	—	0.07
CRR 2.2		14.17	—	0.13	0.01	0.12
CRR 3.1		11.92	0.17	0.22	0.15	0.07
CRR 3.2		11.00	0.10	0.37	0.30	0.07
CRR 3.3		9.35	0.14	0.63	0.47	0.16
CRR 4.1		6.52	0.64	0.87	0.97	(0.10	)
CRR 4.2		5.07	0.45	1.20	1.06	0.14
CRR 4.3		4.38	0.62	1.65	1.55	0.10
CRR 5.1		3.52	0.99	2.25	1.24	1.01
CRR 5.2		2.19	0.61	3.05	1.44	1.61
CRR 5.3		2.24	1.74	4.20	1.89	2.31
CRR 6.1		0.89	4.66	5.75	5.05	0.70
CRR 6.2		0.66	3.58	7.85	6.46	1.39
CRR 7.1		0.31	10.79	10.00	7.13	2.87
CRR 7.2		0.09	7.27	13.00	9.48	3.52
CRR 8.1		0.14	11.33	19.00	11.11	7.89
CRR 8.2		0.07	16.97	36.00	23.61	12.39
CRR 8.3		0.03	16.66	75.00	17.10	57.90
Total		100.0



Table 32: IRB models – corporate PD models – performance by CRR grade (continued)
		Corporates¹
		Facility²	Defaulted³	Estimated PD⁴	Actual PD⁵	Diff. in PD
	Footnote	%	%	%	%	%
2014
CRR 0.1	6	0.01	—	0.01	—	0.01
CRR 1.1		6.32	—	0.02	—	0.02
CRR 1.2		6.68	—	0.04	—	0.04
CRR 2.1		16.71	0.01	0.07	0.04	0.03
CRR 2.2		13.07	—	0.13	—	0.13
CRR 3.1		10.38	0.06	0.22	0.10	0.12
CRR 3.2		12.50	0.11	0.37	0.23	0.14
CRR 3.3		6.62	0.25	0.63	0.54	0.09
CRR 4.1		10.41	0.28	0.87	0.54	0.33
CRR 4.2		4.12	0.79	1.20	0.81	0.39
CRR 4.3		3.49	0.83	1.65	0.91	0.74
CRR 5.1		2.50	0.53	2.25	0.97	1.28
CRR 5.2		2.09	0.54	3.05	1.24	1.81
CRR 5.3		1.47	1.74	4.20	2.70	1.50
CRR 6.1		0.59	3.02	5.75	4.11	1.64
CRR 6.2		0.30	1.12	7.85	4.27	3.58
CRR 7.1		0.29	14.59	10.00	11.35	(1.35	)
CRR 7.2		0.08	2.78	13.00	10.11	2.89
CRR 8.1		2.31	1.17	19.00	13.77	5.23
CRR 8.2		0.04	32.32	36.00	22.33	13.67
CRR 8.3		0.02	4.85	75.00	14.89	60.11
Total		100.0

2013
CRR 0.1	6	—	—	0.01	—	0.01
CRR 1.1		4.83	—	0.02	—	0.02
CRR 1.2		7.47	—	0.04	—	0.04
CRR 2.1		20.85	—	0.07	—	0.07
CRR 2.2		10.38	0.01	0.13	0.03	0.10
CRR 3.1		10.79	0.07	0.22	0.16	0.06
CRR 3.2		9.49	0.13	0.37	0.22	0.15
CRR 3.3		8.33	0.15	0.63	0.27	0.36
CRR 4.1		6.40	0.35	0.87	0.48	0.39
CRR 4.2		5.84	0.93	1.20	0.80	0.40
CRR 4.3		4.22	0.47	1.65	0.67	0.98
CRR 5.1		4.18	0.72	2.25	0.76	1.49
CRR 5.2		3.07	0.97	3.05	1.03	2.02
CRR 5.3		1.85	2.77	4.20	1.89	2.31
CRR 6.1		0.98	4.37	5.75	3.28	2.47
CRR 6.2		0.46	5.74	7.85	3.77	4.08
CRR 7.1		0.44	12.69	10.00	7.95	2.05
CRR 7.2		0.15	7.84	13.00	8.68	4.32
CRR 8.1		0.15	9.48	19.00	11.44	7.56
CRR 8.2		0.07	14.94	36.00	13.70	22.30
CRR 8.3		0.05	13.12	75.00	13.64	61.36
Total		100.0

Retail risk

Retail risk rating systems

Due to the different country-level portfolio performance characteristics and loss history, there are no global models for our retail portfolios. Across the Group, over 100 models are used with the PRA’s approval under our IRB permission.

The 10 most material risk rating systems for which we disclose details of modelling methodology and performance data represent RWAs of $38bn or 58% of the total retail IRB RWA.

In previous years, the most material rating systems have included our US Consumer Lending and Mortgage Services portfolios. These have now been sold. We continue to disclose the 10 most material portfolios, which includes additional mortgage portfolios in the UK and Hong Kong.

PD models are developed using statistical estimation based on a minimum of five years of historical data. The modelling approach

is typically inherently TTC or, where models are developed based on a PIT approach (as in the UK), 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; or


•	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 33: Material retail IRB risk rating systems
Portfolio	CRD IV asset class	RWA $bn	Component model	Number of material component models	Model description and methodology	Number of years loss data¹	Applicable Pillar 1 regulatory thresholds and overlays
UK HSBC residential mortgages	Retail – secured by mortgages on immovable property non-SME	4.60	PD	1	Statistical model built on internal behavioural data and bureau information. Underlying PIT model is calibrated to the latest observed PD. An adjustment is then applied to generate the long-run PD based on a combination of historical misalignment of the underlying model and expert judgement.	7–10	PD floor of 0.03%
			LGD	1	Statistical estimates of loss and probability of possession in combination with the workout process and using the 1990s recession in benchmarking the downturn LGD.	>10	LGD floor of 10% at portfolio level
			EAD	1	Logical model that uses the sum of balance at observation plus further unpaid interest that could accrue before default.	7–10	EAD must at least be equal to current balance
UK First Direct residential mortgages	Retail – secured by mortgages on immovable property non-SME	0.96	PD	1	Underlying PIT PD model is a segmented scorecard. An adjustment is then applied based on observed misalignment in the underlying model (with some additional conservatism applied).	7–10	PD floor of 0.03%
			LGD	1	Underlying model is component based (LGD, forced sale haircut and the time between default and property sale). A downturn 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 haircut.	>10	LGD floor of 10% at portfolio level
			EAD	2	There are two separate EAD models – one for standard capital repayment mortgages and one for offset mortgages which offer a revolving loan facility.	7–10	EAD must at least be equal to current balance
UK HSBC credit cards	Retail – qualifying revolving	2.26	PD	1	Statistical model built on internal behavioural data and bureau information. Underlying PIT model is calibrated to the latest observed PD. An adjustment is then applied to generate the long run PD based on historical observed misalignment of the underlying model.	7–10	PD floor of 0.03%
			LGD	1	Statistical model based on forecasting the amount of expected future recoveries, segmented by default status.	7–10
			EAD	1	Statistical model that directly estimates EAD for different segments of the portfolio using either balance or limit as the key input.	7–10	EAD must at least be equal to current balance
UK HSBC personal loans	Retail – other non-SME	3.87	PD	1	Statistical model built on internal behavioural data and bureau information. Underlying PIT model is calibrated to the latest observed PD. An adjustment is then applied to generate the long run PD based on historical observed misalignment of the underlying model.	7–10	PD floor of 0.03%
			LGD	1	Statistical model based on forecasting the amount of expected future recoveries, segmented by default status.	7–10
			EAD	1	EAD is equal to current balance as this provides a conservative estimate.	7–10	EAD must at least be equal to current balance



Table 33: Material retail IRB risk rating systems (continued)
Portfolio	CRD IV asset class	RWA $bn	Component model	Number of material component models	Model description and methodology	Number of years loss data1	Applicable Pillar 1 regulatory thresholds and overlays
UK business banking	Retail – other SME	3.04	PD	1	Statistical model built on internal behavioural data and bureau information. Underlying PIT model is calibrated to the latest observed PD. An adjustment is then applied to generate the long run PD based on historical observed misalignment of the underlying model.	7–10	PD floor of 0.03%
			LGD	2	Two sets of models – one for secured exposures and another for unsecured exposures. The secured model uses the value to loan as a key component for estimation and the unsecured model estimates the amount of future recoveries and undrawn portion.	7–10
			EAD	1	Statistical model using segmentation according to limit and utilisation and estimation of the undrawn exposure.	7–10	EAD must at least be equal to current balance
Hong Kong HSBC personal residential mortgages²	Retail – secured by mortgages on immovable property non-SME	8.20	PD	2	Statistical model built on internal behavioural data and bureau information, and calibrated to a long-run default rate.	>10	PD floor of 0.03%
			LGD	2	Statistical model based on estimate of loss incurred over a recovery period derived from historical data with downturn LGD based on the worst observed default rate.	>10	LGD floor of 10% at portfolio level
			EAD	2	Rule-based calculation based on current balance which provides a conservative estimate of EAD.	>10	EAD must at least be equal to current balance
Hong Kong Hang Seng personal residential mortgages	Retail – secured by mortgages on immovable property non-SME	4.54	PD	2	Statistical model built on internal behavioural data, and calibrated to a long-run default rate.	>10	PD floor of 0.03%
			LGD	2	Two statistical models and one historical average model based on estimates of loss incurred over a recovery period derived from historical data with a downturn adjustment.	>10	LGD floor of 10% at portfolio level
			EAD	2	Rule-based calculation based on current balance which provides a conservative estimate of EAD.	>10	EAD must at least be equal to current balance
Hong Kong HSBC credit cards	Retail – qualifying revolving	3.50	PD	1	Statistical model built on internal behavioural data and bureau information, and calibrated to a long-run default rate.	>10	PD floor of 0.03%
			LGD	1	Statistical model based on forecasting the amount of expected losses. Downturn LGD derived using data from the period with the highest default rate.	>10
			EAD	1	Statistical model which derives a credit utilisation which is used to estimate EAD.	>10	EAD must at least be equal to current balance
Hong Kong HSBC personal instalment loans	Retail – other non-SME	1.50	PD	1	Statistical model built on internal behavioural data and bureau information, and calibrated to a long-run default rate.	>10	PD floor of 0.03%
			LGD	1	Statistical model based on forecasting the amount of expected future losses. Downturn LGD derived using data from the period with the highest default rate.	>10
			EAD	1	Statistical model which derives a credit conversion factor to determine the proportion of undrawn limit to be added to the balance at observation.	>10	EAD must at least be equal to current balance
US HSBC Mortgage Corporation first lien³	Retail – secured by mortgages on immovable property non-SME	5.41	PD	1	Statistical model built on internal behavioural data and bureau information, and calibrated to a long-run default rate.	>10	PD floor of 0.03%
			LGD	1	Statistical model based on identifying the main risk drivers of loss and recovery and grouping them into homogeneous pools. Downturn LGD is derived based on the peak default rate observed. Additional assumptions and estimations are made on incomplete workouts.	>10	LGD floor of 10% at portfolio level
			EAD	1	Rule-based calculation based on current balance which provides a conservative estimate of EAD.	>10	EAD must at least be equal to current balance

Retail credit models

Given the large number of retail IRB models globally, we disclose information on our most material local models.

The actual and estimated values are derived from the model monitoring and calibration processes performed at a local level. Within the discipline of our global modelling policies, our analytics teams adopt back-testing criteria specific to local conditions in order to assess the accuracy of their models.

Table 34 contains the estimated and actual values from the back-testing of our material IRB models covering portfolios in the UK, Hong Kong and the residential mortgage portfolio in the US. The most recent three years have been included for the portfolios added to this year’s disclosures.

Within table 34, for back-testing purposes, a customer’s PD is observed at a PIT and their default or non-default status in the following one-year period is recorded against that PD grade. 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 of 0.03% and 10%, respectively, are applied during final capital calculation and are not reflected in the estimates below.

For our UK residential mortgage portfolios, the model outputs include required regulatory downturn adjustments. In conducting the back-testing, our UK residential mortgage LGD models consider repossession rates over a 36 month period starting at the date of default. For both our HSBC and First Direct branded residential mortgages, LGD estimates and actual LGD values remained low and stable in 2017.

The Hong Kong estimated LGD values in table 34 include required stressed factors to reflect downturn conditions. The LGD models for our Hong Kong HSBC and Hang Seng residential mortgage portfolios use a recovery outcome period of 24 months starting at the date of default. For both portfolios, LGD estimates remain higher than the calculated actual values but below the 10% regulatory floor. The Hong Kong credit card EAD model currently underestimates exposure values at the point of default; however, this is mitigated by a temporary adjustment to RWAs. An updated model has been submitted to the PRA for approval following approval from the local regulator and is expected to be implemented during 2018. Actual LGD values for Hong Kong personal loans have increased in 2017 due to the inclusion of restructured loans in the calculation. This provides a more accurate assessment of losses. LGD estimates remain higher than the actual values.

The US estimates in table 34 include downturn adjustments and model overlays agreed with the PRA. The LGD models use a recovery outcome period of 36 months, reflecting the recovery process due to foreclosure moratoria. The LGD estimates have increased in 2017 following implementation of new models in 2016 that capture maximum expected losses during an economic cycle. Actual LGD values have continued to decrease due to improving house prices.



Table 34: IRB models – estimated and actual values (retail)
	PD		LGD		EAD
	Estimated	Actuals	Estimated	Actuals	Estimated	Actuals
	%	%	%	%	%	%
2017
UK
– HSBC residential mortgage	0.44	0.28	9.74	0.88	0.26	0.24
– FD residential mortgages	0.48	0.41	2.11	0.45	1.09	0.91
– HSBC credit card	0.92	0.77	90.86	85.68	1.10	1.07
– HSBC personal loans	1.94	1.62	87.77	79.90	1.58	1.50
– Business Banking (Retail SME)	2.57	2.64	73.87	70.25	1.90	1.51
Hong Kong
– HSBC personal residential mortgage	0.72	0.04	1.43	0.14	0.05	0.05
– Hang Seng personal residential mortgage	0.42	0.14	5.18	0.59	0.14	0.14
– HSBC credit card	0.65	0.28	89.33	76.11	0.47	0.50
– HSBC personal instalment loans	2.34	1.51	89.07	80.05	1.25	1.14
US
– HSBC Mortgage Corporation first lien	1.91	0.80	53.27	22.22	0.37	0.36

2016
UK
– HSBC residential mortgage	0.50	0.35	10.53	1.09	0.34	0.31
– FD residential mortgages	0.49	0.43	3.06	0.55	0.95	0.80
– HSBC credit card	0.89	0.75	91.72	89.92	1.03	1.00
– HSBC personal loans	1.84	1.52	88.26	79.08	1.36	1.29
– Business Banking (Retail SME)	2.40	2.47	93.56	82.63	1.80	1.64
Hong Kong
– HSBC personal residential mortgage	0.79	0.04	4.52	0.97	0.04	0.03
– Hang Seng personal residential mortgage	0.49	0.16	4.48	0.62	0.12	0.12
– HSBC credit card	0.69	0.30	88.97	82.48	0.52	0.56
– HSBC personal instalment loans	2.46	1.78	89.28	69.62	1.44	1.33
US
– Consumer Lending real estate first lien	5.30	4.29	74.22	51.89	3.53	3.49
– Mortgage Services real estate first lien	6.16	3.77	68.26	51.79	3.37	3.34
– HSBC Mortgage Corporation first lien	2.20	1.27	41.18	29.25	0.50	0.50

2015
UK
– HSBC residential mortgage	0.45	0.22	16.43	3.54	0.17	0.17
– FD residential mortgages	0.40	0.11	12.13	10.89	0.22	0.20
– HSBC credit card	1.06	0.86	91.54	88.42	1.23	1.19
– HSBC personal loans	1.93	1.23	82.10	78.46	1.18	1.13
– Business Banking (Retail SME)	2.26	2.21	76.06	71.78	1.57	1.47
Hong Kong
– HSBC personal residential mortgage	0.79	0.03	1.90	0.03	0.04	0.03
– Hang Seng personal residential mortgage	0.46	0.14	4.12	0.57	0.11	0.11
– HSBC credit card	0.67	0.32	90.40	81.75	0.52	0.58
– HSBC personal instalment loans	2.40	2.02	89.43	69.59	1.69	1.51
US
– Consumer Lending real estate first lien	5.92	5.47	75.98	51.60	5.37	5.31
– Mortgage Services real estate first lien	6.96	5.96	69.59	54.09	7.97	7.88
– HSBC Mortgage Corporation first lien	4.66	2.08	29.63	37.19	0.70	0.69



Table 34: IRB models – estimated and actual values (retail) (continued)
	PD		LGD		EAD
	Estimated	Actuals	Estimated	Actuals	Estimated	Actuals
	%	%	%	%	%	%
2014
UK
– HSBC residential mortgage	0.50	0.31	15.82	4.68	0.24	0.23
– HSBC credit card	1.37	1.07	91.11	86.30	1.83	1.78
– HSBC personal loans	2.28	1.57	81.56	80.45	1.52	1.46
– Business Banking (Retail SME)	2.83	2.57	73.04	68.17	2.00	1.88
Hong Kong
– HSBC personal residential mortgage	0.72	0.04	1.26	0.35	0.03	0.03
– HSBC credit card	0.62	0.32	92.91	88.13	0.55	0.59
– HSBC personal instalment loans	2.37	2.04	89.69	87.66	1.77	1.63
US
– Consumer Lending real estate first lien	7.31	7.72	77.16	60.29	7.83	7.72
– Mortgage Services real estate first lien	9.43	8.12	71.40	60.17	7.51	7.43
– HSBC Mortgage Corporation first lien	5.24	2.28	29.63	39.36	1.00	1.00

2013
UK
– HSBC residential mortgage	0.55	0.38	17.30	6.40	0.32	0.31
– HSBC credit card	1.54	1.27	88.10	84.10	1.70	1.67
– HSBC personal loans	3.57	2.35	85.40	73.00	2.19	2.11
– Business Banking (Retail SME)	2.39	2.61	78.00	70.00	2.03	1.99
Hong Kong
– HSBC personal residential mortgage	0.71	0.03	1.84	0.43	0.03	0.03
– HSBC credit card	0.63	0.33	91.41	84.58	0.56	0.59
– HSBC personal instalment loans	2.20	1.99	90.07	96.16	1.69	1.55
US
– Consumer Lending real estate first lien	7.74	8.22	67.13	64.93	7.08	6.72
– Mortgage Services real estate first lien	10.15	9.68	60.04	62.92	6.12	5.88
– HSBC Mortgage Corporation first lien	4.64	4.43	49.85	37.17	2.40	2.40



Table 35: Wholesale IRB exposure – back-testing of probability of default (PD) per portfolio¹
PD range	External rating equivalent (S&P)	External rating equivalent (Moody’s)	External rating equivalent (Fitch)	Weighted average PD %	Arithmetic average PD by obligors %	Number of obligors		Defaulted obligors in the year	of which: new defaulted obligors in the year	Average historical annual default rate %
PD range	External rating equivalent (S&P)	External rating equivalent (Moody’s)	External rating equivalent (Fitch)	Weighted average PD %	Arithmetic average PD by obligors %	End of previous year	End of the year	Defaulted obligors in the year	of which: new defaulted obligors in the year	Average historical annual default rate %
2017
Sovereigns²
0.00 to <0.15	AAA to BBB	Aaa to Baa2	AAA to BBB	0.02	0.05	43	53	—	—	—
0.15 to <0.25	BBB-	Baa3	BBB-	0.22	0.22	7	7	—	—	—
0.25 to <0.50	BBB-	Baa3	BBB-	0.37	0.37	7	5	—	—	—
0.50 to <0.75	BB+ to BB	Ba1 to Ba2	BB+ to BB	0.63	0.63	6	7	—	—	—
0.75 to <2.50	BB- to B-	Ba3 to B2	BB- to B-	2.02	1.65	17	23	—	—	—
2.5 to <10.00	B to B-	B2 to Caa1	CCC+ to CCC	3.90	6.09	18	21	—	—	—
10.00 to <100.00	B- to C	Caa1 to C	CCC to C	12.89	12.57	7	8	—	—	2.67

Banks
0.00 to <0.15	AAA to A-	Aaa to Baa1	AAA to BBB+	0.05	0.08	250	258	—	—	—
0.15 to <0.25	BBB+	Baa2	BBB	0.22	0.22	72	62	—	—	—
0.25 to <0.50	BBB	Baa3	BBB-	0.37	0.37	59	48	—	—	—
0.50 to <0.75	BBB-	Baa3	BBB-	0.63	0.63	68	58	—	—	—
0.75 to <2.50	BB+ to BB-	Ba1 to B1	BB+ to B+	1.20	1.40	122	119	—	—	—
2.5 to <10.00	B+ to B-	B2 to Caa1	B to CCC+	4.63	4.71	100	75	—	—	0.20
10.00 to <100.00	CCC+ to C	Caa1 to C	CCC to C	17.91	14.66	32	18	—	—	4.68

Corporates
0.00 to <0.15	AAA to A-	Aaa to Baa1	AAA to BBB+	0.09	0.10	11,220	11,401	2	—	0.01
0.15 to <0.25	BBB+	Baa2	BBB	0.22	0.22	10,899	11,453	10	2	0.12
0.25 to <0.50	BBB	Baa3	BBB-	0.37	0.37	12,161	11,675	20	3	0.25
0.50 to <0.75	BBB-	Baa3	BBB-	0.63	0.63	10,920	10,508	29	2	0.46
0.75 to <2.50	BB+ to BB-	Ba1 to B1	BB+ to B+	1.37	1.45	35,150	34,911	244	12	0.91
2.5 to <10.00	B+ to B-	B2 to Caa1	B to CCC+	4.34	4.38	12,978	13,183	418	30	2.87
10.00 to <100.00	CCC+ to C	Caa1 to C	CCC to C	18.42	19.33	2,119	1,785	266	20	12.54



PD range	External rating equivalent (S&P)	External rating equivalent (Moody’s)	External rating equivalent (Fitch)	Weighted average PD %	Arithmetic average PD by obligors %	Number of obligors		Defaulted obligors in the year	of which: new defaulted obligors in the year	Average historical annual default rate %
PD range	External rating equivalent (S&P)	External rating equivalent (Moody’s)	External rating equivalent (Fitch)	Weighted average PD %	Arithmetic average PD by obligors %	End of previous year	End of the year	Defaulted obligors in the year	of which: new defaulted obligors in the year	Average historical annual default rate %
2016
Sovereigns
0.00 to <0.15	AAA to A-	Aaa to Baa1	AAA to BBB+	0.02	0.05	60	60	—	—	—
0.15 to <0.25	BBB+	Baa2	BBB	0.22	0.22	8	11	—	—	—
0.25 to <0.50	BBB	Baa3	BBB-	0.37	0.37	10	7	—	—	—
0.50 to <0.75	BBB-	Baa3	BBB-	0.63	0.63	7	7	—	—	—
0.75 to <2.50	BB+ to BB-	Ba1 to B1	BB+ to B+	2.01	1.58	19	25	—	—	—
2.5 to <10.00	B+ to B-	B2 to Caa1	B to CCC+	4.66	5.32	35	27	—	—	—
10.00 to <100.00	CCC+ to C	Caa1 to C	CCC to C	20.27	21.07	14	16	—	—	1.67

Banks
0.00 to <0.15	AAA to A-	Aaa to Baa1	AAA to BBB+	0.05	0.08	235	250	—	—	—
0.15 to <0.25	BBB+	Baa2	BBB	0.22	0.22	91	72	—	—	—
0.25 to <0.50	BBB	Baa3	BBB-	0.37	0.37	37	59	—	—	—
0.50 to <0.75	BBB-	Baa3	BBB-	0.63	0.63	64	68	—	—	—
0.75 to <2.50	BB+ to BB-	Ba1 to B1	BB+ to B+	1.16	1.36	139	122	—	—	—
2.5 to <10.00	B+ to B-	B2 to Caa1	B to CCC+	4.96	4.87	109	100	—	—	0.29
10.00 to <100.00	CCC+ to C	Caa1 to C	CCC to C	11.38	11.55	29	32	—	—	1.70

Corporates
0.00 to <0.15	AAA to A-	Aaa to Baa1	AAA to BBB+	0.09	0.10	11,742	11,245	2	—	0.01
0.15 to <0.25	BBB+	Baa2	BBB	0.22	0.22	11,003	10,904	28	1	0.13
0.25 to <0.50	BBB	Baa3	BBB-	0.37	0.37	12,384	12,183	48	1	0.28
0.50 to <0.75	BBB-	Baa3	BBB-	0.63	0.63	10,516	10,924	54	2	0.50
0.75 to <2.50	BB+ to BB-	Ba1 to B1	BB+ to B+	1.39	1.47	36,308	35,588	416	31	1.03
2.5 to <10.00	B+ to B-	B2 to Caa1	B to CCC+	4.39	4.43	13,419	13,488	437	21	3.06
10.00 to <100.00	CCC+ to C	Caa1 to C	CCC to C	19.08	20.29	2,319	2,141	285	12	13.42



Table 36: Retail IRB exposure – back-testing of probability of default (PD) per portfolio¹
PD range	Weighted average PD	Arithmetic average PD by obligors	Number of obligors		Defaulted obligors in the year	of which: new defaulted obligors in the year	Average historical annual default rate
PD range	Weighted average PD	Arithmetic average PD by obligors	End of previous year	End of the year	Defaulted obligors in the year	of which: new defaulted obligors in the year	Average historical annual default rate
2017
Retail – Secured by real estate non-SME
0.00 to <0.15	0.06	0.06	662,941	700,284	238	4	0.03
0.15 to <0.25	0.19	0.19	62,640	59,539	69	—	0.08
0.25 to <0.50	0.36	0.35	63,554	64,051	97	—	0.13
0.50 to <0.75	0.60	0.60	26,579	27,095	63	—	0.21
0.75 to <2.50	1.33	1.34	61,808	59,299	277	1	0.43
2.50 to <10.00	4.63	4.56	18,796	17,156	379	1	1.94
10.00 to <100.00	27.70	24.33	8,090	5,358	1,308	15	19.49

Retail – qualifying revolving
0.00 to <0.15	0.07	0.07	2,903,455	3,128,491	1,403	100	0.05
0.15 to <0.25	0.19	0.19	702,956	715,693	643	25	0.10
0.25 to <0.50	0.36	0.36	641,717	666,802	1,229	44	0.21
0.50 to <0.75	0.61	0.62	316,331	317,666	1,075	36	0.36
0.75 to <2.50	1.35	1.33	717,012	677,685	5,202	131	0.85
2.50 to <10.00	4.39	4.30	214,063	217,996	6,465	79	3.06
10.00 to <100.00	26.42	26.77	66,144	52,014	14,140	10	19.19

Retail – other non-SME
0.00 to <0.15	0.08	0.08	123,797	143,758	216	5	0.15
0.15 to <0.25	0.19	0.19	75,671	84,219	112	6	0.13
0.25 to <0.50	0.36	0.36	109,873	118,254	327	18	0.25
0.50 to <0.75	0.61	0.62	37,381	39,622	208	8	0.48
0.75 to <2.50	1.36	1.41	94,398	93,147	1,261	61	1.05
2.50 to <10.00	4.63	4.88	49,426	39,977	1,811	55	3.03
10.00 to <100.00	42.70	42.41	12,114	5,550	4,380	9	34.31

Retail – other SME
0.00 to <0.15	0.11	0.11	66,454	65,482	45	—	0.09
0.15 to <0.25	0.20	0.20	42,675	43,437	66	—	0.29
0.25 to <0.50	0.38	0.37	126,549	132,200	451	11	0.51
0.50 to <0.75	0.63	0.63	124,441	128,686	739	11	0.83
0.75 to <2.50	1.55	1.38	316,020	305,501	4,562	82	1.77
2.50 to <10.00	4.77	4.68	167,107	148,916	7,730	111	4.48
10.00 to <100.00	17.47	19.38	48,949	39,032	10,329	48	17.57



Table 36: Retail IRB exposure – Back-testing of probability of default (PD) per portfolio¹ (Continued)
PD range	Weighted average PD	Arithmetic average PD by obligors	Number of obligors		Defaulted obligors in the year	of which: new defaulted obligors in the year	Average historical annual default rate
PD range	Weighted average PD	Arithmetic average PD by obligors	End of previous year	End of the year	Defaulted obligors in the year	of which: new defaulted obligors in the year	Average historical annual default rate
2016
Retail – Secured by real estate non-SME
0.00 to <0.15	0.06	0.06	454,384	472,033	196	3	0.03
0.15 to <0.25	0.20	0.19	42,290	40,896	37	—	0.07
0.25 to <0.50	0.39	0.40	78,127	76,119	154	—	0.28
0.50 to <0.75	0.59	0.59	16,323	16,596	22	—	0.10
0.75 to <2.50	1.27	1.32	105,008	70,068	967	2	1.10
2.50 to <10.00	4.83	4.74	52,157	25,774	739	12	3.68
10.00 to <100.00	28.19	27.67	55,403	11,411	2,873	152	33.03

Retail – qualifying revolving
0.00 to <0.15	0.07	0.07	3,081,238	3,212,010	1,556	94	0.05
0.15 to <0.25	0.19	0.20	739,131	686,815	661	15	0.10
0.25 to <0.50	0.36	0.35	577,288	601,986	1,265	18	0.19
0.50 to <0.75	0.61	0.62	291,303	301,068	1,060	15	0.33
0.75 to <2.50	1.35	1.33	649,838	657,683	5,519	80	0.79
2.50 to <10.00	4.42	4.30	180,889	184,846	5,739	29	2.87
10.00 to <100.00	25.88	28.08	62,487	46,776	14,159	2	18.71

Retail – other non-SME
0.00 to <0.15	0.09	0.09	113,178	150,991	142	6	0.13
0.15 to <0.25	0.19	0.19	70,557	82,256	91	3	0.13
0.25 to <0.50	0.34	0.36	135,970	149,246	339	65	0.28
0.50 to <0.75	0.60	0.60	67,774	67,475	313	29	0.53
0.75 to <2.50	1.36	1.37	146,702	145,343	1,171	122	1.14
2.50 to <10.00	4.57	4.91	67,842	59,099	1,584	93	3.20
10.00 to <100.00	25.26	26.44	20,318	12,085	3,722	9	19.94

Retail – other SME
0.00 to <0.15	0.10	0.09	119,633	119,245	142	1	0.09
0.15 to <0.25	0.20	0.20	72,127	79,047	239	4	0.27
0.25 to <0.50	0.37	0.37	150,563	163,934	737	26	0.49
0.50 to <0.75	0.60	0.60	124,371	124,797	998	22	0.84
0.75 to <2.50	1.54	1.38	275,325	262,619	4,569	117	1.66
2.50 to <10.00	4.81	4.73	155,368	133,616	6,953	62	4.27
10.00 to <100.00	18.06	20.84	38,418	26,680	6,982	22	16.62

Counterparty credit risk

Counterparty credit risk management

CCR arises for derivatives and SFTs. It is calculated in both the trading and non-trading books, and is the risk that a counterparty may default before settlement of the transaction. CCR is generated primarily in our wholesale global businesses.

Four approaches may be used under CRD IV to calculate exposure values for CCR: mark-to-market, original exposure, standardised and IMM. Exposure values calculated under these approaches are used to determine RWAs. Across the Group, we use the mark-to-market and IMM approaches.

Under the mark-to-market approach, the EAD is calculated as current exposure plus regulatory add-ons. We use this approach for all products not covered by our IMM permission. Under the IMM approach, EAD is calculated by multiplying the effective expected positive exposure with a multiplier called ‘alpha’.

Alpha (set to a default value of 1.4) accounts for several portfolio features that increase EL above that indicated by effective expected positive exposure in the event of default, such as:


•	co-variance of exposures;


•	correlation between exposures and default;


•	level of volatility/correlation that might coincide with a downturn;


•	concentration risk; and


•	model risk.

The effective expected exposure is derived from simulation, pricing and aggregation internal models approved by regulators. The IMM model is subject to ongoing model validation including monthly model performance monitoring.

From a risk management perspective, including daily monitoring of credit limit utilisation, products not covered by IMM are subject to conservative asset class add-on calculated or repo VaR outside of the IMM framework.

The potential future exposure (‘PFE’) measures used for CCR management are calibrated to the 95th percentile. The measures consider volatility, trade maturity and the counterparty legal documentation covering netting and collateral.

Limits for CCR exposures are assigned within the overall credit process. The credit risk function assigns a limit against each counterparty to cover derivatives exposure which may arise as a result of a counterparty default. The magnitude of this limit will depend on the overall risk appetite and type of derivatives trading undertaken with the counterparty.

The models and methodologies used in the calculation of CCR are approved by the Global Markets MOC. Models are subject to ongoing monitoring and validation. Additionally, they are subject to independent review at inception and annually thereafter.

Credit valuation adjustment

Credit valuation adjustment (‘CVA’) risk is the risk of adverse moves in the credit valuation adjustments taken for expected credit losses on derivative transactions. Where we have both specific risk VaR approval and IMM approval for a product, the CVA VaR approach has been used to calculate the CVA capital charge. Where we do not hold both approvals, the standardised approach has been applied. 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.

Eligible collateral types are controlled under a policy to ensure price transparency, price stability, liquidity, enforceability, independence, reusability and eligibility for regulatory purposes. A valuation ‘haircut’ policy reflects the fact that collateral may fall in value between the date the collateral was called and the date of liquidation or enforcement. Approximately 98% of collateral held as variation margin under CSAs is either cash or liquid government securities.

Further information on gross fair value exposure and the offset due to legally enforceable netting and collateral is set out on page 275 of the Annual Report and Accounts 2017.

Credit rating downgrade

A credit rating downgrade clause in a Master Agreement or a credit rating downgrade threshold clause in a 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.

At 31 December 2017, the potential value of the additional collateral pertaining to International Swaps and Derivatives Association Credit Support Annex (‘CSA’) downgrade thresholds that we would need to post with counterparties in the event of a one-notch downgrade of our rating was $0.3bn (2016: $0.3bn) and for a two-notch downgrade was $0.5bn (2016: $0.8bn).



Table 37: Counterparty credit risk exposure – by exposure class, product and geographical region
		Exposure value
		Europe	Asia	MENA	North America	Latin America	Total
		Europe	Asia	MENA	North America	Latin America	Total
	Footnotes	$bn	$bn	$bn	$bn	$bn	$bn
By exposure class
IRB advanced approach		63.0	33.0	0.7	20.4	1.2	118.3
– central governments and central banks		4.6	4.8	0.3	2.2	0.6	12.5
– institutions		26.8	18.6	0.2	8.6	0.2	54.4
– corporates		31.6	9.6	0.2	9.6	0.4	51.4
IRB foundation approach		3.4	—	0.3	—	—	3.7
– corporates		3.4	—	0.3	—	—	3.7
Standardised approach		6.2	0.4	2.2	—	0.7	9.5
– central governments and central banks		5.6	—	1.9	—	—	7.5
– institutions		0.1	—	—	—	—	0.1
– corporates		0.5	0.4	0.3	—	0.7	1.9
CVA advanced	2	—	—	—	—	—	—
CVA standardised	2	—	—	—	—	—	—
CCP standardised		16.5	8.0	—	11.1	0.4	36.0
At 31 Dec 2017		89.1	41.4	3.2	31.5	2.3	167.5
By product
Derivatives (OTC and exchange traded derivatives)		52.3	31.8	1.0	24.3	1.6	111.0
SFTs		34.1	5.8	2.2	7.2	0.7	50.0
Other	1	2.7	3.8	—	—	—	6.5
CVA advanced	2	—	—	—	—	—	—
CVA standardised	2	—	—	—	—	—	—
CCP default funds	3	—	—	—	—	—	—
At 31 Dec 2017		89.1	41.4	3.2	31.5	2.3	167.5

By exposure class
IRB advanced approach		62.3	36.1	0.5	22.0	0.7	121.6
– central governments and central banks		5.0	4.1	—	3.0	0.2	12.3
– institutions		27.9	19.8	0.2	9.2	0.4	57.5
– corporates		29.4	12.2	0.3	9.8	0.1	51.8
IRB foundation approach		5.0	—	0.5	—	—	5.5
– corporates		5.0	—	0.5	—	—	5.5
Standardised approach		6.5	0.7	2.1	0.1	0.7	10.1
– central governments and central banks		5.9	—	1.4	—	—	7.3
– institutions		—	—	0.2	—	—	0.2
– corporates		0.6	0.7	0.5	0.1	0.7	2.6
CVA advanced	2	—	—	—	—	—
CVA standardised	2	—	—	—	—	—
CCP standardised		13.3	5.5	—	8.8	—	27.6
At 31 Dec 2016		87.1	42.3	3.1	30.9	1.4	164.8
By product
Derivatives (OTC and exchange traded derivatives)		58.9	33.8	1.6	21.5	1.2	117.0
SFTs		25.3	5.0	1.5	9.4	0.2	41.4
Other	1	2.9	3.5	—	—	—	6.4
CVA advanced	2	—	—	—	—	—	—
CVA standardised	2	—	—	—	—	—	—
CCP default funds	3	—	—	—	—	—	—
At 31 Dec 2016		87.1	42.3	3.1	30.9	1.4	164.8



Table 38: Counterparty credit risk – RWAs by exposure class, product and geographical region
		RWAs						Capital required
		Europe	Asia	MENA	North America	Latin America	Total	Capital required
	Footnotes	$bn	$bn	$bn	$bn	$bn	$bn	$bn
By exposure class
IRB advanced approach		21.2	9.9	0.6	7.3	0.9	39.9	3.2
– central governments and central banks		0.7	0.1	0.4	0.8	0.4	2.4	0.2
– institutions		7.1	5.0	0.1	2.1	0.2	14.5	1.2
– corporates		13.4	4.8	0.1	4.4	0.3	23.0	1.8
IRB foundation approach		1.7	—	0.1	—	—	1.8	0.1
– corporates		1.7	—	0.1	—	—	1.8	0.1
Standardised approach		0.6	0.4	0.3	—	0.6	1.9	0.2
– central governments and central banks		—	—	—	—	—	—	—
– institutions		—	—	0.0	—	—	0.0	0.0
– corporates		0.6	0.4	0.3	—	0.6	1.9	0.2
CVA advanced	2	2.8	—	—	—	—	2.8	0.2
CVA standardised	2	0.8	2.4	0.1	3.2	0.2	6.7	0.6
CCP standardised		0.7	0.3	—	0.4	—	1.4	0.1
At 31 Dec 2017		27.8	13.0	1.1	10.9	1.7	54.5	4.4
By product								—
Derivatives (OTC and exchange traded derivatives)		17.3	8.6	0.6	5.4	0.9	32.8	2.6
SFTs		5.0	0.6	0.4	2.1	0.6	8.7	0.7
Other	1	1.5	1.3	—	—	—	2.8	0.2
CVA advanced	2	2.8	—	—	—	—	2.8	0.2
CVA standardised	2	0.8	2.4	0.1	3.2	0.2	6.7	0.6
CCP default funds	3	0.4	0.1	—	0.2	—	0.7	0.1
At 31 Dec 2017		27.8	13.0	1.1	10.9	1.7	54.5	4.4

By exposure class
IRB advanced approach		21.3	11.2	0.2	8.6	0.3	41.6	3.3
– central governments and central banks		0.9	0.2	—	0.5	0.1	1.7	0.1
– institutions		8.1	5.2	—	2.6	0.1	16.0	1.3
– corporates		12.3	5.8	0.2	5.5	0.1	23.9	1.9
IRB foundation approach		1.7	—	0.2	—	—	1.9	0.2
– corporates		1.7	—	0.2	—	—	1.9	0.2
Standardised approach		0.8	0.7	0.6	0.1	0.6	2.8	0.2
– central governments and central banks		—	—	—	—	—	—	—
– institutions		0.1	—	0.1	—	—	0.2	—
– corporates		0.7	0.7	0.5	0.1	0.6	2.6	0.2
CVA advanced	2	3.5	—	—	—	—	3.5	0.3
CVA standardised	2	2.8	4.0	0.2	3.6	0.3	10.9	0.9
CCP standardised		0.7	0.3	—	0.3	—	1.3	0.1
At 31 Dec 2016		30.8	16.2	1.2	12.6	1.2	62.0	5.0
By product
Derivatives (OTC and exchange traded derivatives)		18.2	10.6	1.0	6.6	0.9	37.3	3.0
SFTs		4.5	0.6	—	2.1	0.1	7.3	0.6
Other	1	1.4	0.9	—	—	—	2.3	0.2
CVA advanced	2	3.5	—	—	—	—	3.5	0.3
CVA standardised	2	2.8	4.0	0.2	3.6	0.3	10.9	0.9
CCP default funds	3	0.4	0.1	—	0.2	—	0.7	—
At 31 Dec 2016		30.8	16.2	1.2	12.5	1.3	62.0	5.0

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 HSBC 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. The regional Traded Risk functions are responsible for the control and monitoring process within an overarching Group framework and limit framework.

Central counterparties (‘CCPs’)

While exchange traded derivatives have been cleared through CCPs for many years, recent regulatory initiatives designed to reduce systemic risk in the banking system are directing increasing volumes of OTC derivatives to be cleared through CCPs.

A dedicated CCP risk team has been established to manage the interface with CCPs and undertake in-depth due diligence of the unique risks associated with these organisations. This is to address an implication of the regulations that the Group’s risk will be transferred from being distributed among individual, bilateral counterparties to a significant level of risk concentration on CCPs. We have developed a risk appetite framework to manage risk accordingly, on an individual CCP and global basis.

Securitisation

HSBC securitisation strategy

HSBC acts as originator, sponsor, liquidity provider and derivative

counterparty to our own originated and sponsored 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 any of our originated or sponsored securitisations, and it is not our policy to do so.

We have senior exposures to the securities investment conduits (‘SICs’): Mazarin Funding Limited, Barion Funding Limited and Malachite Funding Limited, and we hold all of the commercial paper issued by Solitaire Funding Limited. These are considered legacy businesses, and exposures are being repaid as the securities they hold amortise.

HSBC securitisation activity

Our roles in the securitisation process are as follows:


•	Originator: where we originate the assets being securitised, either directly or indirectly;


•	Sponsor: where we establish and manage a securitisation programme that purchases exposures from third parties; and


•	Investor: where we invest in a securitisation transaction directly or provide derivatives or liquidity facilities to a securitisation.

HSBC as originator

We use SPEs to securitise customer loans and advances and other debt that we have originated in order to diversify our sources of funding for asset origination and for capital efficiency purposes. In such cases, we transfer the loans and advances to the SPEs for cash, and the SPEs issue debt securities to investors to fund the cash purchases.

In addition, we use SPEs to mitigate the capital absorbed by some of the customer loans and advances we have originated. Credit derivatives 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 writes CDS protection for HSBC.

HSBC as sponsor

We are sponsor to a number of types of securitisation entities, details of which can be found in Note 19 on the Financial Statements of the Annual Report and Accounts 2017 and the table below.

HSBC as investor

We have exposure to third-party securitisations across a wide range of sectors in the form of investments, liquidity facilities and as a derivative counterparty. These are primarily legacy exposures.

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.

In the case of re-securitisation positions, similar processes are conducted in respect of the underlying securitisations.

Liquidity risk of securitised assets is consistently managed as part of the Group’s liquidity and funding risk management framework and further details are provided on page 113 of the Annual Report and Accounts 2017.

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 and re-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.

Full details of these assessments and our accounting policy on structured entities may be found in Note 1.2(a) and Note 19 on the Financial Statements respectively of the Annual Report and Accounts 2017.

We reassess the need to consolidate whenever there is a change in the substance of the relationship between HSBC and a structured entity.

HSBC enters into transactions in the normal course of business by which it transfers financial assets to structured entities. Depending on the circumstances, these transfers may either result in these financial assets being fully or partly derecognised, or continuing to be recognised in their entirety.

Full derecognition occurs when we transfer our contractual right to receive cash flows from the financial assets, or assume an obligation to pass on the cash flows from the assets, and transfer substantially all the risks and rewards of ownership. Only in the event that derecognition is achieved are sales and any resultant gains recognised in the financial statements.

Partial derecognition occurs when we sell or otherwise transfer financial assets in such a way that some but not substantially all of the risks and rewards of ownership are transferred and control is retained. These financial assets are recognised on the balance sheet to the extent of our continuing involvement and an associated liability is also recognised. The net carrying amount of the financial asset and associated liability will be based on the measurement basis of the financial asset, either the amortised cost or the fair value of the rights and obligations retained by the entity.

Further disclosure of such transfers may be found in Note 16 on the Financial Statements of the Annual Report and Accounts 2017.

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.

For the majority of our securitisation non-trading book positions, we use the IRB approach, and within this principally the RBM, with lesser amounts on IAA and SFM. We also use the standardised approach for an immaterial amount of non-trading book positions. Securitisation positions in the trading book are overseen within Market Risk using the standardised approach.

Use of the IAA is limited to exposures arising from Regency Assets Limited related to liquidity facilities. Eligible ECAI rating methodology, which includes stress factors, is applied to each asset class in order to derive the equivalent rating level for each transaction. This methodology is verified by the internal credit function as part of the approval process for each new transaction. The performance of each underlying asset portfolio, including residential and commercial mortgages and re-securitisations, is monitored to confirm that the applicable equivalent rating level still applies and is independently verified. Our IAA approach is audited periodically by Internal Audit and reviewed by the PRA.

There was $0.5bn (2016: $0.7bn) of unrealised losses on Asset-backed securities (‘ABS’) in the year, also disclosed on page 145 of the Annual Report and Accounts 2017, which fully relates to assets within SPEs that are consolidated for regulatory purposes.

Analysis of securitisation exposures

HSBC’s involvement in securitisation activities reflects the following:


•	securitisation positions are not backed by revolving exposures other than trade receivables in Regency Assets Limited, which is unchanged from 2016;


•	facilities are not subject to early amortisation provisions (2016: nil);


•	$4.7bn positions held as synthetic transactions (2016: $4.7bn);


•	no assets awaiting securitisation (2016: nil);

•

total exposures include off-balance sheet exposure of $15.3bn (2016: $15.1bn), mainly relating to contingent liquidity lines provided to securitisation vehicles where we act as sponsor, with a small amount from derivative exposures where we are an investor. The off-balance sheet exposures are held in the non-trading book and the exposure types are residential mortgages, commercial mortgages, trade receivables and re-securitisations; and


•	no realised losses on securitisation asset disposals in the year (2016: nil).

Further details of our securitisation exposures may be found on page 145 of the Annual Report and Accounts 2017.

Market risk

Overview of market risk in global businesses

Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices, will reduce our income or the value of our portfolios.

Exposure to market risk

Exposure to market risk is separated into two portfolios:


•	Trading portfolios comprise positions arising from market-making.


•	Non-trading portfolios comprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments designated as available-for-sale (‘AFS’) and held to maturity, and exposures arising from our insurance operations.

Where appropriate, we apply similar risk management policies and measurement techniques to both trading and non-trading portfolios. Our objective is to manage and control market risk exposures in order to optimise return on risk while maintaining a market profile consistent within our established risk appetite.

The nature of the hedging and risk mitigation strategies performed across the Group corresponds to the market risk management instruments available within each operating jurisdiction. These strategies range from the use of traditional market instruments, such as interest rate swaps, to more sophisticated hedging strategies to address a combination of risk factors arising at portfolio level. For a discussion on hedging risk and monitoring the continuing effectiveness of hedges, refer to page 228 of the Annual Report and Accounts 2017.

The tables below reflect the components of capital requirement under the standardised approach table 41 and the internal model approach table 42 for market risk.

Market risk governance

GB&M manages market risk, where the majority of the total VaR, SVaR and IRC of HSBC (excluding insurance) and almost all trading VaR resides, using risk limits approved by the GMB. For a discussion on market risk governance refer to page 115 of the Annual Report and Accounts 2017.

Market risk measures

Monitoring and limiting market risk exposures

Our objective is to manage and control market risk exposures while maintaining a market profile consistent with our risk appetite.

We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, VaR and stress testing.

Sensitivity analysis

We use sensitivity measures to monitor the market risk positions within each risk type. Sensitivity limits are set for portfolios, products and risk types, with the depth of the market being one of the principal factors in determining the level of limits set.

Value at risk

VaR is a technique that estimates the potential losses on risk positions in the trading portfolio as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and is calculated for all trading positions regardless of how we capitalise those exposures.

Where there is not an approved internal model, we use the appropriate local rules to capitalise exposures locally.

In addition, we calculate VaR for non-trading portfolios to have a complete picture of risk. Our models are predominantly based on historical simulation. VaR is calculated at a 99% confidence level for a one-day holding period. Where we do not calculate VaR explicitly, we use alternative tools as described in the stress testing section below.

Our VaR models derive plausible future scenarios from past series of recorded market rates and prices, taking into account inter-relationships between different markets and rates such as interest rates and foreign exchange rates. Our models use a mixed approach when applying changes in market rates and prices:


•	For equity, credit and foreign exchange risk factors, the potential movements are typically represented on a relative return basis.


•	For interest rates, a mixed approach is used. Curve movements are typically absolute, whereas volatilities are on a relative return basis.

We use the past two years as the data set in our VaR models, which is updated on a fortnightly basis, and these scenarios are then applied to the market baselines and trading positions on a daily basis. The models also incorporate the effect of option features on the underlying exposures.

The valuation approach used in our models values:


•	non-linear instruments using a full revaluation approach; and


•	linear instruments, such as bonds and swaps, using a sensitivity based approach.

The nature of the VaR models means that an increase in observed market volatility will lead to an increase in VaR even without any changes in the underlying positions.

VaR model limitations

Although a valuable guide to risk, VaR should always be viewed in the context of its limitations, for example:



•	the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature;
•	the use of a holding period assumes that all positions can be liquidated or the risks offset during that period. This may not fully reflect the market risk arising at times of severe illiquidity, when the holding period may be insufficient to liquidate or hedge all positions fully;
•	the use of a 99% confidence level by definition does not take into account losses that might occur beyond this level of confidence; and
•	VaR is calculated on the basis of exposures outstanding at close of business and therefore does not necessarily reflect intra-day exposures.

Risk not in VaR framework

The Risks not in VaR (‘RNIV’) framework captures risks from exposures in the HSBC trading book which are not captured well by the VaR model. Our VaR model is designed to capture significant basis risk such as CDS versus bond, asset swap spreads and cross-currency basis. Other basis risks which are not completely covered in VaR, such as the London interbank offered rate (‘Libor’) tenor basis, are complemented by our RNIV calculations and are integrated into our capital framework.

Risk factors are reviewed on a regular basis and either incorporated directly in the VaR models, where possible, or quantified through the VaR-based RNIV approach or a stress test approach within the RNIV framework. The severity of the scenarios is calibrated to be in line with the capital adequacy requirements. The outcome of the VaR-based RNIV is included in the VaR calculation and back-testing; a stressed VaR RNIV is also computed for the risk factors considered in the VaR-based RNIV approach.

Stress-type RNIVs include a gap risk exposure measure to capture risk on non-recourse margin loans and a de-peg risk measure to capture risk to pegged and heavily managed currencies.

Back-testing

We routinely validate the accuracy of our VaR models by back-testing them against both actual and hypothetical profit and loss. Hypothetical profit and loss excludes non-modelled items such as fees, commissions and revenues of intra-day transactions.

The actual number of profits or losses in excess of VaR over this period can therefore be used to gauge how well the models are performing.

We back-test VaR at various levels which reflect a full legal entity scope of HSBC, including entities that do not have local permission to use VaR for regulatory purposes. Back-testing using the regulatory hierarchy includes entities which have approval to use VaR in the calculation of market risk regulatory capital requirement.

HSBC submits separate back-testing results to regulators, including the PRA and the European Central Bank, based on applicable frequencies ranging from two business days after an exception occurs, to quarterly submissions.

In terms of the CRD IV rules, VaR back-testing loss, and not profit, exceptions count towards the multiplier determined by the PRA for the purposes of the capital requirement calculation for market risk. The multiplier does not get increased if there are less than five loss exceptions.

Stress testing

Stress testing is an important procedure that is integrated into our market risk management framework to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. In such scenarios, losses can be greater than those predicted by VaR modelling.

Stress testing is implemented at legal entity, regional and overall Group levels. A set of scenarios is used consistently across all regions within the Group. Scenarios are tailored to capture the relevant events or market movements at each level. The risk appetite around potential stress losses for the Group is set and monitored against referral limits.

Market risk reverse stress tests are undertaken on the premise that there is a fixed loss. The stress testing process identifies which scenarios lead to this loss. The rationale behind the reverse stress test is to understand scenarios that are beyond normal business settings and could have contagion and systemic implications.

Stressed VaR and stress testing, together with reverse stress testing and the management of gap risk, provide management with insights regarding the ‘tail risk’ beyond VaR, for which HSBC’s appetite is limited.

The Market risk stress testing incorporates the historical and hypothetical events.

During 2017 we devised and ran stress hypothetical scenarios to

specific events including the French election and a potential North Korea conflict.

Market risk capital models

There are a number of measures which HSBC has permission to use in calculating regulatory capital which are listed in table below. For regulatory purposes, the trading book comprises all positions in CRD financial instruments and commodities which are held with trading intent, which are taken with the intention of benefiting from short-term gains or positions where it can be demonstrated that they hedge positions in the trading book. Trading book positions must either be free of any restrictive covenants on their tradability or be capable of being hedged.

A CRD financial instrument is defined as any contract that gives rise to both a financial asset to one party and a financial liability or equity instrument to another party.

HSBC maintains a trading book policy which defines the minimum requirements for trading book positions and the process for classifying positions as trading or non-trading book. Positions in the trading book are subject to market risk-based rules, i.e. market risk capital, computed using regulatory approved models. Otherwise, the market risk capital is calculated using the Standardised approach.

If any of the policy criteria are not met, then the position is categorised as a non-trading book exposure.

Stressed VaR

Stressed VaR is primarily used for regulatory capital purposes and is integrated into the risk management process to ensure prudent capital management. Stressed VaR complements other risk measures by providing the potential losses under stressed market conditions.

Stressed VaR modelling follows the same approach as our VaR risk measure except as follows:


•	potential market movements employed for stressed VaR calculations are based on a continuous one-year period of stress for the trading portfolio;


•	the choice of period is based on the assessment at the Group level of the most volatile period in recent history and changed during 2017:


–	from (July 2007 to July 2008) to (July 2012 to July 2013) in March 2017;


–	to (April 2010 to April 2011) in June 2017; and


–	to (May 2008 to May 2009) in September 2017;


•	it is calculated to a 99% confidence using a 10-day holding period; and


•	it is based on an actual 10-day holding period, whereas Regulatory VaR is based on a one-day holding period scaled to 10 days.

The decrease in stressed VaR was from the inclusion of new entities which are now consolidated, and with it increased diversification benefits. This approval was under Article 325 permission from the PRA and included Indonesia, Singapore and the Middle East.

Incremental risk charge

The IRC measures the default and migration risk of issuers of traded instruments.

IRC risk factors include credit migration, default, product basis, concentration, hedge mismatch, recovery rate and liquidity. The PDs are floored to reflect the lack of historical data on defaults and a period of stress is used to calibrate the spread changes for the relevant ratings. The IRC model is validated quarterly by stressing key model parameters and reviewing the response of the model.

The IRC is a stand-alone charge generating no diversification benefit with other charges. We do not use weighted averages for calculating the liquidity horizon for the IRC measure. IRC relies on a range of liquidity horizons from three months, corresponding to the regulatory floor, to one year. A wide range of criteria can indicate the liquidity of a position. The liquidity horizon for the IRC measure depends on a set of factors such as issuer features, including rating, sector, geography and size of positions, including product, maturity and concentration.

The IRC transition matrices are calibrated using transition and default data published by three rating agencies (Standard & Poor’s, Moody’s and Fitch) as the starting point, in combination with internal rules for flooring. The average of the three matrices is computed for each sector, ignoring zero transition probabilities. The PDs are then floored: sovereign PDs are consistent with IRB, while a 3bp floor is applied to corporates’ and banks’ PDs.

The IRC correlation matrix is derived from historical CDS spreads data, covering the latest two-year VaR period. The returns estimation window is set equal to either three or 12 months, depending on the liquidity horizon of each obligor. First, each obligor is mapped to six sector/rating categories; then the correlation matrix is obtained by computing the arithmetic mean of correlations for each category.

The increase in the period end IRC measure was driven from the loss of hedging benefit from short positions as their residual maturity fell below their corresponding liquidity horizons for recognition within the IRC measure.

Prudent valuation adjustment

HSBC has documented policies and maintains systems and controls for the calculation of Prudent Valuation Adjustment (‘PVA’). Prudent value is an estimated conservative pricing with a 90% degree of certainty that would be received to sell an asset or paid to transfer a liability in orderly transactions occurring between market participants at the balance sheet date. HSBC’s methodology addresses fair value uncertainties arising from a number of sources; market price uncertainty, bid offer (‘close out’) uncertainty, model risk, concentration, administrative cost, unearned credit spreads (‘CVA’) and investing and funding costs (‘FFVA’).

Structural foreign exchange exposures

Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates whose functional currency is not the US dollar. An entity’s functional currency is normally that of the primary economic environment in which it operates.

Exchange differences on structural exposures are recognised in ‘Other comprehensive income’. We use the US dollar as our presentation currency in our consolidated financial statements because the US dollar and currencies linked to it form the major currency bloc in which we transact and fund our business.

Our consolidated balance sheet is, therefore, affected by exchange differences between the US dollar and all the non-US dollar functional currencies of underlying subsidiaries.

Our structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that our consolidated capital ratios and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange rates. We hedge structural foreign exchange exposures only in limited circumstances.

Details of our structural foreign exchange exposures are provided in the Market risk section, on page 152 of the Annual Report and Accounts 2017.

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 BSM to manage, in accordance with internal transfer pricing rules. In its management of IRRBB, the Group aims to balance mitigating the effect of future interest rate movements which could reduce net interest income against the cost of hedging. The monitoring of the projected net

interest income and economic value of equity (‘EVE’) sensitivity under varying interest rate scenarios is a key part of this.

EVE represents the present value of the future banking book cash flows that could be distributed to equity providers under a managed run-off scenario, i.e. the current book value of equity plus the present value of future net interest income in this scenario. An EVE sensitivity is the extent to which the EVE will change due to a pre-specified movements in interest rates, where all other economic variables are held constant.

More details on our IRRBB may be found on page 116 of the Annual Report and Accounts 2017.

Operational risk

Overview and objectives

Operational 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.

Operational risk is relevant to every aspect of our business. It covers a wide spectrum of issues, in particular legal, compliance, security and fraud. 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 operational risk.

We have historically experienced operational risk losses in the following major categories:


•	mis-selling of payment protection insurance;


•	external criminal activities, including fraud;


•	breakdowns in processes/procedures due to human error, misjudgement or malice;


•	system failure or non-availability; and


•	breach of regulatory and/or legislative requirements.

We recognise that operational risk losses can be incurred for a wide variety of reasons, including rare but extreme events.

The objective of our operational risk management is to manage and control operational risk in a cost-effective manner and within our risk appetite, as defined by GMB.

Organisation and responsibilities

Responsibility for managing operational risk lies with HSBC’s employees. During 2017 we implemented a new operational risk management framework (‘ORMF’) and Group-wide risk management system. The new ORMF provides an end-to-end view of the non-financial risks, enhancing focus on the risks that matter the most and associated controls. It provides a platform to drive forward-looking risk awareness and assist management focus. It also helps the organisation understand the level of risk it is willing to accept.

Activity to strengthen our risk culture and better embed the use of the new ORMF, particularly the three lines of defence model, was a key focus in 2017.

The first line of defence owns the risk and is responsible for identifying, recording, reporting, managing the risks and ensuring that the right controls and assessments are in place to mitigate these risks. The second line of defence sets the policy and guidelines for managing the risks and provides advice, guidance and challenge to the first line of defence on effective risk management. The third line of defence is Internal Audit which independently ensures we are managing risk effectively.

More details on our ORMF may be found on page 117 of the Annual Report and Accounts 2017.

The Global Operational Risk Committee, which is a sub-committee of the GRMM, meets monthly to discuss key risk issues and review the effective implementation of the ORMF.

Operational risk is organised as a specific risk discipline within Global Risk. The Group Head of Operational Risk is responsible for establishing and maintaining the ORMF, monitoring the level of operational losses and the effectiveness of the internal control environment supported by their second line of defence functions. The Group Head of Operational Risk is accountable to the Group Chief Risk Officer in respect of this element of the overall enterprise-wide, risk management framework.

Measurement and monitoring

We have codified our ORMF in a high level standard, supplemented by detailed policies. These policies explain our approach to identifying, assessing, monitoring and controlling operational risk, and give guidance on mitigating actions to be taken when weaknesses are identified.

Monitoring operational risk exposure against risk appetite on a regular basis, and setting out our risk acceptance process, drives

risk awareness in a more forward-looking manner. It assists management in determining whether further action is required.

Risk scenario analysis across material legal entities provides a top down, forward-looking assessment of risks to help determine whether they are being effectively managed within our risk appetite or whether further management action is required.

In each of our subsidiaries, business managers are responsible for maintaining an appropriate level of internal control, commensurate with the scale and nature of operations. They are responsible for identifying and assessing risks, designing controls and monitoring the effectiveness of these controls. The ORMF helps managers to fulfil these responsibilities by defining a standard risk assessment methodology and providing a tool for the systematic reporting of operational loss data.

Operational risk and control assessment approach

Operational risk and control assessments are performed by individual business units and functions. The risk and control assessment process is designed to provide business areas and functions with a forward-looking view of operational risks, an assessment of the effectiveness of controls, and a tracking mechanism for action plans so that they can proactively manage operational risks within acceptable levels.

Appropriate means of mitigation and controls are considered. These include:


•	making specific changes to strengthen the internal control environment; and


•	investigating whether cost-effective insurance cover is available to mitigate the risk.

Recording

We use a Group-wide risk management system to record the results of our operational risk management process. Operational risk and control assessments, as described above, are input and maintained by business units. Business management monitor and follow up the progress of documented action plans.

Operational risk loss reporting

To ensure that operational risk losses are consistently reported and monitored at Group level, all Group companies are required to report individual losses when the net loss is expected to exceed $10,000 and to aggregate all other operational risk losses under $10,000. Losses are entered into the group-wide risk management system and are reported to Governance on a monthly basis.

We make investments in private equity primarily through managed funds that are subject to limits on the amount of investment. We risk-assess these commitments to ensure that industry and geographical concentrations remain within acceptable levels for the portfolio as a whole, and perform regular reviews to substantiate the valuation of the investments within the portfolio.

Exchange traded investments amounted to $0.7bn (2016: $0.9bn), with the remainder being unlisted. These investments are held at fair value in line with market prices and are mainly strategic in nature. The decrease in strategic investment equities was largely due to disposals of a number of investments.

On a regulatory consolidation basis, the net gain from disposal of equity securities amounted to $0.8bn (2016: $1.1bn), while impairment of AFS equities amounted to $0.1bn (2016: $0.0bn). Unrealised gains on equities of $0.9bn at 31 December 2017 were fully recognised in CET1.

Details of our accounting policy for AFS equity investments and the valuation of financial instruments may be found on page 191 of the Annual Report and Accounts 2017. A detailed description of the valuation techniques applied to private equity may be found on page 246 of the Annual Report and Accounts 2017.

Risk management of insurance operations

We operate an integrated bancassurance model that provides insurance products principally for customers with whom we have a banking relationship.

The insurance contracts we sell relate to the underlying needs of our banking customers, which we can identify from our point-of-sale contacts and customer knowledge. The majority of sales are of savings and investment products and term and credit life contracts.

By focusing largely on personal and small- and medium-sized enterprises (‘SMEs’) lines of business, we are able to optimise volumes and diversify individual insurance risks.

We choose to manufacture these insurance products in HSBC subsidiaries based on an assessment of operational scale and risk appetite. Manufacturing insurance allows us to retain the risks and rewards associated with writing insurance contracts by keeping part of the underwriting profit and investment income within the Group.

We have life insurance manufacturing subsidiaries in nine countries (Argentina, mainland China, France, Hong Kong, Malaysia, Malta, Mexico, Singapore and the UK). We also have a life insurance manufacturing associate in India.

Where we do not have the risk appetite or operational scale to be an effective insurance manufacturer, we engage with a handful of leading external insurance companies in order to provide insurance products to our customers through our banking network and direct channels. These arrangements are generally structured with our exclusive strategic partners and earn the Group a combination of commissions, fees and a share of profits. We distribute insurance products in all of our geographical regions.

Insurance products are sold through all global businesses, but predominantly by RBWM and CMB through our branches and direct channels worldwide.

The risk profile of our insurance manufacturing businesses is measured using an economic capital approach. Assets and liabilities are measured on a market value basis, and a capital requirement is defined to ensure that there is a less than one-in-200 chance of insolvency over a one-year time horizon, given the risks to which the businesses are exposed. The methodology for the economic capital calculation is largely aligned to the pan-European Solvency II insurance capital regulations.

Subsidiaries engaged in insurance activities are excluded from the regulatory consolidation by excluding assets, liabilities and post-acquisition reserves, leaving the investment of these insurance subsidiaries to be recorded at cost and deducted from CET1 subject to thresholds (amounts below the thresholds are risk-weighted).

Further details of the management of financial risks and insurance risk arising from the insurance operations are provided from page 118 of the Annual Report and Accounts 2017.

Liquidity and funding risk

Strategies and processes in the management of liquidity risk

HSBC 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 management of liquidity and funding is primarily undertaken locally (by country) in our operating entities in compliance with the Group’s LFRF, and with practices and limits set by the GMB through the RMM and approved by the Board. Our general policy is that each defined operating entity should be self-sufficient in funding its own activities.

Structure and organisation of the liquidity risk management function

The Group Treasurer, who reports to the Group Finance Director, has responsibility for the oversight of the LFRF. Asset, Liability and Capital Management (‘ALCM’) teams are responsible for the application of the LFRF at a local operating entity level.

The elements of the LFRF are underpinned by a robust governance framework, the two major elements of which are:


•	Group, regional and entity level asset and liability management committees (‘ALCOs’)


•	Annual internal liquidity adequacy assessment process (‘ILAAP’) used to validate risk tolerance and set risk appetite

Liquidity and funding are predominantly managed at a country level. Where appropriate, management may be expanded to cover a consolidated group of legal entities or narrowed to a principal office (branch) of a wider legal entity to reflect the management under internal or regulatory definitions.

The RMM reviews and agrees annually the list of countries, legal entities or consolidated groups it directly oversees and the composition of these entities (‘principal operating entities’). This list forms the basis of liquidity and funding risk disclosures.

Group Treasury/Asset, Liability and Capital Management

The Group Treasury team is responsible for setting the Group’s policy, proposing risk tolerance and providing review and challenge of the operating entities implementation. Regional and local ALCM teams are responsible for the implementation of group wide and local regulatory policy at a legal entity level.

Balance Sheet Management

Along with the Group’s Global Business Lines, the Balance Sheet Management (‘BSM’) teams form the first line of defence in the management of liquidity risk, ensuring continuous compliance with the firm’s risk appetite operating within their risk mandates.

Scope and nature of liquidity risk reporting and measurement

Where possible, the Group maintains standardised platforms utilising common data feeds in order to ensure consistency of standard internal and regulatory reporting and flexibility to deliver ad hoc requests.

Hedging and mitigating liquidity risk at HSBC

Management of liquidity and funding risk

Liquidity coverage ratio

The Liquidity Coverage Ratio (‘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, HSBC follows the guidelines set by the European Commission.

The HSBC application of the LCR metric involves the following two key assumptions about the definition of operational deposits and the ability to transfer liquidity from non-EU legal entities:


•	we define operational deposits as transactional (current) accounts arising from the provision of custody services by HSBC Security Services or Global Liquidity and Cash Management, where the operational component is assessed to be the lower of the current balance and the separate notional values of debits and credits across the account in the previous calculation period; and


•	we assume no transferability of liquidity from non-EU entities other than to the extent currently permitted.

Net stable funding ratio

HSBC uses the NSFR as a basis for establishing stable funding around the Group. The NSFR requires institutions to maintain sufficient stable funding and reflects a bank’s long-term funding profile (funding with a term of more than one year).

Liquid assets of HSBC’s principal operating entities

Liquid assets are held and managed on a stand-alone operating entity basis. Most are held directly by each operating entity’s BSM department, primarily for the purpose of managing liquidity risk in line with the LFRF.

The liquid asset buffer may also include securities in held-to maturity portfolios. To qualify as part of the liquid asset buffer, held-to-maturity portfolios must have a deep and liquid repo market in the underlying security. Liquid assets also include any unencumbered liquid assets held outside BSM departments for any other purpose. The LFRF gives ultimate control of all unencumbered assets and sources of liquidity to BSM.

Overall adequacy of liquidity risk management at HSBC

All operating entities are required to manage liquidity risk and funding risks on a standalone basis in accordance with the LFRF, which includes the preparation of an Internal Liquidity Adequacy Assessment (ILAA) document, in order to ensure that:


•	liquidity resources are adequate, both as to the amount and quality;


•	there is no significant risk that liabilities cannot be met as they fall due;


•	a prudent structural funding profile is maintained;


•	adequate liquidity resources continue to be maintained; and


•	the operating entity’s liquidity risk framework is adequate and robust.

The key objectives of the ILAA process are to:


1.	demonstrate that all material liquidity and funding risks are captured within the internal framework;


2.	validate the operating entity's risk tolerance/appetite by demonstrating that reverse stress testing scenarios are acceptably remote and vulnerabilities have been assessed through the use of severe stress scenarios; and


3.	provide review and challenge of the operating entity’s ILAAP.

The final conclusion of the Group ILAAP, approved by the Board of Directors, is that each operating entity:


•	maintains liquidity resources which are adequate in both amount and quality at all times, and ensures that there is no significant risk that its liabilities cannot be met as they fall due; and


•	ensures its liquidity resources contain an adequate amount of HQLA and maintains a prudent funding profile.

HSBC’s business strategy and overall liquidity risk profile

The key aspects of the internal Liquidity and Funding Risk Framework which is used to ensure that HSBC maintains an appropriate overall liquidity risk profile are:


•	stand-alone management of liquidity and funding by operating entity;


•	operating entity classification by inherent liquidity risk (‘ILR’) categorisation;


•	minimum LCR requirement depending on ILR categorisation;


•	minimum NSFR requirement depending on ILR categorisation;


•	legal entity depositor concentration limit;


•	three-month and 12-month cumulative rolling term contractual maturity limits covering deposits from banks, deposits from non-bank financial institutions and securities issued;


•	annual individual liquidity adequacy assessment by principal operating entity;


•	minimum LCR requirement by currency;


•	intra-day liquidity;


•	liquidity funds transfer pricing; and


•	forward-looking funding assessments.

The internal LFRF and the risk tolerance limits were approved by the RMM and the Board on the basis of recommendations made by the Group Risk Committee.

Concentration of funding and liquidity sources

Depositor concentration and term funding maturity concentration

The LCR and NSFR metrics assume a stressed outflow based on a portfolio of depositors within retail, corporate and financial deposit segments. The validity of these assumptions is challenged if the portfolio of depositors is not large enough to avoid depositor concentration.

Operating entities are exposed to term re-financing concentration risk if the current maturity profile results in future maturities being overly concentrated in any defined period.

At 31 December 2017, all principal operating entities were within the risk tolerance levels set for depositor concentration and term funding maturity concentration. These risk tolerances were established by the Board and are applicable under the LFRF.

Currency mismatch in the LCR

In times of stress it cannot automatically be assumed that one currency can always be converted for another, even if those currencies are ‘hard’ currencies. LCR must therefore be assessed by currency, if the currency is material.

In some currencies, convertibility is restricted by regulators and central banks and this restriction results in local currency not being convertible offshore or even onshore.

In the vast majority of cases, the only way to convert currencies for funding purposes is via deliverable foreign exchange (FX) swaps and, to a lesser extent, cross-currency repo. Access to FX Swaps markets can be impacted by both market wide stress and idiosyncratic stress. Idiosyncratic stress arises from the fact that settlement of the two currency legs occurs at different times during the day, exposing the counterparty who has to settle (pay) first to intra-day credit risk on the entire principal amount, until the other counterparty pays the other currency; this is often referred to as ‘Herstatt Risk’.

The Group’s internal liquidity and funding risk management framework requires all operating entities to monitor single currency LCR. Limits are set in consultation with Group Treasury and approved by Group Treasury before being approved by local ALCO.

Liquidity management across HSBC

The structure of the Group means that liquidity and funding risk cannot practically be managed on a consolidated group basis and can only be managed by entity on a standalone basis. The Group’s liquidity and funding risk framework requires all operating entities to manage liquidity and funding risk on a standalone basis in accordance with the Group’s liquidity and funding risk management framework and the liquidity and funding risk tolerances set out in the Group RAS.

The Group’s internal liquidity and funding risk management framework does not therefore seek to manage liquidity and funding risk on a consolidated basis, other than to ensure that the position of the consolidated group meets the minimum regulatory requirements.

Liquid assets of HSBC’s principal operating entities

The unweighted liquidity value of assets categorised as liquid for HSBC’s principal operating entities is shown on page 102 of the Annual Report and Accounts 2017. This information is used for the purposes of calculating the LCR metric for the Group for which the weighted value of assets is shown in the table on the following page. This reflects the stock of unencumbered liquid assets at the reporting date, using the regulatory definition of liquid assets. The amount recognised by entity at the Group level is different from the amount recognised at a solo entity level, reflecting where liquidity cannot be freely transferred across HSBC.



Table 47: Level and components of HSBC Group Consolidated Liquidity Coverage Ratio
	Quarter ended 31 Dec 2017		Quarter ended 30 Sep 2017		Quarter ended 30 Jun 2017		Quarter ended 31 Mar 2017
	Total unweighted value	Total weighted value	Total unweighted value	Total weighted value	Total unweighted value	Total weighted value	Total unweighted value	Total weighted value
	$m	$m	$m	$m	$m	$m	$m	$m
Number of data points used in the calculation of averages	3		3		3		3
High quality liquid assets
Total high quality liquid assets (‘HQLA’)		517,539		491,993		461,074		440,755
Cash outflows
Retail deposits and small business funding	735,610	76,538	728,622	78,081	707,290	76,109	690,079	75,019
– of which:
stable deposits	282,723	13,976	234,705	11,566	231,742	11,433	221,561	10,924
less stable deposits	452,723	13,976	493,789	66,471	475,426	64,628	468,421	64,059
Unsecured wholesale funding	604,978	284,915	575,907	279,390	536,702	259,791	529,712	257,435
– operational deposits (all counterparties) and deposits in networks of cooperative banks	185,044	44,247	171,692	41,716	154,851	37,621	150,995	36,679
– non-operational deposits (all counterparties)	406,011	226,745	391,621	225,080	370,645	210,964	366,668	208,707
– unsecured debt	13,923	13,923	12,594	12,594	11,206	11,206	12,049	12,049
Secured wholesale funding		14,241		10,459		10,355		9,122
Additional requirements	298,207	89,605	296,919	91,164	285,983	85,095	274,957	76,835
– outflows related to derivative exposures and other collateral requirements	43,816	42,518	43,647	42,842	39,769	39,369	31,952	31,719
– outflows related to loss of funding on debt products	—	—	—	—	—	—	—	—
– credit and liquidity facilities	254,391	47,087	253,272	48,322	246,214	45,726	243,005	45,116
Other contractual funding obligations	92,239	40,551	79,111	41,054	66,281	30,465	71,119	36,993
Other contingent funding obligations	358,034	12,850	348,084	12,921	316,534	10,898	274,248	9,729
Total cash outflows		518,700		513,069		472,713		465,133
Cash inflows
Secured lending transactions (including reverse repos)	253,643	42,238	234,393	31,476	240,805	30,045	221,491	25,522
Inflows from fully performing exposures	111,306	81,653	104,485	78,836	98,880	74,419	96,923	73,592
Other cash inflows	77,731	46,905	83,233	51,245	72,131	42,282	70,609	45,226
(Difference between total weighted inflows and total weighted outflows arising from transactions in third countries where there are transfer restrictions or which are denominated in non-convertible currencies)		—		—		—		—
(Excess inflows from a related specialised credit institution)		—		—		—
Total cash inflows	442,680	170,796	422,111	161,557	411,816	146,746	389,023	144,340
Fully exempt inflows	—	—	—	—	—	—	—	—
Inflows Subject to 90% Cap	—	—	—	—	—	—	—	—
Inflows Subject to 75% Cap	412,897	170,796	416,462	161,557	406,669	146,746	384,822	144,340
Liquidity coverage ratio (Adjusted value)
Liquidity Buffer		517,539		491,993		461,074		440,755
Total net cash outflows		347,904		351,512		325,967		320,793
Liquidity coverage ratio (%)		148.8%		140.0%		141.5%		137.4%

Analysis of on-balance sheet encumbered and unencumbered assets and off-balance sheet collateral

On-balance sheet encumbered and unencumbered assets

The following table, summarises the total on-balance sheet assets capable of supporting future funding and collateral needs, and shows the extent to which they are currently pledged for this purpose. This disclosure aims to facilitate an understanding of available and unrestricted assets that could be used to support potential future funding and collateral needs.

Under ‘Off-balance sheet collateral’ below we discuss the off-balance sheet collateral received and re-pledged, and the level of available unencumbered off-balance sheet collateral.

Off-balance sheet collateral

The fair value of assets accepted as collateral that we are permitted to sell or repledge in the absence of default was $409bn at 31 December 2017 (2016: $269bn). The fair value of any such collateral actually sold or repledged was $242bn (2016: $157bn). We are obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard reverse repo, stock borrowing and derivative transactions.

The fair value of collateral received and re-pledged in relation to reverse repos, stock borrowing and derivatives is reported on a gross basis. The related balance sheet receivables and payables are reported on a net basis where required under IFRS offset criteria. As a consequence of reverse repo, stock borrowing and derivative transactions where the collateral received could be sold or re-pledged but had not been, we held $166bn (2016: $112bn) of unencumbered collateral available to support potential future funding and collateral needs at 31 December 2017.

Under the terms of our current collateral obligations under derivative contracts (which are ISDA compliant CSA contracts and contracts entered into for pension obligations), and based on an estimate of the positions at 31 December 2017, we calculate that we could be required to post additional collateral of up to $0.3bn (2016: $0.3bn) in the event of a one-notch downgrade in third-party agencies’ credit rating of HSBC’s debt. This would increase to $0.5bn (2016: $0.8bn) in the event of a two-notch downgrade.

For further details on liquidity and funding risk management, see page 113 onwards of the Annual Report and Accounts 2017.



Table 48: Analysis of on-balance sheet encumbered and unencumbered assets
	Assets encumbered as a result of transactions with counterparties other than central banks			Assets positioned at central banks (i.e. pre-positioned plus encumbered)	Unencumbered assets not positioned at central banks				Total
	As a result of covered bonds	As a result of securitisations	Other		Assets readily available for encumbrance	Other assets capable of being encumbered	Reverse repos/stock borrowing receivables and derivative assets	Assets that cannot be encumbered	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m
Cash and balances at central banks	—	—	7	128	172,567	206	—	7,716	180,624
Items in the course of collection from other banks	—	—	—	—	—	—	—	6,628	6,628
Hong Kong Government certificates of indebtedness	—	—	—	—	—	—	—	34,186	34,186
Trading assets	—	—	93,867	4,630	143,811	10,234	17,120	18,333	287,995
– treasury and other eligible bills	—	—	2,017	4,210	11,233	71	—	2	17,533
– debt securities	—	—	36,367	420	69,934	657	—	108	107,486
– equity securities	—	—	33,209	—	62,644	3,407	—	—	99,260
– loans and advances to banks	—	—	8,215	—	—	2,430	7,611	7,799	26,055
– loans and advances to customers	—	—	14,059	—	—	3,669	9,509	10,424	37,661
Financial assets designated at fair value	—	—	—	—	1,331	64	—	28,069	29,464
– treasury and other eligible bills	—	—	—	—	540	—	—	65	605
– debt securities	—	—	—	—	447	—	—	3,644	4,091
– equity securities	—	—	—	—	344	64	—	24,352	24,760
– loans and advances to banks and customers	—	—	—	—	—	—	—	8	8
Derivatives	—	—	—	—	—	—	219,818	—	219,818
Loans and advances to banks	—	—	3,599	5,699	1,906	56,542	1,160	21,487	90,393
Loans and advances to customers	4,990	8,296	7,851	69,768	11,923	834,177	3,719	22,240	962,964
Reverse repurchase agreements – non-trading	—	—	—	—	—	—	201,553	—	201,553
Financial investments	—	44	26,772	22,285	264,587	8,815	—	66,573	389,076
– treasury and other eligible bills	—	—	315	3,848	73,098	1,297	—	292	78,850
– debt securities	—	44	26,457	18,437	190,119	5,951	—	65,300	306,308
– equity securities	—	—	—	—	1,370	1,567	—	981	3,918
Prepayments, accrued income and other assets	—	—	2,876	—	5,527	25,647	—	33,141	67,191
Current tax assets	—	—	—	—	—	—	—	1,006	1,006
Interest in associates and joint ventures	—	—	310	—	55	22,101	—	278	22,744
Goodwill and intangible assets	—	—	—	—	—	—	—	23,453	23,453
Deferred tax	—	—	—	—	—	—	—	4,676	4,676
At 31 Dec 2017	4,990	8,340	135,282	102,510	601,707	957,786	443,370	267,786	2,521,771



Table 48: Analysis of on-balance sheet encumbered and unencumbered assets (continued)
	Assets encumbered as a result of transactions with counterparties other than central banks			Assets positioned at central banks (i.e. pre- positioned plus encumbered)	Unencumbered assets not positioned at central banks				Total
	As a result of covered bonds	As a result of securitisations	Other		Assets readily available for encumbrance	Other assets capable of being encumbered	Reverse repos/stock borrowing receivables and derivative assets	Assets that cannot be encumbered	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m
Cash and balances at central banks	—	—	10	82	123,363	326	—	4,228	128,009
Items in the course of collection from other banks	—	—	—	—	—	—	—	5,003	5,003
Hong Kong Government certificates of indebtedness	—	—	—	—	—	—	—	31,228	31,228
Trading assets	—	—	62,962	2,504	131,420	7,419	10,207	20,613	235,125
– treasury and other eligible bills	—	—	981	2,150	11,309	11	—	—	14,451
– debt securities	—	—	34,144	354	59,231	318	—	7	94,054
– equity securities	—	—	2,645	—	59,394	1,565	—	—	63,604
– loans and advances to banks	—	—	10,532	—	1,331	1,910	5,386	5,610	24,769
– loans and advances to customers	—	—	14,660	0	155	3,615	4,821	14,996	38,247
Financial assets designated at fair value	—	—	—	—	835	20	—	23,901	24,756
– treasury and other eligible bills	—	—	—	—	150	—	—	54	204
– debt securities	—	—	—	—	442	0	—	3,747	4,189
– equity securities	—	—	—	—	243	20	—	20,021	20,284
– loans and advances to banks and customers	—	—	—	—	0	—	—	79	79
Derivatives	—	—	—	—	—	—	290,872	—	290,872
Loans and advances to banks	—	1	3,903	6,719	2,051	50,824	2,045	22,583	88,126
Loans and advances to customers	6,258	8,365	10,425	67,208	15,941	732,242	4,027	17,038	861,504
Reverse repurchase agreements – non-trading	—	—	—	—	—	—	160,974	—	160,974
Financial investments	—	—	16,537	17,983	331,154	10,765	—	60,358	436,797
– treasury and other eligible bills	—	—	537	3,766	93,566	1,143	—	214	99,226
– debt securities	—	—	16,000	14,217	236,003	7,904	—	58,780	332,904
– equity securities	—	—	0	—	1,585	1,718	—	1,364	4,667
Prepayments, accrued income and other assets	—	—	2,358	—	8,368	27,099	—	26,084	63,909
Current tax assets	—	—	—	—	—	—	—	1,145	1,145
Interest in associates and joint ventures	—	—	345	—	62	19,329	—	293	20,029
Goodwill and intangible assets	—	—	—	—	—	—	—	21,346	21,346
Deferred tax	—	—	—	—	—	—	—	6,163	6,163
At 31 Dec 2016	6,258	8,366	96,540	94,496	613,194	848,024	468,125	239,983	2,374,986

Reputational risk

Reputational risk is the risk of failing to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by HSBC, our employees or those with whom we are associated. This might cause stakeholders to form a negative view of the Group and result in financial or non-financial effects or loss of confidence in the Group. Reputational risk relates to stakeholders’ perceptions, whether fact-based or otherwise. Stakeholders’ expectations change constantly and so reputational risk is dynamic and varies between geographical regions, groups and individuals. We have an unwavering commitment to operating at the high standards we set for ourselves in every jurisdiction. Any material lapse in standards of integrity, compliance, customer service or operating efficiency may represent a potential reputational risk.

For further details of our reputational risk management, see page 119 of the Annual Report and Accounts 2017.

Sustainability risk

Sustainability risk arises from the provision of financial services to companies or projects which indirectly result in unacceptable impacts on people or on the environment.

Sustainability risk is:


•	measured by assessing the potential sustainability effect of a customer’s activities and assigning a Sustainability Risk Rating to all high-risk transactions;


•	monitored quarterly by the RMM and monthly by the Group’s Sustainability Risk function; and


•	managed using sustainability risk policies covering project finance lending and sector-based sustainability policies for sectors and themes with potentially large environmental or social impacts.

For further details on sustainability risk management, see page 120 of the Annual Report and Accounts 2017.

Business risk

The PRA specifies that banks, as part of their ICAAP, should review their exposure to business risk.

Business risk is the potential negative effect on profits and capital from the Group not meeting our strategic objectives, as a result of unforeseen changes in the business and regulatory environment, exposure to economic cycles and technological changes.

We manage and mitigate business risk through our risk appetite, business planning and stress testing processes, so that our business model and planned activities are monitored, resourced and capitalised consistent with the commercial, economic and risk environment in which the Group operates, and that any potential vulnerabilities of our business plans are identified at an early stage so that mitigating actions can be taken.

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 which provides protection against dilution risk.

Remuneration

The Group’s remuneration policy, including the remuneration committee membership and activities, remuneration strategy, and tables showing remuneration details of HSBC’s Identified Staff and Material Risk Takers, is set out in the Directors’ Remuneration Report on page 141 of the Annual Report and Accounts 2017. An overview of our Group remuneration policy is available on our website (http://www.hsbc.com/our-approach/remuneration).



Table 50.a: PD, LGD, RWA and exposure by country – wholesale IRB advanced approach all asset classes¹²
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	2.15	36.0	91.8	181.0
– France	1.88	30.2	15.2	34.7
– Germany	0.16	41.6	0.3	1.5
– Switzerland	0.02	43.6	0.5	8.1
Asia
– Hong Kong	0.67	40.3	86.0	291.8
– Australia	0.67	43.6	9.1	24.9
– India	0.75	54.3	8.4	18.3
– Indonesia	4.40	58.5	5.5	6.4
– Mainland China	0.70	48.8	28.5	76.9
– Malaysia	1.00	47.4	6.9	15.6
– Singapore	0.49	42.0	10.2	40.5
– Taiwan	0.16	47.8	3.0	15.9
Middle East and North Africa
– Egypt	2.78	44.9	2.8	3.5
– Turkey	0.40	45.1	0.5	1.1
– UAE	0.09	38.7	1.5	9.1
North America
– US	1.27	34.5	44.7	130.1
– Canada	1.38	34.5	21.6	53.7
Latin America
– Argentina	1.66	45.1	1.5	1.5
– Mexico	0.19	44.5	4.3	9.0

At 31 Dec 2016
Europe
– UK	2.18	35.4	79.6	170.9
– France	2.98	30.5	12.6	28.7
– Germany	0.24	42.1	0.3	1.1
– Switzerland	0.02	43.7	0.7	13.0
Asia
– Hong Kong	0.73	41.1	80.6	285.8
– Australia	0.81	43.1	7.6	20.7
– India	1.15	55.0	8.4	17.8
– Indonesia	7.46	52.7	4.8	6.2
– Mainland China	0.87	48.1	25.2	67.4
– Malaysia	1.09	46.7	6.1	13.2
– Singapore	0.70	42.3	9.2	35.6
– Taiwan	0.19	48.0	3.0	15.2
Middle East and North Africa
– Egypt	2.25	45.0	2.7	3.1
– Turkey	0.37	45.1	0.5	1.2
– UAE	0.14	36.6	1.8	11.2
North America
– US	1.51	35.7	50.8	144.1
– Canada	1.89	33.7	20.9	50.6
Latin America
– Argentina	2.25	45.3	1.6	1.5
– Mexico	0.90	44.5	2.6	7.0



Table 50.b: PD, LGD, RWA and exposure by country – wholesale IRB advanced approach central governments and central banks
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	0.03	44.1	2.0	18.0
– France	0.02	45.0	0.2	1.7
– Germany	0.04	45.0	0.1	0.5
– Switzerland	0.01	45.0	0.3	6.8
Asia
– Hong Kong	0.01	44.5	4.6	89.8
– Australia	0.01	45.0	0.4	6.6
– India	0.07	45.0	1.4	6.8
– Indonesia	0.20	45.0	0.6	1.9
– Mainland China	0.02	45.0	2.1	29.0
– Malaysia	0.04	45.0	0.7	4.9
– Singapore	0.01	45.0	0.7	15.8
– Taiwan	0.02	45.0	0.6	10.1
Middle East and North Africa
– Egypt	2.25	45.0	2.3	2.2
– Turkey	0.42	45.0	0.5	0.9
– UAE	0.04	44.6	0.7	6.0
North America
– US	0.01	33.4	3.2	42.8
– Canada	0.02	33.2	1.8	15.9
Latin America
– Argentina	1.65	45.0	1.4	1.4
– Mexico	0.16	45.0	3.8	8.1

At 31 Dec 2016
Europe
– UK	0.04	44.6	2.5	20.1
– France	0.06	45.0	0.2	1.8
– Germany	0.05	45.0	0.1	0.5
– Switzerland	0.01	45.0	0.5	11.7
Asia
– Hong Kong	0.01	44.5	5.5	111.9
– Australia	0.01	45.0	0.3	5.9
– India	0.07	45.0	1.4	6.1
– Indonesia	0.17	45.0	0.5	1.8
– Mainland China	0.02	45.0	1.9	26.1
– Malaysia	0.04	45.0	0.7	5.2
– Singapore	0.01	45.0	0.7	14.3
– Taiwan	0.02	45.0	0.5	8.9
Middle East and North Africa
– Egypt	2.95	45.0	2.4	2.2
– Turkey	0.44	45.0	0.4	0.8
– UAE	0.14	44.6	0.8	6.0
North America
– US	0.01	37.6	3.9	53.6
– Canada	0.02	31.4	2.1	16.6
Latin America
– Argentina	2.23	45.0	1.5	1.5
– Mexico	0.08	45.0	2.2	6.2



Table 50.c: PD, LGD, RWA and exposure by country – wholesale IRB advanced approach institutions
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	0.21	37.4	3.5	12.1
– France	0.17	38.9	0.5	1.7
– Germany	0.13	39.4	0.2	0.9
– Switzerland	0.06	35.1	0.2	1.2
Asia
– Hong Kong	0.06	42.1	5.4	36.1
– Australia	0.07	41.8	0.5	2.6
– India	0.17	45.0	0.3	1.1
– Indonesia	0.43	49.7	—	0.1
– Mainland China	0.14	46.4	2.0	8.0
– Malaysia	0.18	47.5	0.5	1.8
– Singapore	0.12	42.0	0.6	3.6
– Taiwan	0.06	45.0	—	0.2
Middle East and North Africa
– Egypt	0.08	45.0	0.2	0.9
– Turkey	0.11	45.2	—	0.2
– UAE	0.18	45.3	0.3	0.8
North America
– US	0.11	44.6	1.4	6.9
– Canada	0.04	22.8	0.3	3.5
Latin America
– Argentina	—	—	—	—
– Mexico	0.45	45.0	0.3	0.6

At 31 Dec 2016
Europe
– UK	0.24	31.6	2.2	10.4
– France	0.17	41.3	0.6	1.6
– Germany	0.16	39.0	0.1	0.5
– Switzerland	0.04	32.1	0.2	1.3
Asia
– Hong Kong	0.06	42.2	4.9	30.9
– Australia	0.05	41.0	0.5	2.8
– India	0.26	45.0	0.3	0.8
– Indonesia	—	—	—	—
– Mainland China	0.12	45.2	1.8	8.1
– Malaysia	0.38	48.5	0.4	0.9
– Singapore	0.08	43.9	0.7	4.9
– Taiwan	0.10	45.0	0.1	0.3
Middle East and North Africa
– Egypt	0.08	45.0	0.1	0.3
– Turkey	0.07	45.0	—	0.3
– UAE	0.08	45.4	0.2	0.9
North America
– US	0.31	42.4	1.0	2.5
– Canada	0.04	21.6	0.3	2.6
Latin America
– Argentina	0.06	45.0	—	—
– Mexico	0.50	45.0	0.3	0.4



Table 50.d: PD, LGD, RWA and exposure by country – wholesale IRB advanced approach corporates¹
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value¹
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	2.56	34.9	86.3	150.9
– France	2.07	28.9	14.5	31.3
– Germany	1.82	45.0	—	0.1
– Switzerland	0.04	45.0	—	0.1
Asia
– Hong Kong	1.15	37.6	76.0	165.9
– Australia	1.06	43.3	8.2	15.7
– India	1.25	61.4	6.7	10.4
– Indonesia	6.33	64.6	4.9	4.4
– Mainland China	1.30	52.0	24.4	39.9
– Malaysia	1.69	48.7	5.7	8.9
– Singapore	0.92	39.7	8.9	21.1
– Taiwan	0.42	53.0	2.4	5.6
Middle East and North Africa
– Egypt	11.63	44.5	0.3	0.4
– Turkey	0.00	0.0	—	—
– UAE	0.21	20.9	0.5	2.3
North America
– US	2.04	34.1	40.1	80.4
– Canada	2.15	36.3	19.5	34.3
Latin America
– Argentina	1.95	46.7	0.1	0.1
– Mexico	0.65	29.2	0.2	0.3

At 31 Dec 2016
Europe
– UK	2.63	34.3	74.9	140.4
– France	3.36	28.8	11.8	25.3
– Germany	2.71	45.4	0.1	0.1
– Switzerland	—	—	—	—
Asia
– Hong Kong	1.43	38.1	70.2	143.0
– Australia	1.38	42.7	6.8	12.0
– India	1.82	61.3	6.7	10.9
– Indonesia	10.48	55.8	4.3	4.4
– Mainland China	1.71	51.3	21.5	33.2
– Malaysia	1.94	47.7	5.0	7.1
– Singapore	1.49	39.5	7.8	16.4
– Taiwan	0.45	52.7	2.4	6.0
Middle East and North Africa
– Egypt	0.64	44.9	0.2	0.6
– Turkey	0.77	46.2	0.1	0.1
– UAE	0.16	23.9	0.8	4.3
North America
– US	2.45	34.4	45.9	88.0
– Canada	3.02	35.9	18.5	31.4
Latin America
– Argentina	3.10	59.2	0.1	—
– Mexico	15.62	34.7	0.1	0.4



Table 50.e: PD, LGD, RWA and exposure by country – wholesale IRB foundation approach all asset classes
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	2.90	40.8	5.8	9.8
– France	3.22	45.0	0.4	0.4
– Germany	1.37	44.9	11.1	18.4
– Switzerland	—	—	—	—
Asia
– Hong Kong	—	—	—	—
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	4.50	44.8	7.9	12.3
North America
– US	—	—	—	—
– Canada	—	—	—	—
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—

At 31 Dec 2016
Europe
– UK	1.94	41.3	4.4	8.2
– France	4.30	45.0	0.2	0.3
– Germany	0.90	44.8	10.1	15.6
– Switzerland	—	—	—	—
Asia
– Hong Kong	—	—	—	—
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	3.72	44.2	7.8	12.8
North America
– US	—	—	—	—
– Canada	—	—	—	—
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—



Table 50.f: PD, LGD, RWA and exposure by country – wholesale IRB foundation approach central governments and central banks
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	—	—	—	—
– France	—	—	—	—
– Germany	—	—	—	—
– Switzerland	—	—	—	—
Asia
– Hong Kong	—	—	—	—
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	0.05	45.0	—	0.1
North America
– US	—	—	—	—
– Canada	—	—	—	—
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—

At 31 Dec 2016
Europe
– UK	—	—	—	—
– France	—	—	—	—
– Germany	—	—	—	—
– Switzerland	—	—	—	—
Asia
– Hong Kong	—	—	—	—
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	0.04	45.0	—	0.1
North America
– US	—	—	—	—
– Canada	—	—	—	—
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—



Table 50.g: PD, LGD, RWA and exposure by country – wholesale IRB foundation approach institutions
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	—	—	—	—
– France	—	—	—	—
– Germany	—	—	—	—
– Switzerland	—	—	—	—
Asia
– Hong Kong	—	—	—	—
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	0.11	45.0	0.1	0.2
North America
– US	—	—	—	—
– Canada	—	—	—	—
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—

At 31 Dec 2016
Europe
– UK	—	—	—	—
– France	—	—	—	—
– Germany	—	—	—	—
– Switzerland	—	—	—	—
Asia
– Hong Kong	—	—	—	—
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	0.28	45.0	0.1	0.2
North America
– US	—	—	—	—
– Canada	—	—	—	—
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—



Table 50.h: PD, LGD, RWA and exposure by country – wholesale IRB foundation approach corporates
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	2.90	40.8	5.8	9.8
– France	3.22	45.0	0.4	0.4
– Germany	1.37	44.9	11.1	18.4
– Switzerland	—	—	—	—
Asia
– Hong Kong	—	—	—	—
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	4.60	44.8	7.8	12.0
North America
– US	—	—	—	—
– Canada	—	—	—	—
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—

At 31 Dec 2016
Europe
– UK	1.94	41.3	4.4	8.2
– France	4.30	45.0	0.2	0.3
– Germany	0.91	44.8	10.1	15.6
– Switzerland	—	—	—	—
Asia
– Hong Kong	—	—	—	—
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	3.81	44.2	7.7	12.5
North America
– US	—	—	—	—
– Canada	—	—	—	—
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—



Table 50.i: PD, LGD, RWA and exposure by country – retail IRB approach all asset classes
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	1.48	30.9	23.8	180.7
– France	4.35	14.0	3.5	26.3
– Germany	—	—	—	—
– Switzerland	0.74	2.0	0.1	6.7
Asia
– Hong Kong	0.79	38.5	22.7	111.8
– Australia	0.91	10.4	0.9	14.1
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	4.56	11.8	1.3	5.0
– Singapore	0.91	21.8	1.1	6.3
– Taiwan	1.33	11.7	0.7	4.9
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	—	—	—	—
North America
– US	5.33	63.3	9.1	21.9
– Canada	0.80	19.4	2.4	22.0
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—

At 31 Dec 2016
Europe
– UK	1.58	30.5	18.6	155.8
– France	5.06	14.6	2.8	22.7
– Germany	—	—	—	—
– Switzerland	0.73	2.2	0.2	8.1
Asia
– Hong Kong	0.87	39.2	20.2	102.3
– Australia	0.90	10.6	0.7	11.6
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	4.05	12.1	1.0	4.5
– Singapore	0.75	22.3	1.1	6.7
– Taiwan	1.20	11.5	0.5	4.1
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	—	—	—	—
North America
– US	9.67	67.3	18.5	29.8
– Canada	0.96	19.2	2.4	18.7
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—




Table 50.j: PD, LGD, RWA and exposure by country – retail IRB approach – retail secured by mortgages on immovable property non-SME
		Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
	At 31 Dec 2017	%	%	$bn	$bn
	Europe
	– UK	1.20	13.2	6.5	134.4
	– France	6.27	14.0	0.7	3.7
	– Germany	—	—	—	—
	– Switzerland	—	—	—	—
	Asia
	– Hong Kong	0.65	10.0	12.7	69.2
	– Australia	0.91	10.4	0.9	14.1
	– India	—	—	—	—
	– Indonesia	—	—	—	—
	– Mainland China	—	—	—	—
	– Malaysia	4.56	11.8	1.3	5.0
	– Singapore	0.91	21.8	1.1	6.3
	– Taiwan	1.33	11.7	0.7	4.9
	Middle East and North Africa
	– Egypt	—	—	—	—
	– Turkey	—	—	—	—
	– UAE	—	—	—	—
	North America
	– US	6.16	54.7	7.5	17.1
	– Canada	0.69	17.6	1.9	20.1
	Latin America
	– Argentina	—	—	—	—
	– Mexico	—	—	—	—

	At 31 Dec 2016
	Europe
	– UK	1.33	12.2	5.4	114.9
	– France	6.82	14.0	0.6	3.5
	– Germany	—	—	—	—
	– Switzerland	—	—	—	—
	Asia
	– Hong Kong	0.69	10.0	10.7	62.5
	– Australia	0.90	10.6	0.7	11.6
	– India	—	—	—	—
	– Indonesia	—	—	—	—
	– Mainland China	—	—	—	—
	– Malaysia	4.05	12.1	1.0	4.5
	– Singapore	0.75	22.3	1.1	6.7
	– Taiwan	1.20	11.5	0.5	4.1
	Middle East and North Africa
	– Egypt	—	—	—	—
	– Turkey	—	—	—	—
	– UAE	—	—	—	—
	North America
	– US	11.01	59.5	14.6	23.3
	– Canada	0.85	17.2	1.9	16.7
	Latin America
	– Argentina	—	—	—	—
	– Mexico	—	—	—	—



Table 50.k: PD, LGD, RWA and exposure by country – retail IRB approach retail secured by mortgages on immovable property SME
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	—	—	—	—
– France	7.71	25.8	0.4	0.6
– Germany	—	—	—	—
– Switzerland	—	—	—	—
Asia
– Hong Kong	0.77	11.4	—	0.6
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	—	—	—	—
North America
– US	—	—	—	—
– Canada	2.10	28.5	0.1	0.3
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—

At 31 Dec 2016
Europe
– UK	—	—	—	—
– France	7.70	25.8	0.2	0.6
– Germany	—	—	—	—
– Switzerland	—	—	—	—
Asia
– Hong Kong	0.89	11.7	—	0.6
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	—	—	—	—
North America
– US	—	—	—	—
– Canada	2.10	29.6	0.1	0.3
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—



Table 50.l: PD, LGD, RWA and exposure by country – retail IRB approach retail QRRE
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	1.26	85.8	6.8	31.4
– France	—	—	—	—
– Germany	—	—	—	—
– Switzerland	—	—	—	—
Asia
– Hong Kong	1.01	100.2	8.1	34.0
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	—	—	—	—
North America
– US	1.39	93.6	0.9	3.5
– Canada	2.51	64.4	0.1	0.3
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—

At 31 Dec 2016
Europe
– UK	1.14	85.5	5.4	28.0
– France	—	—	—	—
– Germany	—	—	—	—
– Switzerland	—	—	—	—
Asia
– Hong Kong	1.10	100.0	8.1	32.2
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	—	—	—	—
North America
– US	1.49	93.6	1.0	3.4
– Canada	2.72	60.7	0.1	0.3
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—



Table 50.m: PD, LGD, RWA and exposure by country – retail IRB approach other SME
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	6.82	67.7	5.0	6.8
– France	19.77	30.4	0.8	2.3
– Germany	—	—	—	—
– Switzerland	—	—	—	—
Asia
– Hong Kong	0.17	15.9	—	0.1
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	—	—	—	—
North America
– US	—	—	—	—
– Canada	5.44	45.5	0.1	0.2
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—

At 31 Dec 2016
Europe
– UK	7.71	66.6	3.8	6.1
– France	20.34	30.6	0.7	2.3
– Germany	—	—	—	—
– Switzerland	—	—	—	—
Asia
– Hong Kong	0.10	11.3	—	0.1
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	—	—	—	—
North America
– US	—	—	—	—
– Canada	4.33	48.4	0.1	0.2
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—



Table 50.n: PD, LGD, RWA and exposure by country – retail IRB approach other non-SME
	Exposure- weighted average PD	Exposure- weighted average LGD	RWAs	Exposure value
At 31 Dec 2017	%	%	$bn	$bn
Europe
– UK	2.44	80.6	5.5	8.1
– France	2.09	11.8	1.6	19.7
– Germany	—	—	—	—
– Jersey	—	—	—	—
– Switzerland	0.74	2.0	0.1	6.7
Asia
– Hong Kong	1.15	24.2	1.9	7.9
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	—	—	—	—
North America
– US	4.88	96.6	0.7	1.3
– Canada	1.06	30.8	0.2	1.1
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—

At 31 Dec 2016
Europe
– UK	2.05	81.8	4.0	6.8
– France	2.46	12.1	1.3	16.3
– Germany	—	—	—	—
– Jersey	0.52	2.6	—	1.1
– Switzerland	0.73	2.2	0.2	8.1
Asia
– Hong Kong	1.37	21.2	1.4	6.9
– Australia	—	—	—	—
– India	—	—	—	—
– Indonesia	—	—	—	—
– Mainland China	—	—	—	—
– Malaysia	—	—	—	—
– Singapore	—	—	—	—
– Taiwan	—	—	—	—
Middle East and North Africa
– Egypt	—	—	—	—
– Turkey	—	—	—	—
– UAE	—	—	—	—
North America
– US	8.66	96.5	2.9	3.1
– Canada	1.03	28.3	0.2	1.2
Latin America
– Argentina	—	—	—	—
– Mexico	—	—	—	—



Table 51: Retail IRB exposure – by internal PD band
	PD range	Average net carrying values¹	Undrawn commitments
	%	$bn	$bn
At 31 Dec 2017
Secured by mortgages on immovable property
SME		1.5	—
Band 1	0.000 to 0.483	0.6	—
Band 2	0.484 to 1.022	0.2	—
Band 3	1.023 to 4.914	0.4	—
Band 4	4.915 to 8.860	0.2	—
Band 5	8.861 to 15.000	0.1	—
Band 6	15.001 to 50.000	—	—
Band 7	50.001 to 100.000	—	—
Secured by mortgages on immovable property
Non-SME		260.5	18.6
Band 1	0.000 to 0.483	213.0	16.9
Band 2	0.484 to 1.022	21.2	0.9
Band 3	1.023 to 4.914	18.2	0.7
Band 4	4.915 to 8.860	3.0	—
Band 5	8.861 to 15.000	0.5	—
Band 6	15.001 to 50.000	1.5	0.1
Band 7	50.001 to 100.000	3.1	—
Qualifying revolving retail exposures		120.2	104.7
Band 1	0.000 to 0.483	96.2	91.2
Band 2	0.484 to 1.022	10.3	7.1
Band 3	1.023 to 4.914	11.1	5.6
Band 4	4.915 to 8.860	1.4	0.5
Band 5	8.861 to 15.000	0.4	0.1
Band 6	15.001 to 50.000	0.5	0.1
Band 7	50.001 to 100.000	0.3	0.1
Other SME		10.2	4.2
Band 1	0.000 to 0.483	1.3	0.8
Band 2	0.484 to 1.022	1.8	0.9
Band 3	1.023 to 4.914	4.9	1.9
Band 4	4.915 to 8.860	1.1	0.3
Band 5	8.861 to 15.000	0.5	0.1
Band 6	15.001 to 50.000	0.2	0.1
Band 7	50.001 to 100.000	0.4	0.1
Other non-SME		53.1	16.0
Band 1	0.000 to 0.483	33.5	12.8
Band 2	0.484 to 1.022	8.2	1.6
Band 3	1.023 to 4.914	9.6	1.4
Band 4	4.915 to 8.860	0.9	0.1
Band 5	8.861 to 15.000	0.3	—
Band 6	15.001 to 50.000	0.2	—
Band 7	50.001 to 100.000	0.4	0.1
Total retail		445.5	143.5
Band 1	0.000 to 0.483	344.6	121.7
Band 2	0.484 to 1.022	41.7	10.5
Band 3	1.023 to 4.914	44.2	9.6
Band 4	4.915 to 8.860	6.6	0.9
Band 5	8.861 to 15.000	1.8	0.2
Band 6	15.001 to 50.000	2.4	0.3
Band 7	50.001 to 100.000	4.2	0.3



Table 52: IRB expected loss and CRAs – by exposure class
			CRA
		Expected loss	Balances	Charge for the year
		$bn	$bn	$bn
1	Total IRB approach
2	Central governments and central banks	0.1	—	—
3	Institutions	—	—	—
4	Corporates	5.3	4.2	0.7
5	Retail	2.5	1.0	0.3
	– Secured by mortgages on immovable property SME	—	—	—
	– Secured by mortgages on immovable property non-SME	0.8	0.3	—
	– Qualifying revolving retail	0.8	0.2	0.2
	– Other SME	0.5	0.3	—
	– Other non-SME	0.4	0.2	0.1
6	Total at 31 Dec 2017	7.9	5.2	1.0

1	Total IRB approach
2	Central governments and central banks	0.1	—	—
3	Institutions	—	—	—
4	Corporates	5.7	4.3	1.1
5	Retail	3.6	1.2	0.5
	– Secured by mortgages on immovable property SME	—	—	—
	– Secured by mortgages on immovable property non-SME	1.9	0.4	0.1
	– Qualifying revolving retail	0.6	0.2	0.2
	– Other SME	0.6	0.3	—
	– Other non-SME	0.5	0.3	0.2
6	Total at 31 Dec 2016	9.4	5.5	1.6

1	Total IRB approach
2	Central governments and central banks	0.2	—	—
3	Institutions	0.1	—	—
4	Corporates	5.5	4.5	1.0
5	Retail	5.5	2.1	0.4
	– Secured by mortgages on immovable property SME	—	—	—
	– Secured by mortgages on immovable property non-SME	3.5	1.2	—
	– Qualifying revolving retail	0.7	0.2	0.2
	– Other SME	0.7	0.3	—
	– Other non-SME	0.6	0.4	0.2
6	Total at 31 Dec 2015	11.3	6.6	1.4

1	Total IRB approach
2	Central governments and central banks	0.3	—	—
3	Institutions	0.3	—	—
4	Corporates	5.2	4.2	1.1
5	Retail	7.2	3.1	0.2
	– Secured by mortgages on immovable property SME	—	—	—
	– Secured by mortgages on immovable property non-SME	5.1	1.9	(0.1	)
	– Qualifying revolving retail	0.7	0.3	0.1
	– Other SME	0.7	0.4	—
	– Other non-SME	0.7	0.5	0.2
6	Total at 31 Dec 2014	13.0	7.3	1.3



Table 53: Credit risk exposure – by geographical region
	Exposure value
	Europe	Asia	MENA	North America	Latin America	Total
	$bn	$bn	$bn	$bn	$bn	$bn
IRB advanced approach	463.8	692.7	20.6	240.8	11.6	1,429.5
– central governments and central banks	29.9	190.8	14.5	61.5	10.5	307.2
– institutions	16.7	55.6	2.3	11.8	0.6	87.0
– corporates	202.5	303.0	3.8	123.6	0.5	633.4
– total retail	214.7	143.3	—	43.9	—	401.9
– of which:	—	—	—	—	—	—
secured by mortgages on immovable property SME	0.7	0.5	—	0.3	—	1.5
secured by mortgages on immovable property non-SME	138.1	100.8	—	37.2	—	276.1
qualifying revolving retail	31.4	34.0	—	3.8	—	69.2
other SME	9.1	0.1	—	0.2	—	9.4
other non-SME	35.4	7.9	—	2.4	—	45.7
IRB securitisation positions	25.9	2.8	—	4.0	—	32.7
IRB non-credit obligation assets	8.3	43.2	0.8	2.1	1.7	56.1
IRB foundation approach	30.7	—	15.4	—	—	46.1
– central governments and central banks	—	—	0.1	—	—	0.1
– institutions	—	—	0.2	—	—	0.2
– corporates	30.7	—	15.1	—	—	45.8
Standardised approach	220.8	86.3	39.7	15.3	22.0	384.1
– central governments and central banks	178.3	19.2	2.1	3.6	1.0	204.2
– institutions	0.5	0.1	1.8	—	0.1	2.5
– corporates	21.3	21.4	22.1	6.5	12.3	83.6
– retail	1.5	8.6	5.7	1.7	4.7	22.2
– secured by mortgages on immovable property	6.1	15.8	3.1	1.0	2.1	28.1
– exposures in default	1.0	0.5	1.0	0.3	0.3	3.1
– regional governments or local authorities	—	—	2.9	—	0.6	3.5
– public sector entities	0.1	—	—	—	—	0.1
– equity	1.2	13.3	0.2	1.0	0.3	16.0
– items associated with particularly high risk	3.3	—	0.1	0.3	0.1	3.8
– securitisation positions	0.3	1.4	—	—	0.3	2.0
– claims in the form of CIU	0.5	—	—	—	—	0.5
– international organisations	2.2	—	—	—	—	2.2
– multilateral development banks	—	—	0.3	—	—	0.3
– other items	4.5	6.0	0.4	0.9	0.2	12.0
Total at 31 Dec 2017	749.5	825.0	76.5	262.2	35.3	1,948.5



Table 53: Credit risk exposure – by geographical region (continued)
	Exposure value
	Europe	Asia	MENA	North America	Latin America	Total
	$bn	$bn	$bn	$bn	$bn	$bn
IRB advanced approach	422.3	652.8	22.2	257.5	10.2	1,365.0
– central governments and central banks	37.2	205.4	14.0	73.6	9.2	339.4
– institutions	14.2	52.5	1.8	6.8	0.4	75.7
– corporates	183.0	264.5	6.4	128.6	0.6	583.1
– total retail	187.9	130.4	—	48.5	—	366.8
– of which:
secured by mortgages on immovable property SME	0.6	0.6	—	0.3	—	1.5
secured by mortgages on immovable property non-SME	118.5	90.6	—	39.9	—	249.0
qualifying revolving retail	28.0	32.2	—	3.8	—	64.0
other SME	8.4	0.1	—	0.2	—	8.7
other non-SME	32.4	6.9	—	4.3	—	43.6
IRB securitisation positions	29.0	0.8	—	4.0	—	33.8
IRB non-credit obligation assets	7.8	40.2	0.7	1.6	1.6	51.9
IRB foundation approach	26.1	—	16.7	—	—	42.8
– central governments and central banks	—	—	0.1	—	—	0.1
– institutions	—	—	0.3	—	—	0.3
– corporates	26.1	—	16.3	—	—	42.4
Standardised approach	172.2	85.8	41.3	15.6	19.2	334.1
– central governments and central banks	131.7	27.5	3.0	4.3	0.8	167.3
– institutions	0.3	0.2	1.4	0.2	—	2.1
– corporates	21.9	18.2	22.2	5.5	10.6	78.4
– retail	1.9	7.9	6.5	1.4	4.3	22.0
– secured by mortgages on immovable property	5.2	14.0	3.6	1.1	1.8	25.7
– exposures in default	1.0	0.4	1.2	0.3	0.4	3.3
– regional governments or local authorities	—	—	2.4	—	0.5	2.9
– public sector entities	—	—	—	—	—	—
– equity	1.4	12.1	0.2	1.1	0.4	15.2
– items associated with particularly high risk	2.8	—	0.1	0.4	0.1	3.4
– securitisation positions	—	0.8	—	—	0.1	0.9
– claims in the form of CIU	0.4	—	0.1	—	—	0.5
– international organisations	2.7	—	—	—	—	2.7
– multilateral development banks	—	—	0.2	—	—	0.2
– other items	2.9	4.7	0.4	1.3	0.2	9.5
Total at 31 Dec 2016	657.4	779.6	80.9	278.7	31.0	1,827.6



Table 54: Credit risk RWAs – by geographical region
	RWAs
	Europe	Asia	MENA	North America	Latin America	Total
	$bn	$bn	$bn	$bn	$bn	$bn
IRB advanced approach	149.9	208.8	7.1	83.7	5.9	455.4
– central governments and central banks	3.4	14.8	5.1	5.3	5.3	33.9
– institutions	4.9	9.9	0.6	1.9	0.3	17.6
– corporates	114.2	157.3	1.4	65.0	0.3	338.2
– total retail	27.4	26.8	—	11.5	—	65.7
– of which:	—	—	—	—	—	—
secured by mortgages on immovable property SME	0.4	—	—	0.1	—	0.5
secured by mortgages on immovable property non-SME	7.1	16.8	—	9.3	—	33.2
qualifying revolving retail	6.8	8.1	—	1.1	—	16.0
other SME	5.8	—	—	0.1	—	5.9
other non-SME	7.3	1.9	—	0.9	—	10.1
IRB securitisation positions	13.0	0.2	—	0.5	—	13.7
IRB non-credit obligation assets	5.3	5.4	0.4	1.3	0.8	13.2
IRB foundation approach	18.8	—	9.6	—	—	28.4
– central governments and central banks	—	—	—	—	—	—
– institutions	—	—	0.1	—	—	0.1
– corporates	18.8	—	9.5	—	—	28.3
Standardised approach	38.9	69.8	30.6	15.7	19.5	174.5
– central governments and central banks	3.2	1.5	0.7	5.9	1.4	12.7
– institutions	0.2	0.1	0.8	0.0	0.1	1.2
– corporates	20.0	19.3	21.0	5.8	12.2	78.3
– retail	1.0	6.5	4.3	1.3	3.4	16.5
– secured by mortgages on immovable property	2.6	5.5	1.2	0.4	0.7	10.4
– exposures in default	1.3	0.6	1.3	0.3	0.4	3.9
– regional governments or local authorities	—	—	0.7	—	0.3	1.0
– public sector entities	—	—	—	—	0.1	0.1
– equity	2.6	31.8	0.2	1.0	0.5	36.1
– items associated with particularly high risk	5.1	—	0.1	0.4	0.1	5.7
– securitisation positions	0.3	1.1	—	—	0.2	1.6
– claims in the form of CIU	0.6	—	—	—	—	0.6
– international organisations	—	—	—	—	—	—
– multilateral development banks	—	—	—	—	—	—
– other items	2.0	3.4	0.3	0.6	0.1	6.4
Total at 31 Dec 2017	225.9	284.2	47.7	101.2	26.2	685.2



Table 54: Credit risk RWAs – by geographical region (continued)
	RWAs
	Europe	Asia	MENA	North America	Latin America	Total
	$bn	$bn	$bn	$bn	$bn	$bn
IRB advanced approach	127.1	192.4	7.4	99.1	4.5	430.5
– central governments and central banks	3.9	15.9	5.3	6.4	3.9	35.4
– institutions	3.2	9.4	0.4	1.6	0.4	15.0
– corporates	98.4	143.4	1.7	70.3	0.2	314.0
– total retail	21.6	23.7	—	20.8	—	66.1
– of which:
secured by mortgages on immovable property SME	0.2	—	—	0.1	—	0.3
secured by mortgages on immovable property non-SME	6.0	14.1	—	16.4	—	36.5
qualifying revolving retail	5.4	8.2	—	1.1	—	14.7
other SME	4.4	—	—	0.1	—	4.5
other non-SME	5.6	1.4	—	3.1	—	10.1
IRB securitisation positions	20.5	0.1	0.0	0.3	—	20.9
IRB non-credit obligation assets	4.8	5.1	0.3	1.3	0.6	12.1
IRB foundation approach	16.1	—	9.8	—	—	25.9
– central governments and central banks	—	—	—	—	—	—
– institutions	—	—	0.1	—	—	0.1
– corporates	16.1	—	9.7	—	—	25.8
Standardised approach	37.3	62.4	31.5	17.9	17.2	166.3
– central governments and central banks	3.1	1.5	0.7	8.2	1.2	14.7
– institutions	0.1	0.2	0.6	0.1	—	1.0
– corporates	21.0	17.2	21.2	5.0	10.6	75.0
– retail	1.4	5.9	4.8	1.1	3.1	16.3
– secured by mortgages on immovable property	2.0	4.9	1.3	0.5	0.6	9.3
– exposures in default	1.3	0.5	1.5	0.6	0.4	4.3
– regional governments or local authorities	—	—	0.6	—	0.3	0.9
– public sector entities	—	—	—	—	—	—
– equity	2.7	29.1	0.2	1.1	0.5	33.6
– items associated with particularly high risk	4.2	0.0	0.2	0.6	0.1	5.1
– securitisation positions	—	0.7	—	—	0.2	0.9
– claims in the form of CIU	0.4	0.0	0.1	—	—	0.5
– international organisations	—	—	—	—	—	—
– multilateral development banks	—	—	—	—	—	—
– other items	1.1	2.4	0.3	0.7	0.2	4.7
Total at 31 Dec 2016	205.8	260.0	49.0	118.6	22.3	655.7



Table 60: IRB – Credit risk exposures by portfolio and PD range
	Original on-balance sheet gross exposure	Off-balance sheet exposures pre-CCF	Average CCF	EAD post-CRM and post-CCF	Average PD	Number of obligors	Average LGD	Average maturity	RWAs	RWA density	Expected loss	Value adjustments and provisions
PD scale	$bn	$bn	%	$bn	%		%	years	$bn	%	$bn	$bn
AIRB – Central government and central banks
0.00 to <0.15	292.5	2.1	39.8	294.3	0.02	255	42.5	2.07	24.8	8.4	—
0.15 to <0.25	2.2	—	43.0	2.3	0.22	8	42.8	1.71	0.9	39.1	—
0.25 to <0.50	2.2	—	74.3	2.3	0.37	11	45.0	1.15	1.1	48.4	—
0.50 to <0.75	2.5	—	—	2.6	0.63	11	45.0	1.40	1.7	67.5	—
0.75 to <2.50	5.9	—	28.5	5.7	1.62	54	45.0	1.11	5.3	93.2	0.1
2.50 to <10.00	0.5	0.2	1.5	—	4.35	12	45.1	4.70	0.1	179.5	—
10.00 to <100.00	—	—	—	—	—	—	—	—	—	—	—
100.00 (Default)	—	—	—	—	—	—	—	—	—	—	—
Sub-total	305.8	2.3	38.1	307.2	0.06	351	42.6	2.04	33.9	11.0	0.1	—

AIRB – Institutions
0.00 to <0.15	71.5	10.6	45.9	76.9	0.05	2,857	40.9	1.35	11.2	14.6	—
0.15 to <0.25	2.2	1.0	40.9	2.6	0.22	344	45.3	1.20	1.1	41.4	—
0.25 to <0.50	3.3	0.5	47.1	3.5	0.37	270	44.7	0.82	1.9	54.5	—
0.50 to <0.75	2.2	0.7	44.3	2.5	0.63	192	41.8	1.32	1.8	69.3	—
0.75 to <2.50	1.2	0.7	47.6	1.5	1.15	282	46.1	1.52	1.5	98.2	—
2.50 to <10.00	0.4	—	19.2	—	4.35	54	45.8	0.55	—	144.7	—
10.00 to <100.00	—	0.1	23.2	—	12.61	32	50.0	1.29	0.1	239.0	—
100.00 (Default)	—	—	—	—	100.00	2	76.7	1.00	—	81.2	—
Sub-total	80.8	13.6	45.4	87.0	0.11	4,033	41.3	1.33	17.6	20.2	—	—

AIRB – Corporate – Specialised Lending (excluding Slotting)¹
0.00 to <0.15	1.4	1.1	34.3	1.8	0.10	409	30.1	3.31	0.5	26	—
0.15 to <0.25	1.5	0.8	30.9	1.6	0.22	431	32.3	3.91	0.7	44	—
0.25 to <0.50	0.9	0.3	43.4	1.0	0.37	232	32.4	3.55	0.6	54	—
0.50 to <0.75	0.9	0.2	51.8	1.0	0.63	254	23.3	4.18	0.5	52	—
0.75 to <2.50	1.9	0.8	47.4	2.3	1.33	487	30.1	3.55	1.7	79	—
2.50 to <10.00	0.4	0.1	36.2	0.5	4.85	232	23.8	3.24	0.4	87	—
10.00 to <100.00	0.3	0.1	46.0	0.3	24.77	88	22.1	3.02	0.4	127	—
100.00 (Default)	0.1	0.2	70.7	0.3	100.00	133	30.6	4.49	0.3	127	0.1
Sub-total	7.4	3.6	40.2	8.8	4.46	2,266	29.4	3.63	5.1	59	0.1	—

AIRB – Corporate – Other
0.00 to <0.15	105.1	155.2	38.2	202.5	0.08	9,655	40.3	2.20	45.6	23	0.1
0.15 to <0.25	50.9	63.9	36.3	82.0	0.22	9,463	36.5	1.92	29.6	36	0.1
0.25 to <0.50	47.0	51.2	36.3	72.7	0.37	10,194	38.0	2.07	35.5	49	0.1
0.50 to <0.75	45.4	41.6	32.4	57.0	0.63	9,375	37.4	1.97	34.7	61	0.1
0.75 to <2.50	140.5	97.9	31.9	133.5	1.37	44,281	37.7	2.05	109.3	82	0.7
2.50 to <10.00	33.5	26.2	33.7	30.8	4.17	11,455	38.8	1.97	36.4	118	0.5
10.00 to <100.00	5.0	3.6	39.8	4.8	21.79	2,202	37.8	1.90	8.6	179	0.4
100.00 (Default)	5.0	1.0	33.5	5.2	100.00	2,429	46.1	2.11	9.8	190	2.1
Sub-total	432.4	440.6	35.8	588.5	1.75	99,054	38.6	2.07	309.5	53	4.1	3.4

Wholesale AIRB – Total at 31 Dec 2017²	882.5	460.1	36.1	1,047.6	1.11	105,704	40.0	2.01	379.3	37	4.3	3.4



Table 60: IRB – Credit risk exposures by portfolio and PD range (continued)
	Original on-balance sheet gross exposure	Off-balance sheet exposures pre-CCF	Average CCF	EAD post-CRM and post-CCF	Average PD	Number of obligors	Average LGD	Average maturity	RWAs	RWA density	Expected loss	Value adjustments and provisions
PD scale	$bn	$bn	%	$bn	%		%	years	$bn	%	$bn	$bn
AIRB – Secured by mortgages on immovable property SME
0.00 to <0.15	0.4	—	100.0	0.4	0.06	1,291	10.6	—	—	2	—
0.15 to <0.25	—	—	100.0	—	0.18	1,741	17.0	—	—	7	—
0.25 to <0.50	0.2	—	100.0	0.2	0.32	5,164	16.1	—	—	7	—
0.50 to <0.75	0.1	—	117.1	0.1	0.60	3,884	26.2	—	—	19	—
0.75 to <2.50	0.3	—	149.6	0.3	1.60	11,459	27.4	—	0.1	33	—
2.50 to <10.00	0.4	—	102.0	0.4	5.06	5,183	24.3	—	0.2	60	—
10.00 to <100.00	0.1	—	249.6	0.1	17.72	858	26.3	—	0.1	104	—
100.00 (Default)	—	—	78.2	—	100.00	1,215	24.2	—	0.1	216	—
Sub-total	1.5	—	122.5	1.5	4.26	30,795	20.8	—	0.5	35	—	—

AIRB – Secured by mortgages on immovable property non-SME
0.00 to <0.15	161.7	12.9	91.2	177.0	0.06	1,007,985	14.6	—	9.9	6	—
0.15 to <0.25	26.9	1.2	81.9	28.1	0.21	121,136	16.0	—	3.1	11	—
0.25 to <0.50	24.6	2.9	43.9	25.9	0.37	110,580	17.4	—	4.3	17	—
0.50 to <0.75	11.2	0.4	100.2	11.7	0.63	51,845	15.7	—	2.2	19	—
0.75 to <2.50	21.8	1.0	72.4	22.6	1.31	98,817	17.0	—	6.5	29	—
2.50 to <10.00	5.9	0.2	96.6	6.1	4.53	27,756	11.3	—	2.3	38	—
10.00 to <100.00	2.1	0.1	98.8	2.3	26.58	21,434	18.5	—	2.8	120	0.1
100.00 (Default)	2.4	—	69.5	2.4	100.00	20,590	24.7	—	2.1	86	0.7
Sub-total	256.6	18.7	82.5	276.1	1.44	1,460,143	15.3	—	33.2	12	0.8	0.3

AIRB – Qualifying revolving retail exposures
0.00 to <0.15	5.5	68.1	47.1	37.4	0.07	12,974,761	93.5	—	1.7	5	—
0.15 to <0.25	1.4	13.2	44.0	7.2	0.21	2,294,812	94.9	—	0.8	11	—
0.25 to <0.50	2.2	10.2	42.5	6.4	0.37	1,829,719	93.6	—	1.2	19	—
0.50 to <0.75	2.1	4.3	49.8	4.2	0.60	1,104,290	93.4	—	1.1	27	—
0.75 to <2.50	5.8	7.1	47.9	9.0	1.39	2,143,093	91.5	—	4.4	48	0.1
2.50 to <10.00	3.0	1.5	59.4	3.9	4.79	773,854	89.9	—	4.4	114	0.3
10.00 to <100.00	0.8	0.3	58.1	1.0	30.07	281,160	91.6	—	2.2	225	0.3
100.00 (Default)	0.1	—	12.2	0.1	100.00	33,075	83.7	—	0.2	161	0.1
Sub-total	20.9	104.7	46.6	69.2	1.15	21,434,764	93.1	—	16.0	23	0.8	0.2

AIRB – Other SME
0.00 to <0.15	0.1	0.2	44.9	0.2	0.09	92,804	62.2	—	—	12	—
0.15 to <0.25	0.2	0.2	51.1	0.3	0.22	70,783	60.6	—	0.1	23	—
0.25 to <0.50	0.4	0.4	51.4	0.6	0.38	130,411	62.9	—	0.2	33	—
0.50 to <0.75	0.5	0.6	67.7	0.9	0.63	164,640	61.0	—	0.4	42	—
0.75 to <2.50	2.2	1.4	59.1	3.0	1.55	384,599	59.0	—	1.7	57	—
2.50 to <10.00	2.5	1.2	57.3	3.2	4.80	195,235	55.4	—	2.1	67	0.1
10.00 to <100.00	0.5	0.2	53.6	0.6	18.36	80,752	69.8	—	0.7	112	0.1
100.00 (Default)	0.5	0.1	90.6	0.6	100.00	18,209	39.2	—	0.7	116	0.3
Sub-total	6.9	4.3	58.2	9.4	9.84	1,137,433	57.7	—	5.9	63	0.5	0.3

AIRB – Other non-SME
0.00 to <0.15	9.2	6.5	32.2	11.9	0.08	453,740	21.9	—	0.7	6	—
0.15 to <0.25	6.5	3.6	35.6	8.1	0.21	359,875	28.2	—	1.1	13	—
0.25 to <0.50	6.3	2.7	29.4	7.3	0.37	318,434	30.5	—	1.5	21	—
0.50 to <0.75	4.8	1.4	28.4	5.3	0.61	178,341	27.3	—	1.2	24	—
0.75 to <2.50	8.5	0.7	27.9	8.9	1.34	332,213	26.5	—	3.0	33	—
2.50 to <10.00	2.9	0.9	26.1	3.2	4.24	194,512	34.4	—	1.8	57	0.1
10.00 to <100.00	0.6	—	21.2	0.6	24.44	84,817	49.3	—	0.6	107	0.1
100.00 (Default)	0.3	0.1	11.3	0.4	100.00	40,604	46.2	—	0.2	49	0.2
Sub-total	39.1	15.9	31.5	45.7	1.83	1,962,536	27.3	—	10.1	22	0.4	0.2

Retail AIRB – Total at 31 Dec 2017	325.0	143.6	50.0	401.9	1.64	26,025,671	31.1	—	65.7	16	2.5	1.0



Table 60: IRB – Credit risk exposures by portfolio and PD range (continued)
	Original on-balance sheet gross exposure	Off-balance sheet exposures pre-CCF	Average CCF	EAD post-CRM and post-CCF	Average PD	Number of obligors	Average LGD	Average maturity	RWAs	RWA density	Expected loss	Value adjustments and provisions
PD scale	$bn	$bn	%	$bn	%		%	years	$bn	%	$bn	$bn
FIRB – Central government and central banks
0.00 to <0.15	—	—	—	0.1	0.05	1	45.0	4.48	—	31	—
0.15 to <0.25	—	—	—	—	—	—	—	—	—	—	—
0.25 to <0.50	—	—	—	—	—	—	—	—	—	—	—
0.50 to <0.75	—	—	—	—	—	—	—	—	—	—	—
0.75 to <2.50	—	—	—	—	—	—	—	—	—	—	—
2.50 to <10.00	—	—	—	—	—	—	—	—	—	—	—
10.00 to <100.00	—	—	—	—	—	—	—	—	—	—	—
100.00 (Default)	—	—	—	—	—	—	—	—	—	—	—
Sub-total	—	—	—	0.1	0.05	1	45.0	4.48	—	31	—	—

FIRB – Institutions
0.00 to <0.15	0.2	—	0.8	0.2	0.11	4	45.0	2.13	0.1	29	—
0.15 to <0.25	—	—	—	—	—	—	—	—	—	—	—
0.25 to <0.50	—	—	—	—	—	—	—	—	—	—	—
0.50 to <0.75	—	—	—	—	—	—	—	—	—	—	—
0.75 to <2.50	—	—	—	—	—	—	—	—	—	—	—
2.50 to <10.00	—	—	—	—	—	—	—	—	—	—	—
10.00 to <100.00	—	—	—	—	—	—	—	—	—	—	—
100.00 (Default)	—	—	—	—	—	—	—	—	—	—	—
Sub-total	0.2	—	0.8	0.2	0.11	4	45.0	2.13	0.1	29	—	—

FIRB – Corporate – Other
0.00 to <0.15	9.5	12.7	44.3	14.9	0.08	1,144	45.0	2.47	4.1	27	—
0.15 to <0.25	3.0	6.1	42.1	5.6	0.22	1,259	44.1	2.33	2.7	47	—
0.25 to <0.50	4.4	6.1	32.7	6.3	0.37	1,319	44.1	1.88	3.6	56	—
0.50 to <0.75	3.0	4.6	24.0	4.2	0.63	1,091	42.9	2.19	3.1	75	—
0.75 to <2.50	8.5	10.0	25.8	10.7	1.36	3,663	43.1	1.75	9.7	92	0.1
2.50 to <10.00	2.5	2.0	30.9	3.0	4.67	1,059	43.7	2.03	4.4	144	0.1
10.00 to <100.00	0.3	0.3	30.3	0.4	21.37	184	41.4	1.10	0.7	192	—
100.00 (Default)	0.6	0.2	38.6	0.7	100.00	279	43.8	1.68	—	—	0.3
Sub-total	31.8	42.0	34.9	45.8	2.52	9,998	44.0	2.13	28.3	62	0.5	0.5

FIRB – Total at 31 Dec 2017	32.0	42.0	34.9	46.1	2.51	10,003	44.0	2.13	28.4	62	0.5	0.5



Table 60: IRB – Credit risk exposures by portfolio and PD range (continued)
	Original on-balance sheet gross exposure	Off-balance sheet exposures pre-CCF	Average CCF	EAD post-CRM and post-CCF	Average PD	Number of obligors	Average LGD	Average maturity	RWAs	RWA density	Expected loss	Value adjustments and provisions
PD scale	$bn	$bn	%	$bn	%		%	years	$bn	%	$bn	$bn
AIRB – Central government and central banks
0.00 to <0.15	326.6	1.9	60.5	327.7	0.02	417	42.9	2.05	26.0	8	—
0.15 to <0.25	2.2	—	27.5	2.3	0.22	19	43.9	1.48	0.8	37	—
0.25 to <0.50	2.0	—	42.3	2.0	0.37	33	43.5	1.36	0.9	49	—
0.50 to <0.75	0.5	—	50.1	0.5	0.63	15	45.0	1.49	0.4	69	—
0.75 to <2.50	3.7	0.1	26.7	3.7	1.35	35	45.0	1.27	3.4	91	—
2.50 to <10.00	3.2	—	76.5	3.2	3.49	20	45.0	1.07	3.9	123	0.1
10.00 to <100.00	—	—	50.2	—	10.00	4	47.0	0.55	—	189	—
100.00 (Default)	—	—	—	—	100.00	11	88.0	5.00	—	—	—
Sub-total	338.2	2.0	59.1	339.4	0.07	554	43.0	2.02	35.4	10	0.1	—

AIRB – Institutions
0.00 to <0.15	62.5	16.3	30.5	67.7	0.05	2,772	40.2	1.34	10.2	15	—
0.15 to <0.25	2.0	2.0	26.4	2.5	0.22	384	44.7	0.72	0.9	37	—
0.25 to <0.50	2.5	0.6	30.9	2.7	0.37	278	44.9	0.69	1.5	54	—
0.50 to <0.75	0.8	0.2	53.1	0.9	0.63	175	44.7	1.15	0.7	73	—
0.75 to <2.50	1.8	1.1	28.8	1.9	1.11	270	42.2	0.98	1.6	83	—
2.50 to <10.00	—	—	21.7	—	4.37	57	41.7	0.37	—	161	—
10.00 to <100.00	—	0.2	17.4	—	26.64	44	53.2	1.53	0.1	307	—
100.00 (Default)	—	—	—	—	100.00	5	45.0	2.54	—	295	—
Sub-total	69.6	20.4	30.1	75.7	0.12	3,985	40.6	1.29	15	20	—	—

AIRB – Corporate – Specialised Lending (excluding Slotting)¹
0.00 to <0.15	0.9	0.4	62.7	1.2	0.13	614	26.5	3.43	0.3	27	—
0.15 to <0.25	0.9	0.3	45.5	1.0	0.22	659	25.4	3.85	0.4	36	—
0.25 to <0.50	0.4	0.1	58.4	0.4	0.37	296	30.7	3.73	0.2	52	—
0.50 to <0.75	0.4	0.1	31.0	0.4	0.63	250	26.0	4.29	0.2	58	—
0.75 to <2.50	0.7	0.5	34.5	0.9	1.25	523	40.2	3.63	0.9	105	—
2.50 to <10.00	0.1	—	56.5	0.1	3.57	91	26.2	4.99	0.1	102	—
10.00 to <100.00	0.1	—	62.0	0.1	18.58	114	27.2	1.56	0.2	134	—
100.00 (Default)	0.1	—	94.7	0.1	100.00	159	53.3	3.22	—	11	0.1
Sub-total	3.6	1.4	47.7	4.2	4.36	2,706	30.3	3.66	2.3	56	0.1	0.1

AIRB – Corporate – Other
0.00 to <0.15	105.5	144.3	37.9	186.0	0.08	10,931	38.1	2.26	41.4	22	0.1
0.15 to <0.25	39.2	55.0	38.8	67.0	0.22	9,588	39.3	2.04	26.6	40	0.1
0.25 to <0.50	45.3	48.8	36.4	69.6	0.37	10,306	39.2	2.08	34.9	50	0.1
0.50 to <0.75	43.1	38.7	33.4	55.0	0.63	9,322	37.5	1.95	33.5	61	0.1
0.75 to <2.50	120.2	89.8	31.9	123.5	1.37	42,812	37.2	2.00	99.7	81	0.6
2.50 to <10.00	32.7	27.3	34.4	31.9	4.59	11,786	36.5	1.99	36.3	114	0.5
10.00 to <100.00	5.6	4.8	39.8	6.4	19.65	2,459	36.5	2.05	11.1	174	0.5
100.00 (Default)	6.0	0.8	51.5	6.4	100.00	2,583	41.9	2.24	6.0	93	2.5
Sub-total	397.6	409.5	36.2	545.8	2.15	99,787	38.1	2.10	289.5	53	4.5	3.4

Wholesale AIRB – Total at 31 Dec 2016	809.0	433.3	36.0	1,017.0	1.27	107,032	40.0	2.00	354.3	36	4.7	3.5



Table 60: IRB – Credit risk exposures by portfolio and PD range (continued)
	Original on-balance sheet gross exposure	Off-balance sheet exposures pre-CCF	Average CCF	EAD post-CRM and post-CCF	Average PD	Number of obligors	Average LGD	Average maturity	RWAs	RWA density	Expected loss	Value adjustments and provisions
PD scale	$bn	$bn	%	$bn	%		%	years	$bn	%	$bn	$bn
AIRB – Secured by mortgages on immovable property SME
0.00 to <0.15	0.3	—	100.0	0.4	0.07	1,249	10.5	—	—	2	—
0.15 to <0.25	0.1	—	100.0	0.1	0.17	200	17.9	—	—	7	—
0.25 to <0.50	0.2	—	37.7	0.1	0.32	1,012	16.4	—	—	10	—
0.50 to <0.75	0.1	0.1	100.0	0.1	0.63	585	26.0	—	—	19	—
0.75 to <2.50	0.3	—	95.0	0.3	1.63	1,792	28.9	—	0.1	29	—
2.50 to <10.00	0.4	—	102.3	0.4	5.26	1,928	24.4	—	0.2	32	—
10.00 to <100.00	0.1	—	86.0	0.1	17.47	414	26.5	—	—	50	—
100.00 (Default)	—	—	97.8	—	100.00	138	26.2	—	—	48	—
Sub-total	1.5	0.1	97.7	1.5	4.01	7,318	21.1	—	0.3	21	—	—

AIRB – Secured by mortgages on immovable property non-SME
0.00 to <0.15	137.7	11.5	92.3	151.4	0.06	900,158	14.1	—	8.0	5	—
0.15 to <0.25	24.4	1.1	81.0	25.5	0.21	106,945	16.5	—	2.7	11	—
0.25 to <0.50	22.0	2.3	43.8	23.1	0.37	120,044	22.0	—	4.6	20	—
0.50 to <0.75	12.0	0.4	96.0	12.4	0.61	56,427	15.9	—	2.2	18	—
0.75 to <2.50	23.1	1.1	61.8	23.9	1.33	129,916	22.0	—	8.8	37	0.1
2.50 to <10.00	6.4	0.2	93.6	6.6	4.76	36,051	20.0	—	4.7	71	0.1
10.00 to <100.00	2.2	0.1	98.3	2.3	27.26	24,716	27.4	—	3.9	171	0.2
100.00 (Default)	3.8	—	78.5	3.8	100.00	35,131	39.7	—	1.6	42	1.5
Sub-total	231.6	16.7	82.9	249.0	2.14	1,409,388	16.6	—	36.5	15	1.9	0.5

AIRB – Qualifying revolving retail exposures
0.00 to <0.15	4.9	62.5	47.4	34.4	0.07	11,894,411	93.7	—	1.5	4	—
0.15 to <0.25	1.3	12.0	44.0	6.5	0.21	1,824,704	95.0	—	0.8	11	—
0.25 to <0.50	2.1	9.0	42.9	5.9	0.37	1,732,829	93.3	—	1.0	17	—
0.50 to <0.75	2.0	4.0	50.2	3.9	0.60	1,069,619	93.4	—	1.0	26	—
0.75 to <2.50	5.5	6.6	47.3	8.6	1.39	1,991,102	91.4	—	4.0	48	0.1
2.50 to <10.00	2.9	1.4	57.8	3.7	4.78	679,874	89.9	—	4.2	112	0.2
10.00 to <100.00	0.8	0.3	55.7	0.9	28.87	268,254	91.7	—	2.1	219	0.3
100.00 (Default)	0.1	—	6.3	0.1	100.00	26,142	36.0	—	0.1	148	—
Sub-total	19.6	95.8	46.8	64.0	1.14	19,486,935	93.1	—	14.7	23	0.6	0.2

AIRB – Other SME
0.00 to <0.15	0.1	0.1	67.4	0.2	0.10	82,891	39.9	—	—	9	—
0.15 to <0.25	0.2	0.2	53.4	0.3	0.22	91,588	61.2	—	0.1	22	—
0.25 to <0.50	0.3	0.4	51.2	0.6	0.38	141,288	63.1	—	0.2	32	—
0.50 to <0.75	0.4	0.5	66.5	0.8	0.63	157,268	58.0	—	0.3	38	—
0.75 to <2.50	2.0	1.3	60.8	2.8	1.58	427,912	58.8	—	1.5	55	—
2.50 to <10.00	2.3	0.8	69.9	2.8	4.90	201,537	53.6	—	1.8	64	0.1
10.00 to <100.00	0.5	0.1	70.1	0.6	17.66	69,516	66.6	—	0.6	106	0.1
100.00 (Default)	0.6	0.1	94.5	0.6	100.00	21,873	39.5	—	—	3	0.3
Sub-total	6.4	3.5	63.4	8.7	10.84	1,193,873	56.1	—	4.5	52	0.5	0.3

AIRB – Other non-SME
0.00 to <0.15	9.5	6.1	34.4	11.9	0.07	442,581	20.0	—	0.5	5	—
0.15 to <0.25	6.0	2.7	35.8	7.3	0.20	393,748	31.2	—	1.0	14	—
0.25 to <0.50	5.4	2.9	29.6	6.3	0.36	276,509	29.9	—	1.2	19	—
0.50 to <0.75	4.0	1.2	29.1	4.5	0.60	176,642	29.3	—	1.1	24	—
0.75 to <2.50	8.7	0.6	31.7	9.1	1.37	345,838	28.9	—	3.2	35	—
2.50 to <10.00	2.8	1.0	26.8	3.2	4.31	188,614	39.5	—	1.9	61	0.1
10.00 to <100.00	0.7	—	17.1	0.8	25.11	79,970	65.7	—	1.1	138	0.1
100.00 (Default)	0.4	—	52.1	0.5	100.00	58,697	55.4	—	0.1	13	0.3
Sub-total	37.5	14.5	32.6	43.6	2.26	1,962,599	28.7	—	10.1	23	0.5	0.3

Retail AIRB – Total at 31 Dec 2016	296.6	130.6	50.3	366.8	2.19	24,060,113	32.3	—	66.1	18	3.5	1.3



Table 60: IRB – Credit risk exposures by portfolio and PD range (continued)
	Original on-balance sheet gross exposure	Off-balance sheet exposures pre-CCF	Average CCF	EAD post-CRM and post-CCF	Average PD	Number of obligors	Average LGD	Average maturity	RWAs	RWA density	Expected loss	Value adjustments and provisions
PD scale	$bn	$bn	%	$bn	%		%	years	$bn	%	$bn	$bn
FIRB – Central government and central banks
0.00 to <0.15	—	—	75.0	0.1	0.04	1	45.0	5.00	—	32	—
0.15 to <0.25	—	—	—	—	—	—	—	—	—	—	—
0.25 to <0.50	—	—	—	—	—	—	—	—	—	—	—
0.50 to <0.75	—	—	—	—	—	—	—	—	—	—	—
0.75 to <2.50	—	—	—	—	—	—	—	—	—	—	—
2.50 to <10.00	—	—	—	—	—	—	—	—	—	—	—
10.00 to <100.00	—	—	—	—	—	—	—	—	—	—	—
100.00 (Default)	—	—	—	—	—	—	—	—	—	—	—
Sub-total	—	—	75.0	0.1	0.04	1	45.0	5.00	—	32	—	—

FIRB – Institutions
0.00 to <0.15	0.1	—	45.2	0.1	0.06	2	45.0	2.75	—	23	—
0.15 to <0.25	—	—	20.7	—	0.22	—	45.0	3.82	—	62	—
0.25 to <0.50	0.1	—	75.0	0.2	0.37	1	45.0	1.71	0.1	55	—
0.50 to <0.75	—	—	—	—	—	—	—	—	—	—	—
0.75 to <2.50	—	—	—	—	—	—	—	—	—	—	—
2.50 to <10.00	—	—	—	—	—	—	—	—	—	—	—
10.00 to <100.00	—	—	—	—	—	—	—	—	—	—	—
100.00 (Default)	—	—	—	—	—	—	—	—	—	—	—
Sub-total	0.2	—	46.6	0.3	0.26	3	45.0	2.09	0.1	43	—	—

FIRB – Corporate – Other
0.00 to <0.15	8.6	12.2	40.5	13.5	0.09	1,316	44.6	2.45	3.8	28	—
0.15 to <0.25	3.1	5.7	39.2	5.3	0.22	1,303	44.9	2.22	2.4	46	—
0.25 to <0.50	4.5	5.2	32.2	6.1	0.37	1,549	42.8	1.96	3.5	57	—
0.50 to <0.75	3.3	5.2	30.9	4.9	0.63	1,140	43.4	1.98	3.6	72	—
0.75 to <2.50	6.7	9.7	26.5	9.0	1.35	2,817	43.1	1.67	8.3	91	0.1
2.50 to <10.00	2.3	2.2	28.2	2.8	4.65	1,312	42.9	1.90	3.8	138	0.1
10.00 to <100.00	0.2	0.2	15.2	0.3	15.99	180	41.4	0.90	0.4	175	—
100.00 (Default)	0.4	0.1	45.8	0.5	100.00	414	44.9	1.43	—	—	0.2
Sub-total	29.1	40.5	33.9	42.4	1.95	10,031	43.8	2.07	25.8	61	0.4	0.4

FIRB – Total at 31 Dec 2016	29.3	40.5	34.0	42.8	1.94	10,035	43.8	2.1	25.9	61	0.4	0.4



Table 61: Specialised lending on slotting approach¹
		On-balance sheet amount	Off-balance sheet amount	Risk weight	Exposure amount	RWAs	Expected loss
Regulatory categories	Remaining maturity	On-balance sheet amount	Off-balance sheet amount	Risk weight	Exposure amount	RWAs	Expected loss
Regulatory categories	Remaining maturity	$bn	$bn	%	$bn	$bn	$bn
Category 1	Less than 2.5 years	12.2	1.6	50	13.2	6.7	—
Category 1	Equal to or more than 2.5 years	12.9	2.0	70	14.3	10.0	0.1
Category 2	Less than 2.5 years	3.3	0.2	70	3.3	2.4	—
Category 2	Equal to or more than 2.5 years	2.8	0.4	90	3.0	2.7	—
Category 3	Less than 2.5 years	0.4	—	115	0.4	0.4	—
Category 3	Equal to or more than 2.5 years	0.9	0.1	115	0.8	0.9	—
Category 4	Less than 2.5 years	0.1	—	250	0.1	0.2	—
Category 4	Equal to or more than 2.5 years	0.1	—	250	0.1	0.3	—
Category 5	Less than 2.5 years	0.3	—	—	0.6	—	0.3
Category 5	Equal to or more than 2.5 years	0.3	—	—	0.3	—	0.2
Total at 31 Dec 2017	Less than 2.5 years	16.3	1.8		17.6	9.7	0.3
Total at 31 Dec 2017	Equal to or more than 2.5 years	17.0	2.5		18.5	13.9	0.3

Category 1	Less than 2.5 years	9.1	1.5	50	9.9	5.0	—
Category 1	Equal to or more than 2.5 years	12.6	1.5	70	13.7	9.5	0.1
Category 2	Less than 2.5 years	2.9	0.4	70	3.1	2.1	—
Category 2	Equal to or more than 2.5 years	2.8	0.1	90	2.8	2.5	—
Category 3	Less than 2.5 years	0.5	—	115	0.5	0.6	—
Category 3	Equal to or more than 2.5 years	0.9	—	115	0.9	1.0	—
Category 4	Less than 2.5 years	0.3	—	250	0.3	0.8	—
Category 4	Equal to or more than 2.5 years	0.1	—	250	0.1	0.3	—
Category 5	Less than 2.5 years	0.5	—	—	0.8	—	0.5
Category 5	Equal to or more than 2.5 years	0.3	—	—	0.4	—	0.2
Total at 31 Dec 2016	Less than 2.5 years	13.3	1.9		14.6	8.5	0.5
Total at 31 Dec 2016	Equal to or more than 2.5 years	16.7	1.6		17.9	13.3	0.3



Table 65: IRB – CCR exposures by portfolio and PD scale
	EAD post-CRM	Average PD	Number of obligors	Average LGD	Average maturity	RWAs	RWA density
PD scale	$bn	%		%	years	$bn	%
AIRB – Central Government and Central Banks
0.00 to <0.15	10.9	0.03	92	45.0	0.96	0.7	6
0.15 to <0.25	0.2	0.22	9	45.0	2.83	0.1	49
0.25 to <0.50	0.1	0.37	5	45.0	1.96	—	58
0.50 to <0.75	—	0.63	6	45.0	1.01	—	63
0.75 to <2.50	0.3	1.72	9	45.0	1.42	0.4	102
2.50 to <10.00	1.0	3.59	2	45.0	0.46	1.2	123
10.00 to <100.00	—	—	—	—	—	—	—
100.00 (Default)	—	—	—	—	—	—	—
Sub-total	12.5	0.42	123	45.0	1.00	2.4	19

AIRB – Institutions
0.00 to <0.15	46.8	0.06	3,973	45.3	1.34	9.8	21
0.15 to <0.25	3.9	0.22	331	46.1	1.55	2.0	50
0.25 to <0.50	2.1	0.37	93	45.0	1.13	1.3	59
0.50 to <0.75	0.7	0.63	91	46.3	1.24	0.5	76
0.75 to <2.50	0.7	1.23	164	45.4	1.41	0.7	107
2.50 to <10.00	—	6.00	22	25.7	1.75	0.1	187
10.00 to <100.00	—	12.67	13	54.7	2.57	—	279
100.00 (Default)	—	100.00	1	45.0	1.00	—	—
Sub-total	54.2	0.12	4,688	45.4	1.34	14.4	27

AIRB – Corporates
0.00 to <0.15	31.4	0.07	5,025	44.2	1.84	7.2	23
0.15 to <0.25	5.8	0.22	1,726	47.9	1.40	2.7	46
0.25 to <0.50	3.8	0.37	1,053	45.3	2.09	2.4	62
0.50 to <0.75	2.9	0.63	936	46.0	1.38	2.1	76
0.75 to <2.50	6.8	1.36	3,065	45.8	1.48	6.9	102
2.50 to <10.00	0.6	4.53	566	46.3	1.99	1.0	152
10.00 to <100.00	0.1	20.58	86	47.3	1.20	0.2	263
100.00 (Default)	0.1	100.00	22	43.4	4.41	—	—
Sub-total	51.5	0.65	12,479	45.0	1.74	22.5	44

AIRB – Total at 31 Dec 2017	118.2	0.45	17,290	53.4	1.30	39.3	33

FIRB – Corporates
0.00 to <0.15	2.3	0.07	520	40.3	1.98	0.6	25
0.15 to <0.25	0.3	0.22	159	45.0	1.78	0.1	44
0.25 to <0.50	0.2	0.37	151	45.0	1.75	0.1	59
0.50 to <0.75	0.1	0.63	97	45.0	1.93	0.1	75
0.75 to <2.50	0.7	1.55	516	45.0	1.61	0.8	114
2.50 to <10.00	0.1	4.38	82	45.0	1.64	0.1	142
10.00 to <100.00	—	10.22	9	45.0	1.00	—	187
100.00 (Default)	—	100.00	5	45.0	1.10	—	—
FIRB – Total at 31 Dec 2017	3.7	0.54	1,539	45.0	1.99	1.8	50

Total (all portfolios) at 31 Dec 2017	121.9	0.38	18,829	45.0	546.39	41.1	34



Table 65: IRB – CCR exposures by portfolio and PD scale (continued)
	EAD post-CRM	Average PD	Number of obligors	Average LGD	Average maturity	RWAs	RWA density
PD scale	$bn	%		%	years	$bn	%
AIRB – Central Government and Central Banks
0.00 to <0.15	11.7	0.04	104	45.3	1.00	1.1	8
0.15 to <0.25	0.2	0.22	4	45.0	1.00	0.1	32
0.25 to <0.50	—	0.37	5	45.0	0.20	—	38
0.50 to <0.75	—	0.63	5	45.0	0.20	—	55
0.75 to <2.50	—	1.34	12	41.2	2.80	—	111
2.50 to <10.00	0.4	4.20	3	45.0	0.90	0.5	125
10.00 to <100.00	—	—	—	—	—	—	—
100.00 (Default)	—	—	—	—	—	—	—
Sub-total	12.3	0.19	133	45.3	1.00	1.7	13

AIRB – Institutions
0.00 to <0.15	48.5	0.06	3,473	45.2	1.30	10.8	22
0.15 to <0.25	5.9	0.22	295	46.9	1.60	3.0	51
0.25 to <0.50	1.6	0.37	133	45.0	1.40	0.9	61
0.50 to <0.75	0.7	0.63	69	45.0	0.60	0.5	70
0.75 to <2.50	0.6	1.07	144	45.1	1.50	0.6	104
2.50 to <10.00	0.1	4.64	31	45.0	2.30	0.1	186
10.00 to <100.00	0.1	28.13	17	53.4	2.10	0.2	329
100.00 (Default)	—	—	—	—	—	—	—
Sub-total	57.5	0.14	4,162	45.3	1.40	16.1	28

AIRB – Corporates
0.00 to <0.15	30.9	0.07	5,839	41.6	1.90	7.5	24
0.15 to <0.25	7.3	0.22	1,870	46.3	1.90	3.7	51
0.25 to <0.50	3.4	0.37	1,131	47.1	1.70	2.1	62
0.50 to <0.75	3.3	0.63	968	43.3	1.40	2.6	79
0.75 to <2.50	5.7	1.35	3,112	46.3	1.40	6.1	107
2.50 to <10.00	0.7	4.24	693	47.6	1.70	1.2	171
10.00 to <100.00	0.1	24.67	121	49.9	2.00	0.3	300
100.00 (Default)	0.1	100.00	46	45.4	4.20	—	—
Sub-total	51.5	0.66	13,780	43.8	1.80	23.5	46

AIRB – Total at 31 Dec 2016	121.3	34.00	18,075	44.5	1.50	41.3	34

FIRB – Corporates
0.00 to <0.15	4.2	0.06	553	45.0	1.90	0.9	23
0.15 to <0.25	0.3	0.22	137	45.0	2.20	0.1	48
0.25 to <0.50	0.3	0.37	160	45.0	1.70	0.2	58
0.50 to <0.75	0.4	0.63	96	45.0	1.70	0.3	73
0.75 to <2.50	0.3	1.35	496	45.0	2.20	0.3	108
2.50 to <10.00	—	4.61	79	45.0	2.00	0.1	151
10.00 to <100.00	—	13.52	10	45.0	1.00	—	218
100.00 (Default)	—	100.00	7	45.0	1.20	—	—
FIRB – Total at 31 Dec 2017	5.5	0.20	1,538	45.0	1.91	1.9	35

Total (all portfolios) at 31 Dec 2016	126.8	0.33	19,613	44.5	1.52	43.2	34



Table 69: Securitisation exposures in the non-trading book
			Bank acts as originator			Bank acts as sponsor			Bank acts as investor
			Traditional	Synthetic	Sub-total	Traditional	Synthetic	Sub-total	Traditional	Synthetic	Sub-total
		Footnote	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
1	Retail (total)		0.8	—	0.8	18.2	—	18.2	6.0	—	6.0
2	– residential mortgage		—	—	—	0.3	—	0.3	2.6	—	2.6
3	– credit card		—	—	—	—	—	—	1.0	—	1.0
4	– other retail exposures		—	—	—	17.9	—	17.9	2.4	—	2.4
5	– re-securitisation		0.8	—	0.8	—	—	—	—	—	—
6	Wholesale (total)		—	4.7	4.7	2.7	—	2.7	2.8	—	2.8
7	– loans to corporates		—	4.7	4.7	0.4	—	0.4	0.1	—	0.1
8	– commercial mortgage		—	—	—	0.1	—	0.1	2.0	—	2.0
9	– lease and receivables		—	—	—	0.8	—	0.8	0.4	—	0.4
10	– other wholesale		—	—	—	0.4	—	0.4	0.3	—	0.3
11	– re-securitisation		—	—	—	1.0	—	1.0	—	—	—
	Total at 31 Dec 2017		0.8	4.7	5.5	20.9	—	20.9	8.8	—	8.8

1	Retail (total)		1.3	—	1.3	17.3	—	17.3	2.7	—	2.7
2	– residential mortgage		—	—	—	0.1	—	0.1	2.3	—	2.3
3	– credit card		—	—	—	—	—	—	—	—	—
4	– other retail exposures		—	—	—	17.2	—	17.2	0.4	—	0.4
5	– re-securitisation	1	1.3	—	1.3	—	—	—	—	—	—
6	Wholesale (total)		—	4.7	4.7	5.4	—	5.4	3.8	—	3.8
7	– loans to corporates		—	4.7	4.7	—	—	—	—	—	—
8	– commercial mortgage		—	—	—	—	—	—	2.9	—	2.9
9	– lease and receivables		—	—	—	—	—	—	—	—	—
10	– other wholesale		—	—	—	—	—	—	0.8	—	0.8
11	– re-securitisation		—	—	—	5.4	—	5.4	0.1	—	0.1
	Total at 31 Dec 2016		1.3	4.7	6.0	22.7	—	22.7	6.5	—	6.5



Table 71: Securitisation exposures in the non-trading book and associated capital requirements – bank acting as originator or sponsor
		Exposure values (by risk weight bands)					Exposure values (by regulatory approach)
		≤20% RW	>20% to 50% RW	>50% to 100% RW	>100% to 1,250% RW	1,250% RW¹	IRB RBM (including IAA)	IRB SFA	SA	1,250%
		$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
2	Traditional securitisation	18.6	1.4	0.2	0.5	0.8	20.2	—	0.6	0.8
3	Securitisation	18.4	0.7	0.2	0.3	0.2	19.1	—	0.6	0.2
4	– retail underlying	17.4	0.3	0.1	0.3	0.1	17.8	—	0.3	0.1
5	– wholesale	1.0	0.4	0.1	—	0.1	1.3	—	0.3	0.1
6	Re-securitisation	0.2	0.7	—	0.2	0.6	1.1	—	—	0.6
7	– senior	0.2	—	—	—	—	0.1	—	—	—
8	– non-senior	—	0.7	—	0.2	0.6	1.0	—	—	0.6
9	Synthetic securitisation	4.3	—	0.4	—	—	4.7	—	—	—
10	Securitisation	4.3	—	0.4	—	—	4.7	—	—	—
11	– retail underlying	—	—	—	—	—	—	—	—	—
12	– wholesale	4.3	—	0.4	—	—	4.7	—	—	—
13	Re-securitisation	—	—	—	—	—	—	—	—	—
14	– senior	—	—	—	—	—	—	—	—	—
15	– non-senior	—	—	—	—	—	—	—	—	—
1	Total at 31 Dec 2017	22.9	1.4	0.6	0.5	0.8	24.9	—	0.6	0.8

2	Traditional securitisation	16.7	2.0	0.2	0.2	4.9	18.9	—	0.2	4.9
3	Securitisation	16.7	0.4	0.1	0.1	—	17.2	—	0.2	—
4	– retail underlying	16.7	0.4	0.1	0.1	—	17.2	—	0.2	—
5	– wholesale	—	—	—	—	—	—	—	—	—
6	Re-securitisation	—	1.6	0.1	0.1	4.9	1.7	—	—	4.9
7	– senior	—	—	—	—	—	—	—	—	—
8	– non-senior	—	1.6	0.1	0.1	4.9	1.7	—	—	4.9
9	Synthetic securitisation	4.3	—	0.4	—	—	4.7	—	—	—
10	Securitisation	4.3	—	0.4	—	—	4.7	—	—	—
11	– retail underlying	—	—	—	—	—	—	—	—	—
12	– wholesale	4.3	—	0.4	—	—	4.7	—	—	—
13	Re-securitisation	—	—	—	—	—	—	—	—	—
14	– senior	—	—	—	—	—	—	—	—	—
15	– non-senior	—	—	—	—	—	—	—	—	—
1	Total at 31 Dec 2016	21.0	2.0	0.6	0.2	4.9	23.6	—	0.2	4.9



Table 71: Securitisation exposures in the non-trading book and associated capital requirements – bank acting as originator or sponsor (continued)
		RWAs (by regulatory approach)				Capital charge after cap
		IRB RBM (including IAA)	IRB SFA	SA	1,250% ¹	IRB RBM (including IAA)	IRB SFA	SA	1,250%
		$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
2	Traditional securitisation	3.3	—	0.4	7.1	0.2	—	—	0.6
3	Securitisation	2.3	—	0.4	1.4	0.1	—	—	0.2
4	– retail underlying	2.1	—	0.3	0.7	0.1	—	—	0.1
5	– wholesale	0.2	—	0.1	0.7	—	—	—	0.1
6	Re-securitisation	1.0	—	—	5.7	0.1	—	—	0.4
7	– senior	—	—	—	—	—	—	—	—
8	– non-senior	1.0	—	—	5.7	0.1	—	—	0.4
9	Synthetic securitisation	0.8	—	—	0.3	0.1	—	—	—
10	Securitisation	0.8	—	—	0.3	0.1	—	—	—
11	– retail underlying	—	—	—	—	—	—	—	—
12	– wholesale	0.8	—	—	0.3	0.1	—	—	—
13	Re-securitisation	—	—	—	—	—	—	—	—
14	– senior	—	—	—	—	—	—	—	—
15	– non-senior	—	—	—	—	—	—	—	—
1	Total at 31 Dec 2017	4.1	—	0.4	7.4	0.3	—	—	0.6

2	Traditional securitisation	2.6	—	0.2	58.8	0.2	—	—	1.2
3	Securitisation	1.6	—	0.2	—	0.1	—	—	—
4	– retail underlying	1.6	—	0.2	—	0.1	—	—	—
5	– wholesale	—	—	—	—	—	—	—	—
6	Re-securitisation	1.0	—	—	58.8	0.1	—	—	1.2
7	– senior	—	—	—	—	—	—	—	—
8	– non-senior	1.0	—	—	58.8	0.1	—	—	1.2
9	Synthetic securitisation	0.9	—	—	0.4	0.1	—	—	—
10	Securitisation	0.9	—	—	0.4	0.1	—	—	—
11	– retail underlying	—	—	—	—	—	—	—	—
12	– wholesale	0.9	—	—	0.4	0.1	—	—	—
13	Re-securitisation	—	—	—	—	—	—	—	—
14	– senior	—	—	—	—	—	—	—	—
15	– non-senior	—	—	—	—	—	—	—	—
1	Total at 31 Dec 2016	3.5	—	0.2	59.2	0.3	—	—	1.2



Table 72: Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor
		Exposure values (by risk weight bands)					Exposure values (by regulatory approach)
		≤20% RW	>20% to 50% RW	>50% to 100% RW	>100% to 1,250% RW	1,250% RW	IRB RBM (including IAA)	IRB SFA	SA	1,250%
		$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
2	Traditional securitisation	6.7	0.5	1.6	—	0.1	7.2	—	1.4	0.1
3	Securitisation	6.7	0.5	1.6	—	0.1	7.2	—	1.4	0.1
4	– retail underlying	4.5	0.4	1.1	—	0.1	4.5	—	1.4	0.1
5	– wholesale	2.2	0.1	0.5	—	—	2.7	—	—	—
6	Re-securitisation	—	—	—	—	—	—	—	—	—
7	– senior	—	—	—	—	—	—	—	—	—
8	– non-senior	—	—	—	—	—	—	—	—	—
9	Synthetic securitisation	—	—	—	—	—	—	—	—	—
10	Securitisation	—	—	—	—	—	—	—	—	—
11	– retail underlying	—	—	—	—	—	—	—	—	—
12	– wholesale	—	—	—	—	—	—	—	—	—
13	Re-securitisation	—	—	—	—	—	—	—	—	—
14	– senior	—	—	—	—	—	—	—	—	—
15	– non-senior	—	—	—	—	—	—	—	—	—
1	Total at 31 Dec 2017	6.7	0.5	1.6	—	0.1	7.2	—	1.4	0.1

2	Traditional securitisation	4.9	0.3	1.2	—	0.1	5.6	—	0.8	0.1
3	Securitisation	4.9	0.2	1.1	—	0.1	5.4	—	0.8	0.1
4	– retail underlying	2.5	0.1	—	—	0.1	2.4	—	0.1	0.1
5	– wholesale	2.4	0.1	1.1	—	—	3.0	—	0.7	—
6	Re-securitisation	—	0.1	0.1	—	—	0.2	—	—	—
7	– senior	—	—	0.1	—	—	0.1	—	—	—
8	– non-senior	—	0.1	—	—	—	0.1	—	—	—
9	Synthetic securitisation	—	—	—	—	—	—	—	—	—
10	Securitisation	—	—	—	—	—	—	—	—	—
11	– retail underlying	—	—	—	—	—	—	—	—	—
12	– wholesale	—	—	—	—	—	—	—	—	—
13	Re-securitisation	—	—	—	—	—	—	—	—	—
14	– senior	—	—	—	—	—	—	—	—	—
15	– non-senior	—	—	—	—	—	—	—	—	—
1	Total at 31 Dec 2016	4.9	0.3	1.2	—	0.1	5.6	—	0.8	0.1



Table 72: Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor (continued)
		RWAs (by regulatory approach)				Capital charge after cap
		IRB RBM (including IAA)	IRB SFA	SA	1,250%	IRB RBM (including IAA)	IRB SFA	SA	1,250%
		$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn
2	Traditional securitisation	1.9	—	1.2	0.9	0.1	—	0.1	0.1
3	Securitisation	1.9	—	1.2	0.9	0.1	—	0.1	0.1
4	– retail underlying	1.0	—	1.2	0.7	—	—	0.1	0.1
5	– wholesale	0.9	—	—	0.2	0.1	—	—	—
6	Re-securitisation	—	—	—	—	—	—	—	—
7	– senior	—	—	—	—	—	—	—	—
8	– non-senior	—	—	—	—	—	—	—	—
9	Synthetic securitisation	—	—	—	—	—	—	—	—
10	Securitisation	—	—	—	—	—	—	—	—
11	– retail underlying	—	—	—	—	—	—	—	—
12	– wholesale	—	—	—	—	—	—	—	—
13	Re-securitisation	—	—	—	—	—	—	—	—
14	– senior	—	—	—	—	—	—	—	—
15	– non-senior	—	—	—	—	—	—	—	—
1	Total at 31 Dec 2017	1.9	—	1.2	0.9	0.1	—	0.1	0.1

2	Traditional securitisation	1.2	—	0.7	1.3	0.1	—	0.1	0.1
3	Securitisation	1.1	—	0.7	1.1	0.1	—	0.1	0.1
4	– retail underlying	0.3	—	—	1.0	—	—	—	0.1
5	– wholesale	0.8	—	0.7	0.1	0.1	—	0.1	—
6	Re-securitisation	0.1	—	—	0.2	—	—	—	—
7	– senior	—	—	—	—	—	—	—	—
8	– non-senior	0.1	—	—	0.2	—	—	—	—
9	Synthetic securitisation	—	—	—	—	—	—	—	—
10	Securitisation	—	—	—	—	—	—	—	—
11	– retail underlying	—	—	—	—	—	—	—	—
12	– wholesale	—	—	—	—	—	—	—	—
13	Re-securitisation	—	—	—	—	—	—	—	—
14	– senior	—	—	—	—	—	—	—	—
15	– non-senior	—	—	—	—	—	—	—	—
1	Total at 31 Dec 2016	1.2	—	0.7	1.3	0.1	—	0.1	0.1



Currencies
$	United States dollar

A
ABCP	Asset-backed commercial paper
ABS¹	Asset-backed security
AFS¹	Available-for-sale
AIRB¹	Advanced internal ratings based approach
ALCM	Asset, Liability and Capital Management
ALCO	Asset and Liability Management Committee
AT1 capital	Additional tier 1 capital
AVA	Additional value adjustment

B
BCBS	Basel Committee on Banking Supervision


BSM	Balance Sheet Management

C
CCB¹	Capital conservation buffer
CCF¹	Credit conversion factor
CCP	Central counterparty
CCR¹	Counterparty credit risk
CCyB¹	Countercyclical capital buffer
CDS¹	Credit default swap
CET1¹	Common equity tier 1
CIU	Collective investment undertakings
CML¹	Consumer and Mortgage Lending (US)
CRA¹	Credit risk adjustment
CRD IV¹	Capital Requirements Regulation and Directive
CRE¹	Commercial real estate
CRM	Credit risk mitigation/mitigant
CRR¹	Customer risk rating
CSA¹	Credit Support Annex
CVA	Credit valuation adjustment
CVC	Conduct and Values Committee

D
D-SIB	Domestic systemically important bank
DPA	Deferred prosecution agreement
E
EAD¹	Exposure at default
EBA	European Banking Authority
EC	European Commission
ECA	Export Credit Agency
ECAI¹	External Credit Assessment Institution
EEA	European Economic Area
EL¹	Expected loss
EU	European Union
EVE¹	Economic value of equity

F
FFVA	Funding Fair Value Adjustment
FIRB¹	Foundation internal ratings based approach
Fitch	Fitch Ratings
FPC¹	Financial Policy Committee (UK)
FSB	Financial Stability Board
FSVC	Financial System Vulnerabilities Committee

G
GAC	Group Audit Committee
GB&M	Global Banking and Markets, a global business
GMB	Group Management Board
GPB	Global Private Banking, a global business




GRC	Group Risk Committee
Group	HSBC Holdings together with its subsidiary undertakings
G-SIB¹	Global systemically important bank
G-SII	Global systemically important institution

H
HKMA	Hong Kong Monetary Authority
Hong Kong	The Hong Kong Special Administrative Region of the People’s Republic of China
HSBC	HSBC Holdings together with its subsidiary undertakings
HVCRE	High volatility commercial real estate

I
IAA¹	Internal Assessment Approach
ICAAP¹	Internal Capital Adequacy Assessment Process
ICG	Individual capital guidance
IFRSs	International Financial Reporting Standards
ILAA	Individual Liquidity Adequacy Assessment
ILR	Inherent Liquidity Risk
IMA	Internal Models Approach
IMM¹	Internal Model Method
IMR	Independent Model Review
IRB¹	Internal ratings based approach
IRC¹	Incremental risk charge
IRRBB	Interest rate risk in the banking book

L
LCR	Liquidity Coverage Ratio
LFRF	Liquidity and Funding Risk Framework
LGD¹	Loss given default
Libor	London interbank offered rate

M
MDB¹	Multilateral Development Bank
MENA	Middle East and North Africa
MOC	Model Oversight Committee
Moody’s	Moody’s Investor Service
MPE	Multiple point of entry
MREL	Minimum requirements for own funds and eligible liabilities

N
NCOA	Non-credit obligation asset
NSFR	Net Stable Funding Ratio

O
ORMF	Operational risk management framework
OTC¹	Over-the-counter

P
PD¹	Probability of default
PFE¹	Potential future exposure
PIT¹	Point-in-time
PRA¹	Prudential Regulation Authority (UK)
PVA¹	Prudent valuation adjustment

Q
QCCP	Qualifying Central Counterparty

R
RAS	Risk appetite statement
RBM¹	Ratings Based Method
RBWM	Retail Bank and Wealth Management, a global business
Retail IRB¹	Retail internal ratings based approach
RMM	Risk Management Meeting of the GMB
RNIV	Risks not in VaR

Cautionary statement regarding forward-

looking statements

The Pillar 3 Disclosures at 31 December 2017 contain certain forward-looking statements with respect to HSBC’s financial condition, results of operations, capital position and business.

Statements that are not historical facts, including statements about HSBC’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 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 statements.

Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC’s Directors, officers or employees to third parties, including financial analysts.

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. These include, but are not limited to:

•

changes in general economic conditions in the markets in which we operate, such as continuing or deepening recessions and fluctuations in employment beyond those factored into consensus forecasts; changes in foreign exchange rates and interest rates; volatility in equity markets; lack of liquidity in wholesale funding markets; illiquidity and downward price pressure in national real estate markets; adverse changes in central banks’ policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over-indebted countries; adverse changes in the funding status of public or private defined

benefit pensions; and consumer perception as to the continuing availability of credit and price competition in the market segments we serve;

•

changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities; initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; changes in bankruptcy legislation in the principal markets in which we operate and the consequences thereof; general changes in government policy that may significantly influence investor decisions; extraordinary government actions as a result of current market turmoil; other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for our products and services; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies, including securities firms; and

•

factors specific to HSBC, including discretionary RWA growth and our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; our success in addressing operational, legal and regulatory, and litigation challenges; and the other risks and uncertainties we identify in ‘top and emerging risks’ on pages 95 to 106 of the Annual Report and Accounts 2017.



Table 9: Leverage ratio – Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures)
		At 31 Dec
		2017	2016
Ref^*		$bn	$bn
EU-1	Total on-balance sheet exposures (excluding derivatives, SFTs, and exempted exposures)	1,998.7	1,844.4
EU-2	– trading book exposures	268.6	267.5
EU-3	– banking book exposures	1,730.1	1,576.9
	’banking book exposures’ comprises:
EU-4	covered bonds	1.3	1.1
EU-5	exposures treated as sovereigns	504.8	504.4
EU-6	exposures to regional governments, multilateral development banks (‘MDB’), international organisations and public sector entities not treated as sovereigns	9.8	6.0
EU-7	institutions	77.0	67.6
EU-8	secured by mortgages of immovable properties	283.4	254.6
EU-9	retail exposures	89.3	84.6
EU-10	corporate	586.0	532.4
EU-11	exposures in default	9.7	12.4
EU-12	other exposures (e.g. equity, securitisations and other non-credit obligation assets)	168.8	113.8



Table 29: Credit derivatives exposures
		At 31 Dec
		2017				2016
	Footnote	Protection bought		Protection sold		Protection bought		Protection sold
		$bn		$bn		$bn		$bn
Notionals
Credit derivative products used for own credit portfolio
– Index credit default swaps		6.3		3.7		4.6		1.9
Total notionals used for own credit portfolio		6.3		3.7		4.6		1.9
Credit derivative products used for intermediation	1
– Index credit default swaps		195.5		176.0		214.6		207.4
– Total return swaps		7.8		12.2		12.3		7.0
Total notionals used for intermediation		203.3		188.2		226.9		214.4
Total credit derivative notionals		209.6		191.9		231.5		216.3
Fair values
– Positive fair value (asset)		0.8		4.3		2.3		2.9
– Negative fair value (liability)		(4.4	)	(1.0	)	(3.1	)	(2.7	)


†	The references (a) – (q) identify balance sheet components that are used in the calculation of regulatory capital on page 14.


1	The amounts shown in the column ‘Carrying values under scope of regulatory consolidation’ do not equal the sum of the amounts shown in the remaining columns of this table for line items ‘Derivatives’ and ‘Trading assets’, as some of the assets included in these items are subject to regulatory capital charges for both CCR and market risk.


2	The amounts shown in the column ‘Subject to the counterparty credit risk framework’ include both non-trading book and trading book.



Table 5: Main sources of differences between regulatory exposure amounts and carrying values in financial statements
			Items subject to:
	Total		Credit risk framework		CCR framework		Securitisation framework
	$bn		$bn		$bn		$bn
Carrying value of assets within scope of regulatory consolidation¹	2,384.7		1,638.5		459.8		21.5
Carrying value of liabilities within scope of regulatory consolidation¹	520.7		1.6		357.5		—
Net carrying value within scope of regulatory consolidation	1,864.0		1,636.9		102.3		21.5
Off-balance sheet amounts and potential future exposure for counterparty risk	801.7		271.0		135.2		15.3
Differences in netting rules	10.4		9.3		1.1
Differences due to financial collateral on standardised approach	(14.7	)	(14.7	)
Differences due to impairments on IRB approach	4.7		4.7
Differences due to EAD modelling and other differences	3.3		5.0				(1.7	)
Differences due to credit risk mitigation	(71.1	)			(71.1	)
Exposure values considered for regulatory purposes at 31 Dec 2017	2,598.3		1,912.2		167.5		35.1


1	Excludes amounts subject to deduction from capital or not subject to regulatory capital requirements.


*	The references identify the lines prescribed in the European Banking Authority (‘EBA’) template. Lines represented in this table are those lines which are applicable and where there is a value.



Table 7: Summary reconciliation of accounting assets and leverage ratio exposures
		At 31 Dec
		2017		2016
Ref*		$bn		$bn
1	Total assets as per published financial statements	2,521.8		2,375.0
	Adjustments for:
2	– entities which are consolidated for accounting purposes but are outside the scope of regulatory consolidation	(88.4	)	(75.4	)
4	– derivative financial instruments	(91.0	)	(158.6	)
5	– securities financing transactions (‘SFT’)	12.2		10.1
6	– off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)	227.4		223.1
7	– other	(24.9	)	(19.8	)
8	Total leverage ratio exposure	2,557.1		2,354.4



Table 10: Overview of RWAs
		At
		31 Dec	30 Sep	31 Dec
		2017	2017	2017
		RWAs	RWAs	Capital¹ required
		$bn	$bn	$bn
1	Credit risk (excluding counterparty credit risk)	623.9	615.9	50.0
2	– standardised approach	126.9	129.8	10.2
3	– foundation IRB approach	28.4	27.7	2.3
4	– advanced IRB approach	468.6	458.4	37.5
6	Counterparty credit risk	54.1	59.8	4.4
7	– mark-to-market	34.2	37.2	2.7
10	– internal model method	9.7	10.0	0.8
11	– risk exposure amount for contributions to the default fund of a central counterparty	0.7	0.7	0.1
12	– credit valuation adjustment	9.5	11.9	0.8
13	Settlement risk	0.4	0.7	—
14	Securitisation exposures in the non-trading book	15.3	22.8	1.2
15	– IRB ratings based method	12.0	20.0	1.0
16	– IRB supervisory formula method	0.2	0.2	—
17	– IRB internal assessment approach	1.5	1.5	0.1
18	– standardised approach	1.6	1.1	0.1
19	Market risk	38.9	42.6	3.1
20	– standardised approach	4.4	4.4	0.3
21	– internal models approach	34.5	38.2	2.8
23	Operational risk	92.7	98.0	7.4
25	– standardised approach	92.7	98.0	7.4
27	Amounts below the thresholds for deduction (subject to 250% risk weight)	46.0	48.8	3.7
29	Total	871.3	888.6	69.8


1	‘Capital requirements’ here and in all tables where the term is used, represents the Pillar 1 capital charge at 8% of RWAs.


•	an increase in asset size of $8.2bn, mainly as a result of corporate and mortgage book growth in Asia;


•	increases from model updates of $5.6bn, mainly in the UK corporate models; less


•	savings from RWA initiatives of $11.9bn, principally from process improvements of $4.7bn, refined calculations of $3.3bn, US Consumer and Mortgage Lending (‘CML’) run-off of $2.2bn and exposure reductions of $1.7bn.



Table 11: RWA flow statements of credit risk exposures under the IRB approach^{1, 2}
		RWAs		Capital required
		$bn		$bn
1	At 1 Oct 2017	486.1		38.9
2	Asset size	5.6		0.4
3	Asset quality	0.1		—
4	Model updates	6.5		0.6
5	Methodology and policy	(4.2	)	(0.3	)
6	Acquisitions and disposals	—		—
7	Foreign exchange movements	2.9		0.2
8	Other	—		—
9	At 31 Dec 2017	497.0		39.8


1	This table includes RWA initiatives of $6.8bn allocated across the RWA flow layers to which they relate.


•	an increase in asset size of $5.6bn, principally as a result of corporate and mortgage book growth in Asia;


•	an increase in model updates of $6.5bn, mainly due to corporate model updates in the UK; less


•	a decrease in methodology and policy of $4.2bn, mainly as a result of RWA initiatives.



Table 12: RWA flow statements of CCR exposures under the IMM¹
		RWAs		Capital required
		$bn		$bn
1	At 1 Oct 2017	13.3		1.1
2	Asset size	(0.1	)	—
3	Asset quality	(0.1	)	—
5	Methodology and policy	(0.6	)	—
9	At 31 Dec 2017	12.5		1.1



Table 13: RWA flow statements of market risk exposures under the IMA¹
		VaR		Stressed VaR		IRC		Other		Total RWAs		Total capital required
		$bn		$bn		$bn		$bn		$bn		$bn
1	At 1 Oct 2017	8.0		15.2		12.8		2.2		38.2		3.1
2	Movement in risk levels	1.5		1.4		(1.9	)	(0.3	)	0.7		0.1
3	Model updates/changes	—		(0.1	)	—		—		(0.1	)	—
4	Methodology and policy	(1.2	)	(2.2	)	(0.9	)	—		(4.3	)	(0.4	)
8	At 31 Dec 2017	8.3		14.3		10.0		1.9		34.5		2.8


1	Securitisation positions and non-credit obligation assets are not included in this table.


2	Exposures in default comprises principally defaulted exposure to corporates of $3.3bn, retail clients of $1.1bn and exposure secured on immovable property of $1.0bn.



Table 15: Credit quality of exposures by industry or counterparty types
		Gross carrying values of		Specific credit risk adjustments	Write-offs in the year	Credit risk adjustment charges of the period		Net carrying values¹
		Defaulted exposures	Non-defaulted exposures	Specific credit risk adjustments	Write-offs in the year	Credit risk adjustment charges of the period		Net carrying values¹
		$bn	$bn	$bn	$bn	$bn		$bn
1	Agriculture	0.4	9.5	0.1	—	—		9.8
2	Mining	1.4	42.2	0.5	0.2	(0.1	)	43.1
3	Manufacturing	2.3	254.2	1.2	0.3	0.2		255.3
4	Utilities	0.3	33.9	0.1	0.1	—		34.1
5	Water supply	—	3.0	—	—	—		3.0
6	Construction	1.0	39.2	0.3	0.1	—		39.9
7	Wholesale & retail trade	2.4	203.5	1.4	0.4	0.5		204.5
8	Transportation & storage	0.5	52.1	0.1	—	—		52.5
9	Accommodation & food services	0.3	24.9	0.1	—	—		25.1
10	Information & communication	0.1	10.0	—	0.1	—		10.1
11	Financial & insurance	0.4	553.0	0.8	0.1	0.1		552.6
12	Real estate	1.2	220.9	0.9	0.1	0.2		221.2
13	Professional activities	0.2	19.2	—	—	—		19.4
14	Administrative service	0.9	81.6	0.7	0.1	0.1		81.8
15	Public admin & defence	0.3	172.8	—	—	—		173.1
16	Education	—	3.7	—	—	—		3.7
17	Human health & social work	0.2	7.6	—	—	—		7.8
18	Arts & entertainment	0.1	8.9	—	—	—		9.0
19	Other services	0.1	10.4	—	—	—		10.5
20	Personal	5.0	554.7	1.9	1.7	1.0		557.8
21	Extraterritorial bodies	—	39.5	—	—	—		39.5
22	Total at 31 Dec 2017	17.1	2,344.8	8.1	3.2	2.0		2,353.8


1	Securitisation positions and non-customer assets are not included in this table.



Table 16: Credit quality of exposures by geography¹
		Gross carrying values of		Specific credit risk adjustments	Write-offs in the year	Credit risk adjustment charges of the period		Net carrying values²
		Defaulted exposures	Non-defaulted exposures	Specific credit risk adjustments	Write-offs in the year	Credit risk adjustment charges of the period		Net carrying values²
		$bn	$bn	$bn	$bn	$bn		$bn
1	Europe	8.1	795.6	3.0	1.2	0.8		800.7
2	United Kingdom	4.1	465.3	1.8	0.7	0.7		467.6
3	France	1.2	121.5	0.6	0.1	—		122.1
4	Other countries	2.8	208.8	0.6	0.4	0.1		211.0
5	Asia	2.5	970.7	1.7	0.6	0.6		971.5
6	Hong Kong	0.9	465.5	0.5	0.3	0.4		465.9
7	China	0.3	167.2	0.3	0.1	0.1		167.2
8	Singapore	0.1	70.2	0.1	—	—		70.2
9	Other countries	1.2	267.8	0.8	0.2	0.1		268.2
10	MEA	2.9	134.1	1.8	0.4	0.2		135.2
11	North America	2.6	387.6	1.0	0.3	(0.1	)	389.2
12	United States of America	1.5	268.9	0.4	0.1	—		270.0
13	Canada	0.4	100.9	0.3	0.1	(0.1	)	101.0
14	Other countries	0.7	17.8	0.3	0.1	—		18.2
15	Latin America	1.0	62.3	0.6	0.7	0.5		62.7
16	Other geographical areas	—	18.3	—	—	—		18.3
17	Total at 31 Dec 2017	17.1	2,368.6	8.1	3.2	2.0		2,377.6


1	Amounts shown by geographical region and country in this table are based on the country of residence of the counterparty.



Table 17: Ageing of past-due unimpaired and impaired exposures
		Gross carrying values
		Less than 30 days	Between 30 and 60 days	Between 60 and 90 days	Between 90 and 180 days	Between 180 days and 1 year	Greater than 1 year
		$bn	$bn	$bn	$bn	$bn	$bn
1	Loans	7.6	1.5	0.8	2.0	0.9	4.1
2	Debt securities	—	—	—	—	—	—
3	Total exposures at 31 Dec 2017	7.6	1.5	0.8	2.0	0.9	4.1



Table 18: Non-performing and forborne exposures
		Gross carrying values of performing and non-performing exposures							Accumulated impairment and provisions and negative fair value adjustments due to credit risk								Collateral and financial guarantees received
			of which performing but past due between 30 and 90 days	of which performing forborne	of which non-performing				On performing exposures				On non- performing exposures				On non-performing exposures	of which forborne
			of which performing but past due between 30 and 90 days	of which performing forborne		of which defaulted	of which impaired	of which forborne			of which forborne				of which impaired		On non-performing exposures	of which forborne
		$bn	$bn	$bn	$bn	$bn	$bn	$bn	$bn		$bn		$bn		$bn		$bn	$bn
1	Debt securities	325.1	—	—	—	—	—	—	—		—		—		—		—	—
2	Loans	1,240.3	1.7	2.5	15.8	15.1	15.8	6.7	(2.4	)	(0.1	)	(5.5	)	(1.9	)	6.2	4.3
3	Off-balance sheet exposures	784.4		0.3	2.0	2.0	—	—	(0.2	)	—		—		—		0.2	—


1	Corporates includes specialised lending net carrying value subject to supervisory slotting approach of $37.6bn (2016: $34.1bn) and RWAs of $23.6bn (2016: $22.2bn).


2	This includes investments in insurance companies that are risk weighted at 250%.


3	Average net carrying values are calculated by aggregating net carrying values of the last five quarters and dividing by five.