FORM 6-K
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a - 16 or 15d - 16 of
 
the Securities Exchange Act of 1934
 
For the month of August 2019

Commission File Number: 001-14930

HSBC Holdings plc
 
42nd Floor, 8 Canada Square, London E14 5HQ, England
 
(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F).
 
Form 20-F   X             Form 40-F ......
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):   ______
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):   ______


(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934).
 
Yes.......             No    X
 
(If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ..............).
 




Pillar 3 Disclosures at 30 June 2019

Contents
 
Page
Highlights
Regulatory framework for disclosures
Pillar 3 disclosures
Key metrics
Regulatory developments
Structure of the regulatory group
Capital and RWAs
Own funds
Leverage ratio
Capital buffers
Pillar 1 minimum capital requirements and RWA flow
Credit risk
Credit quality of assets
Defaulted exposures
Risk mitigation
Counterparty credit risk
Securitisation
Market risk
Minimum requirement for own funds and eligible liabilities
Creditor ranking at legal entity level
Other information
Abbreviations
Cautionary statement regarding forward-looking statements
Contacts
Tables
 
 
Ref
Page
1
Key metrics (KM1/IFRS9-FL)
a
2
Reconciliation of capital with and without IFRS 9 transitional arrangements
 
3
Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation
 
4
Own funds disclosure
b
5
Leverage ratio common disclosure (LRCom)
a
6
Summary reconciliation of accounting assets and leverage ratio exposures (LRSum)
b
7
Leverage ratio – Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures) (LRSpl)
a
8
Overview of RWAs (OV1)
b
9
RWA flow statements of credit risk exposures under IRB (CR8)
 
10
RWA flow statements of CCR exposures under IMM (CCR7)
 
11
RWA flow statements of market risk exposures under IMA (MR2-B)
 
12
Credit risk summary by approach
a
13
Credit quality of exposures by exposure class and instrument (CR1-A)
 
14
Credit quality of exposures by industry or counterparty types (CR1-B)
 
15
Credit quality of exposures by geography (CR1-C)
 
16
Ageing of past-due unimpaired and impaired exposures (CR1-D)
 
17
Non-performing and forborne exposures (CR1-E)
 
18
Changes in stock of general and specific credit risk adjustments (CR2-A)
 
19
Changes in stock of defaulted loans and debt securities (CR2-B)
 
20
Credit risk mitigation techniques – overview (CR3)
 
21
Standardised approach – credit conversion factor and credit risk mitigation (‘CRM’) effects (CR4)
b
22
Standardised approach – exposures by asset classes and risk weights (CR5)
b
23
IRB – Credit risk exposures by portfolio and PD range (CR6)
a
24
IRB – Effect on RWA of credit derivatives used as CRM techniques (CR7)
 
25
Specialised lending on slotting approach (CR10)
 
 
26
Analysis of counterparty credit risk exposure by approach (excluding centrally cleared exposures) (CCR1)
 
27
Credit valuation adjustment capital charge (CCR2)
 
28
Standardised approach – CCR exposures by regulatory portfolio and risk weights (CCR3)
 
29
IRB – CCR exposures by portfolio and PD scale (CCR4)
 
30
Impact of netting and collateral held on exposure values (CCR5-A)
 
31
Composition of collateral for CCR exposure (CCR5-B)
 
32
Exposures to central counterparties (CCR8)
 
33
Credit derivatives exposures (CCR6)
 
34
Securitisation exposures in the non-trading book (SEC1)
 
35
Securitisation exposures in the trading book (SEC2)
 
36i
Securitisation exposures in the non-trading book and associated regulatory capital requirements – bank acting as originator or as sponsor (under the pre-existing framework) (SEC3)
 
36ii
Securitisation exposures in the non-trading book and associated regulatory capital requirements – bank acting as originator or as sponsor (under the new framework) (SEC3)
 
37i
Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor (under the pre-existing framework) (SEC4)
 
37ii
Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor (under the new framework) (SEC4)
 
38
Market risk under standardised approach (MR1)
 
39
Market risk under IMA (MR2-A)
 
40
IMA values for trading portfolios (MR3)
 
41
Comparison of VaR estimates with gains/losses (MR4)
 
42
Key metrics of the resolution groups (KM2)
a
43
TLAC composition (TLAC1)
a
44
HSBC Holdings plc creditor ranking (TLAC3)
 
45
HSBC UK Bank plc creditor ranking (TLAC2)
 
46
HSBC Bank plc creditor ranking (TLAC2)
 
47
HSBC Asia Holdings Ltd creditor ranking (TLAC3)
 
48
The Hongkong and Shanghai Banking Corporation Ltd creditor ranking (TLAC2)
 
49
Hang Seng Bank Ltd creditor ranking (TLAC2)
 
50
HSBC North America Holdings Inc. creditor ranking (TLAC3)
 
The Group has adopted the EU’s regulatory transitional arrangements for IFRS 9 ‘Financial instruments’. A number of tables in this document report under this arrangement as follows:
a.
Some figures have been prepared on an IFRS 9 transitional basis. Footnotes in the tables provide detail.
b.
All figures have been prepared on an IFRS 9 transitional basis.
All other tables report numbers on the basis of full adoption of IFRS 9.
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 ‘$m’, ‘$bn’ and ‘$tn’ represent millions, billions (thousands of millions) and trillions of US dollars, respectively.



1
HSBC Holdings plc


Highlights
Common equity tier 1 ($bn)
chart-47180a0acb88edcb886.jpg
Risk-weighted assets ($bn)
chart-449c028a0b8f90943cd.jpg
Common equity tier 1 ratio (%)
chart-084d7d970f9816dad90.jpg
Leverage ratio (%)
chart-92624ee7bbfd819293d.jpg
Unless otherwise stated all figures are calculated using the EU's regulatory transitional arrangements for IFRS 9 in article 473a of the Capital Requirements Regulation.
Our leverage ratio at 30 June 2019 is calculated on a CRR II end point basis for capital. Prior period leverage ratios are calculated on the CRD IV end point basis for capital.

 
Regulatory framework for disclosures
We are supervised on a consolidated basis in the 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, capital is calculated for prudential regulatory reporting purposes using the Basel III framework of the Basel Committee on Banking Supervision (‘Basel’), as implemented by the European Union (‘EU’) in the revisions to the Capital Requirements Regulation (‘CRR II’), and in the PRA Rulebook for the UK banking industry. The regulators of Group banking entities outside the EU are at varying stages of implementing the Basel III framework, so the Group may have been subject to local regulations in the first half of 2019 that were on the basis of the Basel I, II or III frameworks. Refer to the Regulatory Developments section on page 4 for further detail.
The Basel Committee’s framework is structured around three ‘pillars’: the Pillar 1 minimum capital requirements; the Pillar 2 supervisory review process; and the Pillar 3 on market discipline. The aim of Pillar 3 is to produce disclosures that allow market participants to assess the scope of banks’ application of the Basel Committee’s framework. It also aims to assess their application of the rules in their jurisdiction, capital conditions, risk exposures and risk management processes, and hence their capital adequacy.
Pillar 3 disclosures
Our Pillar 3 Disclosures at 30 June 2019 comprises both quantitative and qualitative information required under Pillar 3. They are made in accordance with Part Eight of the Capital Requirements Regulation, as amended by CRR II and the European Banking Authority (‘EBA’) guidelines on disclosure requirements 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’).
To give insight into movements during the year, we provide comparative figures for the previous year or period, analytical reviews of variances and flow tables for capital requirements. In all tables where the term ‘capital requirements’ is used, this represents the minimum total capital charge set at 8% of risk weighted assets (‘RWAs’) by article 92 of the Capital Requirements Regulation.
Where disclosures have been enhanced, or are new, we do not generally restate or provide prior year comparatives. Wherever specific rows and columns in the tables prescribed by the EBA or Basel are not applicable or immaterial to our activities, we omit them and follow the same approach for comparative 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 Interim Report 2019 or to 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.

HSBC Holdings plc
2


Pillar 3 Disclosures at 30 June 2019

Key metrics
Table 1: Key metrics (KM1/IFRS9-FL)
 
 
 
At
 
 
 
30 Jun

31 Mar

31 Dec

30 Sep

30 Jun

Ref*
 
Footnotes
2019

2019

2018

2018

2018

 
Available capital ($bn)
1
 
 
 
 
 
1
Common equity tier 1 (‘CET1’) capital
^
126.9

125.8

121.0

123.1

122.8

2
CET1 capital as if IFRS 9 transitional arrangements had not been applied
 
126.0

124.9

120.0

122.1

121.8

3
Tier 1 capital
^
152.8

151.8

147.1

149.3

147.1

4
Tier 1 capital as if IFRS 9 transitional arrangements had not been applied
 
151.9

150.9

146.1

148.3

146.1

5
Total capital
^
178.3

177.8

173.2

178.1

176.6

6
Total capital as if IFRS 9 transitional arrangements had not been applied
 
177.4

176.9

172.2

177.1

175.6

 
Risk-weighted assets (‘RWAs’) ($bn)
 
 
 
 
 
 
7
Total RWAs
 
886.0

879.5

865.3

862.7

865.5

8
Total RWAs as if IFRS 9 transitional arrangements had not been applied
 
885.5

878.9

864.7

862.1

864.9

 
Capital ratios (%)
1
 
 
 
 
 
9
CET1
^
14.3

14.3

14.0

14.3

14.2

10
CET1 as if IFRS 9 transitional arrangements had not been applied
 
14.2

14.2

13.9

14.2

14.1

11
Tier 1
^
17.2

17.3

17.0

17.3

17.0

12
Tier 1 as if IFRS 9 transitional arrangements had not been applied
 
17.2

17.2

16.9

17.2

16.9

13
Total capital
^
20.1

20.2

20.0

20.7

20.4

14
Total capital as if IFRS 9 transitional arrangements had not been applied
 
20.0

20.1

19.9

20.6

20.3

 
Additional CET1 buffer requirements as a percentage of RWA (%)
 
 
 
 
 
 
 
Capital conservation buffer requirement
 
2.50

2.50

1.88

1.88

1.88

 
Countercyclical buffer requirement
 
0.68

0.67

0.56

0.45

0.46

 
Bank G-SIB and/or D-SIB additional requirements
 
2.00

2.00

1.50

1.50

1.50

 
Total of bank CET1 specific buffer requirements
 
5.18

5.17

3.94

3.83

3.84

 
Total capital requirement (%)
2
 
 
 
 
 
 
Total capital requirement
 
11.0

11.0

10.9

11.5

11.5

 
CET1 available after meeting the bank’s minimum capital requirements
 
8.1

8.1

7.9

7.8

7.7

 
Leverage ratio
3
 
 
 
 
 
15
Total leverage ratio exposure measure ($bn)
 
2,786.5

2,735.2

2,614.9

2,676.4

2,664.1

16
Leverage ratio (%)
^
5.4

5.4

5.5

5.4

5.4

17
Leverage ratio as if IFRS 9 transitional arrangements had not been applied (%)
 
5.3

5.4

5.5

5.4

5.3


Liquidity coverage ratio (‘LCR’)
4
 
 
 
 
 

Total high-quality liquid assets ($bn)

532.8

535.4

567.2

533.2

540.2


Total net cash outflow ($bn)

391.0

374.8

368.7

334.1

341.7


LCR ratio (%)

136.3

142.9

153.8

159.6

158.1

*
The references in this and subsequent tables identify the lines prescribed in the relevant EBA template where applicable and where there is a value.
^
Figures have been prepared on an IFRS 9 transitional basis.
1
Capital figures and ratios at 30 June 2019 are reported on a CRR II transitional basis. Prior period capital figures are reported on a CRD IV transitional basis.
2
Total capital requirement is defined as the sum of Pillar 1 and Pillar 2A capital requirements set by the PRA. The minimum requirements represent the total capital requirement to be met by CET1.
3
Leverage ratio at 30 June 2019 is calculated using the CRR II end point basis for capital. Prior period leverage ratios are calculated on the CRD IV end point basis for capital.
4
The EU's regulatory transitional arrangements for IFRS 9 ‘Financial Instruments’ in article 473a of the Capital Requirements Regulation do not apply to liquidity coverage measures. LCR is calculated as at the end of each period rather than using average values. For further details, refer to page 72 of the Interim Report 2019.

The Group has adopted the regulatory transitional arrangements, including paragraph four within article 473a of the Capital Requirements Regulation, published by the EU on 27 December 2017 for IFRS 9 ‘Financial Instruments’. These permit banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances during the first five years of use. The proportion that banks may add back starts at 95% in 2018, and reduces to 25% by 2022.
The impact of IFRS 9 on loan loss allowances is defined as:
the increase in loan loss allowances on day one of IFRS 9 adoption; and

 
any subsequent increase in expected credit losses (‘ECL’) in the non-credit-impaired book thereafter.
The impact is calculated separately for portfolios using the standardised (‘STD’) and internal ratings based (‘IRB’) approaches and, for IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses.
Any add-back must be tax affected and accompanied by a recalculation of capital deduction thresholds, exposure and RWAs.
Table 2 presents a reconciliation recommended by the Disclosing Expected Credit Losses taskforce to further explain the Group's transitional and fully loaded capital measures.

3
HSBC Holdings plc


Table 2: Reconciliation of capital with and without IFRS 9 transitional arrangements
 
At 30 Jun 2019
 
CET1

Tier 1

Total own funds

 
$bn

$bn

$bn

Reported balance using IFRS 9 transitional arrangements
126.9

152.8

178.3

ECL reversed under transitional arrangements for IFRS 9
(1.0
)
(1.0
)
(1.0
)
– STD approach
(1.0
)
(1.0
)
(1.0
)
Tax impacts
0.2

0.2

0.2

Changes in amounts deducted from CET1 for deferred tax assets and significant investments
(0.1
)
(0.1
)
(0.1
)
– amounts deducted from CET1 for significant investments
(0.1
)
(0.1
)
(0.1
)
Reported balance excluding IFRS 9 transitional arrangements
126.0

151.9

177.4

Regulatory developments
The Basel Committee
In December 2017, Basel published the Basel III Reforms. 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 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 RWAs 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 banks (‘G-SIB’). This will take the form of a tier 1 capital buffer set at 50% of the G-SIB’s RWA capital buffer.
Following a recalibration, Basel published the final changes to the market risk RWA regime, the Fundamental Review of the Trading Book (‘FRTB’) in January 2019. The new regime contains a more clearly defined trading book boundary, the introduction of an internal models approach based upon expected shortfall models, capital requirements for risk factors which cannot be modelled, and a more risk-sensitive standardised approach that can serve as a fall-back for the internal models method.
In June 2019, Basel published a revised treatment of client-cleared derivatives for the purposes of the leverage ratio. This will permit both cash and non-cash initial and variation margin to offset derivative exposure in the leverage ratio. At the same time, Basel published revised leverage ratio disclosure requirements that will require banks to disclose their leverage ratios based on quarter-end and on daily average values for securities financing transactions (‘SFT’).
Basel has announced that the package will be implemented on
1 January 2022, with a five-year transitional provision for the output floor, commencing at a rate of 50%. The final standards will need to be transposed into the relevant local law before coming into effect.
Given that the package contains a significant number of national discretions, the final outcome is uncertain both in impact and timing; however, we currently anticipate a potential for an increase in RWAs. The primary drivers include changes in the market risk, operational risk and CVA methodologies, as well the potential loss of equivalence for certain investments in funds and the introduction of an output floor.
The Capital Requirements Regulation amendments
In June 2019, the EU enacted the final rules amending the Capital Requirements Regulation, known as the CRR II. This is the first tranche of changes to the EU’s legislation to reflect the Basel III Reforms and includes the changes to the market risk rules under
 

the FRTB, revisions to the standardised approach for measuring counterparty risk (‘SA-CCR’) and the new leverage ratio rules.
The CRR II rules will follow a phased implementation with significant elements entering into force in 2021, in part in advance of Basel’s timeline. The EU’s timetable for the FRTB will be finalised once further legislation to reflect Basel’s January 2019 amendments has been enacted. It remains uncertain how the elements of the CRR II that come into force after the UK’s withdrawal from the EU will be transposed into UK law.
The CRR II also represents the EU’s implementation of the Financial Stability Board’s (‘FSB’) requirements for Total Loss Absorbing Capacity (‘TLAC’), known in Europe as the Minimum Requirements for Own Funds and Eligible Liabilities (‘MREL’). Furthermore, it also includes changes to the own funds regime. These rules applied in June 2019 and are accompanied by related first time Pillar 3 disclosures which are set out on page 40.
In June 2018, the Bank of England (‘BoE’) published its approach to setting MREL within groups, known as internal MREL, and its final policy on selected outstanding MREL policy matters. These requirements came into effect on 1 January 2019. The BoE will, before the end of 2020, review the calibration of MREL and final compliance date, prior to setting end-state MREL requirements.
The EU’s implementation of Basel III Reforms
In July 2019, the EBA issued its report on the implementation of a second tranche of changes to the EU legislation to reflect the remaining Basel III Reforms (‘CRR III’). This included recommendations in relation to credit risk, operational risk and the output floor. A further report with recommendations on the reforms to the CVA framework and the FRTB is expected later this year.
The EBA’s report is the first stage of the implementation process in the EU. The European Commission will consult upon its view of the policy choices in due course, and is expected to produce draft text in 2020. The package will then be subject to negotiation with the EU Council and Parliament. As a result, the final form of the rules remains unclear.
Given the UK’s withdrawal from the EU, it remains uncertain whether the UK will implement the CRR III or its own version of Basel’s rules.
The UK’s withdrawal from the EU
In August 2018, Her Majesty’s Treasury (‘HMT’) commenced the process of transposing the current EU legislation into UK law to ensure that there is legal continuity in the event of the UK leaving the EU. This includes the Capital Requirements Regulation, Capital Requirements Directive and the Bank Recovery and Resolution Directive. The amendments were made in December 2018 and will come into force in the event that the UK leaves the EU without an agreement on 31 October 2019. A statutory instrument is expected in due course that will detail the transposition into UK law of the elements of the CRR II that are in force on exit day.
The BoE and the PRA have been given the power to grant transitional provisions to delay the implementation of these legislative changes for up to two years, following the UK leaving without an agreement. As part of finalising the changes to their rulebooks if the UK leaves without an agreement, the BoE and the PRA confirmed that they will exercise the transitional provision

HSBC Holdings plc
4


Pillar 3 Disclosures at 30 June 2019

which allows firms to delay implementation until 30 June 2020, except in limited circumstances. Given the uncertainty regarding the UK’s exit date, the transitional arrangements are being kept under review.
Other developments
In January 2019, the EU published final proposals for a prudential backstop for non-performing loans, which will result in a deduction from CET1 capital when a minimum impairment coverage requirement is not met. The rules entered into force in April. They apply to both the HSBC Group and its European regulated bank subsidiaries. The regime only applies to loans originated after the implementation date.
In July 2019, the EBA published a report marking the end of its ‘IRB Repair’ review, with the exception of the credit risk mitigation guidelines which remain subject to completion. This followed the publication in March 2019 of final guidelines on the estimation of loss given default (‘LGD’) appropriate for conditions of an economic downturn. The LGD guidelines are intended to supplement the final draft technical standard that specified the nature, severity and duration of an economic downturn, which was published in November 2018. The report sets out the next steps for implementation, confirming that the LGD guidelines will apply, at the latest, by the end of 2023.
In April 2019, the PRA issued statements setting out its expectations of how firms should manage the financial risks from climate change, focusing on governance, risk management, scenario analysis and disclosure areas. In particular, there is a requirement that the risk associated with climate change should be assessed and captured in firms’ Pillar 2 assessments.

 
Structure of the regulatory group
Assets, liabilities and post-acquisition reserves of subsidiaries engaged in insurance activities are excluded from the regulatory consolidation. Our 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, profits and losses, and RWAs 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.
For further explanation of the differences between the accounting and regulatory scope of consolidation and their definition of exposure, please see page 13 of the Pillar 3 Disclosures at 31 December 2018.

5
HSBC Holdings plc


Table 3: 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
 
171,090

(13
)
343

171,420

Items in the course of collection from other banks
 
8,673



8,673

Hong Kong Government certificates of indebtedness
 
36,492



36,492

Trading assets
 
271,424

(1,098
)

270,326

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
 
41,043

(31,956
)
540

9,627

– of which: debt securities eligible as tier 2 issued by Group Financial Sector Entities (‘FSEs’) that are outside the regulatory scope of consolidation
r

495


495

Derivatives
 
233,621

(41
)
49

233,629

Loans and advances to banks
 
82,397

(1,259
)
1,068

82,206

Loans and advances to customers
 
1,021,632

(1,875
)
12,692

1,032,449

– of which:
    lending eligible as tier 2 to Group FSEs outside the regulatory scope of consolidation

r

292


292

    expected credit losses on IRB portfolios

h
(6,426
)


(6,426
)
Reverse repurchase agreements – non-trading
 
233,079


581

233,660

Financial investments
 
428,101

(64,865
)
4,196

367,432

– of which lending eligible as tier 2 to Group FSEs outside the regulatory scope of consolidation

r

366


366

Capital invested in insurance and other entities
 

2,302


2,302

Prepayments, accrued income and other assets
 
168,880

(5,217
)
577

164,240

– of which: retirement benefit assets
j
8,021



8,021

Current tax assets
 
804

(45
)
22

781

Interests in associates and joint ventures
 
23,892

(432
)
(5,064
)
18,396

– of which: positive goodwill on acquisition
e
493

(13
)

480

Goodwill and intangible assets
e
25,733

(8,225
)
1,174

18,682

Deferred tax assets
f
4,412

176

4

4,592

Total assets at 30 Jun 2019
 
2,751,273

(112,548
)
16,182

2,654,907

Liabilities and equity
 
 
 
 
 
Hong Kong currency notes in circulation
 
36,492



36,492

Deposits by banks
 
71,051

(3
)
292

71,340

Customer accounts
 
1,380,124

2,688

14,722

1,397,534

Repurchase agreements – non-trading
 
184,497



184,497

Items in the course of transmission to other banks
 
9,178



9,178

Trading liabilities
 
94,149



94,149

Financial liabilities designated at fair value
 
165,104

(4,565
)
33

160,572

– of which:
 
 
 
 
 
included in tier 1
n
400



400

included in tier 2
o, q, i
11,243



11,243

Derivatives
 
229,903

68

56

230,027

– of which: debit valuation adjustment
i
97



97

Debt securities in issue
 
103,663

(1,921
)

101,742

Accruals, deferred income and other liabilities
 
152,052

(2,512
)
911

150,451

Current tax liabilities
 
1,653

(56
)
3

1,600

Liabilities under insurance contracts
 
93,794

(93,794
)


Provisions
 
3,025

(7
)
38

3,056

– of which: credit-related contingent liabilities and contractual commitments on IRB portfolios
h
357



357

Deferred tax liabilities
 
2,820

(1,238
)
9

1,591

Subordinated liabilities
 
22,894

2

118

23,014

– of which:
 
 
 
 
 
included in tier 1
l, n
1,783



1,783

included in tier 2
o, q
19,339



19,339

Total liabilities at 30 Jun 2019
 
2,550,399

(101,338
)
16,182

2,465,243

Equity
 
 
 
 
 
Called up share capital
a
10,281



10,281

Share premium account
a, l
13,998



13,998

Other equity instruments
k
22,367



22,367

Other reserves
c, g
3,437

1,942


5,379

Retained earnings
b, c
142,593

(12,114
)

130,479

Total shareholders’ equity
 
192,676

(10,172
)

182,504

Non-controlling interests
d, m, n, p
8,198

(1,038
)

7,160

Total equity at 30 Jun 2019
 
200,874

(11,210
)

189,664

Total liabilities and equity at 30 Jun 2019
 
2,751,273

(112,548
)
16,182

2,654,907

The references (a)–(r) identify balance sheet components that are used in the calculation of regulatory capital in Table 4: Own funds disclosure .

HSBC Holdings plc
6


Pillar 3 Disclosures at 30 June 2019

Table 3: 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
 
162,843

(39
)
191

162,995

Items in the course of collection from other banks
 
5,787



5,787

Hong Kong Government certificates of indebtedness
 
35,859



35,859

Trading assets
 
238,130

(1,244
)

236,886

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
 
41,111

(28,166
)
502

13,447

– of which: debt securities eligible as tier 2 issued by Group FSEs that are outside the regulatory scope of consolidation
r
424

(424
)


Derivatives
 
207,825

(70
)
102

207,857

Loans and advances to banks
 
72,167

(1,264
)
1,462

72,365

– of which: lending to FSEs eligible as tier 2
r
52



52

Loans and advances to customers
 
981,696

(1,530
)
12,692

992,858

– of which:
 
 
 
 
 
lending eligible as tier 2 to Group FSEs outside the regulatory scope of consolidation
r
117

(117
)


expected credit losses on IRB portfolios
h
(6,405
)


(6,405
)
Reverse repurchase agreements – non-trading
 
242,804

(3
)
542

243,343

Financial investments
 
407,433

(61,228
)
3,578

349,783

Capital invested in insurance and other entities
 

2,306


2,306

Prepayments, accrued income and other assets
 
110,571

(5,968
)
247

104,850

– of which: retirement benefit assets
j
7,934



7,934

Current tax assets
 
684

(23
)
26

687

Interests in associates and joint ventures
 
22,407

(398
)
(4,144
)
17,865

– of which: positive goodwill on acquisition
e
492

(13
)

479

Goodwill and intangible assets
e
24,357

(7,281
)

17,076

Deferred tax assets
f
4,450

161

1

4,612

Total assets at 31 Dec 2018
 
2,558,124

(104,747
)
15,199

2,468,576

Liabilities and equity
 
 
 
 
 
Hong Kong currency notes in circulation
 
35,859



35,859

Deposits by banks
 
56,331

1

229

56,561

Customer accounts
 
1,362,643

2,586

13,790

1,379,019

Repurchase agreements – non-trading
 
165,884



165,884

Items in course of transmission to other banks
 
5,641



5,641

Trading liabilities
 
84,431



84,431

Financial liabilities designated at fair value
 
148,505

(4,347
)
36

144,194

– of which:
 
 
 
 
 
included in tier 1
n
411



411

included in tier 2
o, q, i
12,499



12,499

Derivatives
 
205,835

116

81

206,032

– of which: debit valuation adjustment
i
152



152

Debt securities in issue
 
85,342

(1,448
)

83,894

Accruals, deferred income and other liabilities
 
97,380

(2,830
)
691

95,241

Current tax liabilities
 
718

(22
)
4

700

Liabilities under insurance contracts
 
87,330

(87,330
)


Provisions
 
2,920

(9
)
44

2,955

– of which: credit-related contingent liabilities and contractual commitments on IRB portfolios
h
395



395

Deferred tax liabilities
 
2,619

(1,144
)
1

1,476

Subordinated liabilities
 
22,437

2

323

22,762

– of which:
 
 
 
 
 
included in tier 1
l, n
1,786



1,786

included in tier 2
o, q
20,584



20,584

Total liabilities at 31 Dec 2018
 
2,363,875

(94,425
)
15,199

2,284,649

Equity
 
 
 
 
 
Called up share capital
a
10,180



10,180

Share premium account
a, l
13,609



13,609

Other equity instruments
k, l
22,367



22,367

Other reserves
c, g
1,906

1,996


3,902

Retained earnings
b, c
138,191

(11,387
)

126,804

Total shareholders’ equity
 
186,253

(9,391
)

176,862

Non-controlling interests
d, m, n, p
7,996

(931
)

7,065

Total equity at 31 Dec 2018
 
194,249

(10,322
)

183,927

Total liabilities and equity at 31 Dec 2018
 
2,558,124

(104,747
)
15,199

2,468,576

The references (a)–(r) identify balance sheet components that are used in the calculation of regulatory capital in Table 4: Own funds disclosure .


7
HSBC Holdings plc


Capital and RWAs
The Capital and Other TLAC-eligible instruments main features disclosure is published on our website, https://www.hsbc.com/investors/fixed-income-investors/regulatory-capital-securities.
For further detail on our management of capital, see page 80 of the Interim Report 2019.
Own funds
Table 4: Own funds disclosure
 
 
 
 
At
 
 
 
30 Jun

31 Dec

 
 
 
2019

2018



Ref
$m

$m

 
Common equity tier 1 (‘CET1’) capital: instruments and reserves
 
 
 
1
Capital instruments and the related share premium accounts
 
22,874

22,384

 
– ordinary shares
a
22,874

22,384

2
Retained earnings
b
125,478

121,180

3
Accumulated other comprehensive income (and other reserves)
c
3,632

3,368

5
Minority interests (amount allowed in consolidated CET1)
d
5,045

4,854

5a
Independently reviewed interim net profits net of any foreseeable charge or dividend
b
4,319

3,697

6
Common equity tier 1 capital before regulatory adjustments
 
161,348

155,483

 
Common equity tier 1 capital: regulatory adjustments
 
 
 
7
Additional value adjustments1
 
(1,236
)
(1,180
)
8
Intangible assets (net of related deferred tax liability)
e
(18,904
)
(17,323
)
10
Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)
f
(1,113
)
(1,042
)
11
Fair value reserves related to gains or losses on cash flow hedges
g
(97
)
135

12
Negative amounts resulting from the calculation of expected loss amounts
h
(1,733
)
(1,750
)
14
Gains or losses on liabilities valued at fair value resulting from changes in own credit standing
i
1,798

298

15
Defined-benefit pension fund assets
j
(6,160
)
(6,070
)
16
Direct and indirect holdings of own CET1 instruments2

(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)3
 
(6,914
)
(7,489
)
28
Total regulatory adjustments to common equity tier 1
 
(34,399
)
(34,461
)
29
Common equity tier 1 capital
 
126,949

121,022

 
Additional tier 1 (‘AT1’) capital: instruments
 
 
 
30
Capital instruments and the related share premium accounts
 
22,367

22,367

31
– classified as equity under IFRSs
k
22,367

22,367

33
Amount of qualifying items and the related share premium accounts subject to phase out
from AT1
l
2,297

2,297

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
m, n
1,274

1,516

35
– of which: instruments issued by subsidiaries subject to phase out
m
1,218

1,298

36
Additional tier 1 capital before regulatory adjustments
 
25,938

26,180

 
Additional tier 1 capital: regulatory adjustments
 
 
 
37
Direct and indirect holdings of own AT1 instruments2
 
(60
)
(60
)
43
Total regulatory adjustments to additional tier 1 capital
 
(60
)
(60
)
44
Additional tier 1 capital
 
25,878

26,120

45
Tier 1 capital (T1 = CET1 + AT1)
 
152,827

147,142

 
Tier 2 capital: instruments and provisions
 
 
 
46
Capital instruments and the related share premium accounts
o
20,636

20,249

 
– of which: instruments grandfathered under CRR II
 
7,018

N/A

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 parties4
p, q
5,989

6,480

49
– of row 48: instruments issued by subsidiaries subject to phase out
q
832

1,585

 
– of row 48: instruments issued by subsidiaries grandfathered under CRR II
 
1,475

N/A

51
Tier 2 capital before regulatory adjustments
 
26,625

26,729

 
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)
r
(1,153
)
(593
)
57
Total regulatory adjustments to tier 2 capital
 
(1,193
)
(633
)
58
Tier 2 capital
 
25,432

26,096

59
Total capital (TC = T1 + T2)
 
178,259

173,238

60
Total risk-weighted assets
 
885,971

865,318


HSBC Holdings plc
8


Pillar 3 Disclosures at 30 June 2019

Table 4: Own funds disclosure (continued)
 
 
 
At
 
 
 
30 Jun

31 Dec

 
 
 
2019

2018

 
 
 
$m

$m

 
Capital ratios and buffers
 
 
 
61
Common equity tier 1
 
14.3%

14.0%

62
Tier 1
 
17.2%

17.0%

63
Total capital
 
20.1%

20.0%

64
Institution specific buffer requirement
 
5.18%

3.94%

65
– capital conservation buffer requirement
 
2.50%

1.88%

66
– countercyclical buffer requirement
 
0.68%

0.56%

67a
– Global Systemically Important Institution (‘G-SII’) buffer
 
2.00%

1.50%

68
Common equity tier 1 available to meet buffers
 
8.1%

7.9%

 
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)
 
3,782

2,534

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)
 
13,386

12,851

75
Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability)
 
4,524

4,956

 
Applicable caps on the inclusion of provisions in tier 2
 
 
 
77
Cap on inclusion of credit risk adjustments in T2 under standardised approach
 
2,282

2,200

79
Cap for inclusion of credit risk adjustments in T2 under IRB approach
 
3,292

3,221

 
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
 
5,191

6,921

83
Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities)
 
63


84
Current cap on T2 instruments subject to phase out arrangements
 
2,815

5,131

The references (a)–(r) identify balance sheet components in Table 3: Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation which is used in the calculation of regulatory capital.
1
Additional value adjustments are deducted from CET1. These are calculated on all assets measured at fair value.
2
The deduction for holdings of own CET1, T1 and T2 instruments is set by the PRA.
3
Threshold deduction for significant investments relates to balances recorded on numerous lines on the balance sheet and includes: investments in insurance subsidiaries and non-consolidated associates, other CET1 equity held in financial institutions, and connected funding of a capital nature.
4
Eligible instruments issued by subsidiaries previously reported in row 46 ‘Capital instruments and the related share premium accounts’ are now reported here. For comparative purposes, 2018 data have been re-presented to reflect this change.
At 30 June 2019, our CET1 capital ratio increased to 14.3% from 14.0% at 31 December 2018. This was primarily due to CET1 capital growth during the period and was partly offset by the $20.7bn rise in RWAs.
CET1 capital increased in 1H19 by $5.9bn, mainly as a result of:
capital generation of $4.7bn through profits, net of cash and scrip dividends;
a $1.3bn increase in the fair value through other comprehensive income reserve; and
a $0.6bn decrease in threshold deductions as a result of an increase in the CET1 capital base.
These increases were partly offset by a $1.6bn increase in the deduction for goodwill and intangible assets.
 
As part of a review of the Group’s outstanding capital instruments, it was determined that six tier 2 instruments issued by HSBC USA Inc, HSBC Finance Corporation and HSBC Bank Canada should no longer be included in tier 2 capital for the Group. The instruments with a total face value of $1.7bn were previously designated as grandfathered tier 2 under prevailing regulation and contributed $0.7bn to the Group’s tier 2 capital at 31 March 2019. The local capital treatment of these instruments is unchanged.
The $20.7bn increase in RWAs was largely driven by lending growth of $27.8bn and $1.4bn from changes in asset quality, partly offset by reductions of $9.6bn from methodology and policy changes.
For further information, a summary of RWA movements is set out in ‘Risk-weighted assets’ on page 82 of the Interim Report 2019.

9
HSBC Holdings plc


Table 5: Leverage ratio common disclosure (LRCom)
 
 
 
At
 
 
 
30 Jun

31 Dec

 
 
 
2019

2018

 
 
Footnotes
$bn

$bn

 
On-balance sheet exposures (excluding derivatives and SFTs)
 
 
 
1
On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral)
 
2,176.3

2,012.5

2
(Asset amounts deducted in determining tier 1 capital)
 
(34.9
)
(33.8
)
3
Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets)
 
2,141.4

1,978.7

 
Derivative exposures
 
 
 
4
Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)
 
56.9

44.2

5
Add-on amounts for potential future exposure associated with all derivatives transactions
(mark-to-market method)
 
174.1

154.1

6
Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to IFRSs
 
13.2

5.9

7
(Deductions of receivables assets for cash variation margin provided in derivatives transactions)
 
(47.3
)
(21.5
)
8
(Exempted central counterparty (‘CCP’) leg of client-cleared trade exposures)
 
(55.2
)
(38.0
)
9
Adjusted effective notional amount of written credit derivatives
 
191.9

160.9

10
(Adjusted effective notional offsets and add-on deductions for written credit derivatives)
 
(183.9
)
(153.4
)
11
Total derivative exposures
 
149.7

152.2

 
Securities financing transaction exposures
 
 
 
12
Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions
1
412.7

429.8

13
(Netted amounts of cash payables and cash receivables of gross SFT assets)
1
(158.7
)
(184.5
)
14
Counterparty credit risk exposure for SFT assets
 
10.6

11.3

16
Total securities financing transaction exposures
 
264.6

256.6

 
Other off-balance sheet exposures
 
 
 
17
Off-balance sheet exposures at gross notional amount
 
835.2

829.8

18
(Adjustments for conversion to credit equivalent amounts)
 
(604.4
)
(602.4
)
19
Total off-balance sheet exposures
 
230.8

227.4

 
Capital and total exposures
 
 
 
20
Tier 1 capital
 
149.3

143.5

21
Total leverage ratio exposure
 
2,786.5

2,614.9

22
Leverage ratio (%)
 
5.4

5.5

EU-23
Choice of transitional arrangements for the definition of the capital measure
 
 Fully phased-in

 Fully phased-in

1
At 31 December 2018, netting of $180.9bn relating to SFT assets was recognised. This had no impact on the total leverage ratio exposure. Comparatives have been restated.
Leverage ratio
Our leverage ratio calculated in accordance with the Capital Requirements Regulation was 5.4% at 30 June 2019, down from 5.5% at 31 December 2018, mainly due to balance sheet growth.
At 30 June 2019 the Group’s leverage ratio measured under the PRA’s UK leverage framework was 5.8%. This measure excludes qualifying central bank balances from the calculation of exposure.
At 30 June 2019, our UK minimum leverage ratio requirement of 3.25% under the PRA’s UK leverage framework was supplemented by an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.2%. These additional buffers translate into capital values of $18.0bn and $6.1bn, respectively. We exceeded these leverage requirements.
For further details on our leverage ratio under the PRA’s UK leverage framework, refer to page 83 of the Interim Report 2019.

 
The risk of excessive leverage is managed as part of our 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 we are willing to accept in our business activities in order to achieve our strategic business objectives. The RAS measures are 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 Risk Management Meeting of the Group Management Board (‘RMM’) and the Group Risk Committee (‘GRC’).
For further details on our risk appetite, refer to page 69 of the Annual Report and Accounts 2018.
Table 6: Summary reconciliation of accounting assets and leverage ratio exposures (LRSum)
 
 
At
 
 
30 Jun

31 Dec

 
 
2019

2018

 
 
$bn

$bn

1
Total assets as per published financial statements
2,751.3

2,558.1

 
Adjustments for:
 
 
2
– entities which are consolidated for accounting purposes but are outside the scope of regulatory consolidation
(96.4
)
(89.5
)
4
– derivative financial instruments
(83.9
)
(55.6
)
5
– SFTs
8.9

(5.1
)
6
– off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)
230.8

227.4

7
– other
(24.2
)
(20.4
)
8
Total leverage ratio exposure
2,786.5

2,614.9


HSBC Holdings plc
10


Pillar 3 Disclosures at 30 June 2019

Table 7: Leverage ratio – Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures) (LRSpl)
 
 
At
 
 
30 Jun

31 Dec

 
 
2019

2018

 
 
$bn

$bn

EU-1
Total on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures)
2,129.0

1,991.0

EU-2
– trading book exposures
248.4

218.5

EU-3
– banking book exposures
1,880.6

1,772.5

 
   ’banking book exposures’ comprises:
 
 
EU-4
covered bonds
2.5

1.6

EU-5
exposures treated as sovereigns
530.9

507.3

EU-6
exposures to regional governments, multilateral development banks, international organisations and public sector entities not treated as sovereigns
8.8

9.3

EU-7
institutions
77.4

66.8

EU-8
secured by mortgages of immovable properties
313.2

300.0

EU-9
retail exposures
84.7

82.8

EU-10
corporate
634.9

614.3

EU-11
exposures in default
9.2

9.1

EU-12
other exposures (e.g. equity, securitisations and other non-credit obligation assets)
219.0

181.3

Capital buffers
The geographical breakdown and institution-specific countercyclical capital buffer (‘CCyB’) disclosure and the G-SIB Indicators Disclosure are published annually on the HSBC website, www.hsbc.com.

 
Pillar 1 minimum capital requirements and
RWA flow

Pillar 1 covers the minimum capital resource requirements for credit risk, counterparty credit risk (‘CCR’), equity, securitisation, market risk and operational risk. These requirements are expressed in terms of RWAs.
 
Risk category
Scope of permissible approaches
Our approach
 
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 exposure at default (‘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 both determining PD and quantifying EAD and LGD.
For consolidated Group reporting, we have adopted the AIRB approach for the majority of our business.
Some portfolios remain on the standardised or FIRB 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 credit risk approaches: standardised, FIRB or AIRB.
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.
On 1 January 2019, the new securitisation framework came into force in the EU for new transactions. This framework prescribes the following approaches:
internal ratings-based approach (‘SEC-IRBA’);
external ratings-based approach (‘SEC-ERBA’);
internal assessment approach (‘IAA’); and
standardised approach (‘SEC-SA’).
From 1 January 2020, all transactions will be subject to the new framework.
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 the securitisation positions in the trading book.
Our exposures subject to the new framework in 2019 include exposures under SEC-ERBA, IAA and SEC-SA.

11
HSBC Holdings plc


Risk category
Scope of permissible approaches
Our approach
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.

Table 8: Overview of RWAs (OV1)
 
 
 
At
 
 
 
30 Jun

31 Mar

30 Jun

 
 
 
2019

2019

2019

 
 
 
RWAs

RWAs

Capital1 
requirements

 
 
Footnotes
$bn

$bn

$bn

1
Credit risk (excluding counterparty credit risk)
 
657.3

649.8

52.6

2
– standardised approach
 
134.8

130.1

10.8

3
– foundation IRB approach
 
31.1

30.8

2.5

4
– advanced IRB approach
 
491.4

488.9

39.3

6
Counterparty credit risk
 
50.5

50.0

4.0

7
– mark-to-market
 
26.8

27.0

2.1

10
– internal model method
 
17.4

16.3

1.4

11
– risk exposure amount for contributions to the default fund of a central counterparty
 
0.5

0.4


12
– credit valuation adjustment
 
5.8

6.3

0.5

13
Settlement risk
 
0.1

0.1


14
Securitisation exposures in the non-trading book
 
7.4

8.5

0.6

15
– IRB ratings based method
 
2.5

3.7

0.2

16
– IRB supervisory formula method
 



17
– IRB internal assessment approach
 
1.2

1.4

0.1

18
– standardised approach
 
2.0

2.2

0.2

14a
– exposures subject to the new securitisation framework
1
1.7

1.2

0.1

19
Market risk
 
34.8

35.1

2.8

20
– standardised approach
 
4.3

5.4

0.4

21
– internal models approach
 
30.5

29.7

2.4

23
Operational risk
 
91.1

91.1

7.3

25
– standardised approach
 
91.1

91.1

7.3

27
Amounts below the thresholds for deduction (subject to 250% risk weight)
 
44.8

44.9

3.6

29
Total
 
886.0

879.5

70.9

1
On 1 January 2019, a new securitisation framework came into force in the EU for new transactions. Existing positions are subject to ‘grandfathering’ provisions and will transfer to the new framework on 1 January 2020. Our exposures subject to the approaches under the new framework at 30 June 2019 include $353m under SEC-ERBA, $952m under IAA, and $435m under SEC-SA.
Credit risk, including amounts below the thresholds for deduction
RWAs increased by $7.4bn in the second quarter of 2019, including a decrease in foreign currency translation differences of $2.1bn. Excluding foreign currency translation differences, the increase of $9.5bn was primarily driven by lending growth across Asia and Europe in Commercial Banking (‘CMB’), Retail Banking and Wealth Management (‘RBWM’) and Corporate Centre.
Counterparty credit risk
The $0.5bn increase in RWAs was largely due to mark-to-market movements and new trades in Europe, North America and Asia.
 
Securitisation in non-trading book
The $1.1bn RWA decrease arose primarily from the sale of legacy positions.
Market risk
RWAs decreased by $0.3bn mainly due to increased diversification benefits following regulatory approval to expand the scope of consolidation, partly offset by higher sovereign exposures.


HSBC Holdings plc
12


Pillar 3 Disclosures at 30 June 2019

Table 9: RWA flow statements of credit risk exposures under IRB¹ (CR8)
 
 
RWAs

Capital
requirements

 
 
$bn

$bn

1
RWAs at 1 Apr 2019
519.7

41.6

2
Asset size
7.6

0.6

3
Asset quality
1.5

0.1

5
Methodology and policy
(4.2
)
(0.3
)
7
Foreign exchange movements
(2.1
)
(0.2
)
9
RWAs at 30 Jun 2019
522.5

41.8

1
Securitisation positions are not included in this table.
RWAs under the IRB approach increased by $2.8bn in the second quarter of the year, including a decrease of $2.1bn due to foreign currency translation differences.
The $4.9bn increase in RWAs excluding foreign currency translation differences was mainly due to:
a $7.6bn increase in asset size due to lending growth across Asia and Europe;
 
a $1.5bn increase from changes in asset quality, notably in Asia; and
a $4.2bn decrease largely due to management initiatives in Europe and Asia.
Table 10: RWA flow statements of CCR exposures under IMM (CCR7)
 
 
RWAs

Capital
requirements

 
 
$bn

$bn

1
RWAs at 1 Apr 2019
21.0

1.7

2
Asset size
0.3


5
Methodology and policy
0.2


9
RWAs at 30 Jun 2019
21.5

1.7

RWAs under the IMM increased by $0.5bn mainly as a result of a $0.3bn increase in asset size arising from mark to market movements, and a $0.2bn increase under methodology and policy driven by LGD updates.
Table 11: RWA flow statements of market risk exposures under IMA (MR2-B)
 
 
VaR

Stressed
VaR

IRC

Other

Total
RWAs

Total capital requirements

 
 
$bn

$bn

$bn

$bn

$bn

$bn

1
RWAs at 1 Apr 2019
6.7

10.7

8.9

3.4

29.7

2.4

2
Movement in risk levels
0.5

0.7

1.9

0.1

3.2

0.2

4
Methodology and policy
(0.7
)
(2.0
)
0.3


(2.4
)
(0.2
)
8
RWAs at 30 Jun 2019
6.5

9.4

11.1

3.5

30.5

2.4

RWAs under the IMA increased by $0.8bn mainly as a result of a $1.9bn increase in incremental risk charge due to sovereign exposures, and growth in VaR and stressed VaR risk level RWAs of $1.2bn largely due to higher exposure at risk across multiple
 
portfolios. This was partly offset by a $2.4bn decrease in methodology and policy, primarily due to increased diversification benefits following regulatory approval to expand the scope of consolidation.

13
HSBC Holdings plc


Credit risk
Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also
 
from other products, such as guarantees and credit derivatives and from holding assets in the form of debt securities. Credit risk represents our largest regulatory capital requirement. 
There have been no material changes to our policies and practices, which are described in the Pillar 3 Disclosures at 31 December 2018.
Table 12: Credit risk summary by approach
 
At 30 Jun 2019
 
EAD post-CCF and CRM

RWAs^

RWA
density

 
$bn

$bn

%

IRB advanced approach
1,538.1

476.4

31

– central governments and central banks
352.9

38.6

11

– institutions