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
 
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 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-   ).
 
 
 
  
 
 http://www.rns-pdf.londonstockexchange.com/rns/6315V_1-2020-8-10.pdf
 
HSBC Holdings plc
Pillar 3 Disclosures at 30 June 2020
 
 
Contents
 
 
Page
 
Introduction
 
2
Highlights
 
2
Regulatory framework for disclosures
 
2
Pillar 3 disclosures
 
2
Key metrics
 
3
Regulatory developments
 
3
Risk management response to Covid-19
 
4
Linkage to the Interim Report
 
5
Capital and RWAs
 
7
Own funds
 
7
Leverage ratio
 
9
Capital buffers
 
10
Pillar 1 minimum capital requirements and RWA flow
 
10
Minimum requirement for own funds and eligible liabilities
 
13
Credit risk
 
19
Credit quality of assets
 
19
Non-performing and forborne exposures
 
22
Defaulted exposures
 
27
Risk mitigation
 
27
Counterparty credit risk
 
37
Securitisation
 
42
Market risk
 
46
Other information
 
50
Abbreviations
 
50
Cautionary statement regarding forward-looking statements
 
51
Contacts
 
52
Tables
 
 
 
Ref
 
Page
 
1
 
Key metrics (KM1/IFRS9-FL) 
a
 
3
2
 
Reconciliation of balance sheets - financial accounting to regulatory scope of consolidation
 
 
6
 
3
 
Own funds disclosure
 
b
 
7
4
 
Leverage ratio common disclosure ('LRCom')
 
a
 
9
5
 
Summary reconciliation of accounting assets and leverage ratio exposures ('LRSum')
 
b
 
9
 
6
 
Leverage ratio - Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures) ('LRSpl')
 
a
 
10
 
7
 
Overview of RWAs ('OV1')
 
b
 
11
8
 
RWA flow statements of credit risk exposures under IRB ('CR8')
 
 
11
 
9
 
RWA flow statements of CCR exposures under IMM ('CCR7')
 
12
10
 
RWA flow statements of market risk exposures under IMA ('MR2-B')
 
 
12
 
11.i
 
Key metrics of the European resolution group ('KM2')
 
a
 
13
11.ii
 
Key metrics of the Asian resolution group ('KM2')
 
 
14
11.iii
Key metrics of the US resolution group ('KM2')
 
 
14
12
 
TLAC composition ('TLAC1')
 
a
 
15
13
 
HSBC Holdings plc creditor ranking ('TLAC3')
 
 
16
14
 
HSBC UK Bank plc creditor ranking ('TLAC2')
 
 
16
15
 
HSBC Bank plc creditor ranking ('TLAC2')
 
 
17
16
 
HSBC Asia Holdings Ltd creditor ranking ('TLAC3')
 
 
17
17
 
The Hongkong and Shanghai Banking Corporation Ltd creditor ranking ('TLAC2')
 
 
18
 
18
 
Hang Seng Bank Ltd creditor ranking ('TLAC2')
 
 
18
19
 
HSBC North America Holdings Inc. creditor ranking ('TLAC3')
 
 
18
 
20
 
Credit quality of exposures by exposure class and instrument ('CR1-A')
 
 
19
 
21
 
Credit quality of exposures by industry or counterparty types¹, ('CR1-B')
 
 
21
 
22
 
Credit quality of exposures by geography 1,2 ('CR1-C')
 
 
22
23
 
Credit quality of forborne exposures
 
 
23
24
 
Collateral obtained by taking possession and execution processes
 
 
23
 
25
 
Credit quality of performing and non-performing exposures by past due days
 
 
24
 
26
 
Performing and non-performing exposures and related provisions
 
 
25
 
27
 
Changes in stock of general and specific credit risk adjustments ('CR2-A')
 
 
27
 
28
 
Changes in stock of defaulted loans and debt securities ('CR2-B')
 
 
27
 
29
 
Credit risk mitigation techniques - overview ('CR3')
 
 
27
30
 
Standardised approach - credit conversion factor and credit risk mitigation ('CRM') effects ('CR4')
 
b
 
28
 
31
 
Standardised approach - exposures by asset classes and risk weights ('CR5')
 
b
 
29
 
32
 
IRB - Credit risk exposures by portfolio and PD range ('CR6')
 
a
 
30
 
33
 
IRB - Effect on RWA of credit derivatives used as CRM techniques ('CR7')
 
 
36
 
34
 
Specialised lending on slotting approach ('CR10')
 
 
36
35
 
Analysis of counterparty credit risk exposure by approach (excluding centrally cleared exposures) ('CCR1')
 
 
37
 
36
 
Credit valuation adjustment capital charge ('CCR2')
 
 
37
37
 
Standardised approach - CCR exposures by regulatory portfolio and risk weights ('CCR3')
 
 
37
 
38
 
IRB - CCR exposures by portfolio and PD scale ('CCR4')
 
 
38
39
 
Impact of netting and collateral held on exposure values ('CCR5-A')
 
 
40
 
40
 
Composition of collateral for CCR exposure ('CCR5-B')
 
 
40
41
 
Exposures to central counterparties ('CCR8')
 
 
40
42
 
Credit derivatives exposures ('CCR6')
 
 
41
43
 
Securitisation exposures in the non-trading book ('SEC1')
 
 
43
44
 
Securitisation exposures in the trading book ('SEC2')
 
 
44
45
 
Securitisation exposures in the non-trading book and associated regulatory capital requirements - bank acting as originator or as sponsor ('SEC3')
 
 
44
 
46
 
Securitisation exposures in the non-trading book and associated capital requirements - bank acting as investor  ('SEC4')
 
 
45
 
47
 
Market risk under standardised approach (MR1)
 
 
46
48
 
Market risk under IMA (MR2-A)
 
 
46
49
 
IMA values for trading portfolios (MR3)
 
 
47
50
 
Comparison of VaR estimates with gains/losses (MR4)
 
 
48
 
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. Details are provided in the table footnotes.
 
b.   All figures have been prepared on an IFRS 9 transitional basis.
 
All other tables report numbers on the basis of the full adoption of IFRS 9.
 
This document should be read in conjunction with the Interim Report 2020, which has been published on our website www.hsbc.com
 
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.
 
 
 

 
 
 
Introduction
 
 
Highlights
 
 
Common equity tier 1 ('CET1') ratio increased over 2Q20 to 15% due to higher CET1 capital, which included an increase from the cancellation of the 4Q19 dividend and the current suspension of dividends on ordinary shares, more than offsetting the impact of RWA growth.
 
 
 
 
 
Please click on the link below to view the following chart and Pillar 3 document in full:
 
http://www.rns-pdf.londonstockexchange.com/rns/6315V_1-2020-8-10.pdf
 
 
 
 
Common equity tier 1 ($bn and %)
 
 
        
 
Risk-weighted assets by risk type and global business ($bn)
 
 
 
 
 
Credit risk
 
 
 
 
Counterparty credit risk
 
 
 
 
Market risk
 
 
 
 
Operational risk
 
 
 
 
 
 
 
 
Commercial Banking
 
 
Global Banking and Markets
 
 
Wealth and Personal  Banking
 
 
Corporate Centre
 
 
  
 
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, which 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, as implemented ('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 2020 that were on the basis of the Basel I, II or III frameworks.
 
The Basel Committee's framework is structured around three 'pillars': Pillar 1, minimum capital requirements; Pillar 2, supervisory review process; and Pillar 3, 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 2020
 
comprises quantitative and qualitative information required under Pillar 3. They are made in accordance with Part Eight of the Capital Requirements Regulation, as implemented by CRR II and the European Banking Authority ('EBA') guidelines on disclosure requirements. 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 disclosure policy framework approved by the Group Audit Committee.
 
To give insight into movements during the year, we provide comparative figures, commentary 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 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 comparatives.
 
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 2020 or to other documents.
 
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.
 
 
 
Reporting and disclosure of exposures subject to measures applied in response to the Covid-19 outbreak
 
On 2 June, the EBA announced temporary additional reporting and disclosure requirements concerning payment moratoria and forbearance measures related to the Covid-19 outbreak.  
 
On 28 July, the PRA issued a statement setting out its  expectations on how the disclosure guidelines are to be applied, amending the EBA instructions and definitions to reflect the UK approach to payment deferrals.
 
We will publish these disclosures on or around 24 August 2020 on the HSBC website, hsbc.com.
 
 
 
 
 
 
 
Key metrics
Table 1: Key metrics (KM1/IFRS9-FL) 
 
 
 
At
 
 
 
 
30 Jun
 
31 Mar
 
31 Dec
 
30 Sep
 
30 Jun
 
Ref*
 
 
Footnotes
 
2020
 
2020
 
2019
 
2019
 
2019
 
 
Available capital ($bn)1
 
2
 
 
 
 
 
 
1
 
Common equity tier 1 ('CET1') capital
 
^
 
128.4
 
 
125.2
 
 
124.0
 
 
123.8
 
 
126.9
 
 
2
 
CET1 capital as if IFRS 9 transitional arrangements had not been applied
 
 
127.4
 
 
124.5
 
 
123.1
 
 
122.9
 
 
126.0
 
 
3
 
Tier 1 capital
 
^
 
152.5
 
 
149.2
 
 
148.4
 
 
149.7
 
 
152.8
 
 
4
 
Tier 1 capital as if IFRS 9 transitional arrangements had not been applied
 
 
151.4
 
 
148.5
 
 
147.5
 
 
148.8
 
 
151.9
 
 
5
 
Total capital
 
^
 
177.2
 
 
174.0
 
 
172.2
 
 
175.1
 
 
178.3
 
 
6
 
Total capital as if IFRS 9 transitional arrangements had not been applied
 
 
176.1
 
 
173.3
 
 
171.3
 
 
174.2
 
 
177.4
 
 
 
Risk-weighted assets ('RWAs') ($bn)
 
 
 
 
 
 
 
7
 
Total RWAs
 
 
854.6
 
 
857.1
 
 
843.4
 
 
865.2
 
 
886.0
 
 
8
 
Total RWAs as if IFRS 9 transitional arrangements had not been applied
 
 
854.1
 
 
856.7
 
 
842.9
 
 
864.7
 
 
885.5
 
 
 
Capital ratios (%)
 
2
 
 
 
 
 
 
9
 
CET1
 
^
 
15.0
 
 
14.6
 
 
14.7
 
 
14.3
 
 
14.3
 
 
10
 
CET1 as if IFRS 9 transitional arrangements had not been applied
 
 
14.9
 
 
14.5
 
 
14.6
 
 
14.2
 
 
14.2
 
 
11
 
Tier 1
 
^
 
17.8
 
 
17.4
 
 
17.6
 
 
17.3
 
 
17.2
 
 
12
 
Tier 1 as if IFRS 9 transitional arrangements had not been applied
 
 
17.7
 
 
17.3
 
 
17.5
 
 
17.2
 
 
17.2
 
 
13
 
Total capital
 
^
 
20.7
 
 
20.3
 
 
20.4
 
 
20.2
 
 
20.1
 
 
14
 
Total capital as if IFRS 9 transitional arrangements had not been applied
 
 
20.6
 
 
20.2
 
 
20.3
 
 
20.1
 
 
20.0
 
 
 
Additional CET1 buffer requirements as a percentage of RWA (%)
 
 
 
 
 
 
 
 
Capital conservation buffer requirement
 
 
2.50
 
 
2.50
 
 
2.50
 
 
2.50
 
 
2.50
 
 
 
Countercyclical buffer requirement
 
 
0.20
 
 
0.22
 
 
0.61
 
 
0.69
 
 
0.68
 
 
 
Bank G-SIB and/or D-SIB additional requirements
 
 
2.00
 
 
2.00
 
 
2.00
 
 
2.00
 
 
2.00
 
 
 
Total of bank CET1 specific buffer requirements
 
 
4.70
 
 
4.72
 
 
5.11
 
 
5.19
 
 
5.18
 
 
 
Total capital requirement (%)
 
3
 
 
 
 
 
 
 
Total capital requirement
 
 
11.1
 
 
11.0
 
 
11.0
 
 
11.0
 
 
11.0
 
 
 
CET1 available after meeting the bank's minimum capital requirements
 
 
8.8
 
 
8.4
 
 
8.5
 
 
8.1
 
 
8.1
 
 
 
Leverage ratio
 
4
 
 
 
 
 
 
15
 
Total leverage ratio exposure measure ($bn)
 
 
2,801.4
 
 
2,782.7
 
 
2,726.5
 
 
2,708.2
 
 
2,786.5
 
 
16
 
Leverage ratio (%)
 
^
 
5.3
 
 
5.3
 
 
5.3
 
 
5.4
 
 
5.4
 
 
17
 
Leverage ratio as if IFRS 9 transitional arrangements had not been applied (%)
 
 
5.3
 
 
5.2
 
 
5.3
 
 
5.4
 
 
5.3
 
 
 
Liquidity coverage ratio ('LCR')
 
5
 
 
 
 
 
 
 
Total high-quality liquid assets ($bn)
 
 
654.4
 
 
617.2
 
 
601.4
 
 
513.2
 
 
532.8
 
 
 
Total net cash outflow ($bn)
 
 
442.9
 
 
395.0
 
 
400.5
 
 
378.0
 
 
391.0
 
 
 
LCR ratio (%)
 
 
147.8
 
 
156.3
 
 
150.2
 
 
135.8
 
 
136.3
 
 
*     The references in this and subsequent tables identify 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     Where applicable, our reporting throughout this document also reflects government relief schemes intended to mitigate the impact of the Covid-19 outbreak.
2     Capital figures and ratios are reported on a CRR II transitional basis for capital instruments.
3     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.
4     Leverage ratio is calculated using the CRR II end point basis for capital.
5     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 83 of the Interim Report 2020.
 
 
 
 
We have adopted the regulatory transitional arrangements for IFRS 9 'Financial Instruments', including paragraph four within article 473a of the Capital Requirements Regulation, published by the EU on 27 December 2017. These transitional arrangements 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 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.
Any add-back must be tax affected and accompanied by a recalculation of capital deduction thresholds, exposure and RWAs. The impact is calculated separately for portfolios using the standardised ('STD') and internal-ratings based ('IRB') approaches. For IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses.
The EU's CRR 'Quick Fix' relief package enacted in June 2020
increased from 70% to 100% the relief that banks may take for
loan loss allowances recognised since 1 January 2020 on the
non-credit-impaired book.
In the current period, the add-back to the capital base amounted to $1.4bn under the STD approach with a tax impact of $0.3bn.
At 31 December 2019, the add-back to the capital base under the STD approach was $1.0bn with a tax impact of $0.2bn.
 
Regulatory developments
Covid-19
The current Covid-19 pandemic has created an unprecedented challenge to the global economy. Governments, central banks and regulatory authorities have responded to this challenge with a number of regulatory measures. The substance of the announcements and the pace of response varies by jurisdiction, but broadly these have included a number of customer support measures, operational capacity measures and amendments to the RWAs, capital and liquidity frameworks.
In the EU, the relief measures have included a package known as the 'CRR Quick Fix' that was enacted in June 2020. The package represents an acceleration of some of the beneficial elements of the amendments to CRR II that were originally scheduled for June 2021, together with other amendments to mitigate the potential volatility in capital ratios arising from the pandemic. The material changes that were finalised in June, include:
●    a resetting of the transitional provisions in relation to recognising IFRS 9 provisions in CET1 capital;
●    the acceleration of the timetable for the changes to the CET1 deduction of software assets so that once the EBA finishes its current consultation on the new methodology, the rules can go live;
●    the CRR II changes to the small and medium-sized enterprises ('SME') supporting factor and the new infrastructure supporting factor; and
●    the CRR II change to the netting in the leverage ratio exposure measure of regular-way purchases and sales.
The PRA has published a statement in response to the package, stating that it will be undertaking a quantitative analysis of the benefits, which will be used to inform its supervisory approach. This will include an assessment of whether further action is necessary in Pillar 2. The accelerated application of the revised SME and infrastructure supporting factors will be implemented by the Group in the second half of 2020.
In addition to the CRR Quick Fix package, there were other changes to the regime in response to the Covid-19 outbreak. These included the enactment by the EU of beneficial changes to the CET1 deduction for prudent valuation adjustments, which will remain in place until 1 January 2021, and the PRA announcing that it is setting all Pillar 2A requirements in 2020 and 2021 as a nominal amount, instead of as a percentage of total RWAs.
 
The Basel Committee
In December 2017, the Basel Committee ('Basel') published the Basel III Reforms. The package was finalised in July 2020 when Basel published the final revisions to the credit valuation adjustment ('CVA') framework.
In March 2020, Basel announced a one-year delay to the implementation of the package. It is now to be implemented on 
1 January 2023, with a five-year transitional provision for the output floor. This floor ensures that, at the end of the transitional period, banks' total RWAs will be no lower than 72.5% of those generated by the standardised approaches. The final standards will need to be transposed into the relevant local law before coming into effect. The EU, the UK and Hong Kong authorities have already indicated that they will apply the new timetable.
There remains a significant degree of uncertainty about the impact of these changes due to the number of national discretions within Basel's reforms and the need for further supporting technical standards to be developed. Furthermore, any impact needs to be viewed in light of the possibility of offsets against Pillar 2, which may arise as shortcomings within Pillar 1 are addressed.
 
The Capital Requirements Regulation amendments
In June 2019, the EU enacted CRR II. This is the EU's implementation of changes to the own funds regime and to the Financial Stability Board's ('FSB') requirements for total loss-absorbing capacity ('TLAC'), known in the EU as the minimum requirements for own funds and eligible liabilities ('MREL'). CRR II will also implement the first tranche of changes to the EU's legislation to reflect the Basel III Reforms, including the changes to market risk ('FRTB') rules, revisions to the standardised approach for measuring counterparty risk, changes to the equity investments in funds rules and the new leverage ratio rules. The CRR II rules will follow a phased implementation with significant elements entering into force in 2021, in advance of Basel's timeline.
 
The EU's implementation of the Basel III Reforms
The remaining elements of the Basel III Reforms will be implemented in the EU by a further set of amendments to the Capital Requirements Regulation. In 2019, the European Commission began consulting on its implementation, which will include reforms to the credit and operational risk rules and a new output floor. However, draft legislative text has not yet been published. The EU implementation will be subject to an extensive negotiation process with the EU Council and Parliament. As a result, the final form of the rules remains unclear.
 
The UK's withdrawal from the EU
The UK left the EU on 31 January 2020. In order to smooth the transition, the UK remains subject to EU law during an implementation period, which will end on 31 December 2020. The PRA has announced its intention that, save for in certain limited circumstances, the changes to the prudential framework arising as a result of the UK's withdrawal will be delayed until 31 March 2022.
In June, Her Majesty's Treasury ('HMT') published an update on the framework to implement future prudential changes in the UK. This will be in the form of a Financial Services Bill in which powers will be delegated to the PRA for detailed rule making. The UK has stated that it intends to implement its own version of CRR II to the same timetable as the EU.
At the same time, HMT published a consultation on the implementation of the amendments to the Bank Recovery and Resolution Directive, the main EU regulation overseeing resolution and MREL standards. It also subsequently published a consultation on aspects of the amendments to the Capital Requirements Directive ('CRD V'). HMT proposes to implement in UK law only those elements of the Bank Recovery and Resolution Directive and CRD V that will be live on 31 December 2020.
In July 2020, the PRA also issued a consultation on implementing parts of CRD V, which includes its requirements for Pillar 2, remuneration and governance. In the autumn, the PRA will consult on the remaining elements of CRD V and the CRR II elements that apply from December 2020.
 
Other developments
In July 2020, the PRA published its final policy on reducing Pillar 2A to reflect the additional resilience associated with the higher countercyclical capital buffer ('CCyB') in a standard risk environment proposed by the Bank of England's Financial Policy Committee. However, reflecting the reduction of the UK's CCyB to 0% and the fact that the UK's structural CCyB rate set in a standard risk environment has not changed, the PRA introduced a requirement to temporarily increase the PRA buffer to offset some of the reductions in Pillar 2A that firms receive under this proposal. The rules take immediate effect.
Also in July, the PRA published a statement outlining its views on the implications of London interbank offered rate ('Libor') transition for contracts in scope of its resolution-related rules. The EBA also published its final guidelines on the treatment of structural foreign exchange positions, which will apply from 
1 January 2022, one year later than originally planned.
On 1 July, the PRA sent a letter to CEOs outlining its expectations of firms in managing climate-related financial risks and advising firms that they must have fully embedded their approaches to managing such risk by the end of 2021.
 
Risk management response to Covid-19
The first half of 2020 was marked by unprecedented global economic events, leading to banks playing an expanded role to support society and customers. The Covid-19 outbreak and its impact on the global economy have impacted many of our customers' business models and income, requiring significant levels of support from both governments and banks. In response, we have enhanced our approach to the management of risk in this rapidly changing environment.
Throughout the Covid-19 outbreak, we have supported our customers and adapted our operational processes. Our people, processes and systems have responded to the changes needed and increased the workload in serving our customers through this time. To meet the additional challenges, we supplemented our existing approach to risk management with additional tools and practices. We increased our focus on the quality and timeliness of the data used to inform management decisions, through measures such as early warning indicators, prudent active risk management against our risk appetite, and ensuring regular communication with our Board and other key stakeholders. This section sets out how we have managed our key risks resulting from the outbreak and its impacts.
 
Capital and liquidity management
The management of capital was a key focus in 1H20 to ensure the Group responded to unprecedented customer and capital demands arising from Covid-19 outbreak. All major entities remained in excess of their capital risk appetite.
In response to a written request from the PRA, we cancelled the fourth interim dividend for 2019 of $0.21 per ordinary share. Similar requests were also made to other UK incorporated banking groups. We also announced that until the end of 2020, we will make no quarterly or interim dividend payments or accruals in respect of ordinary shares. We also plan to suspend share buy-backs in respect of ordinary shares in 2020 and 2021.
The reduction of the UK countercyclical buffer rate to 0% was reflected in the Group's risk appetite statement, and together with other regulatory relief, resulted in a reduction to Group CET1 and leverage ratio requirements.
In 1H20, all entities remained within the CET1 risk appetite and the Group continues to maintain the appropriate resources required to adequately support risks to which it is exposed. This has been further informed by additional internal stress tests carried out in response to the Covid-19 outbreak. Capital risk management practices continued to be enhanced across the Group through the capital risk management function, focusing on both adequacy of capital and sufficiency of returns.
The management of liquidity risk was enhanced during 1H20 in response to the Covid-19 pandemic to ensure the Group anticipated, monitored and responded to the impacts both at Group and entity level. Liquidity levels were impacted by drawdown of committed facilities and buy-backs of short-term debt. However, this was offset by an increase in deposits, use of central bank facilities where appropriate and the ability to issue in the short-term markets as they stabilised. As a result of these liability enhancing actions, the Group and all entities have significant surplus liquidity, resulting in heightened liquidity coverage ratios ('LCR') in 1H20.
 
Prudential valuation adjustment
To achieve the degree of certainty prescribed for prudent valuation, banks must adjust fair valued exposures for valuation uncertainties and deduct the resulting prudent valuation adjustment ('PVA') charge from CET1. Market turmoil caused by the Covid-19 outbreak resulted in a significant increase in asset price dispersion, bid-offer spreads and subsequent hypothetical exit costs, leading to a material increase of the PVA charge in 1Q20 when compared with 4Q19. For 2Q20, the charge materially reduced from bid offer spreads and price dispersion reduction as market volatility reduced, as well as from the application of a higher diversification benefit temporarily permitted by regulators.
 
Credit risk management
During 1Q20, a number of relief programmes were initiated across the Group in response to the Covid-19 outbreak. These remained in place during the second quarter, with some programmes extended to support our customers where required.
Enhanced model monitoring has been established to detect any trends, shifts in key risk drivers or early performance indicators that could signal that our IRB models are no longer performing as expected. Using the latest available data from May 2020 for our retail models, the monitoring outputs indicate there have been limited impacts on the performance of IRB models as a direct consequence of the outbreak. Within wholesale, the most recent financial data received from customers do not always reflect current business performance during the outbreak, so we apply appropriate levels of judgemental overrides to the model outputs. As better information emerges on the outbreak's impact on the credit quality of loan portfolios and the creditworthiness of groups of borrowers, credit risk evaluations will be modified accordingly. We will continue to monitor the credit risk within our business and take the appropriate mitigating actions to help support our customers and our franchise.
For further details of the customer relief programmes that we are participating in, see page 66 of the Interim Report 2020.
 
Non-financial risk
As a result of the Covid-19 outbreak, business continuity plans have been implemented successfully. Despite high levels of working from home, the majority of service level agreements are being maintained. We have experienced no major impacts to the supply chain from our third-party service providers. The risk of damage or theft to our physical assets or criminal injury to our employees remains unchanged. No significant incidents have impacted our buildings or staff. Expedited decisions to ensure the continuity of critical customer services are being documented through governance.
 
Market risk management
We managed market risk prudently in the first half of 2020. Sensitivity exposures remained within appetite as the business pursued its core market-making activity in support of our customers during the pandemic. We have also undertaken hedging activities to protect the business from potential future deterioration in credit conditions. Market risk continued to be managed using a complementary set of exposure measures and limits, including stress and scenario analysis.
 
Linkage to the Interim Report
 
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, see pages 8 to 13 of the Pillar 3 Disclosures at 31 December 2019.
 
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
 
 
249,673
 
 
(10
 
)
 
323
 
 
249,986
 
Items in the course of collection from other banks
 
 
6,289
 
 
-
 
 
-
 
 
6,289
 
Hong Kong Government certificates of indebtedness
 
 
39,519
 
 
-
 
 
-
 
 
39,519
 
Trading assets
 
 
208,964
 
 
(810
 
)
 
-
 
 
208,154
 
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
 
 
41,785
 
 
(31,488
 
)
 
535
 
 
10,832
 
-  of which: debt securities eligible as tier 2 issued by Group Financial Sector Entities ('FSEs') that are outside the regulatory scope of consolidation
 
r
 
-
 
 
597
 
 
-
 
 
597
 
Derivatives
 
 
313,781
 
 
(169
 
)
 
160
 
 
313,772
 
Loans and advances to banks
 
 
77,015
 
 
(2,071
 
)
 
1,248
 
 
76,192
 
Loans and advances to customers
 
 
1,018,681
 
 
(1,074
 
)
 
12,306
 
 
1,029,913
 
-  of which: lending eligible as tier 2 to Group FSEs outside the regulatory scope of consolidation
 
 
r
 
-
 
 
411
 
 
-
 
 
411
 
    expected credit losses on IRB portfolios
 
h
 
(10,630
 
)
 
-
 
 
-
 
 
(10,630
 
Reverse repurchase agreements - non-trading
 
 
226,345
 
 
2,078
 
 
161
 
 
228,584
 
Financial investments
 
 
494,109
 
 
(70,116
 
)
 
4,625
 
 
428,618
 
-  of which: lending eligible as tier 2 to Group FSEs outside the regulatory scope of consolidation
 
r
 
-
 
 
369
 
 
-
 
 
369
 
Capital invested in insurance and other entities
 
 
-
 
 
2,286
 
 
-
 
 
2,286
 
Prepayments, accrued income and other assets
 
 
197,425
 
 
(6,414
 
)
 
452
 
 
191,463
 
-  of which: retirement benefit assets
 
j
 
9,894
 
 
-
 
 
-
 
 
9,894
 
Current tax assets
 
 
821
 
 
(69
 
)
 
14
 
 
766
 
Interests in associates and joint ventures
 
 
24,800
 
 
(410
 
)
 
(4,626
 
)
 
19,764
 
-  of which: positive goodwill on acquisition
 
e
 
478
 
 
(12
 
)
 
-
 
 
466
 
Goodwill and intangible assets
 
e
 
19,438
 
 
(9,651
 
)
 
1,222
 
 
11,009
 
Deferred tax assets
 
f
 
4,153
 
 
128
 
 
16
 
 
4,297
 
Total assets at 30 Jun 2020
 
 
2,922,798
 
 
(117,790
 
)
 
16,436
 
 
2,821,444
 
Liabilities and equity
 
 
 
 
 
 
Hong Kong currency notes in circulation
 
 
39,519
 
 
-
 
 
-
 
 
39,519
 
Deposits by banks
 
 
82,715
 
 
(29
 
)
 
624
 
 
83,310
 
Customer accounts
 
 
1,532,380
 
 
3,432
 
 
14,656
 
 
1,550,468
 
Repurchase agreements - non-trading
 
 
112,799
 
 
-
 
 
-
 
 
112,799
 
Items in the course of transmission to other banks
 
 
6,296
 
 
-
 
 
-
 
 
6,296
 
Trading liabilities
 
 
79,612
 
 
-
 
 
-
 
 
79,612
 
Financial liabilities designated at fair value
 
 
156,608
 
 
(4,396
 
)
 
-
 
 
152,212
 
-  of which: included in tier 2
 
o, q, i
 
10,054
 
 
-
 
 
-
 
 
10,054
 
Derivatives
 
 
303,059
 
 
72
 
 
229
 
 
303,360
 
-  of which: debit valuation adjustment
 
i
 
138
 
 
-
 
 
-
 
 
138
 
Debt securities in issue
 
 
110,114
 
 
(1,611
 
)
 
-
 
 
108,503
 
Accruals, deferred income and other liabilities
 
 
173,181
 
 
(2,823
 
)
 
640
 
 
170,998
 
Current tax liabilities
 
 
1,141
 
 
(28
 
)
 
106
 
 
1,219
 
Liabilities under insurance contracts
 
 
98,832
 
 
(98,832
 
)
 
-
 
 
-
 
Provisions
 
 
3,209
 
 
(7
 
)
 
55
 
 
3,257
 
-  of which: credit-related contingent liabilities and contractual commitments on IRB portfolios
 
h
 
687
 
 
-
 
 
-
 
 
687
 
Deferred tax liabilities
 
 
4,491
 
 
(1,455
 
)
 
8
 
 
3,044
 
Subordinated liabilities
 
 
23,621
 
 
1
 
 
118
 
 
23,740
 
-  of which:
 
 
 
 
 
 
included in tier 1
 
l, n
 
1,763
 
 
-
 
 
-
 
 
1,763
 
included in tier 2
 
o, q
 
20,168
 
 
-
 
 
-
 
 
20,168
 
Total liabilities at 30 Jun 2020
 
 
2,727,577
 
 
(105,676
 
)
 
16,436
 
 
2,638,337
 
Equity
 
 
 
 
 
 
Called up share capital
 
a
 
10,346
 
 
-
 
 
-
 
 
10,346
 
Share premium account
 
a, l
 
14,268
 
 
-
 
 
-
 
 
14,268
 
Other equity instruments
 
k
 
20,914
 
 
-
 
 
-
 
 
20,914
 
Other reserves
 
c, g
 
(301
 
)
 
1,888
 
 
-
 
 
1,587
 
Retained earnings
 
b, c
 
141,809
 
 
(12,851
 
)
 
-
 
 
128,958
 
Total shareholders' equity
 
 
187,036
 
 
(10,963
 
)
 
-
 
 
176,073
 
Non-controlling interests
 
d, m, n, p
 
8,185
 
 
(1,151
 
)
 
-
 
 
7,034
 
Total equity at 30 Jun 2020
 
 
195,221
 
 
(12,114
 
)
 
-
 
 
183,107
 
Total liabilities and equity at 30 Jun 2020
 
 
2,922,798
 
 
(117,790
 
)
 
16,436
 
 
2,821,444
 
 
†     The references (a)-(r) identify balance sheet components that are used in the calculation of regulatory capital in Table 3: Own funds disclosure. This table shows such items at their accounting values, which may be subject to analysis or adjustment in the calculation of regulatory capital shown in Table 3.
 
 
 
 
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 and loss-absorbing 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, including management of double leverage.
 
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 by the relevant regulatory legislation.
 
A list of the main features of our capital instruments, in accordance with Annex III of Commission Implementing Regulation 1423/2013, is also published on our website. This is in addition to the full terms and conditions of our securities, also available on our website.
 
For further details on our management of capital, see page 77 of the Interim Report 2020.
 
 
 
 
Own funds
 
 
Table 3: Own funds disclosure
 
 
 
 
 
At
 
 
 
 
30 Jun
 
31 Dec
 
 
 
 
2020
 
2019
 
 
 
Ref †
 
$m
 
$m
 
 
Common equity tier 1 ('CET1') capital: instruments and reserves
 
 
 
 
1
 
Capital instruments and the related share premium accounts
 
 
23,209
 
22,873
 
 
-  ordinary shares
 
a
 
23,209
 
22,873
 
2
 
Retained earnings
 
b
 
127,989
 
127,188
 
3
 
Accumulated other comprehensive income (and other reserves)
 
c
 
2,594
 
1,735
 
5
 
Minority interests (amount allowed in consolidated CET1)
 
d
 
4,036
 
4,865
 
5a
 
Independently reviewed interim net profits net of any foreseeable charge or dividend
 
b
 
1,729
 
(3,381
 
6
 
Common equity tier 1 capital before regulatory adjustments
 
 
159,557
 
153,280
 
 
Common equity tier 1 capital: regulatory adjustments
 
 
 
 
7
 
Additional value adjustments1
 
 
(1,162
 
(1,327
 
8
 
Intangible assets (net of related deferred tax liability)
 
e
 
(11,181
 
(12,372
 
10
 
Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)
 
f
 
(1,505
 
(1,281
 
11
 
Fair value reserves related to gains or losses on cash flow hedges
 
g
 
(426
 
(41
 
12
 
Negative amounts resulting from the calculation of expected loss amounts
 
h
 
(1,191
 
(2,424
 
14
 
Gains or losses on liabilities valued at fair value resulting from changes in own credit standing
 
i
 
5
 
2,450
 
15
 
Defined-benefit pension fund assets
 
j
 
(7,409
 
(6,351
 
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
 
 
(8,202
 
(7,928
 
28
 
Total regulatory adjustments to common equity tier 1
 
 
(31,111
 
(29,314
 
29
 
Common equity tier 1 capital
 
 
128,446
 
123,966
 
 
Additional tier 1 ('AT1') capital: instruments
 
 
 
 
30
 
Capital instruments and the related share premium accounts
 
 
20,914
 
20,871
 
31
 
-  classified as equity under IFRSs
 
k
 
20,914
 
20,871
 
33
 
Amount of qualifying items and the related share premium accounts subject to phase out
from AT1
l
 
2,305
 
2,305
 
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
 
872
 
1,277
 
35
 
-  of which: instruments issued by subsidiaries subject to phase out
 
m
 
812
 
1,218
 
36
 
Additional tier 1 capital before regulatory adjustments
 
 
24,091
 
24,453
 
 
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
 
 
24,031
 
24,393
 
45
 
Tier 1 capital (T1 = CET1 + AT1)
 
 
152,477
 
148,359
 
 
 
 
 
Table 3: Own funds disclosure (continued)
 
 
 
 
At
 
 
 
 
30 Jun
 
31 Dec
 
 
 
 
2020
 
2019
 
 
 
Ref †
 
$m
 
$m
 
 
Tier 2 capital: instruments and provisions
 
 
 
 
46
 
Capital instruments and the related share premium accounts
 
o
 
21,338
 
20,525
 
 
-  of which: instruments grandfathered under CRR II
 
 
7,572
 
7,067
 
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
 
4,843
 
4,667
 
49
 
-  of row 48: instruments issued by subsidiaries subject to phase out
 
q
 
2,172
 
2,251
 
 
-  of row 48: instruments issued by subsidiaries grandfathered under CRR II
 
 
1,500
 
1,452
 
51
 
Tier 2 capital before regulatory adjustments
 
 
26,181
 
25,192
 
 
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
 
(1,376
 
(1,361
 
57
 
Total regulatory adjustments to tier 2 capital
 
 
(1,416
 
(1,401
 
58
 
Tier 2 capital
 
 
24,765
 
23,791
 
59
 
Total capital (TC = T1 + T2)
 
 
177,242
 
172,150
 
60
 
Total risk-weighted assets
 
 
854,552
 
843,395
 
 
Capital ratios and buffers
 
 
 
 
61
 
Common equity tier 1
 
 
15.0%
 
14.7%
 
62
 
Tier 1
 
 
17.8%
 
17.6%
 
63
 
Total capital
 
 
20.7%
 
20.4%
 
64
 
Institution specific buffer requirement
 
 
4.70%
 
5.11%
 
65
 
-  capital conservation buffer requirement
 
 
2.50%
 
2.50%
 
66
 
-  countercyclical buffer requirement
 
 
0.20%
 
0.61%
 
67a
 
-  Global Systemically Important Institution ('G-SII') buffer
 
 
2.00%
 
2.00%
 
68
 
Common equity tier 1 available to meet buffers
 
 
8.8%
 
8.5%
 
 
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)
 
 
2,425
 
2,938
 
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)
 
 
13,556
 
13,189
 
75
 
Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability)
 
 
3,915
 
4,529
 
 
Applicable caps on the inclusion of provisions in tier 2
 
 
 
 
77
 
Cap on inclusion of credit risk adjustments in T2 under standardised approach
 
 
2,035
 
2,163
 
79
 
Cap for inclusion of credit risk adjustments in T2 under IRB approach
 
 
3,233
 
3,128
 
 
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
 
 
3,461
 
5,191
 
83
 
Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities)
 
 
51
 
122
 
84
 
Current cap on T2 instruments subject to phase out arrangements
 
 
1,825
 
2,737
 
 
†     The references (a)-(r) identify balance sheet components in Table 2: Reconciliation of balance sheets - financial accounting to regulatory scope of consolidation which is used in the calculation of regulatory capital. This table shows how they contribute to the regulatory capital calculation. Their contribution may differ from their accounting value in Table 2 as a result of adjustment or analysis to apply regulatory definitions of capital.
1     Additional value adjustments are deducted from CET1. These are calculated on assets measured at fair value.
2     The deduction for holdings of own CET1, T1 and T2 instruments is set by the PRA.
3     The 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 etc.
 
 
 
At 30 June 2020, our common equity tier 1 ('CET1') capital ratio increased to 15.0% from 14.7% at 31 December 2019.
 
CET1 capital increased in 1H20 by $4.5bn, mainly as a result of:
 
●    the cancellation of the 4Q19 unpaid dividend of $3.4bn at the PRA's request;
 
●    a $1.8bn increase as a result of lower deductions for excess expected loss. ECL against IRB exposures rose by $4.3bn compared with 31 December 2019, while regulatory expected losses rose by $2.5bn;
 
●    capital generation of $1.7bn through profits, net of dividends relating to other equity instruments; and
 
●    a $1.5bn increase in the fair value through other comprehensive income reserve.
 
These increases were partly offset by:
 
●     foreign currency translation differences of $3.7bn; and
 
●    a $0.8bn fall in allowable non-controlling interests in CET1. This partly reflected the acquisition in May 2020 of additional shares representing 18.66% of the capital of HSBC Trinkaus & Burkhardt AG from Landesbank Baden-Württemberg, the principal minority shareholder.
 
At 30 June 2020, our Pillar 2A requirement was $26.3bn,  equivalent to 3.1% of RWAs. Of this, 1.7% was met by CET1. Pillar 2A requirements are set by the PRA as part of our total capital requirement.
 
 
Leverage ratio
 
 
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. This is 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 and the Group Risk Committee.
 
Our approach to risk appetite is described on page 73 of the Annual Report and Accounts 2019.
 
 
 
 
Table 4: Leverage ratio common disclosure ('LRCom')
 
 
 
 
At
 
 
 
 
30 Jun
 
31 Dec
 
 
 
 
2020
 
2019
 
 
 
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)
 
 
2,232.1
 
2,119.1
 
2
 
(Asset amounts deducted in determining tier 1 capital)
 
 
(29.6
 
(30.5
 
3
 
Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets)
 
 
2,202.5
 
2,088.6
 
 
Derivative exposures
 
 
 
 
4
 
Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)
 
 
85.4
 
53.5
 
5
 
Add-on amounts for potential future exposure associated with all derivatives transactions
(mark-to-market method)
 
 
146.3
 
162.1
 
6
 
Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to IFRSs
 
 
13.3
 
8.3
 
7
 
(Deductions of receivables assets for cash variation margin provided in derivatives transactions)
 
 
(58.5
 
(43.1
 
8
 
(Exempted central counterparty ('CCP') leg of client-cleared trade exposures)
 
 
(80.3
 
(53.2
 
9
 
Adjusted effective notional amount of written credit derivatives
 
 
153.6
 
159.4
 
10
 
(Adjusted effective notional offsets and add-on deductions for written credit derivatives)
 
 
(147.1
 
(150.4
 
11
 
Total derivative exposures
 
 
112.7
 
136.6
 
 
Securities financing transaction exposures
 
 
 
 
12
 
Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions
 
 
483.0
 
451.0
 
13
 
(Netted amounts of cash payables and cash receivables of gross SFT assets)
 
 
(228.3
 
(196.1
 
14
 
Counterparty credit risk exposure for SFT assets
 
 
10.7
 
10.7
 
16
 
Total securities financing transaction exposures
 
 
265.4
 
265.6
 
 
Other off-balance sheet exposures
 
 
 
 
17
 
Off-balance sheet exposures at gross notional amount
 
 
859.9
 
865.5
 
18
 
(Adjustments for conversion to credit equivalent amounts)
 
 
(639.1
 
(629.8
 
19
 
Total off-balance sheet exposures
 
 
220.8
 
235.7
 
 
Capital and total exposures
 
 
 
 
20
 
Tier 1 capital
 
1
 
149.4
 
144.8
 
21
 
Total leverage ratio exposure
 
 
2,801.4
 
2,726.5
 
22
 
Leverage ratio (%)
 
1
 
5.3
 
5.3
 
EU-23
 
Choice of transitional arrangements for the definition of the capital measure
 
 
Fully phased-in
 
 Fully phased-in
 
 
1     Leverage ratio is calculated using the CRR II end point basis for capital.
 
 
 
 
 
 
 
Table 5: Summary reconciliation of accounting assets and leverage ratio exposures ('LRSum')
 
 
 
At
 
 
 
30 Jun
 
31 Dec
 
 
 
2020
 
2019
 
 
 
$bn
 
$bn
 
1
 
Total assets as per published financial statements
 
2,922.8
 
2,715.2
 
 
Adjustments for:
 
 
 
2
 
-  entities which are consolidated for accounting purposes but are outside the scope of regulatory consolidation
 
(101.4
 
(101.2
 
4
 
-  derivative financial instruments
 
(201.0
 
(106.4
 
5
 
-  SFTs
 
12.2
 
2.8
 
6
 
-  off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)
 
220.8
 
235.7
 
7
 
-  other
 
(52.0
 
(19.6
 
8
 
Total leverage ratio exposure
 
2,801.4
 
2,726.5
 
 
 
 
 
Table 6: Leverage ratio - Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures) ('LRSpl')
 
 
 
At
 
 
 
30 Jun
 
31 Dec
 
 
 
2020
 
2019
 
 
 
$bn
 
$bn
 
EU-1
 
Total on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures)
 
2,173.6
 
2,076.0
 
EU-2
 
-  trading book exposures
 
181.2
 
230.8
 
EU-3
 
-  banking book exposures
 
1,992.4
 
1,845.2
 
 
   'banking book exposures' comprises:
 
 
 
EU-4
 
covered bonds
 
2.6
 
2.6
 
EU-5
 
exposures treated as sovereigns
 
682.3
 
539.3
 
EU-6
 
exposures to regional governments, multilateral development banks, international organisations and public sector entities not treated as sovereigns
 
8.8
 
9.4
 
EU-7
 
institutions
 
66.3
 
59.3
 
EU-8
 
secured by mortgages of immovable properties
 
342.9
 
330.4
 
EU-9
 
retail exposures
 
83.6
 
106.2
 
EU-10
 
corporate
 
589.8
 
603.2
 
EU-11
 
exposures in default
 
12.7
 
9.9
 
EU-12
 
other exposures (e.g. equity, securitisations and other non-credit obligation assets)
 
203.4
 
184.9
 
 
 
 
 
Capital buffers
 
 
Our geographical breakdown and institution-specific countercyclical capital buffer ('CCyB') disclosure and 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.
 
 
 
 
 
 
 
 
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
 
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');
●   standardised approach ('SEC-SA');
●   external ratings-based approach ('SEC-ERBA'); and
●   internal assessment approach ('IAA').
From 1 January 2020, all transactions were subject to the new framework.
 
Under the new framework:
●   Our originated positions are reported under SEC-IRBA.
●   Our positions in the sponsored Solitaire programme and our investment in third-party positions are reported under SEC-SA and SEC-ERBA.
●   Our sponsored positions in Regency are reported under IAA. Our IAA approach is audited annually by internal model review and is subject to review by the PRA.
 
 
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 7: Overview of RWAs ('OV1')
 
 
 
 
At
 
 
 
 
30 Jun
 
31 Mar
 
30 Jun
 
 
 
 
2020
 
2020
 
2020
 
 
 
 
RWAs
 
RWAs
 
Capital
requirements
 
 
 
Footnotes
 
$bn
 
$bn
 
$bn
 
1
 
Credit risk (excluding counterparty credit risk)
 
 
632.6
 
631.9
 
50.6
 
2
 
-  standardised approach
 
 
116.8
 
119.9
 
9.3
 
3
 
-  foundation IRB approach
 
 
103.9
 
101.2
 
8.3
 
4
 
-  advanced IRB approach
 
 
411.9
 
410.8
 
33.0
 
6
 
Counterparty credit risk
 
 
43.1
 
47.3
 
3.4
 
7
 
-  mark-to-market
 
 
20.6
 
23.2
 
1.6
 
10
 
-  internal model method
 
 
18.3
 
20.0
 
1.5
 
11
 
-  risk exposure amount for contributions to the default fund of a central counterparty
 
 
0.5
 
0.6
 
-
 
12
 
-  credit valuation adjustment
 
 
3.7
 
3.5
 
0.3
 
13
 
Settlement risk
 
 
-
 
0.2
 
-
 
14
 
Securitisation exposures in the non-trading book
 
 
10.4
 
10.4
 
0.8
 
14a
 
-  internal ratings-based approach ('SEC-IRBA')
 
 
1.8
 
1.8
 
0.1
 
14b
 
-  external ratings-based approach ('SEC-ERBA')
 
 
3.9
 
3.6
 
0.3
 
14c
 
-  internal assessment approach ('IAA')
 
 
2.3
 
2.5
 
0.2
 
14d
 
-  standardised approach ('SEC-SA')
 
 
2.4
 
2.5
 
0.2
 
19
 
Market risk
 
 
35.2
 
34.8
 
2.8
 
20
 
-  standardised approach
 
 
8.4
 
8.8
 
0.7
 
21
 
-  internal models approach
 
 
26.8
 
26.0
 
2.1
 
23
 
Operational risk
 
 
89.6
 
89.2
 
7.2
 
25
 
-  standardised approach
 
 
89.6
 
89.2
 
7.2
 
27
 
Amounts below the thresholds for deduction (subject to 250% risk weight)
 
 
43.7
 
43.3
 
3.5
 
29
 
Total
 
 
854.6
 
857.1
 
68.3
 
 
 
Credit risk, including amounts below the thresholds for deduction
Credit risk RWAs increased by $1.1bn in 2Q20. This included a $11.7bn fall in asset size attributable to repayments and management initiatives, largely offset by an increase in RWAs due to changes in asset quality of $11.6bn. Asset quality movements reflected significant credit migration, largely in North America, Europe and Asia. A $3.9bn increase in RWAs due to foreign currency exchange differences was partly offset by a decrease due to methodology and policy changes of $3.3bn, mainly due to risk parameter refinements.
 
Counterparty credit risk
The $4.0bn decrease in counterparty credit risk RWAs was primarily due to management initiatives, lower market volatility and trade maturities.
 
Market risk
The $0.4bn increase in market risk RWAs included a $3.5bn increase from asset size movements largely due to market volatility, partly offset by management initiatives. This was largely offset by a $2.1bn decrease due to methodology and policy changes, mostly in the calculation of foreign exchange risk, and a $1.0bn fall due to model updates from a temporary adjustment to the calculation of risks not in VaR.
 
 
Table 8: RWA flow statements of credit risk exposures under IRB¹ ('CR8')
 
 
 
RWAs
 
Capital
requirements
 
 
 
$bn
 
$bn
 
1
 
RWAs at 1 Apr 2020
 
512.0
 
41.0
 
2
 
Asset size
 
(10.2
 
(0.8
 
3
 
Asset quality
 
11.4
 
0.8
 
4
 
Model updates
 
0.8
 
0.1
 
5
 
Methodology and policy
 
(1.4
 
(0.1
 
7
 
Foreign exchange movements
 
3.2
 
0.3
 
9
 
RWAs at 30 Jun 2020
 
515.8
 
41.3
 
 
1     Securitisation positions are not included in this table.
 
 

 
IRB RWAs increased by $3.8bn in 2Q20, including a rise of $3.2bn due to foreign currency translation differences. The remaining increase of $0.6bn was mostly from a $11.4bn RWA rise due to asset quality movements, reflecting an increase in credit migration in North America, Europe and Asia. This was partly offset by a fallfrom asset size movements of $10.2bn due to customer repayments and active portfolio management in the same regions. A $1.4bn fall in RWAs from methodology and policy was largely due to risk parameter refinements, and a $0.8bn increase from model updates included changes to global corporate models.
 
 
 
 
 
Table 9: RWA flow statements of CCR exposures under IMM ('CCR7')
 
 
 
RWAs
 
Capital
requirements
 
 
 
$bn
 
$bn
 
1
 
RWAs at 1 Apr 2020
 
22.9
 
1.8
 
2
 
Asset size
 
(1.6
 
(0.1
 
3
 
Asset quality
 
0.4
 
-
 
5
 
Methodology and policy
 
(0.3
 
-
 
9
 
RWAs at 30 Jun 2020
 
21.4
 
1.7
 
 
 
IMM RWAs fell by $1.5bn in 2Q20 predominantly due to management initiatives and a fall in mark-to-market as a result of lower market volatility.
 
 
 
 
Table 10: 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 2020
 
5.8
 
8.6
 
9.2
 
2.4
 
26.0
 
2.1
 
2
 
Movement in risk levels
 
1.9
 
2.3
 
(2.1
 
-
 
2.1
 
0.1
 
3
 
Model updates/changes
 
(0.4
 
(0.6
 
-
 
-
 
(1.0
 
(0.1
 
4
 
Methodology and policy
 
-
 
-
 
-
 
(0.3
 
(0.3
 
-
 
8
 
RWAs at 30 Jun 2020
 
7.3
 
10.3
 
7.1
 
2.1
 
26.8
 
2.1
 
 
 
RWAs under IMA increased by $0.8bn in 2Q20 due to a $2.1bn increase in risk levels, largely offset by a $1.0bn fall due to model updates from a temporary adjustment to the calculation of risks not in VaR. The increase in risk levels reflected heightened market volatility, partly offset by management initiatives and a $2.1bn fall in IRC RWAs following a reduction in exposures.
 
Minimum requirement for own
funds and eligible liabilities
 
 
A requirement for total loss-absorbing capacity ('TLAC'), as defined in the final standards adopted by the Financial Stability Board, came into effect on 1 January 2019. In the EU, TLAC requirements were implemented via CRR II, which came into force in June 2019 and includes a new framework on minimum requirement for own funds and eligible liabilities ('MREL').
 
MREL includes own funds and liabilities that can be written down or converted into capital resources in order to absorb losses or recapitalise a bank in the event of its failure. The new framework is complemented with new disclosure requirements. As the specific EU format for disclosure is yet to be agreed, the disclosures are based on the formats provided in the Basel Committee Standards for Pillar 3 disclosures requirements.
 
The preferred resolution strategy for the Group, as confirmed by the BoE, is a multiple point of entry ('MPE') strategy - allowing each individual resolution group to be resolved by its respective local resolution authority. Aligned with this strategy, the Group issues TLAC to the market from HSBC Holdings only, and then downstreams the proceeds to its subsidiaries as necessary and in accordance with requirements set by our regulators. This approach gives host authorities the option to recapitalise local subsidiaries through the write-down of internal TLAC resources, with the BoE applying bail-in powers at the HSBC Holdings level where necessary and subsequently conducting any necessary restructuring and separation of the Group in coordination with host authorities.
 
In line with the existing structure and business model of the Group, we have three resolution groups. There are some smaller entities that fall outside of the resolution groups, and can be separately resolved.
 
The table below lists the resolution groups, the related resolution entities and their material subsidiaries subject to TLAC requirements as currently agreed with the BoE.
 
The external MREL requirement for the Group as a whole is currently the highest of:
 
●    16% of the Group's consolidated RWAs;
 
●    6% of the Group's consolidated leverage exposure; and
 
●    the sum of all loss-absorbing capacity requirements and other capital requirements relating to Group entities or sub-groups.
 
The indicative, external MREL requirements applying to the Group from 2020 to 2021 follow the same calibration. The indicative, external MREL requirement applicable in 2022 is expected to be the highest of:
 
●    18% of the Group's consolidated RWAs;
 
●    6.75% of the Group's consolidated leverage exposure; and
 
●    the sum of all loss-absorbing capacity requirements and other capital requirements relating to other Group entities or sub-groups.
 
These indicative requirements remain subject to the BoE MREL recalibration as part of setting the 2021 requirements, based on BoE deliberation in 2020.
 
Further details of our approach to capital management can be found in  'Capital risk management' on page 77 of the Interim Report 2020.
 
 
 
 
 
 
European resolution group
 
HSBC Holdings plc
 
HSBC UK Holdings Limited
 
 
HSBC Bank plc
 
 
HSBC UK Bank plc
 
 
HSBC France
 
 
Asian resolution group
 
HSBC Asia Holdings Limited
 
The Hongkong and Shanghai Banking Corporation Limited
 
 
Hang Seng Bank Limited
 
 
US resolution group
 
HSBC North America Holdings Inc
 
N/A
 
 
 
 
The tables below summarise the key metrics for the Group's three resolution groups.
 
Table 11.i: Key metrics of the European resolution group¹ ('KM2')
 
 
 
At
 
 
 
30 Jun
 
31 Mar
 
31 Dec
 
30 Sep
 
30 Jun
 
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
1
 
Total loss absorbing capacity ('TLAC') available ($bn)
 
94.3
 
98.5
 
94.6
 
95.5
 
97.3
 
1a
 
Fully loaded ECL accounting model TLAC available ($bn)
 
94.2
 
98.4
 
94.4
 
95.3
 
97.1
 
2
 
Total RWA at the level of the resolution group ($bn)
 
295.7
 
299.6
 
297.4
 
316.8
 
321.1
 
3
 
TLAC as a percentage of RWA (row1/row2) (%)
 
31.9
 
32.9
 
31.8
 
30.1
 
30.3
 
3a
 
Fully loaded ECL accounting model TLAC as a percentage of fully loaded ECL accounting model RWA (%)
 
31.9
 
32.8
 
31.8
 
30.1
 
30.2
 
4
 
Leverage exposure measure at the level of the resolution group ($bn)
 
1,166
 
1,163
 
1,167
 
1,133
 
1,176
 
5
 
TLAC as a percentage of leverage exposure measure (row1/row4) (%)
 
8.1
 
8.5
 
8.1
 
8.4
 
8.3
 
5a
 
Fully loaded ECL accounting model TLAC as a percentage of fully loaded ECL accounting model Leverage exposure measure (%)
 
8.1
 
8.5
 
8.1
 
8.4
 
8.3
 
6a
 
Does the subordination exemption in the antepenultimate paragraph of Section 11 of the FSB TLAC Term Sheet apply?
 
No
 
No
 
 No
 
No
 
No
 
6b
 
Does the subordination exemption in the penultimate paragraph of Section 11 of the FSB TLAC Term Sheet apply?
 
No
 
No
 
 No
 
No
 
No
 
6c
 
If the capped subordination exemption applies, the amount of funding issued that ranks pari passu with excluded liabilities and that is recognised as external TLAC, divided by funding issued that ranks pari passu with excluded liabilities and that would be recognised as external TLAC if no cap was applied (%)
 
N/A
 
N/A
 
 N/A
 
N/A
 
N/A
 
 
Footnotes can be found at the end of the table.
 
 
 
Table 11.ii: Key metrics of the Asian resolution group² ('KM2')
 
 
 
At
 
 
 
30 Jun
 
31 Mar
 
31 Dec
 
30 Sep
 
30 Jun
 
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
1
 
Total loss absorbing capacity ('TLAC') available ($bn)
 
99.8
 
96.0
 
98.8
 
97.2
 
97.0
 
1a
 
Fully loaded ECL accounting model TLAC available ($bn)
 
99.8
 
96.0
 
98.8
 
97.2
 
97.0
 
2
 
Total RWA at the level of the resolution group ($bn)
 
379.7
 
374.8
 
366.1
 
370.6
 
371.1
 
3
 
TLAC as a percentage of RWA (row1/row2) (%)
 
26.3
 
25.6
 
27.0
 
26.2
 
26.1
 
3a
 
Fully loaded ECL accounting model TLAC as a percentage of fully loaded ECL accounting model RWA (%)
 
26.3
 
25.6
 
27.0
 
26.2
 
26.1
 
4
 
Leverage exposure measure at the level of the resolution group ($bn)
 
1,092
 
1,055
 
1,036
 
1,025
 
1,041
 
5
 
TLAC as a percentage of leverage exposure measure (row1/row4) (%)
 
9.1
 
9.1
 
9.5
 
9.5
 
9.3
 
5a
 
Fully loaded ECL accounting model TLAC as a percentage of fully loaded ECL accounting model Leverage exposure measure (%)
 
9.1
 
9.1
 
9.5
 
9.5
 
9.3
 
6a
 
Does the subordination exemption in the antepenultimate paragraph of Section 11 of the FSB TLAC Term Sheet apply?
 
No
 
No
 
No
 
No
 
No
 
6b
 
Does the subordination exemption in the penultimate paragraph of Section 11 of the FSB TLAC Term Sheet apply?
 
No
 
No
 
No
 
No
 
No
 
6c
 
If the capped subordination exemption applies, the amount of funding issued that ranks pari passu with excluded liabilities and that is recognised as external TLAC, divided by funding issued that ranks pari passu with excluded liabilities and that would be recognised as external TLAC if no cap was applied (%)
 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
 
 
Footnotes can be found at the end of the table.
 
Table 11.iii: Key metrics of the US resolution group³ ('KM2')
 
 
 
At
 
 
 
30 Jun
 
31 Mar
 
31 Dec
 
30 Sep
 
30 Jun
 
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
1
 
Total loss absorbing capacity ('TLAC') available ($bn)
 
30.4
 
30.5
 
29.8
 
30.2
 
31.7
 
1a
 
Fully loaded ECL accounting model TLAC available ($bn)
 
30.3
 
30.4
 
N/A
 
N/A
 
N/A
 
2
 
Total RWA at the level of the resolution group ($m)
 
127.2
 
140.4
 
128.7
 
139.0
 
140.8
 
3
 
TLAC as a percentage of RWA (row1/row2) (%)
 
23.9
 
21.7
 
23.2
 
21.7
 
22.5
 
3a
 
Fully loaded ECL accounting model TLAC as a percentage of fully loaded ECL accounting model RWA (%)
 
23.8
 
21.7
 
N/A
 
N/A
 
N/A
 
4
 
Leverage exposure measure at the level of the resolution group ($bn)
 
306
 
367
 
332
 
373
 
363
 
5
 
TLAC as a percentage of leverage exposure measure (row1/row4) (%)
 
9.9
 
8.3
 
9.0
 
8.1
 
8.8
 
5a
 
Fully loaded ECL accounting model TLAC as a percentage of fully loaded ECL accounting model Leverage exposure measure (%)
 
N/A