UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549

FORM 6-K
 
Report of Foreign Private Issuer Pursuant to Rule 13a - 16 or 15d - 16 under the Securities Exchange Act of 1934

 
For the month of February 2020

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): ......






Pillar 3 Disclosures at 31 December 2019

Contents
 
Page
Introduction
Highlights
Key metrics
Pillar 3 disclosures
Regulatory developments
Risk management
Capital and RWAs
Capital management
Own funds
Leverage
Pillar 1 minimum capital requirements and RWA flow
Minimum requirement for own funds and eligible liabilities
Pillar 2 and ICAAP
Credit risk
Counterparty credit risk
Securitisation
Market risk
Non-financial risk
Liquidity
Other risks
Appendices
 
Appendix I – Additional tables
Appendix II – Countercyclical capital buffer
Appendix III – Asset encumbrance
Appendix IV – Summary of disclosures withheld
Other Information
 
Abbreviations
Cautionary statement regarding forward-looking statements
Contacts
 
Unless the context requires otherwise, ‘HSBC Holdings’ means HSBC Holdings plc and ‘HSBC’, the ‘Group’, ‘we’, ‘us’ and ‘our’ refer to HSBC Holdings together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People’s Republic of China is referred to as ‘Hong Kong’. When used in the terms ‘shareholders’ equity’ and ‘total shareholders’ equity’, ‘shareholders’ means holders of HSBC Holdings ordinary shares and those preference shares and capital securities issued by HSBC Holdings classified as equity. The abbreviations ‘$m’ and ‘$bn’ represent millions and billions (thousands of millions) of US dollars respectively.

1
HSBC Holdings plc Pillar 3 2019


Tables
 
 
Ref
Page

1
Key metrics (KM1/IFRS9-FL)
a
4

2
Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation
 
9

3
Principal entities with a different regulatory and accounting scope of consolidation (LI3)
 
10

4
Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories (LI1)
 
11

5
Main sources of differences between regulatory exposure amounts and carrying values in financial statements (LI2)
a
12

6
Own funds disclosure
b
13

7
Leverage ratio common disclosure (LRCom)
b
15

8
Summary reconciliation of accounting assets and leverage ratio exposures (LRSum)
a
16

9
Leverage ratio – Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures) (LRSpl)
b
16

10
Overview of RWAs (OV1)
b
18

11
RWA flow statements of credit risk exposures under the IRB approach (CR8)
 
18

12
RWA flow statements of CCR exposures under IMM (CCR7)
 
19

13
RWA flow statements of market risk exposures under IMA (MR2-B)
 
19

14
Key metrics of the resolution groups (KM2)
 
20

15
TLAC composition (TLAC1)
 
21

16
HSBC Holdings plc creditor ranking (TLAC3)
 
22

17
HSBC UK Bank plc creditor ranking (TLAC2)
 
22

18
HSBC Bank plc creditor ranking (TLAC2)
 
23

19
HSBC Asia Holdings Ltd creditor ranking (TLAC3)
 
23

20
The Hongkong and Shanghai Banking Corporation Ltd creditor ranking (TLAC2)
 
23

21
Hang Seng Bank Ltd creditor ranking (TLAC2)
 
24

22
HSBC North America Holdings Inc. creditor ranking (TLAC3)
 
24

23
Credit risk exposure – summary (CRB-B)
a
27

24
Credit quality of exposures by exposure classes and instruments (CR1-A)
 
28

25
Credit quality of exposures by industry or counterparty types (CR1-B)
 
30

26
Credit quality of exposures by geography (CR1-C)
 
31

27
Changes in stock of general and specific credit risk adjustments (CR2-A)
 
31

28
Changes in stock of defaulted loans and debt securities (CR2-B)
 
32

29
Credit quality of forborne exposures
 
32

30
Credit quality of performing and non-performing exposures by past due days
 
33

31
Collateral obtained by taking possession and execution processes
 
33

32
Performing and non-performing exposures and related provisions
 
34

33
Amount of past due unimpaired and credit-impaired exposures by geographical region
 
34

34
Geographical breakdown of exposures (CRB-C)
 
35

35
Concentration of exposures by industry or counterparty types (CRB-D)
 
37

36
Maturity of on-balance sheet exposures (CRB-E)
 
39

37
Credit risk mitigation techniques – overview (CR3)
 
41

38
Standardised approach – credit conversion factor (‘CCF’) and credit risk mitigation (‘CRM’) effects (CR4)
b
41

39
Credit risk mitigation techniques – IRB and Standardised
 
42

40
IRB – Effect on RWA of credit derivatives used as CRM techniques (CR7)
 
42

41
Standardised approach – exposures by asset class and risk weight (CR5)
b
43

42
Wholesale IRB credit risk models
 
46

43
IRB models – estimated and actual values (wholesale)
 
47

44
Retail IRB risk rating systems
 
48

45
IRB models – estimated and actual values (retail)
 
50

 

 
 
 
 

 
 
46
Wholesale IRB exposure – back-testing of probability of default (PD) per portfolio (CR9)
 
51

47
Retail IRB exposure – back-testing of probability of default (PD) per portfolio (CR9)
 
53

48
Analysis of counterparty credit risk exposure by approach (excluding centrally cleared exposures) (CCR1)
 
55

49
Credit valuation adjustment (CVA) capital charge (CCR2)
 
56

50
Standardised approach – CCR exposures by regulatory portfolio and risk weights (CCR3)
 
56

51
Impact of netting and collateral held on exposure values (CCR5-A)
 
56

52
Composition of collateral for CCR exposure (CCR5-B)
 
56

53
Credit derivatives exposures (CCR6)
 
57

54
Exposures to central counterparties (CCR8)
 
57

55
Securitisation exposure – movement in the year
 
59

56
Securitisation – asset values and impairments
 
60

57
Securitisation exposures in the non-trading book (SEC1)
 
60

58
Securitisation exposures in the trading book (SEC2)
 
61

59.i
Securitisation exposures in the non-trading book and associated capital requirements – bank acting as originator or sponsor (under the pre-existing framework) (SEC3)
 
61

59.ii
Securitisation exposures in the non-trading book and associated capital requirements – bank acting as originator or sponsor (under the new framework) (SEC3)
 
62

60.i
Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor (under the pre-existing framework) (SEC4)
 
63

60.ii
Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor (under the new framework) (SEC4)
 
63

61
Market risk under standardised approach (MR1)
 
64

62
Market risk under IMA (MR2-A)
 
64

63
IMA values for trading portfolios (MR3)
 
67

64
Prudential valuation adjustments (PV1)
 
69

65
Operational risk RWAs
 
70

66
Level and components of HSBC Group consolidated liquidity coverage ratio (LIQ1)
 
72

67
Analysis of on-balance sheet encumbered and unencumbered assets
 
73

68
Non-trading book equity investments
 
75

69
Wholesale IRB exposure – by obligor grade
 
76

70
PD, LGD, RWA and exposure by country/territory
 
77

71
Retail IRB exposure – by internal PD band
 
80

72
IRB expected loss and CRAs – by exposure class
b
81

73
Credit risk RWAs – by geographical region
b
82

74
Standardised exposure – by credit quality step
a
83

75
Specialised lending on slotting approach (CR10)
 
83

76
IRB – Credit risk exposures by portfolio and PD range (CR6)
a
84

77
Counterparty credit risk – RWAs by exposure class, product and geographical region
 
90

78
IRB – CCR exposures by portfolio and PD scale (CCR4)
 
91

79
Geographical distribution of credit exposures relevant for the calculation of the countercyclical capital buffer
 
93

80
Countercyclical capital buffer
 
93

81
A – Assets
 
94

81
B – Collateral received
 
94

81
C – Encumbered assets/collateral received and associated liabilities
 
94

The Group has adopted the EU’s regulatory transitional arrangements for International Financial Reporting Standard (‘IFRS’) 9 Financial instruments. A number of tables in this document report under this arrangement as follows:
a. Some figures (indicated with ^) within the table have been prepared on an IFRS 9 transitional basis.
b. All figures within the table have been prepared on an IFRS 9 transitional basis.
All other tables report numbers on the basis of full adoption of IFRS 9.



Pillar 3 Disclosures at 31 December 2019

Introduction
Highlights
Common equity tier 1 (‘CET1’) ratio further strengthened over 4Q19 to 14.7% driven by RWA reduction of $22bn
Common equity tier 1 ($bn and %)1
Leverage ratio and exposure ($bn and %)3
chart-2910f1a5feda25ef0b8.jpg      chart-fadb3d63c7e45ac5755.jpg
Risk-weighted assets by risk type and global business ($bn)
$843.4bn
chart-360bf16dbb496aca95b.jpg
 
Credit risk
 
Counterparty credit risk
 
Market risk
 
Operational risk
 
 
 
chart-909ff99f9228068ce53.jpg
 
Commercial Banking
 
Global Banking and Markets
 
Retail Banking and Wealth Management
 
Global Private Banking
 
Corporate Centre
 
Common equity tier 1 ratio movement, %
chart-fe67ddf39289aa20ce3.jpg
For footnotes, see page 4.

3
HSBC Holdings plc Pillar 3 2019


Key metrics
Table 1: Key metrics (KM1/IFRS9-FL)
 
 
 
At
 
 
 
31 Dec

30 Sep

30 Jun

31 Mar

31 Dec

Ref*
 
Footnotes
2019

2019

2019

2019

2018

 
Available capital ($bn)
1
 
 
 
 
 
1
Common equity tier 1 (‘CET1’) capital
^
124.0

123.8

126.9

125.8

121.0

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

 
123.1

122.9

126.0

124.9

120.0

3
Tier 1 capital
^
148.4

149.7

152.8

151.8

147.1

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

 
147.5

148.8

151.9

150.9

146.1

5
Total regulatory capital
^
172.2

175.1

178.3

177.8

173.2

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

 
171.3

174.2

177.4

176.9

172.2

 
Risk-weighted assets (‘RWAs’) ($bn)
 
 
 
 
 
 
7
Total RWAs
 
843.4

865.2

886.0

879.5

865.3

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

 
842.9

864.7

885.5

878.9

864.7

 
Capital ratios (%)
1


 
 
 
 
9
CET1
^
14.7

14.3

14.3

14.3

14.0

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

 
14.6

14.2

14.2

14.2

13.9

11
Tier 1
^
17.6

17.3

17.2

17.3

17.0

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

 
17.5

17.2

17.2

17.2

16.9

13
Total capital
^
20.4

20.2

20.1

20.2

20.0

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

 
20.3

20.1

20.0

20.1

19.9

 
Additional CET1 buffer requirements as a percentage of RWA (%)


 
 
 
 
 
 
 
Capital conservation buffer requirement

 
2.50

2.50

2.50

2.50

1.88

 
Countercyclical buffer requirement

 
0.61

0.69

0.68

0.67

0.56

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

 
2.00

2.00

2.00

2.00

1.50

 
Total of bank CET1 specific buffer requirements

 
5.11

5.19

5.18

5.17

3.94

 
Total capital requirement (%)

2
 
 
 
 
 
 
Total capital requirement

 
11.0

11.0

11.0

11.0

10.9

 
CET1 available after meeting the bank’s minimum capital requirements
 
8.5

8.1

8.1

8.1

7.9

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

 
2,726.5

2,708.2

2,786.5

2,735.2

2,614.9

16
Leverage ratio (%)
^
5.3

5.4

5.4

5.4

5.5

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

 
5.3

5.4

5.3

5.4

5.5

 
Liquidity Coverage Ratio (‘LCR’)

4


 
 
 
 
 
Total high-quality liquid assets ($bn)
 
601.4

513.2

532.8

535.4

567.2

 
Total net cash outflow ($bn)
 
400.5

378.0

391.0

374.8

368.7

 
LCR ratio (%)
 
150.2

135.8

136.3

142.9

153.8

*
The references in this and subsequent tables identify the lines prescribed in the EBA template where applicable and where there is a value.
^
Figures have been prepared on an IFRS 9 transitional basis.
1
Effective 30 June 2019, the capital figures and ratios are reported in accordance with the revised Capital Requirements Regulation and Directive, as implemented (‘CRR II’). Prior period capital figures and ratios are reported on a Capital Requirements Regulation and Directive (‘CRD IV’) transitional basis.
2
Total capital requirement is defined as the sum of Pillar 1 and Pillar 2A capital requirements set by the Prudential Regulation Authority (‘PRA’). Our Pillar 2A requirement at 31 December 2019, as per the PRA’s Individual Capital Requirement based on a point in time assessment, was 3.0% of RWAs, of which 1.7% was met by CET1. The minimum requirements represent the total capital requirement to be met by CET1.
3
Effective 30 June 2019, the leverage ratio is calculated using the CRR II end point basis for capital. Prior period leverage ratios are calculated on the CRD IV end point basis for capital.
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.
We have adopted the regulatory transitional arrangements, including paragraph four within article 473a of the Capital Requirements Regulation, published by the EU on 27 December 2017 for IFRS 9 ‘Financial Instruments’. These permit banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances during the first five years of use. The proportion that banks may add back 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.
In the current period, the add-back to the capital base amounted to $1.0bn under the STD approach with a tax impact of $0.2bn and a capital deduction threshold impact of $0.1bn. This resulted in a net add-back of $0.9bn.




Pillar 3 Disclosures at 31 December 2019

Pillar 3 disclosures
Regulatory framework for disclosure
We are supervised on a consolidated basis in the United Kingdom (‘UK’) by the Prudential Regulation Authority (‘PRA’), which receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. Individual banking subsidiaries are directly regulated by their local banking supervisors, who set and monitor their local capital adequacy requirements. In most jurisdictions, non-banking financial subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.
At the consolidated Group level, capital is calculated for prudential regulatory reporting purposes using the Basel III framework of the Basel Committee (‘Basel’) as implemented by the European Union (‘EU’) in 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 implementation of Basel’s framework, so local regulation in 2019 may have been on the basis of Basel I, II or III.
The Basel framework is structured around three ‘pillars’: the Pillar 1 minimum capital requirements and Pillar 2 supervisory review process are complemented by Pillar 3 market discipline. The aim of Pillar 3 is to produce disclosures that allow market participants to assess the scope of application by banks of the Basel framework and the rules in their jurisdiction, their capital condition, risk exposures and risk management processes, and hence their capital adequacy.
Our Pillar 3 Disclosures at 31 December 2019 comprises both quantitative and qualitative information required under Pillar 3. They are made in accordance with Part Eight of CRR II and the European Banking Authority’s (‘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 Group’s disclosure policy framework as approved by the Group Audit Committee (‘GAC’). Information relating to the rationale for withholding certain disclosures is provided in Appendix IV.

Comparatives
To give insight into movements during the year, we provide comparative figures for the previous year or period, analytical review 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 RWAs by article 92 of the Capital Requirements Regulation. Table name references and row numbering in tables identify those prescribed in the relevant EBA guidelines where applicable and where there is a value.
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.
Frequency and location
We publish comprehensive Pillar 3 disclosures annually and at interim on our website www.hsbc.com, concurrently with the release of our Annual Report and Accounts and Interim Report. Quarterly earnings releases also include regulatory information in line with the guidelines on the frequency of regulatory disclosures. Pillar 3 requirements may be met by inclusion in other disclosure media. Where we adopt this approach, references are provided to the relevant pages of the Annual Report and Accounts 2019 or other locations. We continue to engage in the work of the UK authorities and industry associations to improve the transparency and comparability of UK banks’ Pillar 3 disclosures.
 
Material risks
Pillar 3 requires all material risks to be disclosed to provide a comprehensive view of a bank’s risk profile. In addition to the disclosure in this document, other information on material risks can be found on page 119 of the Annual Report and Accounts 2019. This includes:
Credit risk (refer to page 120 of the Annual Report and Accounts 2019)
Capital and liquidity risk (refer to page 166 of the Annual Report and Accounts 2019)
Market risk (refer to page 171 of the Annual Report and Accounts 2019)
Resilience risk (refer to page 179 of the Annual Report and Accounts 2019)
Regulatory compliance risk (refer to page 180 of the Annual Report and Accounts 2019)
Financial crime and fraud risk (refer to page 181 of the Annual Report and Accounts 2019)
Model risk (refer to page 182 of the Annual Report and Accounts 2019)
Insurance manufacturing operations risk (refer to page 182 of the Annual Report and Accounts 2019)
Information on climate change risk can be found on page 22 of the Annual Report and Accounts 2019.
Capital buffers
Our geographical breakdown and institution-specific countercyclical capital buffer (‘CCyB’) disclosure is provided in Appendix II. The G-SIB Indicators disclosure is published annually on our website, www.hsbc.com.
Remuneration
Our remuneration policy, including the remuneration committee membership and activities, remuneration strategy and remuneration details of HSBC’s Identified Staff and Material Risk Takers, is set out in the Directors’ Remuneration Report on page 220 of the Annual Report and Accounts 2019.
Regulatory developments
The UK’s withdrawal from the EU
As a result of the decision of the referendum on 23 June 2016, the UK left the EU on 31 January 2020. In order to smooth the transition, the UK remains subject to EU law during an implementation period, which is currently expected to end on
31 December 2020. This implementation period may be extended by a further two years, subject to political agreement.
In preparation for the UK leaving without an agreement, a series of statutory instruments were made to transpose into UK law all of the EU laws and regulations that were directly applicable to UK firms on exit day. Although these statutory instruments were prepared for the UK leaving without a deal, it is anticipated that they will form the basis of the UK’s regulation after the implementation period has ended; however, these may be subject to change to reflect the introduction of new EU law during the implementation period and the terms of any trade deal between the UK and the EU.
The Basel Committee
In December 2017, Basel published the Basel III Reforms. The package is broadly final, with Basel having completed a recalibration of the market risk RWA regime, the Fundamental Review of the Trading Book (‘FRTB’), in January 2019. The remaining outstanding element is the revision of the calibration of the CVA framework, which Basel consulted on in November 2019.
The package aims for a 1 January 2022 implementation, with a five-year transitional provision for the output floor. This floor ensures that, at the end of the transitional period, banks’ total

5
HSBC Holdings plc Pillar 3 2019


RWAs are no lower than 72.5% of those generated by the standardised approaches. The final standards will need to be transposed into the relevant local law before coming into effect.
We currently estimate our pre-mitigation RWAs could potentially rise in the range of 5% to 10% as at 1 January 2022 as a result of the regulatory changes. The primary drivers include changes in the market risk, operational risk and credit valuation adjustment methodologies, as well as the potential lack of equivalence for certain investments in funds. We plan to take action to substantially mitigate a significant proportion of the increase.
We estimate that there will be an additional RWA impact as a result of the output floor from 2026.
There remains a significant degree of uncertainty in the impact due to the number of national discretions within Basel’s reforms, the need for further supporting technical standards to be developed and the lack of clarity regarding their implementation following the UK’s withdrawal from the EU. Furthermore, the impact does not take into consideration the possibility of offsets against Pillar 2, which may arise as the shortcomings within Pillar 1 are addressed.
The Capital Requirements Regulation amendments
In June 2019, the EU enacted the final rules amending the Capital Requirements Regulation, known as the CRR II. This was the EU’s implementation of the Financial Stability Board’s (‘FSB’) requirements for Total Loss Absorbing Capacity (‘TLAC’), known in Europe as the Minimum Requirement for Own Funds and Eligible Liabilities (‘MREL’). Furthermore, it also included changes to the own funds regime.
The CRR II will also implement the first tranche of changes to the EU’s legislation to reflect the Basel III Reforms, including the FRTB, 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.
Since Basel’s review of the calibration of the FRTB came too late to be included in the final CRR II text, the changes are being incorporated by way of a Delegated Act, which was published in near final format in December 2019. This introduces the FRTB in the EU as a reporting requirement only until a full impact assessment can be performed. Reporting on the standardised approach will begin 12 months after the enactment of the Delegated Act; whereas reporting on the modelled approaches will begin three years after enactment. A final date for the implementation of the FRTB in the EU has yet to be agreed.
The CRR II applies to HSBC’s subsidiaries in the EU. In the UK, only the parts of the CRR II that are in force at the end of the Brexit implementation period will be transposed into UK law. As a result, any elements that are scheduled to enter into force after the end of the implementation period will need to be implemented separately by the UK.
The EU’s implementation of the Basel III Reforms
The remaining elements of the Basel III Reforms will be implemented in the EU by a further set of amendments to the Capital Requirements Regulation (‘CRR III’). In 2019, the European Commission (‘EC’) began consulting on the implementation of the CRR III, which will include reforms to credit risk, operational risk, and the output floor. The EC is expected to produce a draft CRR III text in the second quarter of 2020. The EU implementation will then be subject to an extensive negotiation process with the EU Council and Parliament. As a result, the final form of the rules remains unclear.
It is expected that the Brexit implementation period will have been completed before the CRR III enters into EU law. As a result, the UK will have to implement the remaining Basel III Reforms independently under UK law.
 
Other developments
In December 2019, the UK’s Financial Policy Committee (‘FPC’) issued the latest Financial Stability Report. In the report, the FPC announced that it will increase the UK’s countercyclical buffer from 1% to 2% on 16 December 2020, in order to give the UK more flexibility in times of future stress. It considers that the UK remains in a standard risk environment and as a result, the total loss absorbing capacity in the banking system should remain unchanged, notwithstanding the buffer increase. To this end, the PRA will consult in 2020 on proposals to reduce Pillar 2A requirements to reflect the additional resilience associated with a higher buffer.
The FPC also announced a review of IFRS9 and stress testing to ensure that there is a permanent solution to avoid unwarranted capital increases as a result of the interaction between the two. This may result in amendments to minimum capital requirements and TLAC.
In October 2019, the EBA published a consultation paper on draft guidelines concerning the carve-out of ‘structural FX positions’ from Pillar 1 market risk RWAs. The guidelines aim to ensure consistency in determining which positions qualify for the Pillar 1 carve out.
In July 2019, the Bank of England (‘BoE’) published its Resolvability Assessment Framework (‘RAF’), which requires firms to develop capabilities to address eight identified barriers to resolvability. Banks are required to assess their resolvability in accordance with the BoE’s criteria, submit this assessment by October 2020 and publish a summary by June 2021. Contemporaneously, the BoE will disclose its assessment of each firm’s resolvability. The deadline for full compliance with the RAF framework is 1 January 2022.
In April 2019, the PRA issued statements setting out its expectations of how firms should manage the financial risks from climate change, focusing on governance, risk management, scenario analysis and disclosure areas. In particular, there is a requirement that the risk associated with climate change should be assessed and captured in firms’ Pillar 2 assessments. The PRA also announced in December 2019 that the effects of climate change will be included in its 2021 stress test and are currently consulting on the form it might take.



Pillar 3 Disclosures at 31 December 2019

Risk management
Our risk management framework

We use an enterprise-wide risk management framework across the organisation and across all risk types. It is underpinned by our risk culture.
The framework fosters continuous monitoring of the risk environment, and promotes risk awareness and sound operational and strategic decision making. It also ensures we have a consistent approach to monitoring, managing and mitigating the risks we accept and incur in our activities.
Further information on our risk management framework is set out on page 96 of the Annual Report and Accounts 2019. The management and mitigation of principal risks facing the Group is described in our top and emerging risks on page 103 of the Annual Report and Accounts 2019.
Commentary on hedging strategies and associated processes can be found in the Market risk and Securitisation sections of this document.
Culture
HSBC has long recognised the importance of a strong culture. Our culture is reinforced by our values. It is instrumental in aligning the behaviours of individuals with our attitude to assuming and managing risk, which helps to ensure that our risk profile remains in line with our risk appetite. The fostering of a strong culture is a key responsibility of our senior executives.
Our culture is also reinforced by our approach to remuneration. Individual awards, including those for senior executives, are based on compliance with our values and the achievement of financial and non-financial objectives, which are aligned to our risk appetite and global strategy.
Further information on risk and remuneration is set out on page 244 of the Annual Report and Accounts 2019.
Risk governance
The Board has ultimate responsibility for the effective management of risk and approves our risk appetite. It is advised on risk-related matters by the Group Risk Committee (‘GRC’) and the Financial System Vulnerabilities Committee (‘FSVC’). The final meeting of the FSVC was held on 15 January 2020, with responsibility for oversight of financial crime risk transferred to the GRC, which will continue to advise the Board on risk-related matters.
The activities of the GRC and the FSVC are set out on pages 214 to 218 of the Annual Report and Accounts 2019.
Executive accountability for the ongoing monitoring, assessment and management of the risk environment, and the effectiveness of the risk management framework resides with the Group Chief Risk Officer (‘CRO’). The CRO is supported by the Risk Management Meeting (‘RMM’) of the Group Management Board.
The management of financial crime risk resides with the Group Chief Compliance Officer (‘COO’). The COO is supported by the Financial Crime Risk Management Meeting.
Further information is available on page 181 of the Annual Report and Accounts 2019.
Day-to-day responsibility for risk management is delegated to senior managers with individual accountability for decision making. These senior managers are supported by global functions. All our people have a role to play in risk management. These roles are defined using the three lines of defence model, which takes into account our business and functional structures.
We use a defined executive risk governance structure to ensure appropriate oversight and accountability for risk, which facilitates the reporting and escalation to the RMM.
Further information about the Group’s three lines of defence model and executive risk governance structures is available on page 97 of the Annual Report and Accounts 2019.
 
Risk appetite
Risk appetite is a key component of our management of risk. It describes the type and quantum of risk that the Group is willing to accept in achieving its medium- and long-term strategic goals. At HSBC, risk appetite is managed through a global risk appetite framework and articulated in a risk appetite statement (‘RAS’), which is approved biannually by the Board on the advice of the GRC.
Our risk appetite informs our strategic and financial planning process, defining the desired forward-looking risk profile of the Group. It is also integrated within other risk management tools, such as the top and emerging risks report and stress testing, to ensure consistency in risk management.
Information about our risk management tools is set out from page 95 of the Annual Report and Accounts 2019. Details of the Group’s overarching risk appetite are set out on page 95 of the Annual Report and Accounts 2019.
Stress testing
HSBC operates a wide-ranging stress testing programme that supports our risk management and capital planning. It includes execution of stress tests mandated by our regulators. Our stress testing is supported by dedicated teams and infrastructure.
Our testing programme assesses our capital strength and enhances our resilience to external shocks. It also helps us understand and mitigate risks, and informs our decision about capital levels. As well as taking part in regulatory driven stress tests, we conduct our own internal stress tests.
The Group stress testing programme is overseen by the GRC, and results are reported, where appropriate, to the RMM and GRC.
Further information about stress testing and details of the Group’s regulatory stress test results are set out on page 97 of the Annual Report and Accounts 2019.
Global Risk function
We have a dedicated Global Risk function, headed by the Group Chief Risk Officer, which is responsible for the Group‘s risk management framework. This includes establishing global policy, monitoring risk profiles, and forward-looking risk identification and management. Global Risk is made up of sub-functions covering all risks to our operations. It is independent from the global businesses in order to provide challenge, appropriate oversight and balance in risk/return decisions. The Global Risk function operates in line with the three lines of defence model.
For further information see page 97 of the Annual Report and Accounts 2019.
Risk management and internal control
systems

The Directors are responsible for maintaining and reviewing the effectiveness of risk management and internal control systems, and for determining the aggregate level and risk types they are willing to accept in achieving the Group’s business objectives. On behalf of the Board, the GAC has responsibility for oversight of risk management and internal controls over financial reporting, and the GRC has responsibility for oversight of risk management and internal controls other than for financial reporting.
The Directors, through the GRC and the GAC received regular updates and confirmation that management has taken, or was taking, the necessary actions to remediate any failings or weaknesses identified through the operation of our framework of controls.
HSBC’s key risk management and internal control procedures are described on page 209 of the Annual Report and Accounts 2019, where the Report of the Directors on the effectiveness of internal controls can also be found.

7
HSBC Holdings plc Pillar 3 2019


Risk measurement and reporting systems
Our risk measurement and reporting systems are designed to help ensure that risks are comprehensively captured with all the attributes necessary to support well-founded decisions, that those attributes are accurately assessed, and that information is delivered in a timely manner for those risks to be successfully managed and mitigated.
Risk measurement and reporting systems are also subject to a governance framework designed to ensure that their build and implementation are fit for purpose and functioning appropriately. Risk information systems development is a key responsibility of the Global Risk function, while the development and operation of risk rating and management systems and processes are ultimately subject to the oversight of the Board.
We continue to invest significant resources in IT systems and processes in order to maintain and improve our risk management capabilities. Group standards govern the procurement and operation of systems used in our subsidiaries to process risk information within business lines and risk functions.
Risk measurement and reporting structures deployed at Group level are applied throughout global businesses and major operating subsidiaries through a common operating model for integrated risk management and control. This model sets out the respective responsibilities of Group, global business, region and country level risk functions in respect of risk governance and oversight, compliance risks, approval authorities and lending guidelines, global and local scorecards, management information and reporting, and relations with third parties such as regulators, rating agencies and auditors.
Risk analytics and model governance

The Global Risk function manages a number of analytics disciplines supporting the development and management of models, including those for risk rating, scoring, economic capital and stress testing; covering different risk types and business segments. The analytics functions formulate technical responses to industry developments and regulatory policy in the field of risk analytics, develops HSBC’s global risk models, and oversees local model development and use around the Group toward our implementation targets for IRB approaches.
The Global Model Oversight Committee (‘Global MOC’) is the primary committee responsible for the oversight of Model Risk globally within HSBC. It serves an important role in providing strategic direction on the management of models and their associated risks to HSBC's businesses globally and is an essential element of the governance structure for model risk management. Global MOC is supported by Functional MOCs at the Global and Regional levels which are responsible for model risk management within their functional areas, including wholesale credit risk, market risk, retail risk, and finance.
The Global MOC meets regularly and reports to RMM. It is chaired by the Group CRO and membership includes the CEOs of the Global Businesses, and senior executives from Risk, Finance and global businesses. Through its oversight of the functional MOCs, it identifies emerging risks for all aspects of the risk rating system, ensuring that model risk is managed within our risk appetite statement, and formally advises RMM on any material model-related issues.
Models are also subject to an independent validation process and governance oversight by the Model Risk Management team within Global Risk. The team provides robust challenge to the modelling approaches used across the Group. It also ensures that the performance of those models is transparent and that their limitations are visible to key stakeholders. The development and use of data and models to meet local requirements are the responsibility of global businesses or functions, as well as regional and/or local entities under the governance of their own management, subject to overall Group policy and oversight.
 
Regulatory and other expectations continue to evolve with regards to our capability and practice of model risk management. We have benchmarked our capability against leading industry practice and are designing a new target operating model for Model Risk Management (‘MRM’) function, which sets model risk management policy, standards and model risk appetite.
Further information is available on page 182 of the Annual Report and Accounts 2019.
Linkage to the Annual Report and Accounts
2019
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, profit and loss, and risk-weighted assets in accordance with the PRA’s application of EU legislation. Non-participating significant investments, along with non-financial associates, are deducted from capital, subject to thresholds.



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
 
154,099

(26
)
299

154,372

Items in the course of collection from other banks
 
4,956



4,956

Hong Kong Government certificates of indebtedness
 
38,380



38,380

Trading assets
 
254,271

(822
)

253,449

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
 
43,627

(33,839
)
604

10,392

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

602


602

Derivatives
 
242,995

(14
)
93

243,074

Loans and advances to banks
 
69,203

(1,309
)
1,316

69,210

Loans and advances to customers
 
1,036,743

(776
)
12,004

1,047,971

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

392


392

expected credit losses on IRB portfolios
h
(6,703
)


(6,703
)
Reverse repurchase agreements – non-trading
 
240,862

(42
)
127

240,947

Financial investments
 
443,312

(66,551
)
4,485

381,246

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

367


367

Capital invested in insurance and other entities
 

2,304


2,304

Prepayments, accrued income and other assets
 
136,680

(6,636
)
588

130,632

– of which: retirement benefit assets
j
8,280



8,280

Current tax assets
 
755



755

Interests in associates and joint ventures
 
24,474

(430
)
(4,836
)
19,208

– of which: positive goodwill on acquisition
e
486

(13
)

473

Goodwill and intangible assets
e
20,163

(9,131
)
1,222

12,254

Deferred tax assets
f
4,632

159

14

4,805

Total assets at 31 Dec 2019
 
2,715,152

(117,113
)
15,916

2,613,955

Liabilities and equity
 
 
 
 
 
Hong Kong currency notes in circulation
 
38,380



38,380

Deposits by banks
 
59,022

(12
)
372

59,382

Customer accounts
 
1,439,115

2,596

14,277

1,455,988

Repurchase agreements – non-trading
 
140,344



140,344

Items in course of transmission to other banks
 
4,817



4,817

Trading liabilities
 
83,170

59


83,229

Financial liabilities designated at fair value
 
164,466

(4,225
)

160,241

– of which:
 
 
 
 
 
included in tier 1
n
419



419

included in tier 2
o, q, i
10,130



10,130

Derivatives
 
239,497

27

127

239,651

– of which: debit valuation adjustment
i
95



95

Debt securities in issue
 
104,555

(2,246
)

102,309

Accruals, deferred income and other liabilities
 
118,156

(2,695
)
819

116,280

Current tax liabilities
 
2,150

(45
)
148

2,253

Liabilities under insurance contracts
 
97,439

(97,439
)


Provisions
 
3,398

(11
)
46

3,433

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



357

Deferred tax liabilities
 
3,375

(1,337
)
9

2,047

Subordinated liabilities
 
24,600

2

118

24,720

– of which:
 
 
 
 
 
included in tier 1
l, n
1,825



1,825

included in tier 2
o, q
21,071



21,071

Total liabilities at 31 Dec 2019
 
2,522,484

(105,326
)
15,916

2,433,074

Equity
 
 
 
 
 
Called up share capital
a
10,319



10,319

Share premium account
a, l
13,959



13,959

Other equity instruments
k
20,871



20,871

Other reserves
c, g
2,127

1,913


4,040

Retained earnings
b, c
136,679

(12,595
)

124,084

Total shareholders’ equity
 
183,955

(10,682
)

173,273

Non-controlling interests
d, m, n, p
8,713

(1,105
)

7,608

Total equity at 31 Dec 2019
 
192,668

(11,787
)

180,881

Total liabilities and equity at 31 Dec 2019
 
2,715,152

(117,113
)
15,916

2,613,955

The references (a)–(r) identify balance sheet components that are used in the calculation of regulatory capital in Table 6: Own funds disclosure on page 13.

9
HSBC Holdings plc Pillar 3 2019


Table 3: Principal entities with a different regulatory and accounting scope of consolidation (LI3)

 
 
At 31 Dec 2019

 
Principal activities
Method of accounting consolidation
Method of regulatory consolidation

Footnotes
Proportional consolidation
Neither consolidated nor deducted
Deducted from capital subject to thresholds
Principal associates
 
 
 
 
 
 
The Saudi British Bank
 
Banking services
 Equity
l


Principal insurance entities excluded from the regulatory consolidation
 
 
 
 
 
 
HSBC Life (International) Ltd
 
Life insurance manufacturing
 Fully consolidated


l
HSBC Assurances Vie (France)
 
Life insurance manufacturing
 Fully consolidated


l
Hang Seng Insurance Company Ltd
 
Life insurance manufacturing
 Fully consolidated


l
HSBC Insurance (Singapore) Pte Ltd
 
Life insurance manufacturing
 Fully consolidated


l
HSBC Life (UK) Ltd
 
Life insurance manufacturing
 Fully consolidated


l
HSBC Life Insurance Company Ltd
 
Life insurance manufacturing
 Fully consolidated


l
HSBC Life Assurance (Malta) Ltd
 
Life insurance manufacturing
 Fully consolidated


l
HSBC Seguros S.A. (Mexico)
 
Life insurance manufacturing
 Fully consolidated


l
Principal SPEs excluded from the regulatory consolidation
1
 
 
 
 
 
Metrix Portfolio Distribution plc
 
Securitisation
 Fully consolidated

l

Neon Portfolio Distribution DAC
 
Securitisation
 Fully consolidated

l

Regency Assets Ltd
 
Securitisation
 Fully consolidated
 
l
 
1
These SPEs issued no or de minimis share capital.
Measurement of regulatory exposures
This section sets out the main reasons why the measurement of regulatory exposures is not directly comparable with the financial information presented in the Annual Report and Accounts 2019.
The Pillar 3 Disclosures at 31 December 2019 are prepared in accordance with regulatory capital adequacy concepts and rules, while the Annual Report and Accounts 2019 are prepared in accordance with IFRSs. The purpose of the regulatory balance sheet is to provide a point-in-time (‘PIT’) value of all on-balance sheet assets.
The regulatory exposure value includes an estimation of risk, and is expressed as the amount expected to be outstanding if and when the counterparty defaults.
Moreover, regulatory exposure classes are based on different criteria from accounting asset types and are therefore not comparable on a line by line basis.
The following tables show in two steps how the accounting values in the regulatory balance sheet link to regulatory exposure at default (‘EAD’).
Table 4 shows the difference between the accounting and regulatory scope of consolidation, and a breakdown of the accounting balances into the risk types that form the basis for regulatory capital requirements. Table 5 then shows the main differences between the accounting balances and regulatory exposures by regulatory risk type.



Pillar 3 Disclosures at 31 December 2019

Table 4: Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with
regulatory risk categories (LI1)
 
 
 
Carrying value of items
 
Carrying values as reported in published financial statements

Carrying values under scope of regulatory consolidation1

Subject to the credit risk framework

Subject to the counter-party credit risk framework2

Subject to the securitisation framework3

Subject to the market risk framework

Subject to deduction from capital or not subject to regulatory capital requirements

 
$bn

$bn

$bn

$bn

$bn

$bn

$bn

Assets
 
 
 
 
 
 
 
Cash and balances at central banks
154.1

154.4

154.4





Items in the course of collection from other banks
5.0

5.0

5.0





Hong Kong Government certificates of indebtedness
38.4

38.4

38.4





Trading assets
254.3

253.4

1.2

21.3


253.4


Financial assets designated and otherwise mandatorily measured at fair value
43.6

10.4

4.2

3.9

2.3



Derivatives
243.0

243.1


242.0

1.1

243.1


Loans and advances to banks
69.2

69.2

68.5


0.7



Loans and advances to customers
1,036.7

1,048.0

1,021.5

2.9

23.6



Reverse repurchase agreements – non-trading
240.9

240.9


240.9




Financial investments
443.3

381.2

381.2





Capital invested in insurance and other entities

2.3

1.5




0.8

Prepayments, accrued income and other assets
136.7

130.6

47.1

55.6


14.8

19.5

Current tax assets
0.8

0.8

0.8





Interests in associates and joint ventures
24.5

19.2

11.6




7.6

Goodwill and intangible assets
20.1

12.3





12.0

Deferred tax assets
4.6

4.8

6.6




(1.8
)
Total assets at 31 Dec 2019
2,715.2

2,614.0

1,742.0

566.6

27.7

511.3

38.1

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Hong Kong currency notes in circulation
38.4

38.4





38.4

Deposits by banks
59.0

59.4





59.4

Customer accounts
1,439.1

1,456.0





1,456.0

Repurchase agreements – non-trading
140.3

140.3


140.3




Items in course of transmission to other banks
4.8

4.8





4.8

Trading liabilities
83.2

83.2


10.3


83.2


Financial liabilities designated at FV
164.5

160.2




62.1

98.1

Derivatives
239.5

239.7


239.7


239.7


Debt securities in issue
104.6

102.3





102.3

Accruals, deferred income, and other liabilities
118.2

116.3


56.6



59.7

Current tax liabilities
2.1

2.3





2.3

Liabilities under insurance contract
97.4







Provisions
3.4

3.4

0.6




2.8

Deferred tax liabilities
3.4

2.1

2.0




2.3

Subordinated liabilities
24.6

24.7





24.7

Total liabilities at 31 Dec 2019
2,522.5

2,433.1

2.6

446.9


385.0

1,850.8

1
The amounts shown in the column ‘Carrying values under scope of regulatory consolidation’ do not equal the sum of the amounts shown in the remaining columns of this table for line items ‘Derivatives’, ’Trading assets’ and ‘Prepayments, accrued income and other assets’ as some of the assets in this column are subject to regulatory capital charges for both CCR and market risk.
2
The amounts shown in the column ‘Subject to the counterparty credit risk framework’ include both non-trading book and trading book.
3
The amounts shown in the column ‘Subject to the securitisation framework’ are non-trading book positions. Trading book securitisation positions are included in the market risk column.

11
HSBC Holdings plc Pillar 3 2019


Table 5: Main sources of differences between regulatory exposure amounts and carrying values in financial statements (LI2)
 
 
 
Of which items subject to:
 
 
Total

Credit risk framework

CCR framework

Securitisation framework

 
Footnotes
$bn

$bn

$bn

$bn

Carrying value of assets within scope of regulatory consolidation
1
2,575.9

1,742.0

566.6

27.7

Carrying value of liabilities within scope of regulatory consolidation
1
582.3

2.6

446.9


Net carrying value within scope of regulatory consolidation
 
1,993.6

1,739.4

119.7

27.7

Off-balance sheet amounts and potential future exposure for counterparty risk
 
865.5

275.6

52.9

11.2

Differences in netting rules
 
4.1

10.1

(6.0
)

Differences due to financial collateral on standardised approach
 
(5.2
)
(5.2
)


Differences due to expected credit losses on IRB approach
 
6.5

6.5



Differences due to EAD modelling and other differences
 
5.3

7.7


(2.4
)
Differences due to credit risk mitigation
 
(10.8
)

(10.8
)

Exposure values considered for regulatory purposes at 31 Dec 2019
 
2,859.0

2,034.1

155.8

36.5

1
Excludes amounts subject to deduction from capital or not subject to regulatory capital requirements.
Explanations of differences between accounting and regulatory exposure amounts
Off-balance sheet amounts and potential future exposure for counterparty risk
Off-balance sheet amounts subject to credit risk and securitisation regulatory frameworks include undrawn portions of committed facilities, various trade finance commitments and guarantees. We apply a credit conversion factor (‘CCF’) to these items and add potential future exposures (‘PFE’) for counterparty credit risk.
Differences in netting rules
The increase from carrying value due to differences in netting rules is the reversal of amounts deducted from gross loans and advances to customers in the published financial statements in accordance with the offsetting criteria of IAS 32 ‘Financial instruments: presentation’.
Differences due to financial collateral
Exposure value under the standardised approach is calculated after deducting credit risk mitigation whereas accounting value is before such deductions.
Differences due to expected credit losses
The carrying value of assets is net of credit risk adjustments. The regulatory exposure value under IRB approaches is before deducting credit risk adjustments.
Differences due to EAD modelling
The carrying value of assets is usually measured at amortised cost or fair value as at the balance sheet date. For certain IRB models, the exposure value used as EAD is the projected value over the next year.
Differences due to credit risk mitigation
In counterparty credit risk (‘CCR’), differences arise between accounting carrying values and regulatory exposure as a result of the application of credit risk mitigation and the use of modelled exposures.
Explanation of differences between accounting fair value and regulatory prudent valuation
Fair value is defined as the best estimate of the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Some fair value adjustments already reflect valuation uncertainty to some degree. These are market data uncertainty, model uncertainty and concentration adjustments.
However, it is recognised that a variety of valuation techniques using stressed assumptions and combined with the range of plausible market parameters at a given point in time may still generate unexpected uncertainty beyond fair value.
A series of additional valuation adjustments (‘AVAs’) are therefore required to reach a specified degree of confidence (the ‘prudent
 
value’) set by regulators that differs both in terms of scope and measurement from HSBC’s own quantification for disclosure purposes.
AVAs should consider at the minimum: market price uncertainty, bid-offer (close-out) uncertainty, model risk, concentration, administrative costs, unearned credit spreads and investing and funding costs.
AVAs are not limited to level 3 exposures, for which a 95% uncertainty range is already computed and disclosed, but must also be calculated for any exposure for which the exit price cannot be determined with a high degree of certainty. Table 64 presents further information on the prudent valuation adjustment.



Pillar 3 Disclosures at 31 December 2019

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. Subject to the above, there is no current or foreseen impediment to HSBC Holdings’ ability to provide such investments.
Each subsidiary manages its own capital to support its planned business growth and meet its local regulatory requirements within the context of the Group capital plan. Capital generated by subsidiaries in excess of planned requirements is returned to HSBC Holdings, normally by way of dividends, in accordance with the Group’s capital plan.
During 2019, the Group’s subsidiaries paid dividends consistent with their financial performance and local regulatory regimes, informed by the Group’s capital plan. No significant restrictions
 
are envisaged with respect to the payment of planned dividends or payments.
However, the ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial and operating performance. None of our subsidiaries that are excluded from the regulatory consolidation have capital resources below their minimum regulatory requirement. HSBC Holdings has not entered into any Group Financial Support Agreements pursuant to the application of early intervention measures under the Bank Recovery and Resolution Directive.
All capital securities included in the capital base of HSBC have either been issued as fully compliant CRD IV securities (on an end point basis) or in accordance with the rules and guidance in the PRA’s previous General Prudential Sourcebook, which are included in the capital base by virtue of the application of CRR II. 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 with reference to our balance sheet on 31 December 2019. This is in addition to the full terms and conditions of our securities, also available on our website.
For further details of our approach to capital risk management, please see page 166 of the Annual Report and Accounts 2019.
Own funds
Table 6: Own funds disclosure
 
 
 
 
At
31 Dec
At
 
 
 
31 Dec
2019

31 Dec
2018

Ref*
 
Ref †
$m

$m

 
Common equity tier 1 (‘CET1’) capital: instruments and reserves
 
 
 
1
Capital instruments and the related share premium accounts
 
22,873

22,384

 
– ordinary shares
a
22,873

22,384

2
Retained earnings
b
127,188

121,180

3
Accumulated other comprehensive income (and other reserves)
c
1,735

3,368

5
Minority interests (amount allowed in consolidated CET1)
d
4,865

4,854

5a
Independently reviewed interim net profits net of any foreseeable charge or dividend
b
(3,381
)
3,697

6
Common equity tier 1 capital before regulatory adjustments
 
153,280

155,483

 
Common equity tier 1 capital: regulatory adjustments
 
 
 
7
Additional value adjustments1
 
(1,327
)
(1,180
)
8
Intangible assets (net of related deferred tax liability)
e
(12,372
)
(17,323
)
10
Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)
f
(1,281
)
(1,042
)
11
Fair value reserves related to gains or losses on cash flow hedges
g
(41
)
135

12
Negative amounts resulting from the calculation of expected loss amounts
h
(2,424
)
(1,750
)
14
Gains or losses on liabilities valued at fair value resulting from changes in own credit standing
i
2,450

298

15
Defined benefit pension fund assets
j
(6,351
)
(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
 
(7,928
)
(7,489
)
28
Total regulatory adjustments to common equity tier 1
 
(29,314
)
(34,461
)
29
Common equity tier 1 capital
 
123,966

121,022

 
Additional tier 1 (‘AT1’) capital: instruments
 
 
 
30
Capital instruments and the related share premium accounts
 
20,871

22,367

31
– classified as equity under IFRSs
k
20,871

22,367

33
Amount of qualifying items and the related share premium accounts subject to phase out
from AT1
l
2,305

2,297


13
HSBC Holdings plc Pillar 3 2019


Table 6: Own funds disclosure (continued)
 
 
 
 
At
 
 
 
31 Dec
2019

31 Dec
2018

Ref*
 
Ref †
$m

$m

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
1,277

1,516

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

1,298

36
Additional tier 1 capital before regulatory adjustments
 
24,453

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
 
24,393

26,120

45
Tier 1 capital (T1 = CET1 + AT1)
 
148,359

147,142

 
Tier 2 capital: instruments and provisions
 
 
 
46
Capital instruments and the related share premium accounts
o
20,525

20,249

 
– of which: instruments grandfathered under CRR II
 
7,067

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
4,667

6,480

49
– of row 48: instruments issued by subsidiaries subject to phase out
q
2,251

1,585

 
– of row 48: instruments issued by subsidiaries grandfathered under CRR II
 
1,452

N/A

51
Tier 2 capital before regulatory adjustments
 
25,192

26,729

 
Tier 2 capital: regulatory adjustments
 
 
 
52
Direct and indirect holdings of own T2 instruments2
 
(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
(1,361
)
(593
)
57
Total regulatory adjustments to tier 2 capital
 
(1,401
)
(633
)
58
Tier 2 capital
 
23,791

26,096

59
Total capital (TC = T1 + T2)
 
172,150

173,238

60
Total risk-weighted assets
 
843,395

865,318

 
Capital ratios and buffers
 
 
 
61
Common equity tier 1
 
14.7%

14.0%

62
Tier 1
 
17.6%

17.0%

63
Total capital
 
20.4%

20.0%

64
Institution specific buffer requirement
 
5.11%

3.94%

65
– capital conservation buffer requirement
 
2.50%

1.88%

66
– counter-cyclical buffer requirement
 
0.61%

0.56%

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

1.50%

68
Common equity tier 1 available to meet buffers
 
8.5%

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)
 
2,938

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)
 
13,189

12,851

75
Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability)
 
4,529

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
 
2,163

2,200

79
Cap for inclusion of credit risk adjustments in T2 under internal ratings-based approach
 
3,128

3,221

 
Capital instruments subject to phase-out arrangements (only applicable until 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)
 
122


84
Current cap on T2 instruments subject to phase out arrangements
 
2,737

5,131

The references (a) – (r) identify balance sheet components in Table 2: Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation on page 9 which are 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
The threshold deduction for significant investments is drawn from numerous lines of 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 31 December 2019, our CET1 ratio increased to 14.7% from 14.0% at 31 December 2018. CET1 capital increased during the year by $2.9bn, mainly as a result of:
capital generation of $6.0bn through profits
a fall in the deduction for intangible assets of $4.9bn. This was primarily due to $7.3bn of goodwill impairment, partly offset by an increase in internally generated software;
a $1.5bn increase in FVOCI reserve; and
favourable foreign currency translation differences of $1.0bn.
 
These increases were partly offset by:
dividends and scrip of $9.0bn;
share buy-back of $1.0bn; and
an increase in the deduction for excess expected loss $0.7bn.
RWAs reduced by $21.9bn during the year. Excluding foreign currency translation differences, the remaining decrease of $26.9bn was primarily driven by methodology and policy changes and model updates which reduced RWAs by $39.9bn. These reductions were partly offset by increases of $12.7bn from movements in asset quality and size, including both RWA



Pillar 3 Disclosures at 31 December 2019

increases due to overall lending growth and reductions as a result of active portfolio management.
Leverage
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 RAS. The RAS articulates the aggregate level and types of risk that HSBC is willing to accept in its business
 
activities in order to achieve its strategic business objectives. The RAS is monitored via the risk appetite profile report, which includes comparisons of actual performance against the risk appetite and tolerance thresholds assigned to each metric, to ensure that any excessive risk is highlighted, assessed and mitigated appropriately. The risk appetite profile report is presented monthly to the RMM and the GRC.
Our approach to risk appetite is described on page 95 of the Annual Report and Accounts 2019.
Table 7: Leverage ratio common disclosure (LRCom)
 
 
 
At 31 Dec
 
 
 
2019^

2018

Ref*
 
Footnotes
$bn

$bn

 
On-balance sheet exposures (excluding derivatives and SFT)
 
 
 
1
On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral)
 
2,119.1

2,012.5

2
(Asset amounts deducted in determining tier 1 capital)
 
(30.5
)
(33.8
)
3
Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets)
 
2,088.6

1,978.7

 
Derivative exposures
 
 
 
4
Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)
 
53.5

44.2

5
Add-on amounts for potential future exposure (‘PFE’) associated with all derivatives transactions (mark-to-market method)
 
162.1

154.1

6
Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to IFRSs
 
8.3

5.9

7
(Deductions of receivables assets for cash variation margin provided in derivatives transactions)
 
(43.1
)
(21.5
)
8
(Exempted central counterparty (‘CCP’) leg of client-cleared trade exposures)
 
(53.2
)
(38.0
)
9
Adjusted effective notional amount of written credit derivatives
 
159.4

160.9

10
(Adjusted effective notional offsets and add-on deductions for written credit derivatives)
 
(150.4
)
(153.4
)
11
Total derivative exposures
 
136.6

152.2

 
Securities financing transaction exposures
 
 
 
12
Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions
1
451.0

429.8

13
(Netted amounts of cash payables and cash receivables of gross SFT assets)
1
(196.1
)
(184.5
)
14
Counterparty credit risk exposure for SFT assets
 
10.7

11.3

16
Total securities financing transaction exposures
 
265.6

256.6

 
Other off-balance sheet exposures
 
 
 
17
Off-balance sheet exposures at gross notional amount
 
865.5

829.8

18
(Adjustments for conversion to credit equivalent amounts)
 
(629.8
)
(602.4
)
19
Total off-balance sheet exposures
 
235.7

227.4

 
Capital and total exposures
 
 
 
20
Tier 1 capital
 
144.8

143.5

21
Total leverage ratio exposure
 
2,726.5

2,614.9

22
Leverage ratio (%)
 
5.3

5.5

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

Fully phased-in

^
Figures have been prepared on an IFRS 9 transitional basis.
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.
Our leverage ratio calculated in accordance with the Capital Requirements Regulation was 5.3% at 31 December 2019, down from 5.5% at 31 December 2018. The increase in exposure was primarily due to growth in customer lending and financial investments.
At 31 December 2019, the Group’s leverage ratio measured under the PRA’s UK leverage framework was 5.7%. This measure excludes qualifying central bank balances from the calculation of exposure.

At 31 December 2019, our UK minimum leverage ratio requirement of 3.25% under the PRA’s UK leverage framework was supplemented by an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.2%. These additional buffers translated into capital values of $17.7bn and $5.4bn respectively. We exceeded these leverage requirements.
For further details of the UK leverage ratio, please see page 191 of the Annual Report and Accounts 2019.


15
HSBC Holdings plc Pillar 3 2019


The following table provides a reconciliation of the total assets in our published balance sheet under IFRS and the total leverage exposure:
Table 8: Summary reconciliation of accounting assets and leverage ratio exposures (LRSum)
 
 
At 31 Dec
 
 
2019

2018

Ref*
 
$bn

$bn

1
Total assets as per published financial statements
2,715.2

2,558.1

 
Adjustments for:
 
 
2
– entities which are consolidated for accounting purposes but are outside the scope of regulatory consolidation
(101.2
)
(89.5
)
4
– derivative financial instruments
(106.4
)
(55.6
)
5
– securities financing transactions (‘SFT’)
2.8

(5.1
)
6
– off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)
235.7

227.4

7
– other
(19.6
)
(20.4
)
8
Total leverage ratio exposure
2,726.5

2,614.9


The table below provides a breakdown of on-balance sheet exposures excluding derivatives, SFTs and exempted exposures, by asset class:
Table 9: Leverage ratio – Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures) (LRSpl)
 
 
At 31 Dec