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 September 2017

Commission File Number: 001-14930

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


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




Pillar 3 Disclosures at 30 June 2017

Contents
 
Page

Regulatory framework for disclosures
3

Pillar 3 disclosures
3

Regulatory developments
3

Structure of the regulatory group
4

Capital and RWAs
7

Own funds
7

Leverage ratio
9

Capital buffers
11

Pillar 1 minimum capital requirements and RWA flow
11

Credit risk
14

Credit quality of assets
14

Defaulted exposures
14

Risk mitigation
14

Counterparty credit risk
24

Securitisation
28

Market risk
33

Other information
36

Abbreviations
36

Cautionary statement regarding forward-looking statements
37

Contacts
37

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

1
Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation
5

2
Own funds disclosure
7

3
Summary reconciliation of accounting assets and leverage ratio exposures
9

4
Leverage ratio common disclosure
9

5
Leverage ratio – Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures)
10

6
Overview of RWAs
12

7
RWA flow statements of credit risk exposures under IRB
12

8
RWA flow statements of CCR exposures under the IMM
13

9
RWA flow statements of market risk exposures under the IMA
13

10
Credit quality of assets
14

11
Changes in stock of defaulted loans and debt securities
14

12
Standardised approach – credit conversion factor (‘CCF’) and credit risk mitigation (‘CRM’) effects
15

13
Standardised approach – exposures by asset classes and risk weights
16

14
IRB – Credit risk exposures by portfolio and PD range
17

15
IRB – Effect on RWA of credit derivatives used as CRM techniques
23

16
Specialised lending
23

17
Analysis of counterparty credit risk (‘CCR’) exposure by approach (excluding centrally cleared exposures)
24

18
Credit valuation adjustment (‘CVA’) capital charge
24

19
Standardised approach – CCR exposures by regulatory portfolio and risk weights
24

20
IRB – CCR exposures by portfolio and PD scale
25

21
Composition of collateral for CCR exposure
27

22
Exposures to central counterparties
27

23
Credit derivatives exposures
28

24
Securitisation exposures in the non-trading book
28

25
Securitisation exposures in the trading book
29

26
Securitisation exposures in the non-trading book and associated regulatory capital requirements – bank acting as originator or as sponsor
29

27
Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor
31

28
Market risk under standardised approach
33

29
Market risk under IMA
33

30
IMA values for trading portfolios
34



2
HSBC Holdings plc


Regulatory framework for disclosures
HSBC is supervised on a consolidated basis in the United Kingdom (‘UK’) by the Prudential Regulation Authority (‘PRA’), which receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. Individual banking subsidiaries are directly regulated by their local banking supervisors, who set and monitor their local capital adequacy requirements. In most jurisdictions, non-banking financial subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.
At a consolidated Group level, we calculate capital for prudential regulatory reporting purposes using the Basel III framework of the Basel Committee on Banking Supervision (‘the Basel Committee’) as implemented by the European Union (‘EU’) in the amended Capital Requirements Directive and Regulation (‘CRD IV’), 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 the Basel III framework, so local regulation in 2017 may have been on the basis of the Basel I, II or III frameworks.
The Basel III framework is structured around three ‘pillars’: the Pillar 1 minimum capital requirements and Pillar 2 supervisory review process are complemented by Pillar 3 which concerns market discipline. The aim of Pillar 3 is to produce disclosures that allow market participants to assess the scope of application by banks of the Basel Committee’s framework and the rules in their jurisdiction, their capital condition, risk exposures and risk management processes, and hence their capital adequacy.
The PRA’s final rules adopted national discretions in order to accelerate significantly the transition timetable to full ‘end point’ CRD IV compliance.
Pillar 3 disclosures
Our Pillar 3 disclosures at 30 June 2017 comprise all information required under Pillar 3, both quantitative and qualitative. They are made in accordance with Part 8 of the Capital Requirements Regulation within CRD IV and as recommended by the European Banking Authority (‘EBA’) guidelines on disclosure requirements issued in December 2016. Additionally, we continue to present a number of Basel Committee’s templates where these do not overlap with the EBA guidelines. 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’). Pillar 3 requires all material risks to be disclosed, enabling a comprehensive view of a bank’s risk profile.
Where disclosures have been enhanced, or are new, we do not generally restate or provide prior-year comparatives. The capital resources tables track the position from a CRD IV transitional to an end-point basis. Furthermore, specific rows and columns in the tables which are not considered to be relevant to HSBC’s activities have been omitted.
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 2017 or to other locations.
We continue to engage constructively with the UK authorities and industry associations to improve the transparency and comparability of UK banks’ Pillar 3 disclosures.

 
Regulatory developments
Basel Committee
During the first half of 2017, the Basel Committee proposed further revisions to the regulatory capital framework. In particular, it published:
a second consultation regarding the identification and management of step-in risk;
the interim regulatory treatment and transitional requirements for International Financial Reporting Standard 9, Financial Instruments (‘IFRS 9’) provisions;
the final Phase 2 Pillar 3 standards; and
a consultation to revise the global systemically important banks (G-SIB’) assessment framework.
In addition, the Basel Committee confirmed that it has largely completed the technical work needed to revise the Basel III regulatory capital framework, including the approaches to credit risk, operational risk and the leverage ratio. The only outstanding area is the proposal to implement a capital floor for modelled risk-weighted assets (‘RWAs’), where the final calibration and associated transitional provisions are expected. In all instances, the final standards will have to be transposed into the relevant local law before coming into effect.
Financial Stability Board
In July 2017, the Financial Stability Board (‘FSB’) expanded its resolution reform policy framework with the publication of its ‘Guiding Principles on the Internal Total Loss-absorbing Capacity of G-SIBs (‘Internal TLAC’)’. These guidelines supplement the FSB’s TLAC standard published in November 2015. Again, this needs to be incorporated into the relevant local law before coming into effect.
European Union
In the EU, elements of the Basel Committee’s and FSB’s reforms are being implemented through revisions to the CRD IV and the EU resolution framework. The key components include changes to the market risk and counterparty credit risk frameworks, a binding leverage ratio and the regulatory recognition of IFRS 9. It also includes details of the minimum requirements for TLAC, which in the EU is known as the ‘Minimum Requirements for own funds and Eligible Liabilities’ (‘MREL’). These changes are expected to be finalised by 2019 and apply from 1 January 2021, with the exception of the rules on MREL and the transitional capital provisions for IFRS 9, which are expected to apply from 1 January 2019 and 1 January 2018, respectively.
In June, the EU reached agreement on the new securitisation capital rules. This is expected to be implemented on 1 January 2019 for new transactions and on 1 January 2020 for existing positions.
Bank of England
In the UK, the Bank of England (‘BoE’) published its policy on setting MREL in November 2016. Elements of this policy remain outstanding, including the application of MREL within groups and the treatment of holdings of TLAC instruments. Meanwhile, in March 2017, HSBC received from the BoE its indicative MREL requirement applicable to HSBC Holdings plc and its European Resolution Group (comprised of HSBC Bank plc and its subsidiaries). This includes interim MREL requirements effective from 1 January 2019 and final requirements effective from 1 January 2022. The BoE also formally confirmed ‘multiple-point-of-entry’ as the preferred resolution strategy for HSBC. In May, the BoE published the quantum of MREL requirements for major UK banks.

HSBC Holdings plc
3


Pillar 3 Disclosures at 30 June 2017

In June 2017, the Financial Policy Committee (‘FPC’) raised the countercyclical buffer rate for UK exposures to 0.5%, to apply from 27 June 2018. It will consider in November whether a further increase to 1% should take effect from November 2018.
In June 2017, the BoE also consulted on the UK leverage ratio framework, proposing to exclude claims on central banks from the leverage exposure measure and, as a result, recalibrating the minimum leverage ratio for HSBC from 3% to 3.25% of tier 1 capital, to take effect during 2017.
Structure of the regulatory group
Subsidiaries engaged in insurance activities are excluded from the regulatory consolidation by excluding assets, liabilities and post-acquisition reserves, leaving the Group’s investment
 
in these insurance subsidiaries to be recorded at cost and deducted from common equity tier 1 (‘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 (‘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).


4
HSBC Holdings plc


Table 1: 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
 
163,353

(43
)
1,177

164,487

Items in the course of collection from other banks
 
7,129


26

7,155

Hong Kong Government certificates of indebtedness
 
31,943



31,943

Trading assets
 
320,037

(334
)
2

319,705

Financial assets designated at fair value
 
27,937

(27,239
)

698

Derivatives
 
229,719

(143
)
56

229,632

Loans and advances to banks
 
86,633

(1,798
)
1,390

86,225

Loans and advances to customers
 
919,838

(3,303
)
12,919

929,454

– of which: impairment allowances on IRB portfolios
h
(4,884
)


(4,884
)
Reverse repurchase agreements – non-trading
 
196,834

424

1,642

198,900

Financial investments
 
385,378

(58,605
)
2,959

329,732

Assets held for sale
 
2,301



2,301

– of which: impairment allowances on IRB portfolios
h
(115
)


(115
)
Capital invested in insurance and other entities
 

2,406


2,406

Prepayments, accrued income and other assets
 
70,592

(3,491
)
330

67,431

– of which: retirement benefit assets
i
7,036



7,036

Current tax assets
 
1,054

(39
)

1,015

Interests in associates and joint ventures
 
21,071

(350
)
(3,826
)
16,895

– of which: positive goodwill on acquisition
e
500

(14
)

486

Goodwill and intangible assets
e
22,653

(6,888
)

15,765

Deferred tax assets
f
5,971

199

2

6,172

Total assets at 30 Jun 2017
 
2,492,443

(99,204
)
16,677

2,409,916

Liabilities and equity
 
 
 
 
 
Hong Kong currency notes in circulation
 
31,943



31,943

Deposits by banks
 
64,230

(107
)
559

64,682

Customer accounts
 
1,311,958

(45
)
15,100

1,327,013

Repurchase agreements – non-trading
 
145,306



145,306

Items in the course of transmission to other banks
 
7,799



7,799

Trading liabilities
 
202,401

819


203,220

Financial liabilities designated at fair value
 
93,163

(6,256
)

86,907

– of which:
 
 
 
 
 
included in tier 1
m
437



437

included in tier 2
n, q
24,182



24,182

Derivatives
 
223,413

3

55

223,471

Debt securities in issue
 
63,289

(2,787
)
324

60,826

Liabilities of disposal groups held for sale
 
620



620

Accruals, deferred income and other liabilities
 
42,724

1,207

499

44,430

Current tax liabilities
 
1,186

(47
)

1,139

Liabilities under insurance contracts
 
81,147

(81,147
)


Provisions
 
4,379

(18
)
140

4,501

– of which: credit-related contingent liabilities and contractual commitments on IRB portfolios
h
217



217

Deferred tax liabilities
 
1,886

(1,070
)

816

Subordinated liabilities
 
21,213

1


21,214

– of which:
 
 
 
 
 
included in tier 1
k, m
1,800



1,800

included in tier 2
n, o, q
19,413



19,413

Total liabilities at 30 Jun 2017
 
2,296,657

(89,447
)
16,677

2,223,887

Called up share capital
a
10,188



10,188

Share premium account
a, k
12,069



12,069

Other equity instruments
j, k
20,830



20,830

Other reserves
c, g
4,472

1,564


6,036

Retained earnings
b, c
140,837

(10,584
)

130,253

Total shareholders’ equity
 
188,396

(9,020
)

179,376

Non-controlling interests
d, l, m, p
7,390

(737
)

6,653

– of which: non-cumulative preference shares issued by subsidiaries included in tier 1 capital
m
270



270

Total equity at 30 Jun 2017
 
195,786

(9,757
)

186,029

Total liabilities and equity at 30 Jun 2017
 
2,492,443

(99,204
)
16,677

2,409,916

The references (a) – (q) identify balance sheet components that are used in the calculation of regulatory capital on page 7.

HSBC Holdings plc
5


Pillar 3 Disclosures at 30 June 2017

Table 1: Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation (continued)
 
 
Accounting
balance sheet

Deconsolidation
of insurance/
other entities

Consolidation
of banking
associates

Regulatory
balance sheet

 
Ref
$m

$m

$m

$m

Assets
 
 
 
 
 
Cash and balances at central banks
 
128,009

(27
)
1,197

129,179

Items in the course of collection from other banks
 
5,003


26

5,029

Hong Kong Government certificates of indebtedness
 
31,228



31,228

Trading assets
 
235,125

(198
)
1

234,928

Financial assets designated at fair value
 
24,756

(24,481
)

275

Derivatives
 
290,872

(145
)
77

290,804

Loans and advances to banks
 
88,126

(1,845
)
922

87,203

Loans and advances to customers
 
861,504

(3,307
)
12,897

871,094

– of which: impairment allowances on IRB portfolios
h
(5,096
)


(5,096
)
Reverse repurchase agreements – non-trading
 
160,974

344

1,444

162,762

Financial investments
 
436,797

(54,904
)
3,500

385,393

Assets held for sale
 
4,389

(7
)

4,382

– of which:
 
 
 
 
 
goodwill and intangible assets
e
1



1

impairment allowances on IRB portfolios
h
(146
)


(146
)
Capital invested in insurance and other entities
 

2,214


2,214

Prepayments, accrued income and other assets
 
59,520

(3,066
)
306

56,760

– of which: retirement benefit assets
i
4,714



4,714

Current tax assets
 
1,145

(118
)

1,027

Interests in associates and joint ventures
 
20,029


(4,195
)
15,834

– of which: positive goodwill on acquisition
e
488


(475
)
13

Goodwill and intangible assets
e
21,346

(6,651
)
481

15,176

Deferred tax assets
f
6,163

176

5

6,344

Total assets at 31 Dec 2016
 
2,374,986

(92,015
)
16,661

2,299,632

Liabilities and equity
 
 
 
 
 
Hong Kong currency notes in circulation
 
31,228



31,228

Deposits by banks
 
59,939

(50
)
441

60,330

Customer accounts
 
1,272,386

(44
)
14,997

1,287,339

Repurchase agreements – non-trading
 
88,958



88,958

Items in course of transmission to other banks
 
5,977



5,977

Trading liabilities
 
153,691

643

1

154,335

Financial liabilities designated at fair value
 
86,832

(6,012
)

80,820

– of which:
 
 
 
 
 
included in tier 1
m
411



411

included in tier 2
n, q
23,172



23,712

Derivatives
 
279,819

193

64

280,076

Debt securities in issue
 
65,915

(3,547
)
662

63,030

Liabilities of disposal groups held for sale
 
2,790



2,790

Accruals, deferred income and other liabilities
 
41,501

1,810

495

43,806

Current tax liabilities
 
719

(26
)

693

Liabilities under insurance contracts
 
75,273

(75,273
)


Provisions
 
4,773

(18
)

4,755

– of which: credit-related contingent liabilities and contractual commitments on IRB portfolios
h
267



267

Deferred tax liabilities
 
1,623

(981
)
1

643

Subordinated liabilities
 
20,984

1


20,985

– of which:
 
 
 
 
 
included in tier 1
k, m
1,754



1,754

included in tier 2
n, o, q
18,652



18,652

Total liabilities at 31 Dec 2016
 
2,192,408

(83,304
)
16,661

2,125,765

Called up share capital
a
10,096



10,096

Share premium account
a, k
12,619



12,619

Other equity instruments
j, k
17,110



17,110

Other reserves
c, g
(1,234
)
1,735


501

Retained earnings
b, c
136,795

(9,442
)

127,353

Total shareholders’ equity
 
175,386

(7,707
)

167,679

Non-controlling interests
d, l, m, p
7,192

(1,004
)

6,188

– of which: non-cumulative preference shares issued by subsidiaries included in tier 1 capital

m
260



260

Total equity at 31 Dec 2016
 
182,578

(8,711
)

173,867

Total liabilities and equity at 31 Dec 2016
 
2,374,986

(92,015
)
16,661

2,299,632



6
HSBC Holdings plc


Capital and RWAs
The main features of HSBC’s capital instruments are set out in the Annual Report and Accounts 2016. Information on those instruments classified as liabilities under IFRSs is included in
 
Note 28 Subordinated liabilities on pages 244 to 247. Information on those instruments classified as equity under IFRSs is included in Note 32 Called up share capital and other equity instruments on pages 253 to 255.


Own funds
Table 2: Own funds disclosure



At
30 Jun
2017

CRD IV
prescribed
residual
amount

Final
CRD IV
text

Ref*

Ref
$m

$m

$m

 
Common equity tier 1 (‘CET1’) capital: instruments and reserves
 
 
 
 
1
Capital instruments and the related share premium accounts
 
20,852

 
20,852

 
– ordinary shares
a
20,852

 
20,852

2
Retained earnings
b
124,203

 
124,203

3
Accumulated other comprehensive income (and other reserves)
c
6,757

 
6,757

5
Minority interests (amount allowed in consolidated CET1)
d
4,496

 
4,496

5a
Independently reviewed interim net profits net of any foreseeable charge or dividend
b
3,718

 
3,718

6
Common equity tier 1 capital before regulatory adjustments
 
160,026

 
160,026

 
Common equity tier 1 capital: regulatory adjustments
 
 
 
 
7
Additional value adjustments
 
(1,201
)
 
(1,201
)
8
Intangible assets (net of related deferred tax liability)
e
(16,114
)
 
(16,114
)
10
Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)
f
(1,476
)
 
(1,476
)
11
Fair value reserves related to gains or losses on cash flow hedges
g
55

 
55

12
Negative amounts resulting from the calculation of expected loss amounts
h
(3,426
)
 
(3,426
)
14
Gains or losses on liabilities valued at fair value resulting from changes in own credit standing

2,656

 
2,656

15
Defined-benefit pension fund assets
i
(5,513
)
 
(5,513
)
16
Direct and indirect holdings of own CET1 instruments

(40
)
 
(40
)
19
Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions)
 
(6,058
)
 
(6,058
)
28
Total regulatory adjustments to common equity tier 1
 
(31,117
)

(31,117
)
29
Common equity tier 1 capital
 
128,909


128,909

 
Additional tier 1 (‘AT1’) capital: instruments
 
 
 
 
30
Capital instruments and the related share premium accounts
 
14,979


14,979

31
– classified as equity under IFRSs
j
14,979


14,979

33
Amount of qualifying items and the related share premium accounts subject to phase out
from AT1
k
6,621

(6,621
)

34
Qualifying tier 1 capital included in consolidated AT1 capital (including minority interests not included in CET1) issued by subsidiaries and held by third parties
l, m
2,095

(1,917
)
178

35
– of which: instruments issued by subsidiaries subject to phase out
m
1,584

(1,584
)

36
Additional tier 1 capital before regulatory adjustments
 
23,695

(8,538
)
15,157

 
Additional tier 1 capital: regulatory adjustments
 
 
 
 
37
Direct and indirect holdings of own AT1 instruments
 
(60
)
 
(60
)
41b
Residual amounts deducted from AT1 capital with regard to deduction from tier 2 (‘T2’) capital during the transitional period
 
(50
)
50


 
– 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
 
(50
)
50


43
Total regulatory adjustments to additional tier 1 capital
 
(110
)
50

(60
)
44
Additional tier 1 capital
 
23,585

(8,488
)
15,097

45
Tier 1 capital (T1 = CET1 + AT1)
 
152,494

(8,488
)
144,006

 
Tier 2 capital: instruments and provisions
 
 
 
 
46
Capital instruments and the related share premium accounts
n
16,849

 
16,849

47
Amount of qualifying items and the related share premium accounts subject to phase out
from T2
o
4,746

(4,746
)


HSBC Holdings plc
7


Pillar 3 Disclosures at 30 June 2017

Table 2: Own funds disclosure (continued)
 
 
 
At
30 Jun
2017

CRD IV
prescribed
residual
amount

Final
CRD IV
text

Ref*
 
Ref
$m

$m

$m

48
Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in CET1 or AT1) issued by subsidiaries and held by third parties
p, q
10,290

(10,223
)
67

49
– of which: instruments issued by subsidiaries subject to phase out
q
10,236

(10,236
)

51
Tier 2 capital before regulatory adjustments
 
31,885

(14,969
)
16,916

 
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)
 
(447
)
(50
)
(497
)
57
Total regulatory adjustments to tier 2 capital
 
(487
)
(50
)
(537
)
58
Tier 2 capital
 
31,398

(15,019
)
16,379

59
Total capital (TC = T1 + T2)
 
183,892

(23,507
)
160,385

60
Total risk-weighted assets
 
876,118


876,118

 
Capital ratios and buffers
 
 
 
 
61
Common equity tier 1
 
14.7%

 
14.7%

62
Tier 1
 
17.4%

 
16.4%

63
Total capital
 
21.0%

 
18.3%

64
Institution specific buffer requirement
 
2.70%

 
 
65
– capital conservation buffer requirement
 
1.25%

 
 
66
– countercyclical buffer requirement
 
0.20%

 
 
67a
– Global Systemically Important Institution (‘G-SII’) buffer
 
1.25%

 
 
68
Common equity tier 1 available to meet buffers
 
8.6%

 
 
 
Amounts below the threshold for deduction (before risk weighting)
 
 
 
 
72
Direct and indirect holdings of the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions)
 
4,213

 
 
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)
 
13,497

 
 
75
Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability)
 
5,765

 
 
 
Applicable caps on the inclusion of provisions in tier 2
 
 
 
 
77
Cap on inclusion of credit risk adjustments in T2 under standardised approach
 
2,267

 
 
79
Cap for inclusion of credit risk adjustments in T2 under IRB approach
 
3,015

 
 
 
Capital instruments subject to phase out arrangements (only applicable between
1 Jan 2013 and 1 Jan 2022)
 
 
 
 
82
Current cap on AT1 instruments subject to phase out arrangements
 
8,652

 
 
83
Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities)
 
1,526

 
 
84
Current cap on T2 instruments subject to phase out arrangements
 
14,982

 
 
85
Amount excluded from T2 due to cap (excess over cap after redemptions and maturities)
 
6,056

 
 
*
The references identify the lines prescribed in the European Banking Authority (‘EBA’) template. Lines represented in this table are those lines which are applicable and where there is a value.
The references (a) – (q) identify balance sheet components on page 5 which are used in the calculation of regulatory capital.

8
HSBC Holdings plc


Leverage ratio
Our leverage ratio calculated in accordance with CRD IV was 5.7% at 30 June 2017, up from 5.4% at 31 December 2016. This was mainly due to increased capital.
In 2016, following recommendations from the Bank of England’s Financial Policy Committee (‘FPC’), a modification to exclude qualifying central bank balances from the leverage exposure measure was made.
In June 2017, the FPC recommended that the PRA increase the minimum requirement of the UK leverage ratio from 3% to 3.25%. This is intended to compensate for the reduction in the capital requirement resulting from the modification to the UK leverage exposure measure. This increase is expected to come into effect before the end of the year.
At 30 June 2017, our UK minimum leverage ratio requirement of 3% was supplemented by an additional leverage ratio buffer of 0.4% and a countercyclical leverage ratio buffer of 0.1%.
 
These additional buffers translate into capital values of $10.4bn and $3.2bn respectively. We comfortably exceeded these leverage requirements.
The risk of excessive leverage is managed as part of HSBC’s global risk appetite framework and monitored using a leverage ratio metric within our risk appetite statement (‘RAS’). The RAS articulates the aggregate level and types of risk that HSBC is willing to accept in its business activities in order to achieve its strategic business objectives. The RAS measures are monitored via the risk appetite profile report, which includes comparisons of actual performance against the risk appetite and tolerance thresholds assigned to each metric, to ensure that any excessive risk is highlighted, assessed and mitigated appropriately. The risk appetite profile report is presented monthly to the Risk Management Meeting of the Group Management Board (‘RMM’) and the Group Risk Committee (‘GRC’).
Table 3: Summary reconciliation of accounting assets and leverage ratio exposures
 
 
At
 
 
30 Jun

31 Dec

 
 
2017

2016

Ref*
 
$bn

$bn

1
Total assets as per published financial statements
2,492.4

2,375.0

 
Adjustments for:
 
 
2
– entities which are consolidated for accounting purposes but are outside the scope of regulatory consolidation
(82.5
)
(75.4
)
4
– derivative financial instruments
(106.0
)
(158.6
)
5
– securities financing transactions (‘SFTs’)
12.5

10.1

6
– off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)
239.9

223.1

7
– other
(23.3
)
(19.8
)
8
Total leverage ratio exposure
2,533.0

2,354.4

*
The references identify the lines prescribed in the EBA template. Lines represented in this table are those lines which are applicable and where there is a value.
Table 4: Leverage ratio common disclosure
 
 
At
 
 
30 Jun

31 Dec

 
 
2017

2016

Ref*
 
$bn

$bn

 
On-balance sheet exposures (excluding derivatives and SFTs)
 
 
1
On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral)
1,967.6

1,844.4

2
(Asset amounts deducted in determining tier 1 capital)
(33.8
)
(34.4
)
3
Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets)
1,933.8

1,810.0

 
Derivative exposures
 
 
4
Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)
29.3

43.7

5
Add-on amounts for potential future exposure (‘PFE’) associated with all derivatives transactions
(mark-to-market method)
120.5

110.2

6
Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to IFRSs
5.1

5.9

7
(Deductions of receivables assets for cash variation margin provided in derivatives transactions)
(26.0
)
(30.6
)
8
(Exempted central counterparty (‘CCP’) leg of client-cleared trade exposures)
(12.8
)
(4.1
)
9
Adjusted effective notional amount of written credit derivatives
167.5

216.4

10
(Adjusted effective notional offsets and add-on deductions for written credit derivatives)
(160.0
)
(209.3
)
11
Total derivative exposures
123.6

132.2

 
Securities financing transaction exposures
 
 
12
Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions
317.8

266.6

13
(Netted amounts of cash payables and cash receivables of gross SFT assets)
(94.5
)
(87.9
)
14
Counterparty credit risk exposure for SFT assets
12.4

10.4

16
Total securities financing transaction exposures
235.7

189.1

 
Other off-balance sheet exposures
 
 
17
Off-balance sheet exposures at gross notional amount
781.4

757.7

18
(Adjustments for conversion to credit equivalent amounts)
(541.5
)
(534.6
)
19
Total off-balance sheet exposures
239.9

223.1

 
Capital and total exposures
 
 
20
Tier 1 capital
144.0

127.3

21
Total leverage ratio exposure
2,533.0

2,354.4

22
Leverage ratio (%)
5.7

5.4

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

Fully phased in

*
The references identify the lines prescribed in the EBA template. Lines represented in this table are those which are applicable and where there is a value.

HSBC Holdings plc
9


Pillar 3 Disclosures at 30 June 2017

Table 5: Leverage ratio – Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures)
 
 
At
 
 
30 Jun

31 Dec

 
 
2017

2016

Ref*
 
$bn

$bn

EU-1
Total on-balance sheet exposures (excluding derivatives, SFTs, and exempted exposures)
1,967.6

1,844.4

EU-2
– trading book exposures
296.3

267.5

EU-3
– banking book exposures
1,671.3

1,576.9

 
   ’banking book exposures’ comprises:
 
 
EU-4
covered bonds
1.4

1.1

EU-5
exposures treated as sovereigns
488.2

504.4

EU-6
exposures to regional governments, multilateral development banks (‘MDBs’), international organisations and public sector entities not treated as sovereigns
8.3

6.0

EU-7
institutions
78.0

67.6

EU-8
secured by mortgages of immovable properties
266.4

254.6

EU-9
retail exposures
85.0

84.6

EU-10
corporate
555.1

532.4

EU-11
exposures in default
11.3

12.4

EU-12
other exposures (e.g. equity, securitisations and other non-credit obligation assets)
177.6

113.8

*
The references identify the lines prescribed in the EBA template. Lines represented in this table are those lines which are applicable and where there is a value.

10
HSBC Holdings plc


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

The market risk capital requirement is measured using internal market risk models, where approved by the PRA, or under the standard rules. Our internal market risk models comprise VaR, stressed VaR and IRC. Non-proprietary details of the scope of our IMA permission are available in the Financial Services Register on the PRA website. We are in compliance with the requirements set out in Articles 104 and 105 of the Capital Requirements Regulation.
 
Operational risk
The Basel Committee allows firms to calculate their operational risk capital requirement under the basic indicator approach, the standardised approach or the advanced measurement approach.
We currently use the standardised approach in determining our operational risk capital requirement. We have in place an operational risk model that is used for economic capital calculation purposes.


HSBC Holdings plc
11


Pillar 3 Disclosures at 30 June 2017

Table 6: Overview of RWAs
 
 
At
 
 
30 Jun

31 Mar

30 Jun

 
 
2017

2017

2017

 
 
RWAs

RWAs

Capital1 
requirements

 
 
$bn

$bn

$bn

1
Credit risk (excluding counterparty credit risk)
601.9

592.8

48.2

2
– standardised approach
130.2

122.5

10.4

3
– foundation IRB approach
26.9

26.0

2.2

4
– advanced IRB approach
444.8

444.3

35.6

6
Counterparty credit risk
61.5

61.2

4.9

7
– mark-to-market
36.7

36.3

2.9

10
– internal model method
10.0

9.9

0.8

11
– risk exposure amount for contributions to the default fund of a central counterparty
0.7

0.7

0.1

12
– credit valuation adjustment
14.1

14.3

1.1

13
Settlement risk
0.3

0.2


14
Securitisation exposures in the non-trading book
22.7

21.3

1.8

15
– IRB ratings based method
19.7

18.5

1.6

16
– IRB supervisory formula method
0.2

0.2


17
– IRB internal assessment approach
1.6

1.5

0.1

18
– standardised approach
1.2

1.1

0.1

19
Market risk
43.6

38.9

3.5

20
– standardised approach
3.8

4.8

0.3

21
– internal models approach
39.8

34.1

3.2

23
Operational risk
98.0

98.0

7.9

25
– standardised approach
98.0

98.0

7.9

27
Amounts below the thresholds for deduction (subject to 250% risk weight)
48.1

45.5

3.8

29
Total
876.1

857.9

70.1

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

Credit Risk, including amounts below the thresholds for deduction
RWAs increased by $11.8bn in the second quarter of the year, including an increase of $10.6bn due to foreign currency translation differences. The increase of $1.2bn (excluding foreign exchange translation) was mainly due to an increase in asset size of $10.5bn driven by corporate lending growth in Asia and Europe, partly offset by reductions due to management initiatives to reduce RWAs.
Counterparty credit risk
The $0.3bn increase in RWAs is primarily due to an increase in asset size of $1.7bn, partly offset by RWA initiatives of $1.6bn.
 
Securitisation in non-trading book
The $1.4bn RWA increase in the second quarter of the year, arises predominantly from new securitisation positions.
Market risk
RWAs increased by $4.7bn, driven by a $5.4bn increase in risk levels, partly offset by RWA initiatives of $0.7bn.
 
 
 
 
 
 
Table 7: RWA flow statements of credit risk exposures under the IRB approach1, 2
 
 
 
 
Three months to
 
 
 
30 Jun

31 Mar

30 Jun

 
 
 
2017

2017

2017

 
 
 
RWAs

RWAs

Capital
requirements

 
 
 
$bn

$bn

$bn

 
1
RWAs at the beginning of the period
470.3

468.5

37.6

 
2
Asset size
0.7

2.0

0.1

 
3
Asset quality
(4.1
)

(0.3
)
 
4
Model updates
0.7


0.1

 
5
Methodology and policy
(2.5
)
1.2

(0.2
)
 
6
Acquisitions and disposals
(1.5
)
(5.7
)
(0.1
)
 
7
Foreign exchange movements
8.1

4.3

0.6

 
9
RWAs at the end of the period
471.7

470.3

37.8

1
This table includes RWA initiatives of $12.1bn allocated across the RWA flow layers to which they relate.
2
Securitisation positions are not included in this table.

12
HSBC Holdings plc


RWAs under the IRB approach increased by $1.4bn in the second quarter of the year, including an increase of $8.1bn due to foreign currency translation differences.
The $6.7bn decrease in RWAs excluding foreign currency translation includes the following movements:
 
$4.1bn as a result of improvements in asset quality and lending growth in lower risk portfolios.
$2.5bn in methodology and policy movements mainly as a result of management initiatives.

 
 
 
 
 
 
Table 8: RWA flow statements of CCR exposures under the IMM1
 
 
 
Three months to
 
 
 
30 Jun

31 Mar

30 Jun

 
 
 
2017

2017

2017

 
 
 
RWAs

RWAs

Capital
requirements

 
 
 
$bn

$bn

$bn

 
1
RWAs at the beginning of the period
14.3

14.4

1.1

 
2
Asset size
0.7

(0.4
)
0.1

 
3
Asset quality
(0.2
)
(0.2
)

 
4
Model updates

1.0


 
5
Methodology and policy
(0.7
)
(0.5
)
(0.1
)
 
9
RWAs at the end of the period
14.1

14.3

1.1

1
This table includes RWA initiatives of $0.9bn allocated across the RWA flow layers to which they relate.
The $0.2bn decrease in counterparty credit risk RWAs under the IMM during the second quarter of the year is driven by RWA initiatives of $0.9bn, partially offset by an increase in asset size of $0.7bn.
 
 
 
 
 
 
 
 
 
Table 9: RWA flow statements of market risk exposures under the IMA1
 
 
 
 
VaR

Stressed
VaR

IRC

Other

Total
RWAs1

Total capital requirements

 
 
 
$bn

$bn

$bn

$bn

$bn

$bn

 
1
RWAs at 1 Apr 2017
9.5

12.3

10.1

2.2

34.1

2.7

 
2
Movement in risk levels
0.4

1.9

1.7

2.5

6.5

0.5

 
3
Model updates/changes
(1.6
)
(0.2
)


(1.8
)
(0.1
)
 
4
Methodology and policy
0.5

0.5



1.0

0.1

 
8
RWAs at 30 Jun 2017
8.8

14.5

11.8

4.7

39.8

3.2

 
 
 
 
 
 
 
 
 
 
1
RWAs at 1 Jan 2017
8.7

15.8

9.5

2.5

36.5

2.9

 
2
Movement in risk levels
0.8

(3.5
)
0.6

(0.3
)
(2.4
)
(0.2
)
 
3
Model updates/changes






 
4
Methodology and policy






 
8
RWAs at 31 Mar 2017
9.5

12.3

10.1

2.2

34.1

2.7

1
This table includes RWA initiatives of $0.7bn allocated across the RWA flow layers to which they relate.
The $5.7bn increase in RWAs during the second quarter of the year is driven by movements in risk levels of $6.5bn and a methodology update to VaR multipliers of $1bn, partially offset by a $1.8bn reduction as a result of model updates.


HSBC Holdings plc
13


Pillar 3 Disclosures at 30 June 2017

Credit risk
Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also from other products, such as guarantees and credit derivatives and from holding assets in the form of debt securities. Credit risk represents our largest regulatory capital
 
requirement. There have been no material changes to our policies and practices, which are described in the Capital and Risk Management Pillar 3 Disclosures 2016.
Credit quality of assets
We are a universal bank with a conservative approach to credit risk. This is reflected in our credit risk profile being diversified across a number of asset classes and geographies with a credit quality profile concentrated in the higher quality bands.
Table 10: Credit quality of assets
 
 
At
 
 
30 Jun 2017
31 Dec 2016
 
 
Gross carrying values of
Allowances/
impairments

Net values
(a+b-c)

Gross carrying values of
Allowances/impairments

Net values
(a+b-c)

 
 
Defaulted exposures

Non-defaulted exposures

Defaulted exposures

Non-
defaulted exposures

 
 
$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

1
Loans
16.6

1,198.9

8.0

1,207.5

17.9

1,067.8

8.3

1,077.4

2
Debt securities

279.6


279.6


377.4


377.4

3
Off-balance sheet exposures
1.9

743.8

0.2

745.5

1.5

735.0

0.3

736.2

4
Total
18.5

2,222.3

8.2

2,232.6

19.4

2,180.2

8.6

2,191.0

Defaulted exposures
The accounting definition of impaired and the regulatory definition of default are generally aligned. For particular retail exposures regulatory default is identified at 180 days past due, while the exposures are identified as impaired at 90 days
 
past due. In the retail portfolio in the US, for accounting purposes, a renegotiation would normally trigger identification as ‘impaired’, whereas for regulatory purposes, default is identified mainly based on the 180 days past due criterion.
Table 11: Changes in stock of defaulted loans and debt securities
 
 
 
6 months to

12 months to

 
 
 
30 Jun

31 Dec

 
 
 
2017

2016

 
 
Footnote
$bn

$bn

1
Defaulted loans and debt securities at the beginning of the period
 
17.9

22.7

2
Loans and debt securities that have defaulted since the last reporting period
 
3.2

8.6

3
Returned to non-defaulted status
 
(1.2
)
(1.5
)
4
Amounts written off
 
(1.1
)
(2.8
)
5
Other changes
1
(0.1
)
(5.1
)
7
Repayments
 
(2.1
)
(4.0
)
6
Defaulted loans and debt securities at the end of the period
 
16.6

17.9

1
Other changes include foreign exchange and assets held for sale in default.
Risk mitigation
Our approach when granting credit facilities is to do so on the basis of capacity to repay, rather than placing primary reliance on credit risk mitigants. Depending on a customer’s standing and the type of product, facilities may be provided unsecured. Mitigation of credit risk is a key aspect of effective risk management and takes many forms.
Our general policy is to promote the use of credit risk mitigation, justified by commercial prudence and capital efficiency. Specifically, detailed policies cover the acceptability, structuring and terms with regard to the availability of credit risk mitigation; for example, in the form of collateral security.
 
These policies, together with the setting of suitable valuation parameters, are subject to regular review to ensure that they are supported by empirical evidence and continue to fulfil their intended purpose.


14
HSBC Holdings plc


Table 12: Standardised approach – credit conversion factor (‘CCF’) and credit risk mitigation (‘CRM’) effects
 
 
Exposures before CCF
and CRM
Exposures post-CCF
and CRM
RWAs and RWA density
 
 
On-balance sheet amount

Off-balance sheet amount

On-balance sheet amount

Off-balance sheet amount

RWAs

RWA density

 
 
$bn

$bn

$bn

$bn

$bn

%

 
Asset classes1
 
 
 
 
 
 
1
Central governments or central banks
170.3

0.9

174.5

0.8

14.8

8

2
Regional governments or local authorities
2.6

0.3

2.6


0.9

33

3
Public sector entities
0.1

0.1

0.1


0.1

100

4
Multilateral development banks
0.2


0.2



7

5
International organisations
2.2


2.2




6
Institutions
2.6


2.4


1.1

48

7
Corporates
90.7

78.7

74.9

12.1

81.6

94

8
Retail
23.0

45.7

21.7

0.4

16.3

74

9
Secured by mortgages on immovable property
26.6

1.0

26.6

0.2

9.7

36

10
Exposures in default
3.4

0.3

3.3

0.1

4.3

128

11
Higher-risk categories
2.4

1.8

2.4

1.7

6.2

150

14
Collective investment undertakings
0.6


0.6


0.6

100

15
Equity
16.2


16.2


36.4

224

16
Other items
13.0


13.0


6.3

49

17
Total at 30 Jun 2017
353.9

128.8

340.7

15.3

178.3

50

 
 
 
 
 
 
 
 
1
Central governments or central banks
161.9

1.5

166.2

1.1

14.7

9

2
Regional governments or local authorities
2.9

0.3

2.9


0.9

32

3
Public sector entities






4
Multilateral development banks
0.2


0.2



5

5
International organisations
2.7


2.7




6
Institutions
2.2


2.1


1.0

46

7
Corporates
80.2

79.9

66.3

12.1

75.0

96

8
Retail
22.7

44.2

21.6

0.4

16.3

74

9
Secured by mortgages on immovable property
25.5

0.8

25.5

0.2

9.3

36

10
Exposures in default
3.2

0.4

3.2

0.1

4.3

130

11
Higher-risk categories
2.1

1.4

2.1

1.3

5.1

150

14