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

Commission File Number: 001-14930


For the month of February 2019
 
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 31 December 2018

Contents
 
Page
Introduction
Key metrics
Regulatory framework for disclosures
Pillar 3 disclosures
Regulatory developments
Accounting developments
Risk management
Linkage to the Annual Report and Accounts 2018
Capital and RWAs
Capital management
Own funds
Leverage ratio
Pillar 1 capital requirements and RWA flow
Pillar 2 and ICAAP
Credit risk
Overview and responsibilities
Credit risk management
Credit risk models governance
Credit quality of assets
Risk mitigation
Global risk
Wholesale risk
Retail risk
Model performance
Counterparty credit risk
Counterparty credit risk management
Securitisation
HSBC securitisation strategy
HSBC securitisation activity
Monitoring of securitisation positions
Securitisation accounting treatment
Securitisation regulatory treatment
Analysis of securitisation exposures
Market risk
Overview of market risk in global businesses
Market risk governance
Market risk measures
Market risk capital models
Prudent valuation adjustment
Structural foreign exchange exposures
Interest rate risk in the banking book
Operational risk
Overview and objectives
Organisation and responsibilities
Developments during 2018
Measurement and monitoring
Other risks
Pension risk
Non-trading book exposures in equities
Risk management of insurance operations
Liquidity and funding risk
Reputational risk
Sustainability risk
Business risk
Dilution risk
Remuneration
 
Appendices
 
 
Page
I
Additional tables
II
Asset encumbrance
III
Summary of disclosures withheld
Other Information
 
Abbreviations
Cautionary statement regarding forward-looking statements
Contacts
Certain defined terms
Unless the context requires otherwise, ‘HSBC Holdings’ means HSBC Holdings plc and ‘HSBC’, the ‘Group’, ‘we’, ‘us’ and ‘our’ refer to HSBC Holdings together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People’s Republic of China is referred to as ‘Hong Kong’. When used in the terms ‘shareholders’ equity’ and ‘total shareholders’ equity’, ‘shareholders’ means holders of HSBC Holdings ordinary shares and those preference shares and capital securities issued by HSBC Holdings classified as equity. The abbreviations ‘$m’ and ‘$bn’ represent millions and billions (thousands of millions) of US dollars respectively.

1
HSBC Holdings plc Pillar 3 2018


Tables
 
 
Ref
Page

1
Key metrics (KM1/IFRS9-FL)
a
3

2
Reconciliation of capital with and without IFRS 9 transitional arrangements applied
 
3

3
Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation
 
8

4
Principal entities with a different regulatory and accounting scope of consolidation (LI3)
 
10

5
Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories (LI1)
 
11

6
Main sources of differences between regulatory exposure amounts and carrying values in financial statements (LI2)
a
13

7
Own funds disclosure
b
14

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

9
Leverage ratio common disclosure (LRCom)
a
16

10
Leverage ratio – Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures) (LRSpl)
a
17

11
Overview of RWAs (OV1)
b
18

12
RWA flow statements of credit risk exposures under the IRB approach (CR8)
 
18

13
RWA flow statements of CCR exposures under IMM (CCR7)
 
19

14
RWA flow statements of market risk exposures under IMA (MR2-B)
 
19

15
Credit quality of exposures by exposure classes and instruments (CR1-A)
 
21

16
Credit quality of exposures by industry or counterparty types (CR1-B)
 
23

17
Credit quality of exposures by geography (CR1-C)
 
24

18
Ageing of past-due unimpaired and impaired exposures (CR1-D)
 
25

19
Non-performing and forborne exposures (CR1-E)
 
25

20
Credit risk exposure – summary (CRB-B)
a
26

21
Geographical breakdown of exposures (CRB-C)
 
27

22
Concentration of exposures by industry or counterparty types (CRB-D)
 
29

23
Maturity of on-balance sheet exposures (CRB-E)
 
33

24
Amount of past due unimpaired and credit-impaired exposures by geographical region
 
34

25
Credit risk mitigation techniques – overview (CR3)
 
35

26
Standardised approach – credit conversion factor (‘CCF’) and credit risk mitigation (‘CRM’) effects (CR4)
b
36

27
Standardised approach – exposures by asset class and risk weight (CR5)
b
37

28
IRB – Effect on RWA of credit derivatives used as CRM techniques (CR7)
 
37

29
Credit derivatives exposures (CCR6)
 
38

30
Wholesale IRB credit risk models
 
41

31
IRB models – estimated and actual values (wholesale)
 
42

32
IRB models – corporate PD models – performance by CRR grade
 
42

33
Material retail IRB risk rating systems
 
46

34
IRB models – estimated and actual values (retail)
 
49

35
Wholesale IRB exposure – back-testing of probability of default (PD) per portfolio (CR9)
 
51

 
 
 
 
 
 
 
Ref
Page

36
Retail IRB exposure – back-testing of probability of default (PD) per portfolio (CR9)
 
53

37
Counterparty credit risk exposure – by exposure class, product and geographical region
 
56

38
Counterparty credit risk – RWAs by exposure class, product and geographical region
 
57

39
Securitisation exposure – movement in the year
 
60

40
Securitisation – asset values and impairments
 
60

41
Market risk under standardised approach (MR1)
 
61

42
Market risk under IMA (MR2-A)
 
61

43
IMA values for trading portfolios (MR3)
 
64

44
Prudential valuation adjustments (PV1)
 
66

45
Operational risk RWAs
 
67

46
Non-trading book equity investments
 
69

47
Level and components of HSBC Group consolidated liquidity coverage ratio (LIQ1)
 
72

48
Analysis of on-balance sheet encumbered and unencumbered assets
 
73

49
Wholesale IRB exposure – by obligor grade
 
76

50
PD, LGD, RWA and exposure by country/territory
 
77

51
Retail IRB exposure – by internal PD band
 
84

52
IRB expected loss and CRAs – by exposure class
b
85

53
Credit risk RWAs – by geographical region
b
86

54
IRB exposure – credit risk mitigation
 
87

55
Standardised exposure – credit risk mitigation
 
87

56
Standardised exposure – by credit quality step
a
88

57
Changes in stock of general and specific credit risk adjustments (CR2-A)
 
88

58
Changes in stock of defaulted loans and debt securities (CR2-B)
 
88

59
IRB – Credit risk exposures by portfolio and PD range (CR6)
a
89

60
Specialised lending on slotting approach (CR10)
 
94

61
Analysis of counterparty credit risk exposure by approach (excluding centrally cleared exposures) (CCR1)
 
95

62
Credit valuation adjustment (CVA) capital charge (CCR2)
 
95

63
Standardised approach – CCR exposures by regulatory portfolio and risk weights (CCR3)
 
95

64
IRB – CCR exposures by portfolio and PD scale (CCR4)
 
96

65
Impact of netting and collateral held on exposure values (CCR5-A)
 
98

66
Composition of collateral for CCR exposure (CCR5-B)
 
98

67
Exposures to central counterparties (CCR8)
 
98

68
Securitisation exposures in the non-trading book (SEC1)
 
99

69
Securitisation exposures in the trading book (SEC2)
 
99

70
Securitisation exposures in the non-trading book and associated capital requirements – bank acting as originator or sponsor (SEC3)
 
100

71
Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor (SEC4)
 
101

72
Asset encumbrance
 
102


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 for 2018 (indicated with ^) within this table have been prepared on an IFRS 9 transitional basis.
b. All figures within this table have been prepared on an IFRS 9 transitional basis.
All other tables report numbers on the basis of full adoption of IFRS 9.

HSBC Holdings plc Pillar 3 2018
2


Pillar 3 Disclosures at 31 December 2018

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

30 Sep

30 Jun

31 Mar

1 Jan

31 Dec1

Ref*
 
Footnotes
2018

2018

2018

2018

2018

2017

 
Available capital ($bn)
2
 
 
 
 
 
 
1
Common equity tier 1 (‘CET1’) capital
^
121.0

123.1

122.8

129.6

127.3

126.1

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

 
120.0

122.1

121.8

128.6

126.3

N/A

3
Tier 1 capital
^
147.1

149.3

147.1

157.1

152.1

151.0

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

 
146.1

148.3

146.1

156.1

151.1

N/A

5
Total regulatory capital
^
173.2

178.1

176.6

185.2

183.1

182.4

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

 
172.2

177.1

175.6

184.2

182.1

N/A

 
Risk-weighted assets (‘RWAs’) ($bn)
 
 
 
 
 
 
 
7
Total RWAs
 
865.3

862.7

865.5

894.4

872.1

871.3

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

 
864.7

862.1

864.9

893.8

871.6

N/A

 
Capital ratios (%)
2


 
 
 
 
 
9
CET1
^
14.0

14.3

14.2

14.5

14.6

14.5

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

 
13.9

14.2

14.1

14.4

14.5

N/A

11
Total tier 1
^
17.0

17.3

17.0

17.6

17.4

17.3

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

 
16.9

17.2

16.9

17.5

17.3

N/A

13
Total capital
^
20.0

20.7

20.4

20.7

21.0

20.9

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

 
19.9

20.6

20.3

20.6

20.9

N/A

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


 
 
 
 
 
 
 
 
Capital conservation buffer requirement

 
1.88

1.88

1.88

1.88

N/A

1.25

 
Countercyclical buffer requirement

 
0.56

0.45

0.46

0.34

N/A

0.22

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

 
1.50

1.50

1.50

1.50

N/A

1.25

 
Total of bank CET1 specific buffer requirements

 
3.94

3.83

3.84

3.72

N/A

2.72

 
Total capital requirement (%)

 
 
 
 
 
 
 
 
Total capital requirement

3
10.9

11.5

11.5

11.5

N/A

N/A

 
CET1 available after meeting the bank’s minimum capital requirements
4
7.9

7.8

7.7

8.0

N/A

8.0

 
Leverage ratio
5
 
 
 
 
 
 
15
Total leverage ratio exposure measure ($bn)

^
2,614.9

2,676.4

2,664.1

2,707.9

2,556.4

2,557.1

16
Leverage ratio (%)
^
5.5

5.4

5.4

5.6

5.6

5.6

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

 
5.5

5.4

5.3

5.5

5.6

N/A

 
Liquidity Coverage Ratio (‘LCR’)

6
 
 
 
 
 
 
 
Total high-quality liquid assets ($bn)
 
567.2

533.2

540.2

533.1

N/A

512.6

 
Total net cash outflow ($bn)
 
368.7

334.1

341.7

338.5

N/A

359.9

 
LCR ratio (%)
7
153.8

159.6

158.1

157.5

N/A

142.2

*
The references in this, and subsequent tables, identify the lines prescribed in the relevant European Banking Authority (‘EBA’) template where applicable and where there is a value.
1
Figures presented as reported under IAS 39 ‘Financial instruments: recognition & measurement’ at 31 December 2017.
2
Capital figures and ratios are reported on the CRD IV transitional basis for additional tier 1 and tier 2 capital in accordance with articles 484-92 of the Capital Requirements Regulation.
3
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 2018, as per the PRA’s Individual Capital Guidance based on a point in time assessment, was 2.9% of RWAs, of which 1.6% was met by CET1. On 1 January 2019, our Pillar 2A requirement increased to 3.0% of RWAs, of which 1.7% must be met by CET1.
4
The minimum requirements represent the total capital requirement to be met by CET1.
5
Leverage ratio is calculated using the CRD IV end point basis for additional tier 1 capital.
6
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.
7
LCR is calculated as at the end of each period rather than using average values. Refer to page 132 of the Annual Report and Accounts 2018 for further detail.
Table 2: Reconciliation of capital with and without IFRS 9 transitional arrangements applied
 
At 31 Dec 2018
 
CET1

Tier 1

Total own funds

 
$bn

$bn

$bn

Reported balance using IFRS 9 transitional arrangements
121.0

147.1

173.2

Expected credit losses (‘ECL’) reversed under transitional arrangements for IFRS 9
(1.2
)
(1.2
)
(1.2
)
  Standardised (‘STD’) approach
(1.2
)
(1.2
)
(1.2
)
 –  Internal ratings based (‘IRB’) approach



Tax impacts
0.3

0.3

0.3

Changes in amounts deducted from CET1 for deferred tax assets and significant investments
(0.1
)
(0.1
)
(0.1
)
  amounts deducted from CET1 for deferred tax assets



  amounts deducted from CET1 for significant investments
(0.1
)
(0.1
)
(0.1
)
Reported balance excluding IFRS 9 transitional arrangements
120.0

146.1

172.2


3
HSBC Holdings plc Pillar 3 2018


Regulatory framework for disclosures
HSBC is supervised on a consolidated basis in the United Kingdom (‘UK’) by the Prudential Regulation Authority (‘PRA’), which receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. Individual banking subsidiaries are directly regulated by their local banking supervisors, who set and monitor their local capital adequacy requirements. In most jurisdictions, non-banking financial subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.
At a consolidated group level, we calculated capital for prudential regulatory reporting purposes throughout 2018 using the Basel III framework of the Basel Committee (‘Basel’) as implemented by the European Union (‘EU’) in the amended Capital Requirements Directive and Regulation (‘CRD IV’), and in the PRA’s Rulebook for the UK banking industry. The regulators of Group banking entities outside the EU are at varying stages of implementation of the Basel Committee’s framework, so local regulation in 2018 may have been on the basis of Basel I, II or III.
The Basel Committee’s framework is structured around three ‘pillars’: the Pillar 1 minimum capital requirements and Pillar 2 supervisory review process are complemented by Pillar 3 market discipline. The aim of Pillar 3 is to produce disclosures that allow market participants to assess the scope of application by banks of the Basel Committee’s framework and the rules in their jurisdiction, their capital condition, risk exposures and risk management processes, and hence their capital adequacy.
Pillar 3 requires all material risks to be disclosed to provide a comprehensive view of a bank’s risk profile.
The PRA’s final rules adopted national discretions in order to accelerate significantly the transition timetable to full ‘end point’ CRD IV compliance.
Pillar 3 disclosures
HSBC’s Pillar 3 Disclosures at 31 December 2018 comprise information required under Pillar 3, both quantitative and qualitative. They are made in accordance with Part 8 of the Capital Requirements Regulation within CRD IV and the European Banking Authority’s (‘EBA’) final standards on revised Pillar 3 disclosures issued in December 2016. These disclosures are supplemented by specific additional requirements of the PRA and discretionary disclosures on our part.
The Pillar 3 disclosures are governed by the Group’s disclosure policy framework as approved by the Group Audit Committee (‘GAC’). Information relating to the rationale for withholding certain disclosures is provided in Appendix III.
In our disclosures, to give insight into movements during the year, we provide comparative figures for the previous year or period, analytical review of variances and ‘flow’ tables for capital requirements.
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 HSBC’s activities, we omit them and follow the same approach for comparative disclosures.
We publish comprehensive Pillar 3 disclosures annually on the HSBC website www.hsbc.com, concurrently with the release of our Annual Report and Accounts 2018. Similarly, a separate Pillar 3 document is also published at half-year concurrently with the release of our Interim Report disclosure. 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 2018 or other locations.
 
We continue to engage in the work of the UK authorities and industry associations to improve the transparency and comparability of UK banks’ Pillar 3 disclosures.
Regulatory developments
The UK’s withdrawal from the EU
In August 2018, Her Majesty’s Treasury (‘HMT’) commenced the process of ‘onshoring’ the current EU legislation to ensure that there is legal continuity in the event of the UK leaving the EU. This involved the publication of draft Statutory Instruments across a wide range of financial services legislation; this included the key prudential legislation for banking groups: the Capital Requirements Regulation and Capital Requirements Directive.
One of the key effects of onshoring will be to treat the EU in the same manner as the EU currently treats non-European Economic Area countries. Under the draft provisions published by HMT, the PRA will be given the power to grant transitional provisions to delay the implementation of these changes for up to two years, should the UK leave the EU without an agreement on 29 March 2019.
The Bank of England (‘BoE’) and the PRA published a package of consultations in October and December 2018, setting out the changes required to the PRA’s rules and technical standards as a result of the UK’s withdrawal. It also included proposals on the exercise of the transitional powers; however the precise scope of these remains uncertain.
There are certain pieces of EU legislation that are in progress, but are not yet live, that will not enter automatically into UK law if it withdraws from the EU without an agreement. The Financial Services (Implementation of Legislation) Bill is currently progressing through the UK Parliament to empower HMT to make regulations in the UK to bring into force certain specified EU legislation that remains in progress on 29 March 2019.
RWAs and leverage ratio
Basel Committee
In December 2017, Basel published revisions to the Basel III framework. The final package includes:
widespread changes to the risk weights under the standardised approach to credit risk;
a change in the scope of application of the internal ratings based (‘IRB’) approach to credit risk, together with changes to the IRB methodology;
the replacement of the operational risk approaches with a single methodology;
an amended set of rules for the credit valuation adjustment (‘CVA’) capital framework;
an aggregate output capital floor that ensures that banks’ total RWAs are no lower than 72.5% of those generated by the standardised approaches; and
changes to the exposure measure for the leverage ratio, together with the imposition of a leverage ratio buffer for global systemically important banks (‘G-SIB’). This will take the form of a tier 1 capital buffer set at 50% of the G-SIB’s RWAs capital buffer.
Further refinements to the leverage ratio exposure measure for centrally cleared derivatives and disclosure of daily-average exposure measures are also under consideration.
Following a recalibration, Basel published the final changes to the market risk RWA regime, the Fundamental Review of the Trading book (‘FRTB’), in January 2019. The new regime contains a more clearly defined trading book boundary, the introduction of an internal models approach based upon expected shortfall models, capital requirements for non-modellable risk factors, and a more risk-sensitive standardised approach that can serve as a fall-back for the internal models method.

HSBC Holdings plc Pillar 3 2018
4


Pillar 3 Disclosures at 31 December 2018

Basel has announced that the package will be implemented on
1 January 2022, with a five-year transitional provision for the output floor, commencing at a rate of 50%. The final standards will need to be transposed into the relevant local law before coming into effect.
HSBC continues to evaluate the final package. Given that the package contains a significant number of national discretions, the possible outcome is uncertain.
European Union
In the EU, Basel’s reforms are being implemented through revisions to the Capital Requirements Regulation and the Capital Requirements Directive. The first tranche of Basel’s reforms,
collectively referred to as CRR2, is expected to follow a phased implementation commencing in 2019; however, it has yet to enter into law. It includes the changes to the market risk rules under the FRTB, revisions to the counterparty credit risk framework and the new leverage ratio rules.
The CRR2 is included within the scope of the Financial Services (Implementation of Legislation) Bill. If passed by the UK Parliament, this would empower HMT to bring CRR2 into UK law even if it is not in force in the EU on exit day.
In May 2018, the European Commission commenced the process of implementing the second tranche of Basel’s reforms, collectively known as CRR3, by requesting that the EBA report on the adoption of the remaining reforms on the EU’s banking sector and the wider economy. This tranche will include Basel’s reforms in relation to credit risk, operational risk and CVA, together with the output floor. The EBA’s final report on the details of the EU’s adoption of the reforms is not due to be published until the end of June 2019.
Separately, in January 2019, the EU published final proposals for a prudential backstop for non-performing loans, which will result in a deduction from CET1 capital when a minimum impairment coverage requirement is not met. This regime is expected to be implemented in the first half of 2019.
The EU continues to work on its ‘IRB Repair’ programme, issuing in November 2018 near final guidance on the specification of economic downturn for the purposes of the loss given default modelling and the final rules on the specification of the definition of default.
In January 2019, the new securitisation framework came into force in the EU for new transactions. Existing transactions will be subject to the framework on 1 January 2020. This regime introduces changes to the methodology for determining RWAs for securitisation positions, with beneficial treatments for simple, transparent and standardised securitisation transactions.
Bank of England
In October 2018, the PRA published a consultation on its supervisory expectations and approach to the financial risks from climate change. This focused on its expectations of firms on the incorporation of the risk from climate change into risk management practices and stress testing, as well as firms’ climate change disclosures and internal governance. The PRA has indicated that it expects that the material financial risks from climate change should be included within Pillar 2.
Capital resources, macroprudential, recovery & resolution and total loss absorbing capacity
Financial Stability Board
In June 2018, the Financial Stability Board (‘FSB’) published a call for feedback on the technical implementation of its standard on total loss absorbing capacity (‘TLAC’) for G-SIBs in resolution (‘the TLAC standard’). This will assess whether the implementation of the TLAC standard is proceeding as envisaged and may be used as a basis to develop further implementation guidance.
Also in June 2018, the FSB published two sets of final guidelines. The first sets out principles to assist authorities as they operationalise resolution strategies and the second covers the development of resolution funding plans for G-SIBs.
 
Basel Committee
In July 2018, Basel published a revised assessment methodology, updating its 2013 rules, for the G-SIB capital buffer. The revised methodology will take effect in 2021 and the resulting capital buffer will be applied in January 2023.
European Union
In addition to the changes to RWAs, CRR2 will implement the EU’s version of the FSB’s TLAC standard for G-SIBs, which is in the form of minimum requirements for own funds and eligible liabilities (‘MREL’). Several changes are also introduced in the own funds calculation and eligibility criteria. Similar applicability issues will arise in relation to the UK’s withdrawal from the EU.
Bank of England
In June 2018, the BoE published its approach to setting MREL within groups, known as internal MREL, and its final policy on selected outstanding MREL policy matters. These requirements came into effect on 1 January 2019. The PRA also published its expectations for MREL reporting, which are also now in force.
In December 2018, the BoE published a consultation on its approach to assessing resolvability. This outlines how it assesses resolvability through its established policies and further proposes new principles on funding and operational continuity in resolution and firms’ restructuring capabilities, as well as management, governance and communication capabilities. Simultaneously, the PRA published a consultation on resolution assessments and public disclosure by firms. Together, these publications contain proposals to form a Resolvability Assessment Framework, presented as the final element in the UK’s resolution regime.
In addition, a number of changes have come into effect since late 2018:
The legislative framework for UK ring-fencing took effect on
1 January 2019. HSBC completed the process to set up its ring-fenced bank, HSBC UK Bank plc (‘HBUK’), in July 2018, six months ahead of the legal deadline.
The PRA’s final rules on group risk and double leverage came into effect on 1 January 2019. Firms are required to consider both elements as part of the Pillar 2 process. In June 2018, the PRA also published modifications to its intra-group large exposures framework, which came into force with immediate effect.
In November 2018, the UK Countercyclical Capital Buffer rate increased from 0.5% to 1%. The Hong Kong rate increased from 1.875% to 2.5% with effect from 1 January 2019.
Accounting developments
IFRS 9 Financial instruments
HSBC adopted the requirements of IFRS 9 Financial Instruments on 1 January 2018, with the exception of the provisions relating to the presentation of gains and losses on financial liabilities designated at fair value, which were adopted from 1 January 2017.
The IFRS 9 classification and measurement of financial assets and the recognition and measurement of expected credit losses (‘ECL’) differ from the previous approach under IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’.
As prior periods have not been restated, comparative periods remain in accordance with the legacy accounting standards and are therefore not necessarily comparable to the IFRS 9 amounts recorded for 2018.
The adoption of IFRS 9 has not resulted in any significant change to HSBC's business model or that of our four global businesses. This includes our strategy, country presence, product offerings and target customer segments.
Existing stress testing and regulatory models, skills and expertise were adapted in order to meet IFRS 9 requirements. Data from various client, finance and risk systems have been integrated and

5
HSBC Holdings plc Pillar 3 2018


validated. As a result of IFRS 9 adoption, management has additional insight and measures not previously utilised, which over time, may influence our risk appetite and risk management processes.
For regulatory reporting, the Group has adopted the transitional arrangements (including paragraph 4 of CRR article 473a) 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 ECL in the non credit-impaired book thereafter.
The impact is calculated separately for portfolios using the STD and IRB approaches. 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 effected and accompanied by a recalculation of capital deduction thresholds, exposure and risk-weighted assets (‘RWAs’).
Additional details on IFRS 9 are disclosed on page 224]of the Annual Report and Accounts 2018.
IFRS 16 Leases
From 1 January 2019, IFRS 16 Leases will replace IAS 17 Leases. IFRS 16 requires lessees to capitalise most leases within the scope of the standard, similar to how finance leases were accounted for under IAS 17. Lessees will recognise a right-of-use (‘ROU’) asset and a corresponding financial liability on the balance sheet. The asset will be amortised over the length of the lease, and the financial liability measured at amortised cost. Lessor accounting remains substantially the same as under IAS 17.
HSBC expects to adopt IFRS 16 using a modified retrospective approach where the cumulative effect of applying the standard is recognised in the opening balance of retained earnings.
For regulatory reporting, the ROU assets will not be deducted from regulatory capital; instead they will be risk-weighted at 100%.
For further information about the Group’s implementation of IFRS 16, refer to Note 1 of the Annual Report and Accounts 2018.
Risk management
Our risk management framework
We use an enterprise-wide risk management framework across the organisation and across all risk types. It is underpinned by our risk culture and is reinforced by the HSBC Values and our Global Standards programme.
The framework fosters continuous monitoring of the risk environment, and 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 73 of the Annual Report and Accounts 2018. The management and mitigation of principal risks facing the Group is described in our top and emerging risks on page 69 of the Annual Report and Accounts 2018.
Commentary on hedging strategies and associated processes can be found in the Market risk and Securitisation sections of this document. Additionally, a comprehensive overview of this topic can be found in Note 1.2(h) on page 229 of the Annual Report and Accounts 2018.
Risk culture
HSBC has long recognised the importance of a strong risk culture, the fostering of which is a key responsibility of senior executives. Our risk culture is reinforced by the HSBC Values and our Global Standards programme. It is instrumental in aligning the behaviours of individuals with our attitude to assuming and managing risk,
 
which helps to ensure that our risk profile remains in line with our risk appetite.
Our risk culture is further reinforced by our approach to remuneration. Individual awards, including those for senior executives, are based on compliance with the HSBC Values and the achievement of financial and non-financial objectives that are aligned to our risk appetite and strategy.
Further information on risk and remuneration is set out on pages 69 and 199 of the Annual Report and Accounts 2018.
Risk governance
The Board has ultimate responsibility for the effective management of risk and approves HSBC’s risk appetite. It is advised on risk-related matters by the Group Risk Committee (‘GRC’) and the Financial System Vulnerabilities Committee (‘FSVC’).
The activities of the GRC and the FSVC are set out on pages 161 to 163 of the Annual Report and Accounts 2018.
Executive accountability for the ongoing monitoring, assessment and management of the risk environment, and the effectiveness of the risk management framework resides with the Group Chief Risk Officer. He is supported by the Risk Management Meeting (‘RMM’) of the Group Management Board.
The management of financial crime risk resides with the Group Chief Compliance Officer. He is supported by the Financial Crime Risk Management Meeting.
Further information is available on page 85 of the Annual Report and Accounts 2018.
Day-to-day responsibility for risk management is delegated to senior managers with individual accountability for decision making. These senior managers are supported by global functions. All employees have a role to play in risk management. These roles are defined using the three lines of defence model, which takes into account the Group’s business and functional structures.
Our executive risk governance structures 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 75 of the Annual Report and Accounts 2018.
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. In HSBC, risk appetite is managed through a global risk appetite framework and articulated in a risk appetite statement (‘RAS’), which is approved biannually by the Board on the advice of the GRC.
The Group‘s risk appetite informs our strategic and financial planning process, defining the desired forward-looking risk profile of the Group. It is also integrated within other risk management tools, such as the top and emerging risks report and stress testing, to ensure consistency in risk management.
Information about our risk management tools is set out on page 74 of the Annual Report and Accounts 2018. Details of the Group’s overarching risk appetite are set out on page 69 of the Annual Report and Accounts 2018.
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.

HSBC Holdings plc Pillar 3 2018
6


Pillar 3 Disclosures at 31 December 2018

Further information about stress testing and details of the Group’s regulatory stress test results are set out on page 76 of the Annual Report and Accounts 2018.
Global Risk function
We have a dedicated Global Risk function, headed by the Group Chief Risk Officer, which is responsible for the Group‘s risk management framework. This includes establishing global policy, monitoring risk profiles, and forward-looking risk identification and management. Global Risk is made up of sub-functions covering all risks to our operations. It is independent from the global businesses, including sales and trading functions, helping to ensure balance in risk/return decisions. The Global Risk function operates in line with the three lines of defence model.
For further information see page 74 of the Annual Report and Accounts 2018.
Risk management and internal control systems
The Directors are responsible for maintaining and reviewing the effectiveness of risk management and internal control systems, and for determining the aggregate level and risk types they are willing to accept in achieving the Group’s business objectives. On behalf of the Board, the GAC has responsibility for oversight of risk management and internal controls over financial reporting, and the GRC has responsibility for oversight of risk management and internal controls other than for financial reporting.
The Directors, through the GRC and the GAC, conduct an annual review of the effectiveness of our system of risk management and internal control. The GRC and the GAC received confirmation that executive management has taken or is taking the necessary actions to remedy any failings or weaknesses identified through the operation of our framework of controls.
HSBC’s key risk management and internal control procedures are described on page 164 of the Annual Report and Accounts 2018, where the Report of the Directors on the effectiveness of internal controls can also be found.
Risk measurement and reporting systems
Our risk measurement and reporting systems are designed to help ensure that risks are comprehensively captured with all the attributes necessary to support well-founded decisions, that those attributes are accurately assessed, and that information is delivered in a timely manner for those risks to be successfully managed and mitigated.
Risk measurement and reporting systems are also subject to a governance framework designed to ensure that their build and implementation are fit for purpose and functioning appropriately. Risk information systems development is a key responsibility of the Global Risk function, while the development and operation of risk rating and management systems and processes are ultimately subject to the oversight of the Board.
We continue to invest significant resources in IT systems and processes in order to maintain and improve our risk management capabilities. A number of key initiatives and projects to enhance consistent data aggregation, reporting and management, and work towards meeting our Basel Committee data obligations are in progress. Group 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.
Linkage to the Annual Report and Accounts
2018
Structure of the regulatory group
Subsidiaries engaged in insurance activities are excluded from the regulatory consolidation by excluding assets, liabilities and post-acquisition reserves. The Group’s investments in these insurance subsidiaries are recorded at cost and deducted from CET1 capital (subject to thresholds).
The regulatory consolidation also excludes special purpose entities (‘SPEs’) where significant risk has been transferred to third parties. Exposures to these SPEs are risk-weighted as securitisation positions for regulatory purposes.
Participating interests in banking associates are proportionally consolidated for regulatory purposes by including our share of assets, liabilities, profit and loss, and risk-weighted assets in accordance with the PRA’s application of EU legislation. Non-participating significant investments, along with non-financial associates, are deducted from capital (subject to thresholds).

7
HSBC Holdings plc Pillar 3 2018


Table 3: Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation
 
 
Accounting
balance
sheet

Deconsolidation
of insurance/
other entities

Consolidation
of banking
associates

Regulatory
balance
sheet

 
Ref †
$m

$m

$m

$m

Assets
 
 
 
 
 
Cash and balances at central banks
 
162,843

(39
)
191

162,995

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



5,787

Hong Kong Government certificates of indebtedness
 
35,859



35,859

Trading assets
 
238,130

(1,244
)

236,886

Financial assets designated and otherwise mandatorily measured at fair value
 
41,111

(28,166
)
502

13,447

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

(424
)


Derivatives
 
207,825

(70
)
102

207,857

Loans and advances to banks
 
72,167

(1,264
)
1,462

72,365

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



52

Loans and advances to customers
 
981,696

(1,530
)
12,692

992,858

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

(117
)


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


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

(3
)
542

243,343

Financial investments
 
407,433

(61,228
)
3,578

349,783

Capital invested in insurance and other entities
 

2,306


2,306

Prepayments, accrued income and other assets
 
110,571

(5,968
)
247

104,850

– of which: retirement benefit assets
j
7,934



7,934

Current tax assets
 
684

(23
)
26

687

Interests in associates and joint ventures
 
22,407

(398
)
(4,144
)
17,865

– of which: positive goodwill on acquisition
e
492

(13
)

479

Goodwill and intangible assets
e
24,357

(7,281
)

17,076

Deferred tax assets
f
4,450

161

1

4,612

Total assets at 31 Dec 2018
 
2,558,124

(104,747
)
15,199

2,468,576

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



35,859

Deposits by banks
 
56,331

1

229

56,561

Customer accounts
 
1,362,643

2,586

13,790

1,379,019

Repurchase agreements – non-trading
 
165,884



165,884

Items in course of transmission to other banks
 
5,641



5,641

Trading liabilities
 
84,431



84,431

Financial liabilities designated at fair value
 
148,505

(4,347
)
36

144,194

– of which:
 
 
 
 
 
included in tier 1
n
411



411

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



12,499

Derivatives
 
205,835

116

81

206,032

– of which: debit valuation adjustment
i
152



152

Debt securities in issue
 
85,342

(1,448
)

83,894

Accruals, deferred income and other liabilities
 
97,380

(2,830
)
691

95,241

Current tax liabilities
 
718

(22
)
4

700

Liabilities under insurance contracts
 
87,330

(87,330
)


Provisions
 
2,920

(9
)
44

2,955

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



395

Deferred tax liabilities
 
2,619

(1,144
)
1

1,476

Subordinated liabilities
 
22,437

2

323

22,762

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



1,786

included in tier 2
o, q
20,584



20,584

Total liabilities at 31 Dec 2018
 
2,363,875

(94,425
)
15,199

2,284,649

Equity
 
 
 
 
 
Called up share capital
a
10,180



10,180

Share premium account
a, l
13,609



13,609

Other equity instruments
k, l
22,367



22,367

Other reserves
c, g
1,906

1,996


3,902

Retained earnings
b, c
138,191

(11,387
)

126,804

Total shareholders’ equity
 
186,253

(9,391
)

176,862

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

(931
)

7,065

Total equity at 31 Dec 2018
 
194,249

(10,322
)

183,927

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

(104,747
)
15,199

2,468,576

The references (a) – (r) identify balance sheet components that are used in the calculation of regulatory capital in Table 7: Own funds disclosure on page 14.

HSBC Holdings plc Pillar 3 2018
8


Pillar 3 Disclosures at 31 December 2018

Table 3: Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation (continued)
 
 
 
Accounting
balance
sheet

Deconsolidation
of insurance/
other entities

Consolidation
of banking
associates

Regulatory
balance
sheet

 
Ref †
$m

$m

$m

$m

Assets
 
 
 
 
 
Cash and balances at central banks
 
180,624

(38
)
1,174

181,760

Items in the course of collection from other banks
 
6,628


2

6,630

Hong Kong Government certificates of indebtedness
 
34,186



34,186

Trading assets
 
287,995

(359
)
1

287,637

Financial assets designated at fair value
 
29,464

(28,674
)

790

– of which: debt securities eligible as Tier 2 issued by Group FSEs that are outside the regulatory scope of consolidation
r
324

(324
)


Derivatives
 
219,818

(128
)
57

219,747

Loans and advances to banks
 
90,393

(2,024
)
1,421

89,790

– of which: lending to FSEs eligible as Tier 2
r
74



74

Loans and advances to customers
 
962,964

(3,633
)
12,835

972,166

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

(117
)


impairment allowances on IRB portfolios
h
(5,004
)


(5,004
)
Reverse repurchase agreements – non-trading
 
201,553


1,854

203,407

Financial investments
 
389,076

(61,480
)
3,325

330,921

Capital invested in insurance and other entities
 

2,430


2,430

Prepayments, accrued income and other assets
 
67,191

(4,202
)
267

63,256

– of which: retirement benefit assets
j
8,752



8,752

Current tax assets

 
1,006

(5
)

1,001

Interests in associates and joint ventures
 
22,744

(370
)
(4,064
)
18,310

– of which: positive goodwill on acquisition
e
521

(14
)
(1
)
506

Goodwill and intangible assets
e
23,453

(6,937
)

16,516

Deferred tax assets
f
4,676

170


4,846

Total assets at 31 Dec 2017
 
2,521,771

(105,250
)
16,872

2,433,393

Liabilities and equity
 
 
 
 
 
Liabilities
 
 
 
 
 
Hong Kong currency notes in circulation
 
34,186



34,186

Deposits by banks
 
69,922

(86
)
695

70,531

Customer accounts
 
1,364,462

(64
)
14,961

1,379,359

Repurchase agreements – non-trading
 
130,002



130,002

Items in course of transmission to other banks
 
6,850



6,850

Trading liabilities
 
184,361

867


185,228

Financial liabilities designated at fair value
 
94,429

(5,622
)

88,807

– of which:
 
 
 
 
 
included in tier 1
n
459



459

included in tier 2
o, q, i
23,831



23,831

Derivatives
 
216,821

69

51

216,941

– of which: debit valuation adjustment
i
59



59

Debt securities in issue
 
64,546

(2,974
)
320

61,892

Accruals, deferred income and other liabilities
 
45,907

(211
)
622

46,318

Current tax liabilities
 
928

(81
)

847

Liabilities under insurance contracts
 
85,667

(85,667
)


Provisions
 
4,011

(17
)
223

4,217

– of which: credit-related contingent liabilities and contractual commitments on IRB portfolios
h
220



220

Deferred tax liabilities
 
1,982

(1,085
)

897

Subordinated liabilities
 
19,826

1


19,827

– of which:
 
 
 
 
 
included in tier 1
l, n
1,838



1,838

included in tier 2
o, q
17,561



17,561

Total liabilities at 31 Dec 2017
 
2,323,900

(94,870
)
16,872

2,245,902

Equity
 
 
 
 
 
Called up share capital
a
10,160



10,160

Share premium account
a, l
10,177



10,177

Other equity instruments
k, l
22,250



22,250

Other reserves
c, g
7,664

1,236


8,900

Retained earnings
b, c
139,999

(10,824
)

129,175

Total shareholders’ equity
 
190,250

(9,588
)

180,662

Non-controlling interests
d, m, n, p
7,621

(792
)

6,829

Total equity at 31 Dec 2017
 
197,871

(10,380
)

187,491

Total liabilities and equity at 31 Dec 2017
 
2,521,771

(105,250
)
16,872

2,433,393

The references (a) – (r) identify balance sheet components that are used in the calculation of regulatory capital in Table 7: Own funds disclosure on page 14.

9
HSBC Holdings plc Pillar 3 2018


Table 4: Principal entities with a different regulatory and accounting scope of consolidation (LI3)

 
 
 
At 31 Dec 2018
At 31 Dec 2017

Principal activities
Method of accounting consolidation
Method of regulatory consolidation
 
Total
assets

Total
equity

Total
assets

Total
equity


Footnotes
$m

$m

$m

$m

Principal associates
 
 
 
 
 
 
 
 
The Saudi British Bank
Banking services
Equity
Proportional consolidation
1
46,634

8,757

50,417

8,752

Principal insurance entities excluded from the regulatory consolidation
 
 
 
 
 
 
 
 
HSBC Life (International) Ltd
Life insurance manufacturing
 Fully consolidated
 N/A
 
48,144

3,321

45,083

3,679

HSBC Assurances Vie (France)
Life insurance manufacturing
 Fully consolidated
 N/A
 
26,066

808

27,713

843

Hang Seng Insurance Company Ltd
Life insurance manufacturing
 Fully consolidated
 N/A
 
17,356

1,642

16,411

1,403

HSBC Insurance (Singapore) Pte Ltd
Life insurance manufacturing
 Fully consolidated
 N/A
 
4,335

493

4,425

706

HSBC Life (UK) Ltd
Life insurance manufacturing
 Fully consolidated
 N/A
 
2,026

157

2,115

196

HSBC Life Insurance Company Ltd
Life insurance manufacturing
 Fully consolidated
 N/A
 
1,208

70

1,113

87

HSBC Life Assurance (Malta) Ltd
Life insurance manufacturing
 Fully consolidated
 N/A
 
976

58

1,681

61

HSBC Seguros S.A. (Mexico)
Life insurance manufacturing
 Fully consolidated
 N/A
 
796

121

785

120

Principal SPEs excluded from the regulatory consolidation
 
 
 
2
 
 
 
 
Regency Assets Ltd
Securitisation
 Fully consolidated
 N/A
 
6,548


7,466


Mazarin Funding Ltd
Securitisation
 Fully consolidated
 N/A
 
476

(21
)
852

48

Metrix Portfolio Distribution Plc
Securitisation
 Fully consolidated
 N/A
 
296


326


Barion Funding Ltd
Securitisation
 Fully consolidated
 N/A
 
2


424

78

1
Total assets and total equity for 2018 are as at 30 September 2018.
2
These SPEs issued no or de minimis share capital.
Group entities that have different regulatory and accounting scope of consolidation are provided in table 4 with their total assets and total equity, on a stand-alone IFRS basis. The figures shown therefore include intra-Group balances. For associates, table 4 shows the total assets and total equity of the entity as a whole rather than HSBC’s share in the entities’ balance sheets.
For insurance entities, the present value of the in-force long-term insurance business asset of $7.1bn and the related deferred tax liability are only recognised on consolidation in financial reporting, and are therefore not included in the asset or equity positions for the stand-alone entities presented in table 4. In addition, these figures exclude any deferred acquisition cost assets that may be recognised in the entities’ stand-alone financial reporting.
Measurement of regulatory exposures
This section sets out the main reasons why the measurement of regulatory exposures is not directly comparable with the financial information presented in the Annual Report and Accounts 2018.
The Pillar 3 Disclosures at 31 December 2018 are prepared in accordance with regulatory capital adequacy concepts and rules, while the Annual Report and Accounts 2018 are prepared in accordance with IFRSs. The purpose of the regulatory balance sheet is to provide a point-in-time (‘PIT’) value of all on-balance sheet assets.
 
The regulatory exposure value includes an estimation of risk, and is expressed as the amount expected to be outstanding if and when the counterparty defaults.
Moreover, regulatory exposure classes are based on different criteria from accounting asset types and are therefore not comparable on a line by line basis.
The following tables show in two steps how the accounting values in the regulatory balance sheet link to regulatory exposure at default (‘EAD’).
In a first step, table 5 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 6 then shows the main differences between the accounting balances and regulatory exposures by regulatory risk type.

HSBC Holdings plc Pillar 3 2018
10


Pillar 3 Disclosures at 31 December 2018

Table 5: 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
162.8

163.0

163.0





Items in the course of collection from other banks
5.8

5.8

5.8





Hong Kong Government certificates of indebtedness
35.9

35.9

35.9





Trading assets
238.1

236.9


18.3


236.9


Financial assets designated and otherwise mandatorily measured at fair value
41.1

13.4

10.9

1.9

0.6



Derivatives
207.9

207.9


207.1

0.8

207.9


Loans and advances to banks
72.2

72.4

71.4


1.0



Loans and advances to customers
981.7

992.9

969.6

5.6

18.5



Reverse repurchase agreements – non-trading
242.8

243.3


243.3




Financial investments
407.4

349.8

347.8


2.0



Capital invested in insurance and other entities

2.3

1.5




0.8

Prepayments, accrued income and other assets
110.5

104.7

40.0

39.5


47.0

17.7

Current tax assets
0.7

0.7

0.7





Interests in associates and joint ventures
22.4

17.9

11.4




6.5

Goodwill and intangible assets
24.4

17.1





16.9

Deferred tax assets
4.5

4.6

6.8




(2.2
)
Total assets at 31 Dec 2018
2,558.2

2,468.6

1,664.8

515.7

22.9

491.8

39.7

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Hong Kong currency notes in circulation
35.9

35.9





35.9

Deposits by banks
56.4

56.6





56.6

Customer accounts
1,362.6

1,379.0





1,379.0

Repurchase agreements – non-trading
165.9

165.9


165.9




Items in course of transmission to other banks
5.6

5.6





5.6

Trading liabilities
84.4

84.4


11.8


84.4


Financial liabilities designated at FV
148.6

144.2




58.0

86.2

Derivatives
205.9

206.0


206.0


206.0


Debt securities in issue
85.3

83.9





83.9

Accruals, deferred income, and other liabilities
97.4

95.2


41.0


41.0

54.2

Current tax liabilities
0.7

0.7





0.7

Liabilities under insurance contract
87.3







Provisions
2.9

3.0

0.6




2.4

Deferred tax liabilities
2.6

1.5

1.3




2.3

Subordinated liabilities
22.4

22.8





22.8

Total liabilities at 31 Dec 2018
2,363.9

2,284.7

1.9

424.7


389.4

1,729.6



11
HSBC Holdings plc Pillar 3 2018


Table 5: Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with
regulatory risk categories (LI1) (continued)
 
 
 
Carrying value of items
 
Carrying values as reported in published financial statements

Carrying values under scope of regulatory consolidation1

Subject to the credit risk framework

Subject to the counter party credit risk framework2

Subject to the securitisation framework3

Subject to the market risk framework

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

 
$bn

$bn

$bn

$bn

$bn

$bn

$bn

Assets
 
 
 
 
 
 
 
Cash and balances at central banks
180.6

181.8

164.7





Items in the course of collection from other banks
6.6

6.6

6.6





Hong Kong Government certificates of indebtedness
34.2

34.2

34.2





Trading assets
288.0

287.6

2.0

17.1


270.4

15.2

Financial assets designated at fair value
29.5

0.8

0.8





Derivatives
219.8

219.7


218.5

1.2

219.7


Loans and advances to banks
90.4

89.8

98.6

6.6

0.6


1.1

Loans and advances to customers
963.0

972.2

943.7

10.4

13.1


5.0

Reverse repurchase agreements – non-trading
201.6

203.4


203.4




Financial investments
389.1

330.9

324.1


6.5


0.3

Capital invested in insurance and other entities

2.4

1.6




0.8

Current tax assets
1.0

1.0

1.0





Prepayments, accrued income and other assets
67.1

63.4

42.0

3.8

0.1

13.3

6.0

Interests in associates and joint ventures
22.7

18.3

12.9




5.4

Goodwill and intangible assets
23.5

16.5





16.4

Deferred tax assets
4.7

4.8

6.3




(1.5
)
Total assets at 31 Dec 2017
2,521.8

2,433.4

1,638.5

459.8

21.5

503.4

48.7

 
 
 
 
 
 
 
 
Liabilities
 
 
 
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