Document
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 2018
 
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 2017

Contents
 
Page
Introduction
Key metrics
Regulatory framework for disclosures
Pillar 3 disclosures
Regulatory developments
Risk management
Linkage to the Annual Report and Accounts 2017
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
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
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 2017


Tables
 
 
Page

1
Key metrics
3

2
Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation
6

3
Principal entities with a different regulatory and accounting scope of consolidation
9

4
Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories
with regulatory risk categories
10

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

6
Own funds disclosure
14

7
Summary reconciliation of accounting assets and leverage ratio exposures
16

8
Leverage ratio common disclosure
16

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

10
Overview of RWAs
18

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

12
RWA flow statements of CCR exposures under IMM
19

13
RWA flow statements of market risk exposures under IMA
19

14
Credit quality of exposures by exposure classes and instruments
21

15
Credit quality of exposures by industry or counterparty types
22

16
Credit quality of exposures by geography¹
22

17
Ageing of past-due unimpaired and impaired exposures
23

18
Non-performing and forborne exposures
23

19
Credit risk exposure – summary
24

20
Geographical breakdown of exposures
25

21
Concentration of exposures by industry or counterparty types
26

22
Maturity of on-balance sheet exposures
28

23
Amount of impaired exposures and related allowances, broken down by geographical region
29

24
Movement in specific credit risk adjustments by industry and geographical region
29

25
Credit risk mitigation techniques – overview¹
31

26
Standardised approach – credit conversion factor (‘CCF’) and credit risk mitigation (‘CRM’) effects
32

27
Standardised approach – exposures by asset class and risk weight
33

28
IRB – Effect on RWA of credit derivatives used as CRM techniques
33

29
Credit derivatives exposures
34

30
Wholesale IRB credit risk models
37

31
IRB models – estimated and actual values (wholesale)¹
38

32
IRB models – corporate PD models – performance by CRR grade
38

33
Material retail IRB risk rating systems
41

34
IRB models – estimated and actual values (retail)
44

35
Wholesale IRB exposure – back-testing of probability of default (PD) per portfolio¹
46

 
 
 
 
 
 
Page

36
Retail IRB exposure – back-testing of probability of default (PD) per portfolio¹
48

37
Counterparty credit risk exposure – by exposure class, product and geographical region
51

38
Counterparty credit risk – RWAs by exposure class, product and geographical region
52

39
Securitisation exposure – movement in the year
55

40
Securitisation – asset values and impairments
55

41
Market risk under standardised approach
56

42
Market risk under IMA
56

43
IMA values for trading portfolios
59

44
Prudential valuation adjustments
60

45
Operational risk RWAs
61

46
Non-trading book equity investments
63

47
Level and components of HSBC Group Consolidated Liquidity Coverage Ratio
66

48
Analysis of on-balance sheet encumbered and unencumbered assets
67

49
Wholesale IRB exposure – by obligor grade
70

50
PD, LGD, RWA and exposure by country
72

51
Retail IRB exposure – by internal PD band
86

52
IRB expected loss and CRAs – by exposure class
87

53
Credit risk exposure – by geographical region
88

54
Credit risk RWAs – by geographical region
90

55
IRB exposure – credit risk mitigation
91

56
Standardised exposure – credit risk mitigation
92

57
Standardised exposure – by credit quality step
92

58
Changes in stock of general and specific credit risk adjustments
93

59
Changes in stock of defaulted loans and debt securities
93

60
IRB – Credit risk exposures by portfolio and PD range
94

61
Specialised lending on slotting approach¹
100

62
Analysis of counterparty credit risk (CCR) exposure by approach (excluding centrally cleared exposures)
100

63
Credit valuation adjustment (CVA) capital charge
100

64
Standardised approach – CCR exposures by regulatory portfolio and risk weights
101

65
IRB – CCR exposures by portfolio and PD scale
102

66
Impact of netting and collateral held on exposure values
104

67
Composition of collateral for CCR exposure
104

68
Exposures to central counterparties
104

69
Securitisation exposures in the non-trading book
105

70
Securitisation exposures in the trading book
105

71
Securitisation exposures in the non-trading book and associated capital requirements – bank acting as originator or sponsor
106

72
Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor
108

73
Asset encumbrance
110



HSBC Holdings plc Pillar 3 2017
2


Pillar 3 Disclosures at 31 December 2017

Introduction
Table 1: Key metrics
 
 
 
At 31 Dec

 
 
Footnotes
2017

 
Available capital ($bn)
1
 
1
Common equity tier 1 (‘CET1’) capital
 
126.1

2
Tier 1 capital
 
151.0

3
Total regulatory capital
 
182.4

 
Risk-weighted assets (‘RWAs’) ($bn)
 
 
4
Total RWAs
 
871.3

 
Capital ratios (%)
 
 
5
CET1
 
14.5

6
Total tier 1
 
17.3

7
Total capital
 
20.9

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


 
 
8
Capital conservation buffer requirement

 
1.25

9
Countercyclical buffer requirement

 
0.22

10
Bank G-SIB and/or D-SIB additional requirements

 
1.25

11
Total of bank CET1 specific buffer requirements

 
2.72

12
CET1 available after meeting the bank’s minimum capital requirements
 
8.0

 
Leverage ratio
 
 
13
Total leverage ratio exposure measure ($bn)

 
2,557.1

14
Leverage ratio (%)
2
5.6

 
Liquidity Coverage Ratio (‘LCR’)

 
 
15
Total high-quality liquid assets ($bn)
 
512.6

16
Total net cash outflow ($bn)
 
359.9

17
LCR ratio (%)
3
142.2

1
Capital figures are reported on a transitional basis.
2
Leverage ratio is calculated on a fully phased-in basis.
3
LCR ratio is calculated as at 31 December 2017.
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 2017 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 2017 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 December 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 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, analytical review of variances and ‘flow’ tables for capital requirements.
Key ratios and figures are reflected throughout the Pillar 3 disclosures at December 2017 and a summary is presented in Table 1. 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.
We publish comprehensive Pillar 3 disclosures annually on the HSBC website www.hsbc.com, concurrently with the release of our Annual Report and Accounts 2017. A separate Pillar 3 document is also published at half-year following our Interim Report disclosure. Quarterly earnings releases also include regulatory information in line with the new requirements 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 2017 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
Basel Committee
In December, the Basel Committee (‘Basel’) published the revisions to the Basel III framework (sometimes referred to as ‘Basel IV’). 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 risk-weighted assets 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 institutions (‘G-SIB’). This will take the form of a tier 1 capital buffer set at 50% of the G-SIB’s RWAs capital buffer.
Basel has announced that the package will be implemented on 1 January 2022, with a five-year transitional provision for the output floor from that date, commencing at a rate of 50%.
HSBC is currently evaluating the final package. Given that the package contains a significant number of national discretions and that Basel has committed to re-calibrate the market risk elements

3
HSBC Holdings plc Pillar 3 2017


of the final framework during 2018, significant uncertainty remains as to the impact.
In all instances, the final standards will have to be transposed into the relevant local law before coming into effect. In addition, during 2017, Basel proposed other revisions to the regulatory capital framework. In particular, it published:
a discussion paper on the treatment of sovereign exposures;
the final guidelines 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
proposals to revise the G-SIB assessment framework.
Financial Stability Board
In July, 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. In addition, the FSB published consultations on other outstanding issues related to its resolution framework. Again, these need to be incorporated into the relevant local law before coming into effect.
European Union
In the EU, elements of Basel’s and the FSB’s reforms are being implemented through revisions to the Capital Requirements Regulation and Capital Requirements Directive (collectively referred to as ‘CRR2’) and the EU resolution framework. The key components of CRR2 include changes to the market risk framework under the Fundamental Review of the Trading Book, changes to the counterparty credit risk framework and a binding leverage ratio. 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’). The CRR2 changes are expected to be finalised in 2018 and apply from 1 January 2021, although certain elements, such as MREL, are expected to apply from 1 January 2019.
In December, the EU’s IFRS 9 transitional capital arrangements were published formally and the EBA published its final guidelines on the IFRS 9 disclosures. Separately, the final changes to the capital rules on securitisation were also published formally by the EU with implementation expected on 1 January 2019 for new transactions and on 1 January 2020 for existing positions. In addition, during 2017, the EBA published a consultation on the methods of prudential consolidation under the EU’s rules.
Also in December, in line with the EU’s rules, the requirement to have a Basel I floor lapsed and the PRA confirmed that its application is no longer required. A new output floor will be implemented as part of the Basel IV amendments.
Bank of England
In March, HSBC received from the Bank of England (‘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 confirmed formally that ‘multiple-point-of-entry’ (‘MPE’) is the preferred resolution strategy for HSBC. In May, the BoE published the quantum of MREL requirements for major UK banks.
In addition, during 2017, the BoE and the PRA proposed other revisions to the regulatory capital and MREL frameworks. In particular, they published proposals and/or final rules setting out:
the approach to setting internal MREL and the setting of MREL for MPE groups;
the interaction of MREL with both the capital and leverage ratio buffers;
 
changes to the groups and double leverage policy;
the policy refining the PRA’s Pillar 2A capital requirements and disclosure; and
the policy to ensure that valuation processes do not impede resolvability.
The PRA also published its final rules on the exclusion of claims on central banks from the UK leverage ratio framework and the re-calibration of the minimum leverage ratio for HSBC from 3% to 3.25% of tier 1 capital. These changes took effect in October 2017.
Lastly, in June, the Financial Policy Committee raised the countercyclical buffer rate for UK exposures to 0.5%, to apply from June 2018 and in November, increased it further to 1% with binding effect from November 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 an integrated evaluation of risks and their interactions. 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 106 of the Annual Report and Accounts 2017. The management and mitigation of principal risks facing the Group is described in our top and emerging risks on page 95 of the Annual Report and Accounts 2017.
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(e) on page 227 of the Annual Report and Accounts 2017.
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 95 and 203 of the Annual Report and Accounts 2017.
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’), the Financial System Vulnerabilities Committee (‘FSVC’) and the Conduct and Values Committee (‘CVC’). The activities of the GRC, FSVC and CVC are set out on pages 175 to 177 of the Annual Report and Accounts 2017.
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.

HSBC Holdings plc Pillar 3 2017
4


Pillar 3 Disclosures at 31 December 2017

The management of financial crime risk resides with the Group Head of Financial Crime Risk. He is supported by the Financial Crime Risk Management Meeting, as described on page 118 of the Annual Report and Accounts 2017.
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 (see page 107 of the Annual Report and Accounts 2017).
Our executive risk governance structures ensure appropriate oversight and accountability for risk, which facilitates the reporting and escalation to the RMM (see page 107 of the Annual Report and Accounts 2017).
Risk appetite
Risk appetite is a key component of our management of risk. It describes the aggregate level and risk types that we are willing to accept in achieving our medium to long-term business objectives. 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 on our risk management tools is set out on page 107 of the Annual Report and Accounts 2017. Details on the Group’s overarching risk appetite are set out on page 95 of the Annual Report and Accounts 2017.
Stress testing
HSBC operates a comprehensive stress testing programme that supports our risk management and capital planning. It includes execution of stress tests mandated by our regulators. Our stress testing is supported by dedicated teams and infrastructure.
Our testing programme assesses our capital strength and enhances our resilience to external shocks. It also helps us understand and mitigate risks, and informs our decision about capital levels. As well as taking part in regulatory driven stress tests, we conduct our own internal stress tests.
The Group stress testing programme is overseen by the GRC, and results are reported, where appropriate, to the RMM and GRC.
Further information on stress testing and details of the Group’s regulatory stress test results are set out on page 109 of the Annual Report and Accounts 2017.
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 (see page 107 of the Annual Report and Accounts 2017).
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 178 of the Annual Report and Accounts 2017, where the Directors’ Report 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 policy promotes the deployment of preferred technology where practicable. 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 such matters as risk governance and oversight, compliance risks, approval authorities and lending guidelines, global and local scorecards, management information and reporting, and relations with third parties, including regulators, rating agencies and auditors.
Risk analytics and model governance
The Global Risk function manages a number of analytics disciplines supporting model development and management, including rating, scoring, economic capital and stress testing models for different risk types and business segments. It formulates 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.
Model governance is under the general oversight of the Global Model Oversight Committee (‘MOC’). The Global MOC is supported by specific global functional MOCs for wholesale credit risk, market risk, Retail Banking and Wealth Management (‘RBWM’), Global Private Banking (‘GPB’), Finance, regulatory compliance, operational risk, fraud risk and financial intelligence, pensions risk and financial crime risk, and has functional and/or regional and entity-level counterparts with comparable terms of reference where required.

5
HSBC Holdings plc Pillar 3 2017


The Global MOC meets regularly and reports to RMM. It is chaired by the Global Risk function, and its membership is drawn from Risk, Finance and global businesses. Its primary responsibilities are to oversee the framework for the management of model risk, bring a strategic approach to model-related issues across the Group, and to oversee the governance of our risk rating models, their consistency and approval, within the regulatory framework. 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 model review and validation process led by the Independent Model Review team within Global Risk. The Independent Model Review team provides robust challenge to the modelling approaches used across the Group, and 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
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. 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).
Table 2: Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation
 
 
Accounting
balance
sheet

Deconsolidation
of insurance/
other entities

Consolidation
of banking
associates

Regulatory
balance
sheet

 
Ref †
$m

$m

$m

$m

Assets
 
 
 
 
 
Cash and balances at central banks
 
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

Derivatives
 
219,818

(128
)
57

219,747

Loans and advances to banks
 
90,393

(2,024
)
1,421

89,790

Loans and advances to customers
 
962,964

(3,633
)
12,835

972,166

– of which: 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
i
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


HSBC Holdings plc Pillar 3 2017
6


Pillar 3 Disclosures at 31 December 2017

 
 
Accounting
balance
sheet

Deconsolidation
of insurance/
other entities

Consolidation
of banking
associates

Regulatory
balance
sheet

 
Ref †
$m

$m

$m

$m

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
m
459



459

included in tier 2
n, q
23,831



23,831

Derivatives
 
216,821

69

51

216,941

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
k, m
1,838



1,838

included in tier 2
n, 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, k
10,177



10,177

Other equity instruments
j, k
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, l, m, p
7,621

(792
)

6,829

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




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) – (q) identify balance sheet components that are used in the calculation of regulatory capital on page 14.
Table 2: 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

Capital invested in insurance and other entities
 

2,214


2,214

Prepayments, accrued income and other assets
 
63,909

(3,073
)
306

61,142

– 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


7
HSBC Holdings plc Pillar 3 2017


 
 
Accounting
balance
sheet

Deconsolidation
of insurance/
other entities

Consolidation
of banking
associates

Regulatory
balance
sheet

 
Ref †
$m

$m

$m

$m

Liabilities and equity
 
 
 
 
 
Liabilities
 
 
 
 
 
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



23,172

Derivatives
 
279,819

193

64

280,076

Debt securities in issue
 
65,915

(3,547
)
662

63,030

Accruals, deferred income and other liabilities
 
44,291

1,810

495

46,596

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

Equity
 
 
 
 
 
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

The references (a) – (q) identify balance sheet components that are used in the calculation of regulatory capital on page 14.

HSBC Holdings plc Pillar 3 2017
8


Pillar 3 Disclosures at 31 December 2017

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

 
 
 
At 31 Dec 2017
At 31 Dec 2016

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

Total
equity

Total
assets

Total
equity


Footnote
$m

$m

$m

$m

Principal associates
 
 
 
 
 
 
 
 
The Saudi British Bank
Banking services
Equity
Proportional consolidation
 
50,417

8,752

49,784

8,202

Principal insurance entities excluded from the regulatory consolidation
 
 
 
 
 
 
 
 
HSBC Life (International) Ltd
Life insurance manufacturing
Fully consolidated
N/A
 
45,083

3,679

39,346

2,838

HSBC Assurances Vie (France)
Life insurance manufacturing
Fully consolidated
N/A
 
27,713

843

23,418

721

Hang Seng Insurance Company Ltd
Life insurance manufacturing
Fully consolidated
N/A
 
16,411

1,403

15,225

1,107

HSBC Insurance (Singapore) Pte Ltd
Life insurance manufacturing
Fully consolidated
N/A
 
4,425

706

3,589

360

HSBC Life (UK) Ltd
Life insurance manufacturing
Fully consolidated
N/A
 
2,115

196

1,678

158

HSBC Life Assurance (Malta) Ltd
Life insurance manufacturing
Fully consolidated
N/A
 
1,681

61

1,747

54

HSBC Life Insurance Company Ltd
Life insurance manufacturing
Fully consolidated
N/A
 
1,113

87

864

85

HSBC Seguros S.A. (Mexico)
Life insurance manufacturing
Fully consolidated
N/A
 
785

120

716

118

Principal SPEs excluded from the regulatory consolidation
 
 
 
1
 
 
 
 
Regency Assets Ltd
Securitisation
Fully consolidated
N/A
 
7,466


7,380


Mazarin Funding Ltd
Securitisation
Fully consolidated
N/A
 
852

48

1,117

12

Barion Funding Ltd
Securitisation
Fully consolidated
N/A
 
424

78

653

56

Metrix Portfolio Distribution Plc
Securitisation
Fully consolidated
N/A
 
326


333


1
These SPEs issued no or de minimis share capital.
Table 3 also presents the total assets and total equity, on a stand-alone IFRS basis, of the entities which are included in the Group consolidation on different bases for accounting and regulatory purposes. The figures shown therefore include intra-Group balances. For associates, table 3 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 $6.6bn 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 3. 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 2017.
The Pillar 3 Disclosures at December 2017 are prepared in accordance with regulatory capital adequacy concepts and rules, while the Annual Report and Accounts 2017 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 4 shows the difference between the accounting and regulatory scope of consolidation, and a breakdown of the accounting balances into the risk types that form the basis for regulatory capital requirements. Table 5 then shows the main differences between the accounting balances and regulatory exposures by regulatory risk type.

9
HSBC Holdings plc Pillar 3 2017


Table 4: Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with
regulatory risk categories
 
 
 
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
 
 
 
 
 
 
 
Hong Kong currency notes in circulation
34.2

34.2





34.2

Deposits by banks
69.9

70.5





70.5

Customer accounts
1,364.5

1,379.4





1,379.4

Repurchase agreements – non trading
130.0

130.0


130.0




Items in course of transmission to other banks
6.9

6.9





6.9

Trading liabilities
184.4

185.2


10.6


172.2

13.0

Financial liabilities designated at FV
94.4

88.8





88.8

Derivatives
216.8

216.9


216.9


216.9


Debt securities in issue
64.5

61.9





61.9

Current tax liabilities
0.9

0.8





0.8

Liabilities under insurance contract
85.7







Accruals, deferred income, and other liabilities
45.9

46.3





46.3

Provisions
4.0

4.2

0.3




3.9

Deferred tax liabilities
2.0

0.9

1.3




1.7

Subordinated liabilities
19.8

19.9





19.9

Total liabilities at 31 Dec 2017
2,323.9

2,245.9

1.6

357.5


389.1

1,727.3



HSBC Holdings plc Pillar 3 2017
10


Pillar 3 Disclosures at 31 December 2017

Table 4: Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories
with regulatory risk categories (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
128.0

129.2

129.2





Items in the course of collection from other banks
5.0

5.0

5.0





Hong Kong Government certificates of indebtedness
31.2

31.2

31.2





Trading assets
235.1

234.9

8.4

11.3


208.7

17.6

Financial assets designated at fair value
24.8

0.3

0.3





Derivatives
290.9

290.8


289.9

0.9

290.8


Loans and advances to banks
88.1

87.2

76.3

2.0

1.2


7.7

Loans and advances to customers
861.5

871.1

847.4

8.9

10.8


4.0

Reverse repurchase agreements – non-trading
161.0

162.8


162.4

0.4



Financial investments
436.8

385.4

375.8


9.5


0.1

Capital invested in insurance and other entities

2.2

1.4




0.8

Current tax assets
1.1

1.0

1.0





Prepayments, accrued income and other assets
63.9

61.2

42.4

3.9


8.2

6.7

Interests in associates and joint ventures
20.0

15.8

10.3




5.5

Goodwill and intangible assets
21.3

15.2





15.2

Deferred tax assets
6.2

6.3

5.2




1.1

Total assets at 31 Dec 2016
2,374.9

2,299.6

1,533.9

478.4

22.8

507.7

58.7

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Hong Kong currency notes in circulation
31.2

31.2





31.2

Deposits by banks
59.9

60.3





60.3

Customer accounts
1,272.4

1,287.3





1,287.3

Repurchase agreements – non trading
89.0

89.0


89.0




Items in course of transmission to other banks
6.0

6.0





6.0

Trading liabilities
153.7

154.3


5.1


139.1

15.2

Financial liabilities designated at FV
86.8

80.8





80.8

Derivatives
279.8

280.1


280.1


280.1


Debt securities in issue
65.9

63.0





63.0

Current tax liabilities
0.7

0.7





0.7

Liabilities under insurance contract
75.3

0.0






Accruals, deferred income, and other liabilities
44.3

46.7





46.7

Provisions
4.8

4.8

0.3




4.5

Deferred tax liabilities
1.6

0.6

0.6





Subordinated liabilities
21.0

21.0





21.0

Total liabilities at 31 Dec 2016
2,192.4

2,125.8

0.9

374.2


419.2

1,616.7

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

11
HSBC Holdings plc Pillar 3 2017


Table 5: Main sources of differences between regulatory exposure amounts and carrying values in financial statements
 
 
Items subject to:
 
 
Total

Credit risk framework

CCR framework

Securitisation framework

 
$bn

$bn

$bn

$bn

Carrying value of assets within scope of regulatory consolidation1
2,384.7

1,638.5

459.8

21.5

Carrying value of liabilities within scope of regulatory consolidation1
520.7

1.6

357.5


Net carrying value within scope of regulatory consolidation
1,864.0

1,636.9

102.3

21.5

Off-balance sheet amounts and potential future exposure for counterparty risk
801.7

271.0

135.2

15.3

Differences in netting rules
10.4

9.3

1.1



Differences due to financial collateral on standardised approach
(14.7
)
(14.7
)




Differences due to impairments on IRB approach
4.7

4.7





Differences due to EAD modelling and other differences
3.3

5.0

 
(1.7
)
Differences due to credit risk mitigation
(71.1
)
 
(71.1
)
 
Exposure values considered for regulatory purposes at 31 Dec 2017
2,598.3

1,912.2

167.5

35.1

1
Excludes amounts subject to deduction from capital or not subject to regulatory capital requirements.

Explanations of differences between accounting and regulatory exposure amounts
Off-balance sheet amounts and potential future exposure for counterparty risk (CCR)
Off-balance sheet amounts subject to credit risk and securitisation regulatory frameworks include undrawn portions of committed facilities, various trade finance commitments and guarantees, by applying a credit conversion factor (‘CCF’) to these items and consideration of potential future exposures (‘PFE’) for counterparty risk.
Differences in netting rules
Under IFRS, netting is only permitted if legal right of set-off exists and the cash flows are intended to be settled on a net basis. Under the PRA’s regulatory rules, however, netting is applied for capital calculations if there is legal certainty and the positions are managed on a net collateralised basis. As a consequence, we recognise greater netting under the PRA’s rules, reflecting the close-out provisions that would take effect in the event of default of a counterparty rather than just those transactions that are actually settled net in the normal course of business.
Differences due to financial collateral
Exposure value under the standardised approach is calculated after deducting credit risk mitigation whereas accounting value is before such deductions.
Differences due to impairments
The carrying value of assets is net of credit risk adjustments. The regulatory exposure value under IRB approaches is before deducting credit risk adjustments.
Differences due to EAD modelling
The carrying value of assets is usually measured at amortised cost or fair value as at the balance sheet date. For certain IRB models, the exposure value used as EAD is the projected value one year hence.
 
Differences due to credit risk adjustments
In counterparty credit risk, differences arise between accounting carrying values and regulatory exposure as a result of the application of credit risk mitigation and the use of modelled exposures.
Explanation of differences between accounting fair value and regulatory prudent valuation
Fair value is defined as the best estimate of the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Some fair value adjustments already reflect valuation uncertainty to some degree. These are market data uncertainty, model uncertainty and concentration adjustments.
However, it is recognised that a variety of valuation techniques using stressed assumptions and combined with the range of plausible market parameters at a given point in time may still generate unexpected uncertainty beyond fair value.
A series of additional valuation adjustments (‘AVAs’) are therefore required to reach a specified degree of confidence (the ‘Prudent Value’) set by regulators that differs both in terms of scope and measurement from HSBC’s own quantification for disclosure purposes.
AVAs should consider at the minimum: market price uncertainty, bid/offer (close out) uncertainty, model risk, concentration, administrative cost, unearned credit spreads (‘CVA’) and investing and funding costs (‘FFVA’).
AVAs are not limited to level 3 exposures, for which a 95% uncertainty range is already computed and disclosed, but must also be calculated for any exposure for which the exit price cannot be determined with a high degree of certainty.

HSBC Holdings plc Pillar 3 2017
12


Pillar 3 Disclosures at 31 December 2017

Capital and RWAs
Capital management
Approach and policy
Our approach to capital management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim to maintain a strong capital base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory capital requirements at all times.
Our capital management process culminates in the annual Group capital plan, which is approved by the Board. HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings’ issuance of equity and non-equity capital and by profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a balance between the composition of its capital and its investment in subsidiaries. Subject to the above, there is no current or foreseen impediment to HSBC Holdings’ ability to provide such investments.
Each subsidiary manages its own capital to support its planned business growth and meet its local regulatory requirements within the context of the Group capital plan. Capital generated by subsidiaries in excess of planned requirements is returned to HSBC Holdings, normally by way of dividends, in accordance with the Group’s capital plan.
During 2017, consistent with the Group’s capital plan, the Group’s subsidiaries did not experience any significant restrictions on
 
paying dividends or repaying loans and advances, and none are envisaged with regard to planned dividends or payments. However, the ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial and operating performance. None of our subsidiaries that are excluded from the regulatory consolidation have capital resources below their minimum regulatory requirement. HSBC Holdings has not entered into any Group Financial Support Agreements pursuant to the application of early intervention measures under the Bank Recovery and Resolution Directive.
All capital securities included in the capital base of HSBC have either been issued as fully compliant CRD IV securities (on an end point basis) or in accordance with the rules and guidance in the PRA’s previous General Prudential Sourcebook, which are included in the capital base by virtue of application of the CRD IV grandfathering provisions. The main features of capital securities issued by the Group, categorised as tier 1 (‘T1’) capital and tier 2 (‘T2’) capital, are set out on the HSBC website, www.hsbc.com.
The values disclosed are the IFRS balance sheet carrying amounts, not the amounts that these securities contribute to regulatory capital. For example, the IFRS accounting and the regulatory treatments differ in their approaches to issuance costs, regulatory amortisation and regulatory eligibility limits prescribed in the grandfathering provisions under CRD IV.
A list of the features of our capital instruments in accordance with Annex III of Commission Implementing Regulation 1423/2013 is also published on our website with reference to our balance sheet on 31 December 2017. This is in addition to the full terms and conditions of our securities, also available on our website.
For further details of our approach to capital management, please see page 162 of the Annual Report and Accounts 2017.


13
HSBC Holdings plc Pillar 3 2017


Own funds
Table 6: Own funds disclosure
 
 
 
At
31 Dec
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
 
18,932

 
18,932

 
– ordinary shares
a
18,932

 
18,932

2
Retained earnings
b
124,679

 
124,679

3
Accumulated other comprehensive income (and other reserves)
c
9,433

 
9,433

5
Minority interests (amount allowed in consolidated CET1)
d
4,905

 
4,905

5a
Independently reviewed interim net profits net of any foreseeable charge or dividend
b
608

 
608

6
Common equity tier 1 capital before regulatory adjustments
 
158,557

 
158,557

 
Common equity tier 1 capital: regulatory adjustments
 
 
 
 
7
Additional value adjustments
 
(1,146
)
 
(1,146
)
8
Intangible assets (net of related deferred tax liability)
e
(16,872
)
 
(16,872
)
10
Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)
f
(1,181
)
 
(1,181
)
11
Fair value reserves related to gains or losses on cash flow hedges
g
208

 
208

12
Negative amounts resulting from the calculation of expected loss amounts
h
(2,820
)
 
(2,820
)
14
Gains or losses on liabilities valued at fair value resulting from changes in own credit standing

3,731

 
3,731

15
Defined benefit pension fund assets
i
(6,740
)
 
(6,740
)
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)
 
(7,553
)
 
(7,553
)
28
Total regulatory adjustments to common equity tier 1
 
(32,413
)

(32,413
)
29
Common equity tier 1 capital
 
126,144


126,144

 
Additional tier 1 (‘AT1’) capital: instruments
 
 
 
 
30
Capital instruments and the related share premium accounts
 
16,399


16,399

31
– classified as equity under IFRSs
j
16,399


16,399

33
Amount of qualifying items and the related share premium accounts subject to phase out
from AT1
k
6,622

(6,622
)

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
1,901

(1,709
)
192

35
– of which: instruments issued by subsidiaries subject to phase out
m
1,374

(1,374
)

36
Additional tier 1 capital before regulatory adjustments
 
24,922

(8,331
)
16,591

 
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
 
(52
)
52


 
– 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
 
(52
)
52


43
Total regulatory adjustments to additional tier 1 capital
 
(112
)
52

(60
)
44
Additional tier 1 capital
 
24,810

(8,279
)
16,531

45
Tier 1 capital (T1 = CET1 + AT1)
 
150,954

(8,279
)
142,675

 
Tier 2 capital: instruments and provisions
 
 
 
 
46
Capital instruments and the related share premium accounts
n
16,880

 
16,880

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

(4,746
)

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
10,306

(10,218
)
88

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

(10,236
)

51
Tier 2 capital before regulatory adjustments
 
31,932

(14,964
)
16,968

 
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)
 
(463
)
(52
)
(515
)
57
Total regulatory adjustments to tier 2 capital
 
(503
)
(52
)
(555
)
58
Tier 2 capital
 
31,429

(15,016
)
16,413

59
Total capital (TC = T1 + T2)
 
182,383

(23,295
)
159,088


HSBC Holdings plc Pillar 3 2017
14


Pillar 3 Disclosures at 31 December 2017

Table 6: Own funds disclosure (continued)
 
 
 
At
31 Dec
2017

CRD IV
prescribed
residual
amount

Final
CRD IV
text

Ref*
 
Ref †
$m

$m

$m

60
Total risk-weighted assets
 
871,337


871,337

 
Capital ratios and buffers
 
 
 
 
61
Common equity tier 1
 
14.5%

 
14.5%

62
Tier 1
 
17.3%

 
16.4%

63
Total capital
 
20.9%

 
18.3%

64
Institution specific buffer requirement
 
2.72%

 
 
65
– capital conservation buffer requirement
 
1.25%

 
 
66
– counter-cyclical buffer requirement
 
0.22%

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

 
 
68
Common equity tier 1 available to meet buffers
 
8.0%

 
 
 
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)
 
4,473

 
 
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)
 
13,370

 
 
75
Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability)
 
5,004

 
 
 
Applicable caps on the inclusion of provisions in tier 2
 
 
 
 
77
Cap on inclusion of credit risk adjustments in T2 under standardised approach
 
2,193

 
 
79
Cap for inclusion of credit risk adjustments in T2 under internal ratings-based approach
 
3,150

 
 
 
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)
 
5,290

 
 
*
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 6 which are used in the calculation of regulatory capital.
CET1 capital increased during the year by $9.5bn, due to:
$3.7bn of capital generated through profits, net of dividends and scrip;
$6.3bn of favourable foreign currency translation differences;
regulatory netting of $1.5bn;
a decrease of $1.3bn in the deduction for excess expected loss; and
an increase of $1.0bn in the value of minority interests allowed in CET1.
These increases were partly offset by:
the $3.0bn share buy-back; and
a $1.2bn decrease as a result of the change in US tax legislation; this change also reduces RWAs by $3.1bn.
Leverage ratio
Our leverage ratio calculated in accordance with CRD IV was 5.6% at 31 December 2017, up from 5.4% at 31 December 2016. Growth in tier 1 capital was partly offset by a rise in exposure, primarily due to growth in customer advances, balances at central banks and trading assets.
 
In October 2017, the PRA increased the minimum requirement of the UK leverage ratio from 3% to 3.25%.
At 31 December 2017, our UK minimum leverage ratio requirement of 3.25% 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 $10.3bn and $1.8bn 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 is monitored via the risk appetite profile report, which includes comparisons of actual performance against the risk appetite and tolerance thresholds assigned to each metric, to ensure that any excessive risk is highlighted, assessed and mitigated appropriately. The risk appetite profile report is presented monthly to the RMM and the GRC. Our approach to risk appetite is described on page 95 of the Annual Report and Accounts 2017.

15
HSBC Holdings plc Pillar 3 2017


Table 7: Summary reconciliation of accounting assets and leverage ratio exposures
 
 
At 31 Dec
 
 
2017

2016

Ref*
 
$bn

$bn

1
Total assets as per published financial statements
2,521.8

2,375.0

 
Adjustments for:
 
 
2
– entities which are consolidated for accounting purposes but are outside the scope of regulatory consolidation
(88.4
)
(75.4
)
4
– derivative financial instruments
(91.0
)
(158.6
)
5
– securities financing transactions (‘SFT’)
12.2

10.1

6
– off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)
227.4

223.1

7
– other
(24.9
)
(19.8
)
8
Total leverage ratio exposure
2,557.1

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 8: Leverage ratio common disclosure
 
 
At 31 Dec
 
 
2017

2016

Ref*
 
$bn

$bn

 
On-balance sheet exposures (excluding derivatives and SFT)
 
 
1
On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral)
1,998.7

1,844.4

2
(Asset amounts deducted in determining tier 1 capital)
(35.3
)
(34.4
)
3
Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets)
1,963.4

1,810.0

 
Derivative exposures
 
 
4
Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)
29.0

43.7

5
Add-on amounts for potential future exposure (‘PFE’) associated with all derivatives transactions (mark-to-market method)
125.5

110.2

6
Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to IFRSs
5.2

5.9

7
(Deductions of receivables assets for cash variation margin provided in derivatives transactions)
(23.6
)
(30.6
)
8
(Exempted central counterparty (‘CCP’) leg of client-cleared trade exposures)
(14.0
)
(4.1
)
9
Adjusted effective notional amount of written credit derivatives
188.2

216.4

10
(Adjusted effective notional offsets and add-on deductions for written credit derivatives)
(181.6
)
(209.3
)
11
Total derivative exposures
128.7

132.2

 
Securities financing transaction exposures
 
 
12
Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions
331.2

266.6

13
(Netted amounts of cash payables and cash receivables of gross SFT assets)
(105.8
)
(87.9
)
14
Counterparty credit risk exposure for SFT assets
12.2

10.4

16
Total securities financing transaction exposures
237.6

189.1

 
Other off-balance sheet exposures
 
 
17
Off-balance sheet exposures at gross notional amount
801.7

757.7

18
(Adjustments for conversion to credit equivalent amounts)
(574.3
)
(534.6
)
19
Total off-balance sheet exposures
227.4

223.1

 
Capital and total exposures
 
 
20
Tier 1 capital
142.7

127.3

21
Total leverage ratio exposure
2,557.1

2,354.4

22
Leverage ratio (%)
5.6

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 lines which are applicable and where there is a value.
Table 9: Leverage ratio – Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures)
 
 
At 31 Dec
 
 
2017

2016

Ref*
 
$bn

$bn

EU-1
Total on-balance sheet exposures (excluding derivatives, SFTs, and exempted exposures)
1,998.7

1,844.4

EU-2
trading book exposures
268.6

267.5

EU-3
banking book exposures
1,730.1

1,576.9

 
’banking book exposures’ comprises:
 
 
EU-4
covered bonds
1.3

1.1

EU-5
exposures treated as sovereigns
504.8

504.4

EU-6
exposures to regional governments, multilateral development banks (‘MDB’), international organisations and public sector entities not treated as sovereigns
9.8

6.0

EU-7
institutions
77.0

67.6

EU-8
secured by mortgages of immovable properties
283.4

254.6

EU-9
retail exposures
89.3

84.6

EU-10
corporate
586.0

532.4

EU-11
exposures in default
9.7

12.4

EU-12
other exposures (e.g. equity, securitisations and other non-credit obligation assets)
168.8

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.

HSBC Holdings plc Pillar 3 2017
16


Pillar 3 Disclosures at 31 December 2017

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

 
Pillar 1 minimum capital requirements and RWA flow
Pillar 1 covers the minimum capital resource requirements for credit risk, counterparty credit risk (‘CCR’), equity, securitisation, market risk and operational risk. These requirements are expressed in terms of RWAs.
Risk category
Scope of permissible approaches
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 determining PD and in 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 three approaches to credit risk: 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 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.


17
HSBC Holdings plc Pillar 3 2017


Table 10: Overview of RWAs
 
 
At
 
 
31 Dec

30 Sep

31 Dec

 
 
2017

2017

2017

 
 
RWAs

RWAs

Capital1 
required

 
 
$bn

$bn

$bn

1
Credit risk (excluding counterparty credit risk)
623.9

615.9

50.0

2
– standardised approach
126.9

129.8

10.2

3
– foundation IRB approach
28.4

27.7

2.3

4
– advanced IRB approach
468.6

458.4

37.5

6
Counterparty credit risk
54.1

59.8

4.4

7
– mark-to-market
34.2

37.2

2.7

10
– internal model method
9.7

10.0

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
9.5

11.9

0.8

13
Settlement risk
0.4

0.7


14
Securitisation exposures in the non-trading book
15.3

22.8

1.2

15
– IRB ratings based method
12.0

20.0

1.0

16
– IRB supervisory formula method
0.2

0.2


17
– IRB internal assessment approach
1.5

1.5

0.1

18
– standardised approach
1.6

1.1

0.1

19
Market risk
38.9

42.6

3.1

20
– standardised approach
4.4

4.4

0.3

21
– internal models approach
34.5

38.2

2.8

23
Operational risk
92.7

98.0

7.4

25
– standardised approach
92.7

98.0

7.4

27
Amounts below the thresholds for deduction (subject to 250% risk weight)
46.0

48.8

3.7

29
Total
871.3

888.6

69.8

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 $5.2bn in the fourth quarter, including an increase of $2.8bn due to foreign currency translation differences. The remaining increase of $2.4bn (excluding foreign currency translation differences) was due to:
an increase in asset size of $8.2bn, mainly as a result of corporate and mortgage book growth in Asia;
increases from model updates of $5.6bn, mainly in the UK corporate models; less
savings from RWA initiatives of $11.9bn, principally from process improvements of $4.7bn, refined calculations of $3.3bn, US Consumer and Mortgage Lending (‘CML’) run-off of $2.2bn and exposure reductions of $1.7bn.
 
Counterparty credit risk
RWAs decreased by $5.7bn, primarily as a result of $4.5bn savings from RWA initiatives through the increased use of economic hedging.
Securitisation
RWAs decreased by $7.5bn, mainly as a result of RWA initiatives in the legacy book.
Market risk
RWAs decreased by $3.7bn, primarily as a result of savings achieved from increased diversification in the IMA book.
Operational risk
RWAs decreased by $5.3bn at year-end, mainly as a result of $3.1bn savings realised from RWA initiatives.
Table 11: RWA flow statements of credit risk exposures under the IRB approach1, 2
 
 
RWAs

Capital
required

 
 
$bn

$bn

1
At 1 Oct 2017
486.1

38.9

2
Asset size
5.6

0.4

3
Asset quality
0.1


4
Model updates
6.5

0.6

5
Methodology and policy
(4.2
)
(0.3
)
6
Acquisitions and disposals


7
Foreign exchange movements
2.9

0.2

8
Other


9
At 31 Dec 2017
497.0

39.8

1
This table includes RWA initiatives of $6.8bn allocated across the RWA flow layers to which they relate.
2
Securitisation positions are not included in this table.
RWAs under the IRB approach increased by $10.9bn in the fourth quarter of the year, including an increase of $2.9bn due to foreign currency translation differences.
The remaining increase of $8.0bn (excluding foreign currency translation differences) was principally due to:
an increase in asset size of $5.6bn, principally as a result of corporate and mortgage book growth in Asia;
 
an increase in model updates of $6.5bn, mainly due to corporate model updates in the UK; less
a decrease in methodology and policy of $4.2bn, mainly as a result of RWA initiatives.

HSBC Holdings plc Pillar 3 2017
18


Pillar 3 Disclosures at 31 December 2017

Table 12: RWA flow statements of CCR exposures under the IMM1
 
 
RWAs

Capital
required

 
 
$bn

$bn

1
At 1 Oct 2017
13.3

1.1

2
Asset size
(0.1
)

3
Asset quality
(0.1
)

5
Methodology and policy
(0.6
)

9
At 31 Dec 2017
12.5

1.1

1
This table includes RWA initiatives of $0.7bn allocated across the RWA flow layers to which they relate.
RWAs decreased by $0.8bn mainly as a result of a change in internal policy.
Table 13: RWA flow statements of market risk exposures under the IMA1
 
 
VaR

Stressed
VaR

IRC

Other

Total
RWAs

Total capital required

 
 
$bn

$bn

$bn

$bn

$bn

$bn

1
At 1 Oct 2017
8.0

15.2

12.8

2.2

38.2

3.1

2
Movement in risk levels
1.5

1.4

(1.9
)
(0.3
)
0.7

0.1

3
Model updates/changes

(0.1
)


(0.1
)

4
Methodology and policy
(1.2
)
(2.2
)
(0.9
)

(4.3
)
(0.4
)
8
At 31 Dec 2017
8.3

14.3

10.0

1.9

34.5

2.8

1
This table includes RWA initiatives of $1.9bn allocated across the RWA flow layers to which they relate.
RWAs decreased by $3.7bn due to:
savings of $4.3bn achieved from increased diversification; less
increased risk levels of $0.7bn, mainly as a result of rises in volatility.
Pillar 2 and ICAAP
Pillar 2
We conduct an Internal Capital Adequacy Assessment Process (‘ICAAP’) to determine a forward-looking assessment of our capital requirements given our business strategy, risk profile, risk appetite and capital plan. This process incorporates the Group’s risk management processes and governance framework. Our base capital plan undergoes stress testing. This, coupled with our economic capital framework and other risk management practices, is used to assess our internal capital adequacy requirements and inform our view of our internal capital planning buffer. The ICAAP is formally approved by the Board, which has the ultimate responsibility for the effective management of risk and approval of HSBC’s risk appetite.
The ICAAP is reviewed by the PRA and by a college of EEA supervisors, as part of the Joint Risk Assessment and Decision process, during the supervisory review and evaluation process. This process occurs periodically to enable the regulator to define the Individual Capital Guidance (‘ICG’) or minimum capital requirements for HSBC, and the PRA to define the PRA buffer, where required. Under the revised Pillar 2 PRA regime, which came into effect from 1 January 2017, the capital planning buffer has been replaced with a PRA buffer. This is not intended to duplicate the CRD IV buffers and, where necessary, will be set according to vulnerability in a stress scenario, as assessed through the annual PRA stress testing exercise.
The processes of internal capital adequacy assessment and supervisory review lead to a final determination by the PRA of the ICG and any PRA buffer that may be required.
Within Pillar 2, Pillar 2A considers, in addition to the minimum capital requirements for Pillar 1 risks described above, any supplementary requirements for those risks and any requirements for risk categories not captured by Pillar 1. The risk categories to be covered under Pillar 2A depend on the specific circumstances of a firm and the nature and scale of its business.
Pillar 2B consists of guidance from the PRA on the capital buffer a firm would require in order to remain above its ICG in adverse circumstances that may be largely outside the firm’s normal and direct control; for example, during a period of severe but plausible
 
downturn stress, when asset values and the firm’s capital surplus may become strained. This is quantified via any PRA buffer requirement the PRA may consider necessary. The assessment of this is informed by stress tests and a rounded judgement of a firm’s business model, also taking into account the PRA’s view of a firm’s options and capacity to protect its capital position under stress; for instance, through capital generation. Where the PRA assesses that a firm’s risk management and governance are significantly weak, it may also increase the PRA buffer to cover the risks posed by those weaknesses until they are addressed. The PRA buffer is intended to be drawn upon in times of stress, and its use is not of itself a breach of capital requirements that would trigger automatic restrictions on distributions. In specific circumstances, the PRA should agree a plan with a firm for its restoration over an agreed timescale.
Internal capital adequacy assessment
The Board manages the Group ICAAP, and together with RMM and GRC, it examines the Group’s risk profile from both regulatory and economic capital viewpoints, aiming to ensure that capital resources:
remain sufficient to support our risk profile and outstanding commitments;
meet current regulatory requirements, and that HSBC is well placed to meet those expected in the future;
allow the bank to remain adequately capitalised in the event of a severe economic downturn stress scenario; and
remain consistent with our strategic and operational goals, and our shareholder and investor expectations.
The minimum regulatory capital that we are required to hold is determined by the rules and guidance established by the PRA for the consolidated Group and by local regulators for individual Group companies. These capital requirements are a primary influence shaping the business planning process, in which RWA targets are established for our global businesses in accordance with the Group’s strategic direction and risk appetite.
Economic capital is the internally calculated capital requirement that we deem necessary to support the risks to which we are exposed. The economic capital assessment is a more risk-sensitive measure than the regulatory minimum, and takes account of the substantial diversification of risk accruing from our operations. Both the regulatory and the economic capital assessments rely upon the use of models that are integrated into our management of risk. Our economic capital models are calibrated to quantify the level of capital that is sufficient to absorb potential losses over a one-year time horizon to a 99.95% level of confidence for our

19
HSBC Holdings plc Pillar 3 2017


banking and trading activities, to a 99.5% level of confidence for our insurance activities and pension risks, and to a 99.9% level of confidence for our operating risks.
The ICAAP and its constituent economic capital calculations are examined by the PRA as part of its supervisory review and evaluation process. This examination informs the regulator’s view of our Pillar 2 capital requirements.
Preserving our strong capital position remains a priority, and the level of integration of our risk and capital management helps to optimise our response to business demand for regulatory and economic capital. Risks that are explicitly assessed through economic capital are credit risk, including CCR, market and operational risk, interest rate risk in the banking book, insurance risk, pension risk, residual risk and structural foreign exchange risk.
Credit risk
Overview and responsibilities
Credit risk represents our largest regulatory capital requirement.
The principal objectives of our credit risk management function are:
to maintain across HSBC a strong culture of responsible lending and a robust credit risk policy and control framework;
to both partner and challenge our businesses in defining, implementing and continually re-evaluating our credit risk appetite under actual and stress scenario conditions; and
to ensure there is independent, expert scrutiny of credit risks, their costs and their mitigation.
The credit risk functions within Wholesale Credit and Market Risk and RBWM are the constituent parts of Global Risk that support the Group Chief Risk Officer in overseeing credit risks. Their major duties comprise undertaking independent reviews of large and high-risk credit proposals, overseeing large exposure policy and reporting on our wholesale and retail credit risk management disciplines, owning our credit policy and credit systems programmes, overseeing portfolio management and reporting on risk matters to senior executive management and to regulators.
These credit risk functions work closely with other parts of Global Risk; for example, with Operational Risk on the internal control framework and with Risk Strategy on the risk appetite process. In addition, they work jointly with Risk Strategy and Global Finance on stress testing.
The credit responsibilities of Global Risk are described on page 107 of the Annual Report and Accounts 2017.
Group-wide, the credit risk functions comprise a network of credit risk management offices reporting within regional risk functions. They fulfil an essential role as independent risk control units distinct from business line management in providing objective scrutiny of risk rating assessments, credit proposals for approval and other risk matters.
Credit risk operates through a hierarchy of personal credit limit approval authorities. Operating company chief executives, acting under authorities delegated by their boards and Group standards, are accountable for credit risk and other risks in their business. In turn, chief executives delegate authority to operating company chief risk officers and management teams on an individual basis. Each operating company is responsible for the quality and performance of its credit portfolios in accordance with Group standards. Above these thresholds of delegated personal credit limited approval authorities, approval must be sought from the regional and, as appropriate, global credit risk function.
Credit risk management
Our exposure to credit risk arises from a wide range of customer and product types, and the risk rating systems in place to measure and monitor these risks are correspondingly diverse. Senior management receives a variety of reports on our credit risk exposures including loan impairments, total exposures and RWAs,
 
as well as updates on specific portfolios that are considered to have heightened credit risk.
Credit risk exposures are generally measured and managed in portfolios of either customer types or product categories. Risk rating systems are designed to assess the default propensity of, and loss severity associated with, distinct customers who are typically managed as individual relationships or, in the case of retail business exposures, on a product portfolio basis.
Risk rating systems for retail exposures are generally quantitative in nature, applying techniques such as behavioural analysis across product portfolios comprising large numbers of homogeneous transactions. Rating systems for individually managed relationships typically use customer financial statements and market data analysis, but also qualitative elements and a final subjective overlay to better reflect any idiosyncratic elements of the customer’s risk profile. See ‘Application of the IRB Approach’ on page 34.
A fundamental principle of our policy and approach is that analytical risk rating systems and scorecards are all valuable tools at the disposal of management.
The credit process provides for at least an annual review of facility limits granted. Review may be more frequent, as required by circumstances such as the emergence of adverse risk factors.
We constantly seek to improve the quality of our risk management. Group IT systems that process credit risk data continue to be enhanced in order to deliver both comprehensive management information in support of business strategy and solutions to evolving regulatory reporting requirements.
Group standards govern the process through which risk rating systems are initially developed, judged fit for purpose, approved and implemented. They also govern the conditions under which analytical risk model outcomes can be overridden by decision-takers and the process of model performance monitoring and reporting. The emphasis is on an effective dialogue between business line and risk management, suitable independence of decision-takers, and a good understanding and robust challenge on the part of senior management.
Like other facets of risk management, analytical risk rating systems are not static; they are subject to review and modification in light of the changing environment, the greater availability and quality of data, and any deficiencies identified through internal and external regulatory review. Structured processes and metrics are in place to capture relevant data and feed this into continuous model improvement. See also the comments on ‘Model performance’ on page 46.
Credit risk models governance
All new or materially changed IRB capital models require the PRA’s approval, as set out in more detail on page 34, and throughout HSBC such models fall directly under the remit of the global functional MOCs, operating in line with HSBC’s model risk policy, and under the oversight of the Global MOC. Additionally, the global functional MOCs are responsible for the approval of stress testing models used for regulatory stress testing exercises such as those carried out by the EBA and the BoE.
Both the Wholesale and RBWM MOCs require all credit risk models for which they are responsible to be approved by delegated senior managers with notification to the committees that retain the responsibility for oversight.
Global Risk sets internal standards for the development, validation, independent review, approval, implementation and performance monitoring of credit risk rating models. Independent reviews of our models are performed by our Independent Model Review (IMR) function which is separate from our Risk Analytics functions that are responsible for the development of models.
Compliance with Group standards is subject to examination by Risk oversight and review from within the Risk function itself, and by Internal Audit.

HSBC Holdings plc Pillar 3 2017
20


Pillar 3 Disclosures at 31 December 2017

IFRS 9
IFRS 9 introduces new accounting concepts and measures such as significant credit deterioration and lifetime loss measurement. Existing stress testing and regulatory models, skills and expertise were harnessed and leveraged in order to meet the IFRS 9 requirements. Data from various client, finance and risk systems are integrated and validated. As a result of IFRS 9 adoption, management has additional insight and measures not previously
 
available which, over time, may influence our risk appetite and risk management processes.
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 mainly concentrated in the higher quality bands.
Table 14: Credit quality of exposures by exposure classes and instruments
 
 
Gross carrying values of
Specific credit risk adjustments


Write-offs in the year

Credit risk adjustment charges of the period

Net carrying values1

 
 
Defaulted exposures

Non-defaulted exposures

 
 
$bn

$bn

$bn

$bn

$bn

$bn

1
Central governments and central banks

308.1




308.1

2
Institutions

94.5




94.5

3
Corporates
8.1

987.5

4.2

1.0

0.7

991.4

 
– of which:
 
 
 
 
 
 
4
specialised lending
1.2

47.5

0.3



48.4

6
Retail
3.6

465.0

1.0

0.7

0.3

467.6

7
– secured by real estate property
2.5

274.3

0.3



276.5

 
– of which:
 
 
 
 
 
 
8
SMEs

1.5




1.5

9
Non-SMEs
2.5

272.8

0.3



275.0

10
– qualifying revolving retail
0.1

125.4

0.2

0.3

0.2

125.3

11
– other retail
1.0

65.3

0.5

0.4

0.1

65.8

 
– of which:
 
 
 
 
 
 
12
SMEs
0.6

10.6

0.3



10.9

13
Non-SMEs
0.4

54.7

0.2

0.4

0.1

54.9

15
Total IRB approach
11.7

1,855.1

5.2

1.7

1.0

1,861.6

16
Central governments and central banks

198.1




198.1

17
Regional governments or local authorities

3.8




3.8

18
Public sector entities

0.4




0.4

19
Multilateral development banks

0.3




0.3

20
International organisations

2.2




2.2

21
Institutions

3.5




3.5

22
Corporates

172.8

0.5


0.1

172.3

23
– of which: SMEs

1.1




1.1

24
Retail

71.0

0.4


0.2

70.6

25
– of which: SMEs

1.7




1.7

26
Secured by mortgages on immovable property

29.0




29.0

27
– of which: SMEs

0.1




0.1

28
Exposures in default2
5.4


2.0

1.5

0.7

3.4

29
Items associated with particularly high risk

3.9




3.9

32
Collective investment undertakings (‘CIU’)

0.6




0.6

33
Equity exposures

16.0




16.0

34
Other exposures

11.9




11.9

35
Total standardised approach
5.4

513.5

2.9

1.5

1.0

516.0

36
Total at 31 Dec 2017
17.1

2,368.6

8.1

3.2

2.0

2,377.6

 
– of which: loans
15.1

1,225.2

7.8

3.2

2.0

1,232.5

 
– of which: debt securities

325.1




325.1

 
– of which: off-balance sheet exposures
2.0

782.4

0.2



784.2

1
Securitisation positions and non-credit obligation assets are not included in this table.
2
Exposures in default comprises principally defaulted exposure to corporates of $3.3bn, retail clients of $1.1bn and exposure secured on immovable property of $1.0bn.




21
HSBC Holdings plc Pillar 3 2017


Table 15: Credit quality of exposures by industry or counterparty types
 
 
Gross carrying values of
Specific credit risk adjustments


Write-offs in the year

Credit risk adjustment charges of the period

Net carrying values1

 
 
Defaulted exposures

Non-defaulted exposures

 
 
$bn

$bn

$bn

$bn

$bn

$bn

1
Agriculture
0.4

9.5

0.1



9.8

2
Mining
1.4

42.2

0.5

0.2

(0.1
)
43.1

3
Manufacturing
2.3

254.2

1.2

0.3

0.2

255.3

4
Utilities
0.3

33.9

0.1

0.1


34.1

5
Water supply

3.0




3.0

6
Construction
1.0

39.2

0.3

0.1


39.9

7
Wholesale & retail trade
2.4

203.5

1.4

0.4

0.5

204.5

8
Transportation & storage
0.5

52.1

0.1



52.5

9
Accommodation & food services
0.3

24.9

0.1



25.1

10
Information & communication
0.1

10.0


0.1


10.1

11
Financial & insurance
0.4

553.0

0.8

0.1

0.1

552.6

12
Real estate
1.2

220.9

0.9

0.1

0.2

221.2

13
Professional activities
0.2

19.2




19.4

14
Administrative service
0.9

81.6

0.7

0.1

0.1

81.8

15
Public admin & defence
0.3

172.8




173.1

16
Education

3.7




3.7

17
Human health & social work
0.2

7.6




7.8

18
Arts & entertainment
0.1

8.9




9.0

19
Other services
0.1

10.4




10.5

20
Personal
5.0

554.7

1.9

1.7

1.0

557.8

21
Extraterritorial bodies

39.5




39.5

22
Total at 31 Dec 2017
17.1

2,344.8

8.1

3.2

2.0

2,353.8

1
Securitisation positions and non-customer assets are not included in this table.
Table 16: Credit quality of exposures by geography¹
 
 
Gross carrying values of
Specific credit risk adjustments


Write-offs in the year

Credit risk adjustment charges of the period

Net carrying values2

 
 
Defaulted exposures

Non-defaulted exposures

 
 
$bn

$bn

$bn

$bn

$bn

$bn

1
Europe
8.1

795.6

3.0

1.2

0.8

800.7

2
United Kingdom
4.1

465.3

1.8

0.7

0.7

467.6

3
France
1.2

121.5

0.6

0.1


122.1

4
Other countries
2.8

208.8

0.6

0.4

0.1

211.0

5
Asia
2.5

970.7

1.7

0.6

0.6

971.5

6
Hong Kong
0.9

465.5

0.5

0.3

0.4

465.9

7
China
0.3

167.2

0.3

0.1

0.1

167.2

8
Singapore
0.1

70.2

0.1



70.2

9
Other countries
1.2

267.8

0.8

0.2

0.1

268.2

10
MEA
2.9

134.1

1.8

0.4

0.2

135.2

11
North America
2.6

387.6

1.0

0.3

(0.1
)
389.2

12
United States of America
1.5

268.9

0.4

0.1


270.0

13
Canada
0.4

100.9

0.3

0.1

(0.1
)
101.0

14
Other countries
0.7

17.8

0.3

0.1


18.2

15
Latin America
1.0

62.3

0.6

0.7

0.5

62.7

16
Other geographical areas

18.3




18.3

17
Total at 31 Dec 2017
17.1

2,368.6

8.1

3.2

2.0

2,377.6

1
Amounts shown by geographical region and country in this table are based on the country of residence of the counterparty.
2
Securitisation positions and non-credit obligation assets are not included in this table.

HSBC Holdings plc Pillar 3 2017
22


Pillar 3 Disclosures at 31 December 2017

Table 17: Ageing of past-due unimpaired and impaired exposures
 
 
Gross carrying values
 
 
Less than
30 days

Between
30 and
60 days

Between
60 and
90 days

Between
90 and
180 days

Between
180 days and
1 year

Greater than
1 year

 
 
   $bn

   $bn

   $bn

   $bn

   $bn

   $bn

1
Loans
7.6

1.5

0.8

2.0

0.9

4.1

2
Debt securities






3
Total exposures at 31 Dec 2017
7.6

1.5

0.8

2.0

0.9

4.1

Table 18: Non-performing and forborne exposures
 
 
Gross carrying values of performing and non-performing exposures
Accumulated impairment and provisions and negative fair value adjustments due to credit risk
Collateral and financial guarantees received
 
 
 
of which performing but past due between 30 and 90 days

of which performing forborne

of which non-performing
On performing exposures
On non- performing exposures
On non-performing exposures

of which forborne

 
 
 
of which defaulted

of which impaired

of which forborne

 
of which forborne

 
of which impaired

 
 
$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

1
Debt securities
325.1













2
Loans
1,240.3

1.7

2.5

15.8

15.1

15.8

6.7

(2.4
)
(0.1
)
(5.5
)
(1.9
)
6.2

4.3

3
Off-balance sheet exposures
784.4



0.3

2.0

2.0



(0.2
)



0.2


This table is presented based on the EBA definitions of ‘non-performing’ and ‘forborne’ exposures. Forborne exposures are referred to as Renegotiated Loans in the Annual Report and Accounts 2017. In the Annual Report and Accounts 2017 we classify and report loans on which concessions have been granted under conditions of credit distress as ‘renegotiated loans’ when their contractual payment terms have been modified because we have significant concerns about the borrowers’ ability to meet contractual payments when due. This is aligned to the EBA definitions of forborne exposures. The EBA and Annual Report and Accounts 2017 differ in the treatment of cures from the forborne/renegotiated status. Under the EBA definition, exposures are no longer considered forborne once the exposures have complied with the revised contractual obligations for a period of at least
 
three years and the exposures are no longer considered impaired or have any elements that are more than 30 days past due. Under the Annual Report and Accounts 2017 definition, renegotiated loans retain this classification until maturity or derecognition. The EBA definition of non-performing captures those exposures that have material exposures which are more than 90 days past due or the debtors is assessed as unlikely to pay its credit obligations in full without the realisation of collateral, regardless of the existence of any past due amounts. Any debtors that are in default for regulatory purposes or impaired under the applicable accounting framework are considered to be unlikely to pay. The Annual Report and Accounts 2017 does not have a non-performing exposure category however the definition of impaired loans is well aligned to the EBA non-performing definitions.


23
HSBC Holdings plc Pillar 3 2017


Table 19: Credit risk exposure – summary
 
 
Net carrying
values

Average
net carrying
values3

RWAs

Capital
required

 
Footnotes
$bn

$bn

$bn

$bn

IRB advanced approach
 
1,788.2

1,729.1

455.4

36.4

– central governments and central banks
 
308.1

320.9

33.9

2.7

– institutions
 
94.3

92.1

17.6

1.4

– corporates
1
918.2

870.6

338.2

27.0

– total retail
 
467.6

445.5

65.7

5.3

– of which:
 








secured by mortgages on immovable property SME
 
1.5

1.5

0.5


secured by mortgages on immovable property non-SME
 
275.0

260.5

33.2

2.7

qualifying revolving retail
 
125.3

120.2

16.0

1.3

other SME
 
10.9

10.2

5.9

0.5

other non-SME
 
54.9

53.1

10.1

0.8

IRB securitisation positions
 
32.8

33.9

13.7

1.1

IRB non-credit obligation assets
 
56.1

55.2

13.2

1.1

IRB foundation approach
 
73.4

71.2

28.4

2.3

– central governments and central banks
 




– institutions
 
0.2

0.2

0.1


– corporates
 
73.2

71.0

28.3

2.3

Standardised approach
 
518.0

483.1

174.5

13.9

– central governments and central banks
 
198.1

173.1

12.7

1.0

– institutions
 
3.5

2.9

1.2

0.1

– corporates
 
172.3

167.8

78.3

6.3

– retail
 
70.6

68.9

16.5

1.3

– secured by mortgages on immovable property
 
29.0

27.6

10.4

0.8

– exposures in default
 
3.4

3.6

3.9

0.3

– regional governments or local authorities
 
3.8

3.2

1.0

0.1

– public sector entities
 
0.4

0.2

0.1


– equity
2
16.0

15.9

36.1

2.9

– items associated with particularly high risk
 
3.9

3.9

5.7

0.5

– securitisation positions
 
2.0

1.3

1.6

0.1

– claims in the form of collective investment undertakings (‘CIU’)
 
0.6

0.5

0.6


– international organisations
 
2.2

2.5



– multilateral development banks
 
0.3

0.3



– other items
 
11.9

11.4

6.4

0.5

Total at 31 Dec 2017
 
2,468.5

2,372.5

685.2

54.8

1
Corporates includes specialised lending net carrying value subject to supervisory slotting approach of $37.6bn (2016: $34.1bn) and RWAs of $23.6bn (2016: $22.2bn).
2
This includes investments in insurance companies that are risk weighted at 250%.
3
Average net carrying values are calculated by aggregating net carrying values of the last five quarters and dividing by five.


HSBC Holdings plc Pillar 3 2017
24


Pillar 3 Disclosures at 31 December 2017

Table 20: Geographical breakdown of exposures
 
 
Net carrying values1,2
 
 
Europe:

United Kingdom

France

Other countries

Asia:

Hong Kong

China

Singapore

Other countries

 
 
$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

 
IRB approach exposure classes
 
 
 
 
 
 
 
 
 
1
Central governments and central banks
6.8



6.8

171.8

55.9

30.8

13.1

72.0

2
Institutions
23.9

11.1

1.8

11.0

48.0

9.0

18.6

3.7

16.7

3
Corporates
299.5

170.2

47.5

81.8

427.2

194.1

83.2

31.6

118.3

4
Retail
226.5

198.3

26.2

2.0

185.5

148.3

6.0

6.3

24.9

6
Total IRB approach
556.7

379.6

75.5

101.6

832.5

407.3

138.6

54.7

231.9

 
Standardised approach exposure classes
 
 
 
 
 
 
 
 
 
7
Central governments and central banks
193.1

75.8

39.4

77.9

0.9

0.3

0.1


0.5

8
Regional governments or local authorities









9
Public sector entities
0.3



0.3






10
Multilateral development banks









11
International organisations









12
Institutions
1.1


0.8

0.3

0.1

0.1




13
Corporates
30.2

3.0

2.7

24.5

60.0

37.7

5.3

6.7

10.3

14
Retail
4.2

1.2

1.8

1.2

41.7

11.4

3.1

8.2

19.0

15
Secured by mortgages on immovable property SME
5.6

1.2

0.8

3.6

16.5

3.4

7.8

0.4

4.9

16
Exposures in default
1.0

0.1

0.1

0.8

0.5

0.1



0.4

17
Items associated with particularly high risk
2.4

1.3

0.4

0.7






20
Collective investment undertakings (‘CIU’)
0.6

0.6








21
Equity exposures
1.2

1.1

0.1


13.3

1.6

11.4

0.2

0.1

22
Other exposures
4.3

3.7

0.5

0.1

6.0

4.0

0.9


1.1

23
Total standardised approach
244.0

88.0

46.6

109.4

139.0

58.6

28.6

15.5

36.3

24
Total at 31 Dec 2017
800.7

467.6

122.1

211.0

971.5

465.9

167.2

70.2

268.2

Table 20: Geographical breakdown of exposures (continued)
 
 
 
Net carrying values1,2
 
 
MEA

North
America:

United States of America

Canada

Other countries

Latin
America

Other

Total

 
 
$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

 
IRB approach exposure classes
 
 
 
 
 
 
 
 
1
Central governments and central banks
16.8

87.2

69.6

17.5

0.1

10.2

15.3

308.1

2
Institutions
5.5

15.2

7.9

7.3


1.4

0.5

94.5

3
Corporates
42.6

210.7

149.4

50.8

10.5

11.4


991.4

4
Retail
2.4

53.1

27.1

22.9

3.1

0.1


467.6

6
Total IRB approach
67.3

366.2

254.0

98.5

13.7

23.1

15.8

1,861.6

 
Standardised approach exposure classes


 
 
 
 
 
 
 
7
Central governments and central banks
1.1

2.4

2.3

0.1


0.6


198.1

8
Regional governments or local authorities
3.1





0.7


3.8

9
Public sector entities





0.1


0.4

10
Multilateral development banks






0.3

0.3

11
International organisations






2.2

2.2

12
Institutions
2.2





0.1


3.5

13
Corporates
45.8

11.9

9.7

0.3

1.9

24.4


172.3

14
Retail
10.3

3.9

1.8

1.6

0.5

10.5


70.6

15
Secured by mortgages on immovable property SME
3.2

1.5

0.2

0.1

1.2

2.2


29.0

16
Exposures in default
1.3

0.2



0.2

0.4


3.4

17
Items associated with particularly high risk
0.2

1.2

0.5


0.7

0.1


3.9

20
Collective investment undertakings (‘CIU’)







0.6

21
Equity exposures
0.2

1.0

1.0



0.3


16.0

22
Other exposures
0.5

0.9

0.5

0.4


0.2


11.9

23
Total standardised approach
67.9

23.0

16.0

2.5

4.5

39.6

2.5

516.0

24
Total at 31 Dec 2017
135.2

389.2

270.0

101.0

18.2

62.7

18.3

2,377.6

1
Amounts shown by geographical region and country in this table are based on the country of residence of the counterparty.
2
Securitisation positions and non-credit obligation assets are not included in this table.


25
HSBC Holdings plc Pillar 3 2017


Table 21: Concentration of exposures by industry or counterparty types
 
 
Agriculture

Mining

Manufac-turing

Utilities

Water supply

Construction

Wholesale & retail trade

Transpor-tation & storage

Accom-modation & food services

Infor-mation & commun-ication

Financial & insurance

 
Net carrying values1
$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

 
IRB approach exposure classes






















1
Central governments and central banks










141.0

2
Institutions

0.3









94.1

3
Corporates
7.3

38.9

226.8

29.3

2.8

31.8

174.0

47.9

21.0

7.7

126.0

4
Retail
1.0


0.7



0.3

1.7

0.3

0.4


0.1

6
Total IRB approach
8.3

39.2

227.5

29.3

2.8

32.1

175.7

48.2

21.4

7.7

361.2

 
Standardised approach exposure classes























7
Central governments and central banks










153.6

8
Regional governments or local authorities










1.5

9
Public sector entities











10
Multilateral development banks










0.3

11
International organisations











12
Institutions










3.5

13
Corporates
1.3

3.8

26.6

4.8

0.2

7.4

28.0

4.3

3.6

1.9

18.8

14
Retail
0.1


0.2




0.5




1.6

15
Secured by mortgages on immovable property SME





0.1






16
Exposures in default
0.1

0.1

0.7



0.2

0.3


0.1


0.1

17
Items associated with particularly high risk





0.1





3.4

20
Collective investment undertakings (‘CIU’)










0.6

21
Equity exposures


0.1







0.5

1.8

22
Other exposures


0.2








6.2

23
Total standardised approach
1.5

3.9

27.8

4.8

0.2

7.8

28.8

4.3

3.7

2.4

191.4

24
Total at 31 Dec 2017
9.8

43.1

255.3

34.1

3.0

39.9

204.5

52.5

25.1

10.1

552.6


HSBC Holdings plc Pillar 3 2017
26


Pillar 3 Disclosures at 31 December 2017

Table 21: Concentration of exposures by industry or counterparty types (continued)
 
 
Real estate

Professional activities

Administ-rative service

Public admin & defence

Education

Human health & social work

Arts & entertain-ment

Other services

Personal

Extra-territorial bodies

Total

 
Net carrying values1
$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

 
IRB approach exposure classes






















1
Central governments and central banks



139.6


0.1

0.1



27.3

308.1

2
Institutions



0.1







94.5

3
Corporates
180.0

18.0

53.0

0.8

3.2

6.1

8.3

8.5



991.4

4
Retail
0.7


0.7


0.1

0.3

0.1

0.4

460.8


467.6

6
Total IRB approach
180.7

18.0

53.7

140.5

3.3

6.5

8.5

8.9

460.8

27.3

1,861.6

 
Standardised approach exposure classes























7
Central governments and central banks



29.2






10.3

193.1

8
Regional governments or local authorities



2.3







3.8

9
Public sector entities



0.4







0.4

10
Multilateral development banks










0.3

11
International organisations



0.3






1.9

2.2

12
Institutions










3.5

13
Corporates
38.7

1.3

27.0

0.4

0.4

1.3

0.5

1.4

0.6


172.3

14
Retail
0.6

0.1

0.4





0.1

67.0


70.6

15
Secured by mortgages on immovable property SME
0.8








28.1


29.0

16
Exposures in default
0.2


0.3






1.3


3.4

17
Items associated with particularly high risk
0.2


0.2








3.9

20
Collective investment undertakings (‘CIU’)










0.6

21
Equity exposures


0.1





0.1



2.6

22
Other exposures


0.1








6.5

23
Total standardised approach
40.5

1.4

28.1

32.6

0.4

1.3

0.5

1.6

97.0

12.2

492.2

24
Total at 31 Dec 2017
221.2

19.4

81.8

173.1

3.7

7.8

9.0

10.5

557.8

39.5

2,353.8

1
Securitisation positions and non-customer assets are not included in this table.

27
HSBC Holdings plc Pillar 3 2017


Table 22: Maturity of on-balance sheet exposures
 
 
 
Net carrying values1
 
 
 
On demand

Less than
1 year

Between
1 and 5 years

More than
5 years

Undated

Total

 
 
Footnotes
$bn

$bn

$bn

$bn

$bn

$bn

 
IRB approach exposure classes
 
 
 
 
 
 
 
1
Central governments and central banks
 
38.8

139.9

82.2

44.9


305.8

2
Institutions
 
6.5

51.5

22.1

0.8


80.9

3
Corporates
 
60.6

163.7

214.3

62.6


501.2

4
Retail
 
21.1

10.0

38.8

254.1


324.0

6
Total IRB approach
 
127.0

365.1

357.4

362.4


1,211.9

 
Standardised approach exposure classes
 
 
 
 
 
 
 
7
Central governments and central banks
 
41.7

99.2

40.1

10.9

5.0

196.9

8
Regional governments or local authorities
 
0.8

0.4

0.2

1.9


3.3

9
Public sector entities
 

0.1


0.1


0.2

10
Multilateral development banks
 

0.1


0.2


0.3

11
International organisations
 

0.4

1.3

0.5


2.2

12
Institutions
 
0.1

1.5

1.5

0.3


3.4

13
Corporates
 
3.8

53.3

23.6

7.9


88.6

14
Retail
 
7.7

3.5

9.5

3.1


23.8

15
Secured by mortgages on immovable property SME
 

2.0

4.9

20.9


27.8

16
Exposures in default
 
0.3

1.1

1.0

0.7


3.1

17
Items associated with particularly high risk
 

0.1

0.7

0.4

0.9

2.1

20
Collective investment undertakings (‘CIU’)
 



0.1

0.5

0.6

21
Equity exposures
 




16.0

16.0

22
Other exposures
 

0.1


0.2

10.8

11.1

23
Total standardised approach
 
54.4

161.8

82.8

47.2

33.2

379.4

24
Total at 31 Dec 2017
 
181.4

526.9

440.2

409.6

33.2

1,591.3

1
Securitisation positions and non-credit obligation assets are not included in this table.
Past due but not impaired exposures, impaired exposures, renegotiated exposures and credit risk adjustments
Tables 23 and 24 analyse past due but not impaired exposures, impaired exposures, renegotiated exposures and impairment allowances and other credit risk provisions on a regulatory consolidation basis. These tables use accounting values. The main differences between the amounts presented here and those on a financial consolidation basis are: the proportional consolidation of associates in the regulatory consolidation; the regulatory consolidation excluding special purpose entities where significant risk has been transferred to third parties; and the exclusion of exposures treated under the securitisation approach.
Our approach for determining impairment allowances is explained on Note 1.2(d) of the Annual Report and Accounts 2017, and the Group’s definitions for accounting purposes of ‘past due’, ‘impaired’ and ‘renegotiated’ are set out on pages 125, 126 and 113 respectively. The accounting definition of impaired and the
 
regulatory definition of default are generally aligned. In certain jurisdictions, for certain 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.
Under the accounting standards currently adopted by HSBC, impairment allowances, value adjustments and credit-related provisions for off-balance sheet amounts are treated as specific credit risk adjustments (‘CRAs’).

HSBC Holdings plc Pillar 3 2017
28


Pillar 3 Disclosures at 31 December 2017

Table 23: Amount of impaired exposures and related allowances, broken down by geographical region
 
Europe

Asia

MENA

North
America

Latin America

Total

At 31 Dec 2017
$bn

$bn

$bn

$bn

$bn

$bn

Past due but not impaired exposures
1.3

3.9

1.1

2.0

0.6

8.9

– personal
0.8

2.4

0.4

0.7

0.4

4.7

– corporate and commercial
0.5

1.2

0.6

1.1

0.2

3.6

– financial

0.3

0.1

0.2


0.6

Impaired exposures
8.1

2.3

2.1

2.6

0.7

15.8

– personal
2.0

0.7

0.4

1.6

0.3

5.0

– corporate and commercial
5.9

1.6

1.6

1.0

0.4

10.5

– financial
0.2


0.1



0.3

Impairment allowances and other credit risk provisions
(3.2
)
(1.6
)
(1.8
)
(0.9
)
(0.6
)
(8.1
)
– personal
(0.6
)
(0.3
)
(0.4
)
(0.2
)
(0.3
)
(1.8
)
– corporate and commercial
(2.4
)
(1.3
)
(1.1
)
(0.7
)
(0.3
)
(5.8
)
– financial
(0.2
)

(0.3
)


(0.5
)
 
 
 
 
 
 
 
At 31 Dec 2016
 
 
 
 
 
 
Past due but not impaired exposures
1.2

3.5

1.5

2.6

0.5

9.3

– personal
0.8

2.4

0.5

1.4

0.4

5.5

– corporate and commercial
0.4

1.1

0.9

0.8

0.1

3.3

– financial


0.1

0.4


0.5

Impaired exposures
8.2

2.6

2.4

5.9

0.6

19.7

– personal
2.0

0.6

0.5

4.2

0.3

7.6

– corporate and commercial
5.9

2.0

1.7

1.7

0.3

11.6

– financial
0.3


0.2



0.5

Impairment allowances and other credit risk provisions
(2.9
)
(1.6
)
(1.9
)
(1.7
)
(0.5
)
(8.6
)
– personal
(0.5
)
(0.3
)
(0.6
)
(0.6
)
(0.3
)
(2.3
)
– corporate and commercial
(2.2
)
(1.3
)
(1.1
)
(1.1
)
(0.2
)
(5.9
)
– financial
(0.2
)

(0.2
)


(0.4
)
Table 24: Movement in specific credit risk adjustments by industry and geographical region
 
Europe

Asia

MENA

North
America

Latin
America

Total

 
$bn

$bn

$bn

$bn

$bn

$bn

Specific credit risk adjustments at 1 Jan 2017
2.9

1.6

1.9

1.7

0.5

8.6

Amounts written off
(1.1
)
(0.7
)
(0.4
)
(0.4
)
(0.6
)
(3.2
)
– personal
(0.4
)
(0.4
)
(0.3
)
(0.1
)
(0.5
)
(1.7
)
– corporate and commercial
(0.6
)
(0.3
)
(0.1
)
(0.3
)
(0.1
)
(1.4
)
– financial
(0.1
)




(0.1
)
Recoveries of amounts written off in previous years
0.3

0.1


0.1

0.1

0.6

– personal
0.3

0.1



0.1

0.5

– corporate and commercial



0.1


0.1

– financial






Charge to income statement
0.8

0.6

0.3

(0.2
)
0.5

2.0

– personal
0.1

0.3

0.1


0.5

1.0

– corporate and commercial
0.6

0.3

0.2

(0.2
)

0.9

– financial
0.1





0.1

Exchange and other movements
0.3



(0.3
)
0.1

0.1

Specific credit risk adjustments at 31 Dec 2017
3.2

1.6

1.8

0.9

0.6

8.1

 
 
 
 
 
 
 
Specific credit risk adjustments at 1 Jan 2016
3.5

4.1

2.0

2.2

2.2

14.0

Amounts written off
(1.1
)
(0.7
)
(0.3
)
(0.7
)
(0.6
)
(3.4
)
– personal
(0.4
)
(0.4
)
(0.2
)
(0.3
)
(0.3
)
(1.6
)
– corporate and commercial
(0.7
)
(0.3
)
(0.1
)
(0.4
)
(0.3
)
(1.8
)
– financial






Recoveries of amounts written off in previous years
0.2

0.1


0.1

0.1

0.5

– personal
0.2

0.1


0.1

0.1

0.5

– corporate and commercial






– financial






Charge to income statement
0.6

0.7

0.3

0.8

1.1

3.5

– personal
0.2

0.3

0.2

0.2

0.8

1.7

– corporate and commercial
0.4

0.4

0.1

0.6

0.3

1.8

– financial






Exchange and other movements
(0.3
)
(2.6
)
(0.1
)
(0.7
)
(2.3
)
(6.0
)
Specific credit risk adjustments at 31 Dec 2016
2.9

1.6

1.9

1.7

0.5

8.6


29
HSBC Holdings plc Pillar 3 2017


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.
Collateral
The most common method of mitigating credit risk is to take collateral. In our retail residential and commercial real estate (‘CRE’) businesses, a mortgage over the property is usually taken to help secure claims. Physical collateral is also taken in various forms of specialised lending and leasing transactions where income from the physical assets that are financed is also the principal source of facility repayment. In the commercial and industrial sectors, charges are created over business assets such as premises, stock and debtors. Loans to private banking clients may be made against a pledge of eligible marketable securities, cash or real estate. Facilities to SMEs are commonly granted against guarantees given by their owners and/or directors.
For credit risk mitigants comprising immovable property, the key determinant of concentration at Group level is geographic. Use of immovable property mitigants for risk management purposes is predominantly in Asia and Europe.
Further information regarding collateral held over CRE and residential property is provided on pages 132 and 137, respectively, of the Annual Report and Accounts 2017.
Financial collateral
In the institutional sector, trading facilities are supported by charges over financial instruments, such as cash, debt securities and equities. Financial collateral in the form of marketable securities is used in much of the Group’s derivatives activities and in securities financing transactions, such as repos, reverse repos, securities lending and borrowing. Netting is used extensively and is a prominent feature of market standard documentation.
Further information regarding collateral held for trading exposures is on page 115.
In the non-trading book, we provide customers with working capital management products. Some of these products have loans and advances to customers, and customer accounts where we have rights of offset and comply with the regulatory requirements for on-balance sheet netting. Under on-balance sheet netting, the customer accounts are treated as cash collateral and the effects of this collateral are incorporated in our LGD estimates. For risk management purposes, the net amounts of such exposures are subject to limits and the relevant customer agreements are subject to review to ensure the legal right of offset remains appropriate. At 31 December 2017, $33bn of customer accounts were treated as cash collateral, mainly in the UK.
Other forms of credit risk mitigation
Our Global Banking and Markets (‘GB&M’) business utilises credit risk mitigation to manage the credit risk of its portfolios, with the goal of reducing concentrations in individual names, sectors or portfolios. The techniques in use include credit default swap (‘CDS’) purchases, structured credit notes and securitisation structures. Buying credit protection creates credit exposure against the protection provider, which is monitored as part of the overall credit exposure to them. Where applicable, the transaction
 
is entered into directly with a central clearing house counterparty; otherwise our exposure to CDS protection providers is diversified among mainly banking counterparties with strong credit ratings. In our corporate lending, we also take guarantees from corporates and Export Credit Agencies (‘ECA’). Corporates would normally provide guarantees as part of a parent/subsidiary or common parent relationship and would span a number of credit grades. The ECAs will normally be investment grade.
Policy and procedures
Policies and procedures govern the protection of our position from the outset of a customer relationship; for instance, in requiring standard terms and conditions or specifically agreed documentation permitting the offset of credit balances against debt obligations, and through controls over the integrity, current valuation and, if necessary, realisation of collateral security.
Valuing collateral
Valuation strategies are established to monitor collateral mitigants to ensure that they will continue to provide the anticipated secure secondary repayment source. Where collateral is subject to high volatility, valuation is frequent; where stable, less so. For market trading activities such as collateralised over-the-counter (‘OTC’) derivatives and SFTs, we typically carry out daily valuations. In the residential mortgage business, Group policy prescribes revaluation at intervals of up to three years, or more frequently as the need arises; for example, where market conditions are subject to significant change. Residential property collateral values are determined through a combination of professional appraisals, house price indices or statistical analysis.
Local market conditions determine the frequency of valuation for CRE. Revaluations are sought where, for example, material concerns arise in relation to the performance of the collateral. CRE revaluation also occurs commonly in circumstances where an obligor’s credit quality has declined sufficiently to cause concern that the principal payment source may not fully meet the obligation.
Recognition of risk mitigation under the IRB approach
Within an IRB approach, risk mitigants are considered in two broad categories:
those which reduce the intrinsic PD of an obligor and therefore operate as determinants of PD; and
those which affect the estimated recoverability of obligations and require adjustment of LGD or, in certain limited circumstances, EAD.
The first category typically includes full parental guarantees – where one obligor within a group guarantees another. It is assumed that the guarantor’s performance materially informs the PD of the guaranteed entity. PD estimates are also subject to a ‘sovereign ceiling’, constraining the risk ratings assigned to obligors in countries of higher risk, and where only partial parental support exists. In certain jurisdictions, certain types of third-party guarantee are recognised by substituting the obligor’s PD with that of the guarantor.
In the second category, LGD estimates are affected by a wider range of collateral, including cash, charges over real estate property, fixed assets, trade goods, receivables and floating charges such as mortgage debentures. Unfunded mitigants, such as third-party guarantees, are also considered in LGD estimates where there is evidence that they reduce loss expectation.
The main types of provider of guarantees are banks, other financial institutions and corporates. The creditworthiness of providers of unfunded credit risk mitigation is taken into consideration as part of the guarantor’s risk profile. Internal limits for such contingent exposure are approved in the same way as direct exposures.

HSBC Holdings plc Pillar 3 2017
30


Pillar 3 Disclosures at 31 December 2017

EAD and LGD values, in the case of individually assessed exposures, are determined by reference to regionally approved internal risk parameters based on the nature of the exposure. For retail portfolios, credit risk mitigation data is incorporated into the internal risk parameters for exposures and feeds into the calculation of the expected loss (‘EL’) band value summarising both customer delinquency and product or facility risk. Credit and credit risk mitigation data form inputs submitted by all Group offices to centralised databases. A range of collateral recognition approaches are applied to IRB capital treatments:
unfunded protection, which includes credit derivatives and guarantees, is reflected through adjustment or determination of PD or LGD. Under the IRB advanced approach, recognition may be through PD or LGD;
eligible financial collateral under the IRB advanced approach is recognised in LGD models. Under the IRB foundation approach, regulatory LGD values are adjusted. The adjustment to LGD is based on the degree to which the exposure value would be adjusted notionally if the financial collateral comprehensive method were applied; and
for all other types of collateral, including real estate, the LGD for exposures calculated under the IRB advanced approach are calculated by models. For IRB foundation, base regulatory LGDs are adjusted depending on the value and type of the asset taken as collateral relative to the exposure. The types of eligible mitigant recognised under the IRB foundation approach are more limited.
 
Table 55 in Appendix I sets out, for IRB exposures, the exposure value and the effective value of credit risk mitigation expressed as the exposure value covered by the credit risk mitigant. IRB credit risk mitigation reductions of EAD were immaterial at 31 December 2017.
Recognition of risk mitigation under the standardised approach
Where credit risk mitigation is available in the form of an eligible guarantee, non-financial collateral or credit derivatives, the exposure is divided into covered and uncovered portions. The covered portion, which is determined after applying an appropriate ‘haircut’ for currency and maturity mismatches (and for omission of restructuring clauses for credit derivatives, where appropriate) to the amount of the protection provided, attracts the risk weight of the protection provider. The uncovered portion attracts the risk weight of the obligor. For exposures fully or partially covered by eligible financial collateral, the value of the exposure is adjusted under the financial collateral comprehensive method using supervisory volatility adjustments, including those arising from currency mismatch, which are determined by the specific type of collateral (and, in the case of eligible debt securities, their credit quality) and its liquidation period. The adjusted exposure value is subject to the risk weight of the obligor.
Table 25: Credit risk mitigation techniques – overview¹
 
 
Exposures unsecured: carrying amount

Exposures secured: carrying amount

Exposures secured
by collateral

Exposures secured
by financial guarantees

Exposures secured by credit derivatives

 
 
$bn

$bn

$bn

$bn

$bn

1
Loans
657.7

574.8

478.9

93.8

2.1

2
Debt securities
301.0

24.1

18.7

5.4


3
Total at 31 Dec 2017
958.7

598.9

497.6

99.2

2.1

4
Of which: defaulted
6.5

5.1

4.8

0.3


 
 
 
 
 
 
 
1
Loans
561.9

515.5

445.0

67.8

2.7

2
Debt securities
356.9

20.5

15.2

5.3


3
Total at 31 Dec 2016
918.8

536.0

460.2

73.1

2.7

4
Of which: defaulted
9.3

4.8

4.7

0.1


1
The prior period comparison has been restated and presented in the EBA table format for consistency.

31
HSBC Holdings plc Pillar 3 2017


Table 26: 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
196.9

1.2

203.4

0.8

12.7

6

2
Regional governments or local authorities
3.3

0.5

3.3

0.2

1.0

29

3
Public sector entities
0.2

0.2

0.1


0.1

79

4
Multilateral development banks
0.3


0.3



5

5
International organisations
2.2


2.2




6
Institutions
3.4

0.1

2.5


1.2

50

7
Corporates
88.6

83.7

71.8

11.8

78.3

94

8
Retail
23.8

46.8

21.9

0.3

16.5

74

9
Secured by mortgage on immovable property
27.8

1.2

27.9

0.2

10.4

37

10
Exposures in default
3.1

0.3

3.0

0.1

3.9

127

11
Higher-risk categories
2.1

1.8

2.0

1.8

5.7

150

14
Collective investment undertakings
0.6


0.5


0.6

100

15
Equity
16.0


16.0


36.1

225

16
Other items
11.1

0.8

11.2

0.8

6.4

54

17
Total at 31 Dec 2017
379.4

136.6

366.1

16.0

172.9

45

 
 
 
 
 
 
 
 
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 mortgage 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
Collective investment undertakings
0.5


0.5


0.5

100

15
Equity
15.2


15.2


33.6

221

16
Other items
9.5


9.5


4.7

50

17
Total at 31 Dec 2016
328.8

128.5

318.0

15.2

165.4

50

1
Securitisation positions are not included in this table.


HSBC Holdings plc Pillar 3 2017
32


Pillar 3 Disclosures at 31 December 2017

Table 27: Standardised approach – exposures by asset class and risk weight
 
Risk weight (‘RW%’)
0%

2%

20%

35%

50%

70%

75%

100%

150%

250%

Deducted

Total credit
exposure
amount (post-CCF and CRM)

of which unrated

 
 
$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

 
Asset classes1
 
 
 
 
 
 
 
 
 
 
 
 
 
1
Central governments or central banks
198.9


0.1


0.2





5.0


204.2

5.0

2
Regional governments or local authorities


2.6


0.7



0.2




3.5

0.6

3
Public sector entities







0.1




0.1

0.1

4
Multilateral development banks
0.2


0.1









0.3

0.3

5
International organisations
2.2











2.2


6
Institutions

0.1

0.4


1.7



0.3




2.5

0.3

7
Corporates


3.8

0.2

3.9

0.5


74.5

0.7



83.6

72.4

8
Retail






22.2





22.2

22.2

9
Secured by mortgage on immovable property



27.3




0.8




28.1

28.1

10
Exposures in default







1.5

1.6



3.1

3.1

11
Higher-risk categories








3.8



3.8

3.8

14
Collective investment undertakings







0.5




0.5

0.5

15
Equity







2.6


13.4


16.0

16.0

16
Other items
0.2


6.7





5.1




12.0

12.0

17
Total at 31 Dec 2017
201.5

0.1

13.7

27.5

6.5

0.5

22.2

85.6

6.1

18.4


382.1

164.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
Central governments or central banks
160.4


0.8


0.3



0.2


5.6


167.3

5.7

2
Regional governments or local authorities
0.2


1.8


0.7



0.2




2.9

0.3

3
Public sector entities













4
Multilateral development banks
0.1


0.1









0.2

0.2

5
International organisations
2.7


 








2.7


6
Institutions

0.1

0.8


0.7



0.5




2.1

0.3

7
Corporates


2.1

0.2

2.7

0.1


72.6

0.7



78.4

67.9

8
Retail






22.0





22.0

22.0

9
Secured by mortgage on immovable property



25.2




0.5




25.7

25.7

10
Exposures in default







1.3

2.0



3.3

3.3

11
Higher-risk categories








3.4



3.4

3.4

14
Collective investment undertakings







0.5




0.5

0.5

15
Equity







2.9


12.3


15.2

15.2

16
Other items
0.7


5.1





3.7




9.5

9.5

17
Total at 31 Dec 2016
164.1

0.1

10.7

25.4

4.4

0.1

22.0

82.4

6.1

17.9


333.2

154.0

1
Securitisation positions are not included in this table.
Table 28: IRB – Effect on RWA of credit derivatives used as CRM techniques
 
 
At 31 Dec
 
 
2017
2016
 
 
Pre-credit derivatives RWAs

Actual
RWAs

Pre-credit derivatives
RWAs
Actual
RWAs
 
 
$bn

$bn

$bn
$bn
1
Exposures under FIRB
0.3

0.3

0.3
0.3
6
Corporates – other
0.3

0.3

0.3
0.3
7
Exposures under AIRB1
181.3

180.1

159.7
158.6
8
Central governments and central banks
5.2

5.2

5.9
5.9
9
Institutions
4.8

4.8

2.7
2.7
11
Corporates – specialised lending
19.0

19.0

14.4
14.4
12
Corporates – other
122.5

121.3

105.2
104.1
14
Retail – Secured by real estate non-SMEs
13.0

13.0

18.4
18.4
15
Retail – Qualifying revolving
6.3

6.3

4.4
4.4
16
Retail – Other SMEs
5.0

5.0

3.0
3.0
17
Retail – Other non-SMEs
5.5

5.5

5.7
5.7
20
Total
181.6

180.4

160.0
158.9
1
Securitisation positions are not included in this table.

33
HSBC Holdings plc Pillar 3 2017


Table 29: Credit derivatives exposures
 
 
At 31 Dec
 
 
2017
2016
 
Footnote
Protection bought

Protection sold

Protection bought

Protection sold

 
 
$bn

$bn

$bn

$bn

Notionals
 
 
 
 
 
Credit derivative products used for own credit portfolio
 
 
 
 
 
– Index credit default swaps
 
6.3

3.7

4.6

1.9

Total notionals used for own credit portfolio
 
6.3

3.7

4.6

1.9

Credit derivative products used for intermediation
1




 
 
– Index credit default swaps
 
195.5

176.0

214.6

207.4

– Total return swaps
 
7.8

12.2

12.3

7.0

Total notionals used for intermediation
 
203.3

188.2

226.9

214.4

Total credit derivative notionals
 
209.6

191.9

231.5

216.3

Fair values
 




 
 
– Positive fair value (asset)
 
0.8

4.3

2.3

2.9

– Negative fair value (liability)
 
(4.4
)
(1.0
)
(3.1
)
(2.7
)
1
This is where we act as an intermediary for our clients, enabling them to take a position in the underlying securities. This does not increase risk for HSBC.
The above table shows the credit derivative exposures that HSBC holds, split between those amounts due to client intermediation and those amounts booked as part of HSBC’s own credit portfolio. Where the credit derivative is used to hedge our own portfolio the resulting credit risk impact is seen in table 29 above and no counterparty credit risk capital requirement arises. For a discussion on hedging risk and monitoring the continuing effectiveness of hedges refer to Note 1.2(e) of the Annual Report and Accounts 2017.
Global risk
Application of the IRB approach
Our Group IRB credit risk rating framework incorporates obligor propensity to default expressed in PD, and loss severity in the event of default expressed in EAD and LGD. These measures are used to calculate regulatory EL and capital requirements. They are also used with other inputs to inform rating assessments for the purposes of credit approval and many other purposes, for example:
credit approval and monitoring: IRB models are used in the assessment of customer and portfolio risk in lending decisions;
risk appetite: IRB measures are an important element in identifying risk exposure at customer, sector and portfolio level;
pricing: IRB parameters are used in pricing tools for new transactions and reviews; and
economic capital and portfolio management: IRB parameters are used in the economic capital model that has been implemented across HSBC.
Roll-out of the IRB approach
With the PRA’s permission, we have adopted the advanced approach for the majority of our business. At the end of 2017, portfolios in much of Europe, Asia and North America were on advanced IRB approaches. Others remain on the standardised or foundation approaches pending the development of models for the PRA’s approval in line with our IRB roll-out plans where the primary focus is on corporate and retail exposures.
At 31 December 2017, 76% of the exposures were treated under AIRB, 3% under FIRB and 21% under the standardised approach.
 
EL and credit risk adjustments
We analyse credit loss experience in order to assess the performance of our risk measurement and control processes, and to inform our understanding of the implications for risk and capital management of dynamic changes occurring in the risk profile of our exposures.
When comparing EL with measures of credit losses under IFRSs, it is necessary to take into account differences in the definition and scope of each. Below are examples of matters that can give rise to material differences in the way economic, business and methodological drivers are reflected quantitatively in the accounting and regulatory measures of loss.
In 2018, IFRS 9 changes the way credit losses are measured for accounting purposes. IFRS 9 is conceptually more aligned with the IRB measurement of expected loss and uses similar building blocks such as PD and LGD and EL. Significant differences between regulatory and accounting measures of expected loss will continue under IFRS 9 due to factors such as: the removal of regulatory conservatism and supervisory set parameters under IFRS, point-in-time and forward-looking measurements under IFRS compared to through-the-cycle measures under regulatory, 12-month expected losses under regulatory versus lifetime expected losses under IFRS.
Table 52 in Appendix I set out for IRB credit exposures the EL, CRA balances and actual loss experience reflected in the charges for CRAs.
CRA balances represent management’s best estimate of losses incurred in the loan portfolios at the balance sheet date. Charges for CRAs represent a movement in the CRA balance during the year, reflecting loss events that occurred during the financial year and changes in estimates of losses arising on events that occurred prior to the current year. EL represents the one-year regulatory expected loss accumulated in the book at the balance sheet date.

HSBC Holdings plc Pillar 3 2017
34


Pillar 3 Disclosures at 31 December 2017

Examples of differences in definition and scope between EL and CRA balances:
Under IAS 39, our estimates of loss in impairment allowances are required to reflect the current circumstances and specific cash flow expectations of a customer. EL is based on modelled estimates and although the estimates may be individually assigned to specific exposures, the statistical nature of these models means that they are influenced by the behaviour of the overall portfolio.
EL is based on exposure values that incorporate expected future drawings of committed credit lines, while CRAs are recognised in respect of financial assets recognised on the balance sheet and in respect of committed credit lines where a loss is probable.
EL is generally based on through-the-cycle (‘TTC’) estimates of PD over a one-year future horizon, determined via statistical analysis of historical default experience. CRAs are recognised for losses that have been incurred at the balance sheet date.
In the majority of cases, EL is based on economic downturn estimates of LGD, while CRAs are measured using estimated future cash flows at the balance sheet date.
EL incorporates LGD, which may discount recoveries at a different rate from the effective interest rate employed in discounted cash flow analysis for CRAs.
LGDs typically include all costs associated with recovery, whereas the accounting measurement considers only the costs of obtaining and selling collateral.
In the foundation IRB approach, LGD and the conversion factors used to calculate EAD are set by regulations, and may differ significantly from the accounting assumptions about estimated cash flows.
For EL, certain exposures are subject to regulatory minimum thresholds for one or more parameters, whereas credit losses under IFRSs are determined using management’s judgement about estimated future cash flows.
In the case of EL, to meet regulatory prudential standards, HSBC’s model philosophy favours the incorporation of conservative estimation to accommodate uncertainty, for instance where modelling portfolios with limited data. Under IFRSs, uncertainty is considered when forming management’s estimates of future cash flows, using balanced and neutral judgement.
Qualitative disclosures on banks’ use of external credit ratings under the standardised approach for credit risk
The standardised approach is applied where exposures do not qualify for use of an IRB approach and/or where an exemption from IRB has been granted. The standardised approach requires banks to use risk assessments prepared by external credit assessment institutions (‘ECAIs’) or ECAs to determine the risk weightings applied to rated counterparties.
ECAI risk assessments are used within the Group as part of the determination of risk weightings for the following classes of exposure:
central governments and central banks;
institutions;
corporates;
securitisation positions;
short-term claims on institutions and corporates;
regional governments and local authorities; and
multilateral development banks.
We have nominated three ECAIs for this purpose – Moody’s Investor Service (‘Moody’s’), Standard and Poor’s rating agency (‘S&P’) and Fitch Ratings (‘Fitch’). In addition to this, we use DBRS ratings specifically for securitisation positions. We have not nominated any ECAs.
Data files of external ratings from the nominated ECAIs are matched with customer records in our centralised credit database.
 
When calculating the risk-weighted value of an exposure using ECAI risk assessments, risk systems identify the customer in question and look up the available ratings in the central database according to the rating selection rules. The systems then apply the prescribed credit quality step mapping to derive from the rating the relevant risk weight.
All other exposure classes are assigned risk weightings as prescribed in the PRA’s Rulebook.
Credit quality step
Moody’s assessment
S&P’s
assessment
Fitch’s
assessment
DBRS assessment
1
Aaa to Aa3
AAA to AA–
AAA to AA–
AAA to AAL
2
A1 to A3
A+ to A–
A+ to A–
AH to AL
3
Baa1 to Baa3
BBB+ to BBB–
BBB+ to BBB–
BBBH to BBBL
4
Ba1 to Ba3
BB+ to BB–
BB+ to BB–
BBH to BBL
5
B1 to B3
B+ to B–
B+ to B–
BH to BL
6
Caa1 and below
CCC+ and below
CCC+ and below
CCCH and below
Exposures to, or guaranteed by, central governments and central banks of European Economic Area (‘EEA’) states and denominated in local currency are risk-weighted at 0% using the standardised approach, provided they would be eligible under that approach for a 0% risk weighting.
Wholesale risk
The wholesale risk rating system
This section describes how we operate our credit risk analytical models and use IRB metrics in the wholesale customer business.
PDs for wholesale customer segments (that is central governments and central banks, financial institutions and corporate customers) and for certain individually assessed personal customers are derived from a customer risk rating (‘CRR’) master scale of 23 grades. Of these, 21 are non-default grades representing varying degrees of strength of financial condition, and two are default grades. Each CRR has a PD range associated with it as well as a mid-point PD.
The score generated by a credit risk rating model for the obligor is mapped to a corresponding PD and master-scale CRR. The CRR is then reviewed by a credit approver who, taking into account information such as the most recent events and market data, makes the final decision on the rating. The rating assigned reflects the approver’s overall view of the obligor’s credit standing.
The mid-point PD associated with the finally assigned CRR is then used in the regulatory capital calculation.
Relationship managers may propose a different CRR from that indicated through an override process which must be approved by the Credit function. Overrides for each model are recorded and monitored as part of the model management process.
The CRR is assigned at an obligor level,which means that separate exposures to the same obligor are generally subject to a single, consistent rating. Unfunded credit risk mitigants, such as guarantees, may also influence the final assignment of a CRR to an obligor. The effect of unfunded risk mitigants is considered for IRB approaches in table 55 and for the standardised approach in table 56.
If an obligor is in default on any material credit obligation to the Group, all of the obligor’s facilities from the Group are considered to be in default.
Under the IRB approach, obligors are grouped into grades that have similar PD or anticipated default frequency. The anticipated default frequency may be estimated using all relevant information at the relevant date (PIT rating system) or be free of the effects of the credit cycle (TTC rating system).

35
HSBC Holdings plc Pillar 3 2017


We generally utilise a hybrid approach of PIT and TTC. That is, while models are calibrated to long-run default rates, obligor ratings are reviewed annually, or more frequently if necessary, to reflect changes in their circumstances and/or their economic operating environment.
Our policy requires approvers to downgrade ratings on expectations, but to upgrade them only on performance. This leads to expected defaults typically exceeding actual defaults.
For EAD and LGD estimation, operating entities are permitted, subject to overview by Group Risk, to use their own modelling approaches to suit conditions in their jurisdictions. Group Risk provides co-ordination, benchmarks, and promotion of best practice on EAD and LGD estimation.
EAD is estimated to a 12-month forward time horizon and represents the current exposure, plus an estimate for future increases in exposure and the realisation of contingent exposures post-default.
LGD is based on the effects of facility and collateral structure on outcomes post-default. This includes such factors as the type of client, the facility seniority, the type and value of collateral, past recovery experience and priority under law. It is expressed as a percentage of EAD.
Wholesale models
To determine credit ratings for the different types of wholesale obligor, multiple models and scorecards are used for PD, LGD, and EAD. These models may be differentiated by region, customer segment and/or customer size. For example, PD models are differentiated for all of our key customer segments, including sovereigns, financial institutions, and large-, medium- and small-sized corporates.
Global PD models have been developed for asset classes or clearly identifiable segments of asset classes where the customer relationship is managed globally; for example, sovereigns, financial institutions and the largest corporate clients that typically operate internationally.
Local PD models, specific to a particular country, region, or sector, are developed for other obligors. This includes corporate clients when they show distinct characteristics in common in a particular geography.
The two major drivers of model methodology are the nature of the portfolio and the availability of internal or external data on historical defaults and risk factors. For some historically low-default portfolios, e.g. sovereign and financial institutions, a model will rely more heavily on external data and/or the input of an expert panel. Where sufficient data is available, models are built on a statistical basis, although the input of expert judgement may still form an important part of the overall model development methodology.
 
Most LGD and EAD models are developed according to local circumstances, considering legal and procedural differences in the recovery and workout processes. Our approach to EAD and LGD also encompasses global models for central governments and central banks, and for institutions, as exposures to these customer types are managed centrally by Global Risk. The PRA requires all firms to apply an LGD floor of 45% for senior unsecured exposure to sovereign entities. This floor was applied to reflect the relatively few loss observations across all firms in relation to these obligors. This floor is applied for the purposes of regulatory capital reporting.
The PRA has published guidance on the appropriateness of LGD models for low default portfolios. It states there should be at least 20 defaults per country per collateral type for LGD models to be approved. Where there are insufficient defaults, an LGD floor will be applied. As a result, in 2017, we continued to apply LGD floors for our banks portfolio and some Asian corporate portfolios where there were insufficient loss observations.
In the same guidance, the PRA also indicated that it considered income-producing real estate to be an asset class that would be difficult to model. As a result, RWAs for our UK CRE portfolio and US income-producing CRE portfolio are calculated using the supervisory slotting approach. Under the supervisory slotting approach the bank allocates exposures to one of five categories. Each category then fixed pre-determined RWA and EL percentages.
Local models for the corporate exposure class are developed using various data inputs, including collateral information and geography (for LGD) and product type (for EAD). The most material corporate models are the UK and Asia models, all of which are developed using more than 10-years’ worth of data. The LGD models are calibrated to a period of credit stress or downturn in economic conditions.
None of the EAD models are calibrated for a downturn, as analysis shows that utilisation decreases during a downturn because credit stress is accompanied by more intensive limit monitoring and facility reduction.
Table 30 sets out the key characteristics of the significant wholesale credit risk models that drive the capital calculation split by regulatory wholesale asset class, with their associated RWAs, including the number of models for each component, the model method or approach and the number of years of loss data used.


HSBC Holdings plc Pillar 3 2017
36


Pillar 3 Disclosures at 31 December 2017

Table 30: Wholesale IRB credit risk models
Regulatory asset
classes measured
RWAs for
associated
asset class
$bn
Component
Number of
significant
models
Model description and methodology
Number
of years
loss data
Regulatory Floors
Central governments and central banks
33.9
PD
1
A shadow rating approach that includes macroeconomic and political factors, constrained with expert judgement.
>10
No
LGD
1
An unsecured model built on assessment of structural factors that influence the country’s long-term economic performance. For unsecured LGD, a floor of 45% is applied.
8
45%
EAD
1
A cross-classification model that uses both internal data and expert judgement, as well as information on similar exposure types from other asset classes.
8
EAD must be at least equal to the current utilisation of the balance at account level
Institutions
17.7
PD
1
A statistical model that combines quantitative analysis on financial information with expert inputs and macroeconomic factors.
10
PD >0.03%
LGD
1
A quantitative model that produces both downturn and expected LGD. Several securities types are included in the model to recognise collateral in the LGD calculation. For unsecured LGD, a floor of 45% is applied.
10
45%
EAD
1
A quantitative model that assigns credit conversion factors (‘CCF’) taking into account product types and committed/uncommitted indicator to calculate EAD using current utilisation and available headroom.
10
EAD must be at least equal to the current utilisation of the balance at account level
Corporates¹
342.9
 
 
 
 
 
Global large corporates
 
PD
1
A statistical model built on 15 years of data. The model uses financial information, macroeconomic information and market-driven data, and is complemented by a qualitative assessment.
15
PD >0.03%
Other regional / local corporates
 
PD
11
Corporates that fall below the global large corporate threshold are rated through regional/local PD models, which reflect regional/local circumstances. These models use financial information, behavioural data and qualitative information to derive a statistically built PD.
>10

Non-bank financial institutions
 
PD
10
Predominantly statistical models that combines quantitative analysis on financial information with expert inputs.
10
PD >0.03%
All corporates
 
LGD
7
Regional/local statistical models covering all corporates, including global large corporates, developed using historical loss/recovery data and various data inputs, including collateral information, customer type and geography.
>7
UK 45%
 
 
EAD
5
Regional/local statistical models covering all corporates, including global large corporates, developed using historical utilisation information and various data inputs, including product type and geography.
>7
EAD must be at least equal to the current utilisation of the balance at account level
1
Excludes specialised lending exposures subject to supervisory slotting approach (see table 61).

37
HSBC Holdings plc Pillar 3 2017


 
 
 
 
 
 
 
 
 
Table 31: IRB models – estimated and actual values (wholesale)¹
 
 
 
PD2
LGD3
EAD4
 
 
 
Estimated

Actuals

Estimated5

Actuals5

Estimated

Actuals

 
 
Footnotes
%

%

%

%

%

%

 
2017
 
 
 
 
 
 
 
 
– Sovereigns model
6
2.24






 
– Banks model
 
1.72






 
– Corporates models
7
1.72

0.96

27.75

25.45

0.39

0.36

 
 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
– Sovereigns model
6
3.43






 
– Banks model
 
1.63






 
– Corporates models
7
1.79

1.23

37.71

29.43

0.91

0.76

 
 
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
– Sovereigns model
6
1.72

1.12

45.00


0.07


 
– Banks model
 
2.22






 
– Corporates models
7
1.89

1.26

37.74

21.52

0.60

0.55

 
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
– Sovereigns model
6
2.27






 
– Banks model
 
3.28






 
– Corporates models
7
1.88

1.16

36.83

16.06

0.47

0.34

 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
 
– Sovereigns model
6
4.14






 
– Banks model
 
3.18

0.20

40.01


0.06

0.04

 
– Corporates models
7
2.63

1.20

33.09

18.69

0.54

0.48

1
Data represents an annual view, analysed at 30 September.
2
Estimated PD for all models is average PD calculated on the number of obligors covered by the model(s).
3
Estimated and actual LGD represent defaulted populations. Average LGD values are EAD-weighted.
4
Expressed as a percentage of total EAD, which includes all defaulted and non-defaulted exposures for the relevant population.
5
For sovereigns and banks models, estimated and actual LGD represents the average LGD for customers that defaulted in the year. For corporates models, they represent the average LGD for customers that have defaulted and been resolved in the period.
6
For 2017, 2016, 2015 and 2014, the estimated PD excludes inactive sovereign obligors.
7
Covers the combined populations of the global large corporates model, all regional IRB models for large, medium and small corporates, and non-bank financial institutions. For 2017, 2016, 2015 and 2014, the estimated and observed PDs were calculated only for unique obligors.
Table 32: IRB models – corporate PD models – performance by CRR grade
 
 
Corporates1
 
 
Facility2
Defaulted3

Estimated PD4
Actual PD5

Diff. in PD

Actual PD5
Footnotes
   %
   %

   %
   %

   %

2017
 
 
 
 
 
 
CRR 0.1
6

0.01

0.00

CRR 1.1
 
2.84

0.02

0.02

CRR 1.2
 
5.98

0.04

0.04

CRR 2.1
 
17.92

0.07

0.07

CRR 2.2
 
13.84
0.02

0.13
0.03

0.10

CRR 3.1
 
11.53
0.01

0.22
0.07

0.15

CRR 3.2
 
10.51
0.02

0.37
0.14

0.23

CRR 3.3
 
10.78
0.12

0.63
0.25

0.38

CRR 4.1
 
7.05
0.15

0.87
0.36

0.51

CRR 4.2
 
5.35
0.27

1.20
0.40

0.80

CRR 4.3
 
4.89
0.14

1.65
0.58

1.07

CRR 5.1
 
3.58
0.77

2.25
1.39

0.86

CRR 5.2
 
1.93
1.25

3.05
1.61

1.44

CRR 5.3
 
1.58
2.56

4.20
2.28

1.92

CRR 6.1
 
1.21
4.95

5.75
4.47

1.28

CRR 6.2
 
0.36
4.43

7.85
7.88

(0.03
)
CRR 7.1
 
0.27
8.32

10.00
10.47

(0.47
)
CRR 7.2
 
0.09
11.95

13.00
10.10

2.90

CRR 8.1
 
0.22
14.07

19.00
10.88

8.12

CRR 8.2
 
0.04
32.01

36.00
15.88

20.12

CRR 8.3
 
0.03
33.10

75.00
17.89

57.11

Total
 
100.00
 
 
 
 

HSBC Holdings plc Pillar 3 2017
38


Pillar 3 Disclosures at 31 December 2017

Table 32: IRB models – corporate PD models – performance by CRR grade (continued)
 
 
Corporates1
 
 
Facility2

Defaulted3

Estimated PD4
Actual PD5

   Diff. in PD

 
Footnotes
   %

   %

   %
   %

   %

2016
 
 
 
 
 
 
CRR 0.1
6


0.01

0.01

CRR 1.1
 
3.88


0.02

0.02

CRR 1.2
 
6.05


0.04

0.04

CRR 2.1
 
17.51


0.07

0.07

CRR 2.2
 
15.05

0.01

0.13
0.03

0.10

CRR 3.1
 
11.22

1.03

0.22
0.25

(0.03
)
CRR 3.2
 
10.67

0.26

0.37
0.36

0.01

CRR 3.3
 
9.21

0.26

0.63
0.49

0.14

CRR 4.1
 
6.46

0.78

0.87
0.79

0.08

CRR 4.2
 
5.49

0.47

1.20
0.64

0.56

CRR 4.3
 
4.59

1.18

1.65
1.46

0.19

CRR 5.1
 
4.08

1.31

2.25
1.41

0.84

CRR 5.2
 
2.11

1.40

3.05
1.89

1.16

CRR 5.3
 
1.76

1.96

4.20
2.27

1.93

CRR 6.1
 
0.98

10.15

5.75
5.57

0.18

CRR 6.2
 
0.38

15.38

7.85
4.68

3.17

CRR 7.1
 
0.27

14.29

10.00
9.46

0.54

CRR 7.2
 
0.09

12.38

13.00
6.63

6.37

CRR 8.1
 
0.10

48.22

19.00
13.11

5.89

CRR 8.2
 
0.07

47.10

36.00
20.29

15.71

CRR 8.3
 
0.03

36.10

75.00
17.83

57.17

Total
 
100.00

 
 
 
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
CRR 0.1
6


0.01

0.01

CRR 1.1
 
5.72


0.02

0.02

CRR 1.2
 
5.25


0.04

0.04

CRR 2.1
 
16.48


0.07

0.07

CRR 2.2
 
14.17


0.13
0.01

0.12

CRR 3.1
 
11.92

0.17

0.22
0.15

0.07

CRR 3.2
 
11.00

0.10

0.37
0.30

0.07

CRR 3.3
 
9.35

0.14

0.63
0.47

0.16

CRR 4.1
 
6.52

0.64

0.87
0.97

(0.10
)
CRR 4.2
 
5.07

0.45

1.20
1.06

0.14

CRR 4.3
 
4.38

0.62

1.65
1.55

0.10

CRR 5.1
 
3.52

0.99

2.25
1.24

1.01

CRR 5.2
 
2.19

0.61

3.05
1.44

1.61

CRR 5.3
 
2.24

1.74

4.20
1.89

2.31

CRR 6.1
 
0.89

4.66

5.75
5.05

0.70

CRR 6.2
 
0.66

3.58

7.85
6.46

1.39

CRR 7.1
 
0.31

10.79

10.00
7.13

2.87

CRR 7.2
 
0.09

7.27

13.00
9.48

3.52

CRR 8.1
 
0.14

11.33

19.00
11.11

7.89

CRR 8.2
 
0.07

16.97

36.00
23.61

12.39

CRR 8.3
 
0.03

16.66

75.00
17.10

57.90

Total
 
100.0

 
 
 
 

39
HSBC Holdings plc Pillar 3 2017


Table 32: IRB models – corporate PD models – performance by CRR grade (continued)
 
 
Corporates1
 
 
Facility2

Defaulted3

Estimated PD4
Actual PD5

Diff. in PD

 
Footnote
   %

   %

   %
   %

   %

2014
 
 
 
 
 
 
CRR 0.1
6
0.01


0.01

0.01

CRR 1.1
 
6.32


0.02

0.02

CRR 1.2
 
6.68


0.04

0.04

CRR 2.1
 
16.71

0.01

0.07
0.04

0.03

CRR 2.2
 
13.07


0.13

0.13

CRR 3.1
 
10.38

0.06

0.22
0.10

0.12

CRR 3.2
 
12.50

0.11

0.37
0.23

0.14

CRR 3.3
 
6.62

0.25

0.63
0.54

0.09

CRR 4.1
 
10.41

0.28

0.87
0.54

0.33

CRR 4.2
 
4.12

0.79

1.20
0.81

0.39

CRR 4.3
 
3.49

0.83

1.65
0.91

0.74

CRR 5.1
 
2.50

0.53

2.25
0.97

1.28

CRR 5.2
 
2.09

0.54

3.05
1.24

1.81

CRR 5.3
 
1.47

1.74

4.20
2.70

1.50

CRR 6.1
 
0.59

3.02

5.75
4.11

1.64

CRR 6.2
 
0.30

1.12

7.85
4.27

3.58

CRR 7.1
 
0.29

14.59

10.00
11.35

(1.35
)
CRR 7.2
 
0.08

2.78

13.00
10.11

2.89

CRR 8.1
 
2.31

1.17

19.00
13.77

5.23

CRR 8.2
 
0.04

32.32

36.00
22.33

13.67

CRR 8.3
 
0.02

4.85

75.00
14.89

60.11

Total
 
100.0

 
 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
CRR 0.1
6


0.01

0.01

CRR 1.1
 
4.83


0.02

0.02

CRR 1.2
 
7.47


0.04

0.04

CRR 2.1
 
20.85


0.07

0.07

CRR 2.2
 
10.38

0.01

0.13
0.03

0.10

CRR 3.1
 
10.79

0.07

0.22
0.16

0.06

CRR 3.2
 
9.49

0.13

0.37
0.22

0.15

CRR 3.3
 
8.33

0.15

0.63
0.27

0.36

CRR 4.1
 
6.40

0.35

0.87
0.48

0.39

CRR 4.2
 
5.84

0.93

1.20
0.80

0.40

CRR 4.3
 
4.22

0.47

1.65
0.67

0.98

CRR 5.1
 
4.18

0.72

2.25
0.76

1.49

CRR 5.2
 
3.07

0.97

3.05
1.03

2.02

CRR 5.3
 
1.85

2.77

4.20
1.89

2.31

CRR 6.1
 
0.98

4.37

5.75
3.28

2.47

CRR 6.2
 
0.46

5.74

7.85
3.77

4.08

CRR 7.1
 
0.44

12.69

10.00
7.95

2.05

CRR 7.2
 
0.15

7.84

13.00
8.68

4.32

CRR 8.1
 
0.15

9.48

19.00
11.44

7.56

CRR 8.2
 
0.07

14.94

36.00
13.70

22.30

CRR 8.3
 
0.05

13.12

75.00
13.64

61.36

Total
 
100.0

 
 
 
 
1
Covers the combined populations of the global large corporates model, all regional IRB models for large, medium and small corporates and non-bank financial institutions.
2
Total facility limits for each CRR grade, expressed as a percentage of total limits granted.
3
Defaulted facilities as a percentage of total facility limits at that grade.
4
The estimated PD is before application of the 0.03% regulatory floor.
5
Actual PD is based on the number of defaulted obligors covered by the model(s), without taking into account the size of the facility granted or the exposures to the obligor.
6
The top band of the wholesale CRR master scale is not available to entities in the corporates exposure class. It is restricted to the strongest central governments, central banks and institutions.

HSBC Holdings plc Pillar 3 2017
40


Pillar 3 Disclosures at 31 December 2017

Retail risk
Retail risk rating systems
Due to the different country-level portfolio performance characteristics and loss history, there are no global models for our retail portfolios. Across the Group, over 100 models are used with the PRA’s approval under our IRB permission.
The 10 most material risk rating systems for which we disclose details of modelling methodology and performance data represent RWAs of $38bn or 58% of the total retail IRB RWA.
In previous years, the most material rating systems have included our US Consumer Lending and Mortgage Services portfolios. These have now been sold. We continue to disclose the 10 most material portfolios, which includes additional mortgage portfolios in the UK and Hong Kong.
PD models are developed using statistical estimation based on a minimum of five years of historical data. The modelling approach
 
is typically inherently TTC or, where models are developed based on a PIT approach (as in the UK), the model outputs become effectively TTC through the application of buffer or model adjustments as agreed with the PRA.
EAD models are also developed using at least five years of historical observations and typically adopt one of two approaches:
for closed-end products without the facility for additional drawdowns, EAD is estimated as the outstanding balance of accounts at the time of observation; or
for products with the facility for additional drawdowns, EAD is estimated as the outstanding balance of accounts at the time of observation plus a credit conversion factor applied to the undrawn portion of the facility.
LGD estimates have more variation, particularly in respect of the time period that is used to quantify economic downturn assumptions.
Table 33: Material retail IRB risk rating systems
Portfolio
CRD IV asset
class
RWA
$bn
Component model
Number of material component models
Model description and methodology
Number of years loss
data1
Applicable Pillar 1 regulatory thresholds and overlays
UK HSBC
residential
mortgages
Retail
– secured by mortgages on immovable property non-SME
4.60
PD
1
Statistical model built on internal behavioural data and bureau information. Underlying PIT model is calibrated to the latest observed PD. An adjustment is then applied to generate the long-run PD based on a combination of historical misalignment of the underlying model and expert judgement.
7–10
PD floor of 0.03%
LGD
1
Statistical estimates of loss and probability of possession in combination with the workout process and using the 1990s recession in benchmarking the downturn LGD.
>10
LGD floor of 10% at portfolio level
EAD
1
Logical model that uses the sum of balance at observation plus further unpaid interest that could accrue before default.
7–10
EAD must at least be equal to current balance
UK First Direct
residential
mortgages
Retail
– secured by mortgages on immovable property non-SME
0.96
PD
1
Underlying PIT PD model is a segmented scorecard. An adjustment is then applied based on observed misalignment in the underlying model (with some additional conservatism applied).
7–10
PD floor of 0.03%
LGD
1
Underlying model is component based (LGD, forced sale haircut and the time between default and property sale). A downturn adjustment is applied through a 30% drop from peak house price plus adjustments to the other components in the model, including a 10% forced sale haircut.
>10
LGD floor of 10% at portfolio level
EAD
2
There are two separate EAD models – one for standard capital repayment mortgages and one for offset mortgages which offer a revolving loan facility.
7–10
EAD must at least be equal to current balance
UK HSBC
credit cards
Retail
– qualifying revolving
2.26
PD
1
Statistical model built on internal behavioural data and bureau information. Underlying PIT model is calibrated to the latest observed PD. An adjustment is then applied to generate the long run PD based on historical observed misalignment of the underlying model.
7–10
PD floor of 0.03%
LGD
1
Statistical model based on forecasting the amount of expected future recoveries, segmented by default status.
7–10
 
EAD
1
Statistical model that directly estimates EAD for different segments of the portfolio using either balance or limit as the key input.
7–10
EAD must at least be equal to current balance
UK HSBC
personal loans
Retail
– other non-SME
3.87
PD
1
Statistical model built on internal behavioural data and bureau information. Underlying PIT model is calibrated to the latest observed PD. An adjustment is then applied to generate the long run PD based on historical observed misalignment of the underlying model.
7–10
PD floor of 0.03%
LGD
1
Statistical model based on forecasting the amount of expected future recoveries, segmented by default status.
7–10
 
EAD
1
EAD is equal to current balance as this provides a conservative estimate.
7–10
EAD must at least be equal to current balance

41
HSBC Holdings plc Pillar 3 2017


Table 33: Material retail IRB risk rating systems (continued)
Portfolio
CRD IV asset
class
RWA
$bn
Component model
Number of material component models
Model description and methodology
Number of years loss
data1
Applicable Pillar 1 regulatory thresholds and overlays
UK business banking
Retail
– other SME
3.04
PD
1
Statistical model built on internal behavioural data and bureau information. Underlying PIT model is calibrated to the latest observed PD. An adjustment is then applied to generate the long run PD based on historical observed misalignment of the underlying model.
7–10
PD floor of 0.03%
LGD
2
Two sets of models – one for secured exposures and another for unsecured exposures. The secured model uses the value to loan as a key component for estimation and the unsecured model estimates the amount of future recoveries and undrawn portion.
7–10
 
EAD
1
Statistical model using segmentation according to limit and utilisation and estimation of the undrawn exposure.
7–10
EAD must at least be equal to current balance
Hong Kong
HSBC personal residential mortgages
2
Retail
– secured by mortgages on immovable property non-SME
8.20
PD
2
Statistical model built on internal behavioural data and bureau information, and calibrated to a long-run default rate.
>10
PD floor of 0.03%
LGD
2
Statistical model based on estimate of loss incurred over a recovery period derived from historical data with downturn LGD based on the worst observed default rate.
>10
LGD floor of 10% at portfolio level
EAD
2
Rule-based calculation based on current balance which provides a conservative estimate of EAD.
>10
EAD must at least be equal to current balance
Hong Kong
Hang Seng personal residential mortgages
Retail
– secured by mortgages on immovable property non-SME
4.54
PD
2
Statistical model built on internal behavioural data, and calibrated to a long-run default rate.
>10
PD floor of 0.03%
LGD
2
Two statistical models and one historical average model based on estimates of loss incurred over a recovery period derived from historical data with a downturn adjustment.
>10
LGD floor of 10% at portfolio level
EAD
2
Rule-based calculation based on current balance which provides a conservative estimate of EAD.
>10
EAD must at least be equal to current balance
Hong Kong
HSBC credit
cards
Retail
– qualifying revolving
3.50
PD
1
Statistical model built on internal behavioural data and bureau information, and calibrated to a long-run default rate.
>10
PD floor of 0.03%
LGD
1
Statistical model based on forecasting the amount of expected losses. Downturn LGD derived using data from the period with the highest default rate.
>10
 
EAD
1
Statistical model which derives a credit utilisation which is used to estimate EAD.
>10
EAD must at least be equal to current balance
Hong Kong
HSBC personal instalment loans
Retail
– other non-SME
1.50
PD
1
Statistical model built on internal behavioural data and bureau information, and calibrated to a long-run default rate.
>10
PD floor of 0.03%
LGD
1
Statistical model based on forecasting the amount of expected future losses. Downturn LGD derived using data from the period with the highest default rate.
>10
 
EAD
1
Statistical model which derives a credit conversion factor to determine the proportion of undrawn limit to be added to the balance at observation.
>10
EAD must at least be equal to current balance
US HSBC Mortgage Corporation
first lien
3
Retail
– secured by mortgages on immovable property non-SME
5.41
PD
1
Statistical model built on internal behavioural data and bureau information, and calibrated to a long-run default rate.
>10
PD floor of 0.03%
LGD
1
Statistical model based on identifying the main risk drivers of loss and recovery and grouping them into homogeneous pools. Downturn LGD is derived based on the peak default rate observed. Additional assumptions and estimations are made on incomplete workouts.
>10
LGD floor of 10% at portfolio level
EAD
1
Rule-based calculation based on current balance which provides a conservative estimate of EAD.
>10
EAD must at least be equal to current balance
1
Defined as the number of years of historical data used in model development and estimation.
2
In 2017, the Hong Kong Monetary Authority (‘HKMA’) increased the risk weight floor from 15% to 25% for all residential mortgages booked after 19 May 2017.
3
In US mortgage business, first lien is a primary claim on a property that takes precedence over all subsequent claims and will be paid first from the proceeds in case of the property’s foreclosure sale.

HSBC Holdings plc Pillar 3 2017
42


Pillar 3 Disclosures at 31 December 2017

Retail credit models
Given the large number of retail IRB models globally, we disclose information on our most material local models.
The actual and estimated values are derived from the model monitoring and calibration processes performed at a local level. Within the discipline of our global modelling policies, our analytics teams adopt back-testing criteria specific to local conditions in order to assess the accuracy of their models.
Table 34 contains the estimated and actual values from the back-testing of our material IRB models covering portfolios in the UK, Hong Kong and the residential mortgage portfolio in the US. The most recent three years have been included for the portfolios added to this year’s disclosures.
Within table 34, for back-testing purposes, a customer’s PD is observed at a PIT and their default or non-default status in the following one-year period is recorded against that PD grade. The PD presented here is expressed on an obligor count basis consisting of non-defaulted obligors at the time of observation. The LGD and EAD refer to observations for the defaulted population, being the appropriate focus of an assessment of these models’ performance. The LGD values represent the amount of loss as a percentage of EAD, and are calculated based on defaulted accounts that were fully resolved or have completed the modelled recovery outcome period at the reporting date. The EAD values of the defaulted exposures are presented as a percentage of the total EAD, which includes all defaulted and non-defaulted exposures for the relevant population. The regulatory PD and LGD floors of 0.03% and 10%, respectively, are applied during final capital calculation and are not reflected in the estimates below.
 
For our UK residential mortgage portfolios, the model outputs include required regulatory downturn adjustments. In conducting the back-testing, our UK residential mortgage LGD models consider repossession rates over a 36 month period starting at the date of default. For both our HSBC and First Direct branded residential mortgages, LGD estimates and actual LGD values remained low and stable in 2017.
The Hong Kong estimated LGD values in table 34 include required stressed factors to reflect downturn conditions. The LGD models for our Hong Kong HSBC and Hang Seng residential mortgage portfolios use a recovery outcome period of 24 months starting at the date of default. For both portfolios, LGD estimates remain higher than the calculated actual values but below the 10% regulatory floor. The Hong Kong credit card EAD model currently underestimates exposure values at the point of default; however, this is mitigated by a temporary adjustment to RWAs. An updated model has been submitted to the PRA for approval following approval from the local regulator and is expected to be implemented during 2018. Actual LGD values for Hong Kong personal loans have increased in 2017 due to the inclusion of restructured loans in the calculation. This provides a more accurate assessment of losses. LGD estimates remain higher than the actual values.
The US estimates in table 34 include downturn adjustments and model overlays agreed with the PRA. The LGD models use a recovery outcome period of 36 months, reflecting the recovery process due to foreclosure moratoria. The LGD estimates have increased in 2017 following implementation of new models in 2016 that capture maximum expected losses during an economic cycle. Actual LGD values have continued to decrease due to improving house prices.

43
HSBC Holdings plc Pillar 3 2017


Table 34: IRB models – estimated and actual values (retail)
 
PD
LGD
EAD
 
Estimated

Actuals

Estimated

Actuals

Estimated

Actuals

 
%

%

%

%

%

%

2017
 
 
 
 
 
 
UK
 
 
 
 
 
 
– HSBC residential mortgage
0.44

0.28

9.74

0.88

0.26

0.24

– FD residential mortgages
0.48

0.41

2.11

0.45

1.09

0.91

– HSBC credit card
0.92

0.77

90.86

85.68

1.10

1.07

– HSBC personal loans
1.94

1.62

87.77

79.90

1.58

1.50

– Business Banking (Retail SME)
2.57

2.64

73.87

70.25

1.90

1.51

Hong Kong
 
 
 
 
 
 
– HSBC personal residential mortgage
0.72

0.04

1.43

0.14

0.05

0.05

– Hang Seng personal residential mortgage
0.42

0.14

5.18

0.59

0.14

0.14

– HSBC credit card
0.65

0.28

89.33

76.11

0.47

0.50

– HSBC personal instalment loans
2.34

1.51

89.07

80.05

1.25

1.14

US
 
 
 
 
 
 
– HSBC Mortgage Corporation first lien
1.91

0.80

53.27

22.22

0.37

0.36

 
 
 
 
 
 
 
2016
 
 
 
 
 
 
UK
 
 
 
 
 
 
– HSBC residential mortgage
0.50

0.35

10.53

1.09

0.34

0.31

– FD residential mortgages
0.49

0.43

3.06

0.55

0.95

0.80

– HSBC credit card
0.89

0.75

91.72

89.92

1.03

1.00

– HSBC personal loans
1.84

1.52

88.26

79.08

1.36

1.29

– Business Banking (Retail SME)
2.40

2.47

93.56

82.63

1.80

1.64

Hong Kong
 
 
 
 
 
 
– HSBC personal residential mortgage
0.79

0.04

4.52

0.97

0.04

0.03

– Hang Seng personal residential mortgage
0.49

0.16

4.48

0.62

0.12

0.12

– HSBC credit card
0.69

0.30

88.97

82.48

0.52

0.56

– HSBC personal instalment loans
2.46

1.78

89.28

69.62

1.44

1.33

US
 
 
 
 
 
 
– Consumer Lending real estate first lien
5.30

4.29

74.22

51.89

3.53

3.49

– Mortgage Services real estate first lien
6.16

3.77

68.26

51.79

3.37

3.34

– HSBC Mortgage Corporation first lien
2.20

1.27

41.18

29.25

0.50

0.50

 
 
 
 
 
 
 
2015
 
 
 
 
 
 
UK
 
 
 
 
 
 
– HSBC residential mortgage
0.45

0.22

16.43

3.54

0.17

0.17

– FD residential mortgages
0.40

0.11

12.13

10.89

0.22

0.20

– HSBC credit card
1.06

0.86

91.54

88.42

1.23

1.19

– HSBC personal loans
1.93

1.23

82.10

78.46

1.18

1.13

– Business Banking (Retail SME)
2.26

2.21

76.06

71.78

1.57

1.47

Hong Kong
 
 
 
 
 
 
– HSBC personal residential mortgage
0.79

0.03

1.90

0.03

0.04

0.03

– Hang Seng personal residential mortgage
0.46

0.14

4.12

0.57

0.11

0.11

– HSBC credit card
0.67

0.32

90.40

81.75

0.52

0.58

– HSBC personal instalment loans
2.40

2.02

89.43

69.59

1.69

1.51

US
 
 
 
 
 
 
– Consumer Lending real estate first lien
5.92

5.47

75.98

51.60

5.37

5.31

– Mortgage Services real estate first lien
6.96

5.96

69.59

54.09

7.97

7.88

– HSBC Mortgage Corporation first lien
4.66

2.08

29.63

37.19

0.70

0.69


HSBC Holdings plc Pillar 3 2017
44


Pillar 3 Disclosures at 31 December 2017

Table 34: IRB models – estimated and actual values (retail) (continued)
 
PD

 
LGD

 
EAD

 
 
Estimated

Actuals

Estimated

Actuals

Estimated

Actuals

 
%

%

%

%

%

%

2014
 
 
 
 
 
 
UK
 
 
 
 
 
 
– HSBC residential mortgage
0.50

0.31

15.82

4.68

0.24

0.23

– HSBC credit card
1.37

1.07

91.11

86.30

1.83

1.78

– HSBC personal loans
2.28

1.57

81.56

80.45

1.52

1.46

– Business Banking (Retail SME)
2.83

2.57

73.04

68.17

2.00

1.88

Hong Kong
 
 
 
 
 
 
– HSBC personal residential mortgage
0.72

0.04

1.26

0.35

0.03

0.03

– HSBC credit card
0.62

0.32

92.91

88.13

0.55

0.59

– HSBC personal instalment loans
2.37

2.04

89.69

87.66

1.77

1.63

US
 
 
 
 
 
 
– Consumer Lending real estate first lien
7.31

7.72

77.16

60.29

7.83

7.72

– Mortgage Services real estate first lien
9.43

8.12

71.40

60.17

7.51

7.43

– HSBC Mortgage Corporation first lien
5.24

2.28

29.63

39.36

1.00

1.00

 
 
 
 
 
 
 
2013
 
 
 
 
 
 
UK
 
 
 
 
 
 
– HSBC residential mortgage
0.55

0.38

17.30

6.40

0.32

0.31

– HSBC credit card
1.54

1.27

88.10

84.10

1.70

1.67

– HSBC personal loans
3.57

2.35

85.40

73.00

2.19

2.11

– Business Banking (Retail SME)
2.39

2.61

78.00

70.00

2.03

1.99

Hong Kong
 
 
 
 
 
 
– HSBC personal residential mortgage
0.71

0.03

1.84

0.43

0.03

0.03

– HSBC credit card
0.63

0.33

91.41

84.58

0.56

0.59

– HSBC personal instalment loans
2.20

1.99

90.07

96.16

1.69

1.55

US
 
 
 
 
 
 
– Consumer Lending real estate first lien
7.74

8.22

67.13

64.93

7.08

6.72

– Mortgage Services real estate first lien
10.15

9.68

60.04

62.92

6.12

5.88

– HSBC Mortgage Corporation first lien
4.64

4.43

49.85

37.17

2.40

2.40


45
HSBC Holdings plc Pillar 3 2017


Model performance
Model validation is subject to global internal standards designed to support a comprehensive quantitative and qualitative process within a cycle of model monitoring and validation that includes:
investigation of model stability;
model performance measured through testing the model’s outputs against actual outcomes; and
model use within the business, e.g. user input data quality, override activity and the assessment of results from key controls around the usage of the rating system as a whole within the overall credit process.
Models are validated against a series of metrics and triggers approved by the appropriate governance committee. Model
 
performance metrics, and any remedial actions in the event of a trigger breach, are reported at the Wholesale and RBWM MOCs. We also disclose model performance reports for our IRB models to our lead regulator, the PRA, quarterly.
A large number of models are used within the Group, and data at individual model level is, in most cases, immaterial in the context of the overall Group. We therefore disclose data covering most wholesale models, including corporate models on an aggregated basis, and on the most material retail models.
Tables 35 and 36 below validate the reliability of PD calculations by comparing the PD used in IRB calculations with actual default experience.
Table 35: Wholesale IRB exposure – back-testing of probability of default (PD) per portfolio¹
PD range
External rating equivalent (S&P)
External rating equivalent (Moody’s)
External rating equivalent (Fitch)
Weighted average PD %
Arithmetic average PD by obligors %
Number of obligors
Defaulted obligors in the year
of which: new defaulted obligors in the year
Average historical annual default rate %
End of previous year
End of the year
2017
 
 
 
 
 
 
 
 
 
 
Sovereigns²
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
AAA to BBB
Aaa to Baa2
AAA to BBB
0.02
0.05
43
53
0.15 to <0.25
BBB-
Baa3
BBB-
0.22
0.22
7
7
0.25 to <0.50
BBB-
Baa3
BBB-
0.37
0.37
7
5
0.50 to <0.75
BB+ to BB
Ba1 to Ba2
BB+ to BB
0.63
0.63
6
7
0.75 to <2.50
BB- to B-
Ba3 to B2
BB- to B-
2.02
1.65
17
23
2.5 to <10.00
B to B-
B2 to Caa1
CCC+ to CCC
3.90
6.09
18
21
10.00 to <100.00
B- to C
Caa1 to C
CCC to C
12.89
12.57
7
8
2.67
 
 
 
 
 
 
 
 
 
 
 
Banks
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
AAA to A-
Aaa to Baa1
AAA to BBB+
0.05
0.08
250
258
0.15 to <0.25
BBB+
Baa2
BBB
0.22
0.22
72
62
0.25 to <0.50
BBB
Baa3
BBB-
0.37
0.37
59
48
0.50 to <0.75
BBB-
Baa3
BBB-
0.63
0.63
68
58
0.75 to <2.50
BB+ to BB-
Ba1 to B1
BB+ to B+
1.20
1.40
122
119
2.5 to <10.00
B+ to B-
B2 to Caa1
B to CCC+
4.63
4.71
100
75
0.20
10.00 to <100.00
CCC+ to C
Caa1 to C
CCC to C
17.91
14.66
32
18
4.68
 
 
 
 
 
 
 
 
 
 
 
Corporates
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
AAA to A-
Aaa to Baa1
AAA to BBB+
0.09
0.10
11,220
11,401
2
0.01
0.15 to <0.25
BBB+
Baa2
BBB
0.22
0.22
10,899
11,453
10
2
0.12
0.25 to <0.50
BBB
Baa3
BBB-
0.37
0.37
12,161
11,675
20
3
0.25
0.50 to <0.75
BBB-
Baa3
BBB-
0.63
0.63
10,920
10,508
29
2
0.46
0.75 to <2.50
BB+ to BB-
Ba1 to B1
BB+ to B+
1.37
1.45
35,150
34,911
244
12
0.91
2.5 to <10.00
B+ to B-
B2 to Caa1
B to CCC+
4.34
4.38
12,978
13,183
418
30
2.87
10.00 to <100.00
CCC+ to C
Caa1 to C
CCC to C
18.42
19.33
2,119
1,785
266
20
12.54

HSBC Holdings plc Pillar 3 2017
46


Pillar 3 Disclosures at 31 December 2017

PD range
External rating equivalent (S&P)
External rating equivalent (Moody’s)
External rating equivalent (Fitch)
Weighted average PD %
Arithmetic average PD by obligors %
Number of obligors
Defaulted obligors in the year

of which: new defaulted obligors in the year

Average historical annual default rate %
End of previous year

End of the year

2016
 
 
 
 
 
 
 
 
 
 
Sovereigns
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
AAA to A-
Aaa to Baa1
AAA to BBB+
0.02
0.05
60

60



0.15 to <0.25
BBB+
Baa2
BBB
0.22
0.22
8

11



0.25 to <0.50
BBB
Baa3
BBB-
0.37
0.37
10

7



0.50 to <0.75
BBB-
Baa3
BBB-
0.63
0.63
7

7



0.75 to <2.50
BB+ to BB-
Ba1 to B1
BB+ to B+
2.01
1.58
19

25



2.5 to <10.00
B+ to B-
B2 to Caa1
B to CCC+
4.66
5.32
35

27



10.00 to <100.00
CCC+ to C
Caa1 to C
CCC to C
20.27
21.07
14

16



1.67
 
 
 
 
 
 
 
 
 
 
 
Banks
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
AAA to A-
Aaa to Baa1
AAA to BBB+
0.05
0.08
235

250



0.15 to <0.25
BBB+
Baa2
BBB
0.22
0.22
91

72



0.25 to <0.50
BBB
Baa3
BBB-
0.37
0.37
37

59



0.50 to <0.75
BBB-
Baa3
BBB-
0.63
0.63
64

68



0.75 to <2.50
BB+ to BB-
Ba1 to B1
BB+ to B+
1.16
1.36
139

122



2.5 to <10.00
B+ to B-
B2 to Caa1
B to CCC+
4.96
4.87
109

100



0.29
10.00 to <100.00
CCC+ to C
Caa1 to C
CCC to C
11.38
11.55
29

32



1.70
 
 
 
 
 
 
 
 
 
 
 
Corporates
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
AAA to A-
Aaa to Baa1
AAA to BBB+
0.09
0.10
11,742

11,245

2


0.01
0.15 to <0.25
BBB+
Baa2
BBB
0.22
0.22
11,003

10,904

28

1

0.13
0.25 to <0.50
BBB
Baa3
BBB-
0.37
0.37
12,384

12,183

48

1

0.28
0.50 to <0.75
BBB-
Baa3
BBB-
0.63
0.63
10,516

10,924

54

2

0.50
0.75 to <2.50
BB+ to BB-
Ba1 to B1
BB+ to B+
1.39
1.47
36,308

35,588

416

31

1.03
2.5 to <10.00
B+ to B-
B2 to Caa1
B to CCC+
4.39
4.43
13,419

13,488

437

21

3.06
10.00 to <100.00
CCC+ to C
Caa1 to C
CCC to C
19.08
20.29
2,319

2,141

285

12

13.42
1
Data represents an annual view, analysed at 30 September.
2
The CRR to external ratings mapping has been updated for Sovereign portfolios to reflect the current CRR master scale.

47
HSBC Holdings plc Pillar 3 2017


Table 36: Retail IRB exposure – back-testing of probability of default (PD) per portfolio¹
 
 
 
PD range
Weighted average PD

Arithmetic average PD by obligors

Number of obligors
Defaulted obligors in the year

of which: new defaulted obligors in the year

Average historical annual default rate

End of previous year

End of the year

2017
 
 
 
 
 
 
 
Retail – Secured by real estate non-SME
 
 
 
 
 
 
 
0.00 to <0.15
0.06

0.06

662,941

700,284

238

4

0.03

0.15 to <0.25
0.19

0.19

62,640

59,539

69


0.08

0.25 to <0.50
0.36

0.35

63,554

64,051

97


0.13

0.50 to <0.75
0.60

0.60

26,579

27,095

63


0.21

0.75 to <2.50
1.33

1.34

61,808

59,299

277

1

0.43

2.50 to <10.00
4.63

4.56

18,796

17,156

379

1

1.94

10.00 to <100.00
27.70

24.33

8,090

5,358

1,308

15

19.49

 
 
 
 
 
 
 
 
Retail – qualifying revolving
 
 
 
 
 
 
 
0.00 to <0.15
0.07

0.07

2,903,455

3,128,491

1,403

100

0.05

0.15 to <0.25
0.19

0.19

702,956

715,693

643

25

0.10

0.25 to <0.50
0.36

0.36

641,717

666,802

1,229

44

0.21

0.50 to <0.75
0.61

0.62

316,331

317,666

1,075

36

0.36

0.75 to <2.50
1.35

1.33

717,012

677,685

5,202

131

0.85

2.50 to <10.00
4.39

4.30

214,063

217,996

6,465

79

3.06

10.00 to <100.00
26.42

26.77

66,144

52,014

14,140

10

19.19

 
 
 
 
 
 
 
 
Retail – other non-SME
 
 
 
 
 
 
 
0.00 to <0.15
0.08

0.08

123,797

143,758

216

5

0.15

0.15 to <0.25
0.19

0.19

75,671

84,219

112

6

0.13

0.25 to <0.50
0.36

0.36

109,873

118,254

327

18

0.25

0.50 to <0.75
0.61

0.62

37,381

39,622

208

8

0.48

0.75 to <2.50
1.36

1.41

94,398

93,147

1,261

61

1.05

2.50 to <10.00
4.63

4.88

49,426

39,977

1,811

55

3.03

10.00 to <100.00
42.70

42.41

12,114

5,550

4,380

9

34.31

 
 
 
 
 
 
 
 
Retail – other SME
 
 
 
 
 
 
 
0.00 to <0.15
0.11

0.11

66,454

65,482

45


0.09

0.15 to <0.25
0.20

0.20

42,675

43,437

66


0.29

0.25 to <0.50
0.38

0.37

126,549

132,200

451

11

0.51

0.50 to <0.75
0.63

0.63

124,441

128,686

739

11

0.83

0.75 to <2.50
1.55

1.38

316,020

305,501

4,562

82

1.77

2.50 to <10.00
4.77

4.68

167,107

148,916

7,730

111

4.48

10.00 to <100.00
17.47

19.38

48,949

39,032

10,329

48

17.57


HSBC Holdings plc Pillar 3 2017
48


Pillar 3 Disclosures at 31 December 2017

Table 36: Retail IRB exposure – Back-testing of probability of default (PD) per portfolio¹ (Continued)
 
 
PD range
Weighted average PD

Arithmetic average PD by obligors

Number of obligors
Defaulted obligors in the year

of which: new defaulted obligors in the year

Average historical annual default rate

End of previous year

End of the year

2016
 
 
 
 
 
 
 
Retail – Secured by real estate non-SME
 
 
 
 
 
 
 
0.00 to <0.15
0.06

0.06

454,384

472,033

196

3

0.03

0.15 to <0.25
0.20

0.19

42,290

40,896

37


0.07

0.25 to <0.50
0.39

0.40

78,127

76,119

154


0.28

0.50 to <0.75
0.59

0.59

16,323

16,596

22


0.10

0.75 to <2.50
1.27

1.32

105,008

70,068

967

2

1.10

2.50 to <10.00
4.83

4.74

52,157

25,774

739

12

3.68

10.00 to <100.00
28.19

27.67

55,403

11,411

2,873

152

33.03

 
 
 
 
 
 
 
 
Retail – qualifying revolving
 
 
 
 
 
 
 
0.00 to <0.15
0.07

0.07

3,081,238

3,212,010

1,556

94

0.05

0.15 to <0.25
0.19

0.20

739,131

686,815

661

15

0.10

0.25 to <0.50
0.36

0.35

577,288

601,986

1,265

18

0.19

0.50 to <0.75
0.61

0.62

291,303

301,068

1,060

15

0.33

0.75 to <2.50
1.35

1.33

649,838

657,683

5,519

80

0.79

2.50 to <10.00
4.42

4.30

180,889

184,846

5,739

29

2.87

10.00 to <100.00
25.88

28.08

62,487

46,776

14,159

2

18.71

 
 
 
 
 
 
 
 
Retail – other non-SME
 
 
 
 
 
 
 
0.00 to <0.15
0.09

0.09

113,178

150,991

142

6

0.13

0.15 to <0.25
0.19

0.19

70,557

82,256

91

3

0.13

0.25 to <0.50
0.34

0.36

135,970

149,246

339

65

0.28

0.50 to <0.75
0.60

0.60

67,774

67,475

313

29

0.53

0.75 to <2.50
1.36

1.37

146,702

145,343

1,171

122

1.14

2.50 to <10.00
4.57

4.91

67,842

59,099

1,584

93

3.20

10.00 to <100.00
25.26

26.44

20,318

12,085

3,722

9

19.94

 
 
 
 
 
 
 
 
Retail – other SME
 
 
 
 
 
 
 
0.00 to <0.15
0.10

0.09

119,633

119,245

142

1

0.09

0.15 to <0.25
0.20

0.20

72,127

79,047

239

4

0.27

0.25 to <0.50
0.37

0.37

150,563

163,934

737

26

0.49

0.50 to <0.75
0.60

0.60

124,371

124,797

998

22

0.84

0.75 to <2.50
1.54

1.38

275,325

262,619

4,569

117

1.66

2.50 to <10.00
4.81

4.73

155,368

133,616

6,953

62

4.27

10.00 to <100.00
18.06

20.84

38,418

26,680

6,982

22

16.62

1
Data represents an annual view, analysed at 30 September.


49
HSBC Holdings plc Pillar 3 2017


Counterparty credit risk
Counterparty credit risk management
CCR arises for derivatives and SFTs. It is calculated in both the trading and non-trading books, and is the risk that a counterparty may default before settlement of the transaction. CCR is generated primarily in our wholesale global businesses.
Four approaches may be used under CRD IV to calculate exposure values for CCR: mark-to-market, original exposure, standardised and IMM. Exposure values calculated under these approaches are used to determine RWAs. Across the Group, we use the mark-to-market and IMM approaches.
Under the mark-to-market approach, the EAD is calculated as current exposure plus regulatory add-ons. We use this approach for all products not covered by our IMM permission. Under the IMM approach, EAD is calculated by multiplying the effective expected positive exposure with a multiplier called ‘alpha’.
Alpha (set to a default value of 1.4) accounts for several portfolio features that increase EL above that indicated by effective expected positive exposure in the event of default, such as:
co-variance of exposures;
correlation between exposures and default;
level of volatility/correlation that might coincide with a downturn;
concentration risk; and
model risk.
The effective expected exposure is derived from simulation, pricing and aggregation internal models approved by regulators. The IMM model is subject to ongoing model validation including monthly model performance monitoring.
From a risk management perspective, including daily monitoring of credit limit utilisation, products not covered by IMM are subject to conservative asset class add-on calculated or repo VaR outside of the IMM framework.
The potential future exposure (‘PFE’) measures used for CCR management are calibrated to the 95th percentile. The measures consider volatility, trade maturity and the counterparty legal documentation covering netting and collateral.
Limits for CCR exposures are assigned within the overall credit process. The credit risk function assigns a limit against each counterparty to cover derivatives exposure which may arise as a result of a counterparty default. The magnitude of this limit will depend on the overall risk appetite and type of derivatives trading undertaken with the counterparty.
 
The models and methodologies used in the calculation of CCR are approved by the Global Markets MOC. Models are subject to ongoing monitoring and validation. Additionally, they are subject to independent review at inception and annually thereafter.
Credit valuation adjustment
Credit valuation adjustment (‘CVA’) risk is the risk of adverse moves in the credit valuation adjustments taken for expected credit losses on derivative transactions. Where we have both specific risk VaR approval and IMM approval for a product, the CVA VaR approach has been used to calculate the CVA capital charge. Where we do not hold both approvals, the standardised approach has been applied. Certain counterparty exposures are exempt from CVA, such as non-financial counterparties and sovereigns.
Collateral arrangements
Our policy is to revalue all traded transactions and associated collateral positions on a daily basis. An independent collateral management function manages the collateral process including pledging and receiving collateral and investigating disputes and non-receipts.
Eligible collateral types are controlled under a policy to ensure price transparency, price stability, liquidity, enforceability, independence, reusability and eligibility for regulatory purposes. A valuation ‘haircut’ policy reflects the fact that collateral may fall in value between the date the collateral was called and the date of liquidation or enforcement. Approximately 98% of collateral held as variation margin under CSAs is either cash or liquid government securities.
Further information on gross fair value exposure and the offset due to legally enforceable netting and collateral is set out on page 275 of the Annual Report and Accounts 2017.
Credit rating downgrade
A credit rating downgrade clause in a Master Agreement or a credit rating downgrade threshold clause in a CSA is designed to trigger an action if the credit rating of the affected party falls below a specified level. These actions may include the requirement to pay or increase collateral, the termination of transactions by the non-affected party or the assignment of transactions by the affected party.
At 31 December 2017, the potential value of the additional collateral pertaining to International Swaps and Derivatives Association Credit Support Annex (‘CSA’) downgrade thresholds that we would need to post with counterparties in the event of a one-notch downgrade of our rating was $0.3bn (2016: $0.3bn) and for a two-notch downgrade was $0.5bn (2016: $0.8bn).

HSBC Holdings plc Pillar 3 2017
50


Pillar 3 Disclosures at 31 December 2017

Counterparty credit risk exposures
 
Table 37: Counterparty credit risk exposure – by exposure class, product and geographical region
 
 
 
Exposure value
 
 
 
Europe

Asia

MENA

North
America

Latin
America

Total

 
 
 
Footnotes
$bn

$bn

$bn

$bn

$bn

$bn

 
By exposure class
 
 
 
 
 
 
 
 
IRB advanced approach
 
63.0

33.0

0.7

20.4

1.2

118.3

 
– central governments and central banks
 
4.6

4.8

0.3

2.2

0.6

12.5

 
– institutions
 
26.8

18.6

0.2

8.6

0.2

54.4

 
– corporates
 
31.6

9.6

0.2

9.6

0.4

51.4

 
IRB foundation approach
 
3.4


0.3



3.7

 
– corporates
 
3.4


0.3



3.7

 
Standardised approach
 
6.2

0.4

2.2


0.7

9.5

 
– central governments and central banks
 
5.6


1.9



7.5

 
– institutions
 
0.1





0.1

 
– corporates
 
0.5

0.4

0.3


0.7

1.9

 
CVA advanced
2






 
CVA standardised
2






 
CCP standardised
 
16.5

8.0


11.1

0.4

36.0

 
At 31 Dec 2017
 
89.1

41.4

3.2

31.5

2.3

167.5

 
By product
 






 
Derivatives (OTC and exchange traded derivatives)
 
52.3

31.8

1.0

24.3

1.6

111.0

 
SFTs
 
34.1

5.8

2.2

7.2

0.7

50.0

 
Other
1
2.7

3.8




6.5

 
CVA advanced
2






 
CVA standardised
2






 
CCP default funds
3






 
At 31 Dec 2017
 
89.1

41.4

3.2

31.5

2.3

167.5

 
 
 
 
 
 
 
 
 
 
By exposure class
 
 
 
 
 
 
 
 
IRB advanced approach
 
62.3

36.1

0.5

22.0

0.7

121.6

 
– central governments and central banks
 
5.0

4.1


3.0

0.2

12.3

 
– institutions
 
27.9

19.8

0.2

9.2

0.4

57.5

 
– corporates
 
29.4

12.2

0.3

9.8

0.1

51.8

 
IRB foundation approach
 
5.0


0.5



5.5

 
– corporates
 
5.0


0.5



5.5

 
Standardised approach
 
6.5

0.7

2.1

0.1

0.7

10.1

 
– central governments and central banks
 
5.9


1.4



7.3

 
– institutions
 


0.2



0.2

 
– corporates
 
0.6

0.7

0.5

0.1

0.7

2.6

 
CVA advanced
2





 
 
CVA standardised
2





 
 
CCP standardised
 
13.3

5.5


8.8


27.6

 
At 31 Dec 2016
 
87.1

42.3

3.1

30.9

1.4

164.8

 
By product
 
 
 
 
 
 
 
 
Derivatives (OTC and exchange traded derivatives)
 
58.9

33.8

1.6

21.5

1.2

117.0

 
SFTs
 
25.3

5.0

1.5

9.4

0.2

41.4

 
Other
1
2.9

3.5




6.4

 
CVA advanced
2






 
CVA standardised
2






 
CCP default funds
3






 
At 31 Dec 2016
 
87.1

42.3

3.1

30.9

1.4

164.8

1
Includes free deliveries not deducted from regulatory capital.
2
The RWA impact due to the CVA capital charge is calculated based on the same exposures as the IRB and standardised approaches. The table above does not present any exposures for CVA to avoid double counting.
3
Default fund contributions are cash balances posted to CCPs by all members. These cash balances have nil impact on reported exposure.

51
HSBC Holdings plc Pillar 3 2017


Table 38: Counterparty credit risk – RWAs by exposure class, product and geographical region
 
 
 
RWAs
Capital required

 
 
Europe

Asia

MENA

North
America

Latin
America

Total

 
Footnotes
$bn

$bn

$bn

$bn

$bn

$bn

$bn

By exposure class
 
 
 
 
 
 
 
 
IRB advanced approach
 
21.2

9.9

0.6

7.3

0.9

39.9

3.2

– central governments and central banks
 
0.7

0.1

0.4

0.8

0.4

2.4

0.2

– institutions
 
7.1

5.0

0.1

2.1

0.2

14.5

1.2

– corporates
 
13.4

4.8

0.1

4.4

0.3

23.0

1.8

IRB foundation approach
 
1.7


0.1



1.8

0.1

– corporates
 
1.7


0.1



1.8

0.1

Standardised approach
 
0.6

0.4

0.3


0.6

1.9

0.2

– central governments and central banks
 







– institutions
 


0.0



0.0

0.0

– corporates
 
0.6

0.4

0.3


0.6

1.9

0.2

CVA advanced
2
2.8





2.8

0.2

CVA standardised
2
0.8

2.4

0.1

3.2

0.2

6.7

0.6

CCP standardised
 
0.7

0.3


0.4


1.4

0.1

At 31 Dec 2017
 
27.8

13.0

1.1

10.9

1.7

54.5

4.4

By product
 













Derivatives (OTC and exchange traded derivatives)
 
17.3

8.6

0.6

5.4

0.9

32.8

2.6

SFTs
 
5.0

0.6

0.4

2.1

0.6

8.7

0.7

Other
1
1.5

1.3




2.8

0.2

CVA advanced
2
2.8





2.8

0.2

CVA standardised
2
0.8

2.4

0.1

3.2

0.2

6.7

0.6

CCP default funds
3
0.4

0.1


0.2


0.7

0.1

At 31 Dec 2017
 
27.8

13.0

1.1

10.9

1.7

54.5

4.4

 
 
 
 
 
 
 
 
 
By exposure class
 
 
 
 
 
 
 
 
IRB advanced approach
 
21.3

11.2

0.2

8.6

0.3

41.6

3.3

– central governments and central banks
 
0.9

0.2


0.5

0.1

1.7

0.1

– institutions
 
8.1

5.2


2.6

0.1

16.0

1.3

– corporates
 
12.3

5.8

0.2

5.5

0.1

23.9

1.9

IRB foundation approach
 
1.7


0.2



1.9

0.2

– corporates
 
1.7


0.2



1.9

0.2

Standardised approach
 
0.8

0.7

0.6

0.1

0.6

2.8

0.2

– central governments and central banks
 







– institutions
 
0.1


0.1



0.2


– corporates
 
0.7

0.7

0.5

0.1

0.6

2.6

0.2

CVA advanced
2
3.5





3.5

0.3

CVA standardised
2
2.8

4.0

0.2

3.6

0.3

10.9

0.9

CCP standardised
 
0.7

0.3


0.3


1.3

0.1

At 31 Dec 2016
 
30.8

16.2

1.2

12.6

1.2

62.0

5.0

By product
 
 
 
 
 
 
 
 
Derivatives (OTC and exchange traded derivatives)
 
18.2

10.6

1.0

6.6

0.9

37.3

3.0

SFTs
 
4.5

0.6


2.1

0.1

7.3

0.6

Other
1
1.4

0.9




2.3

0.2

CVA advanced
2
3.5





3.5

0.3

CVA standardised
2
2.8

4.0

0.2

3.6

0.3

10.9

0.9

CCP default funds
3
0.4

0.1


0.2


0.7


At 31 Dec 2016
 
30.8

16.2

1.2

12.5

1.3

62.0

5.0

1
Includes free deliveries not deducted from regulatory capital.
2
The RWA impact due to the CVA capital charge is calculated based on the exposures under the IRB and standardised approaches. No additional exposures are taken into account.
3
Default fund contributions are cash balances posted to CCPs by all members. These cash balances are not included in the total reported exposure.

HSBC Holdings plc Pillar 3 2017
52


Pillar 3 Disclosures at 31 December 2017

Wrong-way risk
Wrong-way risk occurs when a counterparty’s exposures are adversely correlated with its credit quality.
There are two types of wrong-way risk.
General wrong-way risk occurs when the probability of counterparty default is positively correlated with general risk factors, for example, where a counterparty is resident and/or incorporated in a higher-risk country and seeks to sell a non-domestic currency in exchange for its home currency.
Specific wrong-way risk occurs in self-referencing transactions. These are transactions in which exposure is driven by capital or financing instruments issued by the counterparty and occurs where exposure from HSBC’s perspective materially increases as the value of the counterparty’s capital or financing instruments referenced in the contract decreases. It is HSBC policy that specific wrong-way transactions are approved on a case-by-case basis.
We use a range of tools to monitor and control wrong-way risk, including requiring the business to obtain prior approval before undertaking wrong-way risk transactions outside pre-agreed guidelines. The regional Traded Risk functions are responsible for the control and monitoring process within an overarching Group framework and limit framework.
Central counterparties (‘CCPs’)
While exchange traded derivatives have been cleared through CCPs for many years, recent regulatory initiatives designed to reduce systemic risk in the banking system are directing increasing volumes of OTC derivatives to be cleared through CCPs.
A dedicated CCP risk team has been established to manage the interface with CCPs and undertake in-depth due diligence of the unique risks associated with these organisations. This is to address an implication of the regulations that the Group’s risk will be transferred from being distributed among individual, bilateral counterparties to a significant level of risk concentration on CCPs. We have developed a risk appetite framework to manage risk accordingly, on an individual CCP and global basis.
Securitisation
HSBC securitisation strategy
HSBC acts as originator, sponsor, liquidity provider and derivative
 
counterparty to our own originated and sponsored securitisations, as well as those of third parties. Our strategy is to use securitisation to meet our needs for aggregate funding or capital management, to the extent that market, regulatory treatments and other conditions are suitable, and for customer facilitation. We do not provide support to any of our originated or sponsored securitisations, and it is not our policy to do so.
We have senior exposures to the securities investment conduits (‘SICs’): Mazarin Funding Limited, Barion Funding Limited and Malachite Funding Limited, and we hold all of the commercial paper issued by Solitaire Funding Limited. These are considered legacy businesses, and exposures are being repaid as the securities they hold amortise.
HSBC securitisation activity
Our roles in the securitisation process are as follows:
Originator: where we originate the assets being securitised, either directly or indirectly;
Sponsor: where we establish and manage a securitisation programme that purchases exposures from third parties; and
Investor: where we invest in a securitisation transaction directly or provide derivatives or liquidity facilities to a securitisation.
HSBC as originator
We use SPEs to securitise customer loans and advances and other debt that we have originated in order to diversify our sources of funding for asset origination and for capital efficiency purposes. In such cases, we transfer the loans and advances to the SPEs for cash, and the SPEs issue debt securities to investors to fund the cash purchases.
In addition, we use SPEs to mitigate the capital absorbed by some of the customer loans and advances we have originated. Credit derivatives are used to transfer the credit risk associated with such customer loans and advances to an SPE, using an approach commonly known as synthetic securitisation by which the SPE writes CDS protection for HSBC.
HSBC as sponsor
We are sponsor to a number of types of securitisation entities, details of which can be found in Note 19 on the Financial Statements of the Annual Report and Accounts 2017 and the table below.
Entity
Entity description and nature of exposure
Accounting
consolidation
Regulatory
consolidation
Regulatory treatment
Solitaire
Asset-backed commercial paper (‘ABCP’) conduit to which a first-loss letter of credit and transaction-specific liquidity facilities are provided
P
P
Look through to risk weights of underlying assets
Barion
Vehicle to which senior term funding is provided
P
O
Exposures (including derivatives and liquidity facilities) are risk-weighted as securitisation positions
Malachite
Vehicle to which senior term funding is provided
P
O
Mazarin
Vehicle to which senior term funding is provided
P
O
Regency
Multi-seller conduit to which senior liquidity facilities and programme-wide credit enhancement are provided
P
O

53
HSBC Holdings plc Pillar 3 2017


HSBC as investor
We have exposure to third-party securitisations across a wide range of sectors in the form of investments, liquidity facilities and as a derivative counterparty. These are primarily legacy exposures.
Monitoring of securitisation positions
Securitisation positions are managed by a dedicated team that uses a combination of market standard systems and third-party data providers to monitor performance data and manage market and credit risks.
In the case of re-securitisation positions, similar processes are conducted in respect of the underlying securitisations.
Liquidity risk of securitised assets is consistently managed as part of the Group’s liquidity and funding risk management framework and further details are provided on page 113 of the Annual Report and Accounts 2017.
Valuation of securitisation positions
The process of valuing our investments in securitisation exposures primarily focuses on quotations from third parties, observed trade levels and calibrated valuations from market standard models.
Our hedging and credit risk mitigation strategy, with regards to retained securitisation and re-securitisation exposures, is to continually review our positions.
Securitisation accounting treatment
For accounting purposes, we consolidate structured entities (including SPEs) when the substance of the relationship indicates that we control them; that is, we are exposed, or have rights, to variable returns from our involvement with the structured entity and have the ability to affect those returns through our power over the entity.
Full details of these assessments and our accounting policy on structured entities may be found in Note 1.2(a) and Note 19 on the Financial Statements respectively of the Annual Report and Accounts 2017.
We reassess the need to consolidate whenever there is a change in the substance of the relationship between HSBC and a structured entity.
HSBC enters into transactions in the normal course of business by which it transfers financial assets to structured entities. Depending on the circumstances, these transfers may either result in these financial assets being fully or partly derecognised, or continuing to be recognised in their entirety.
Full derecognition occurs when we transfer our contractual right to receive cash flows from the financial assets, or assume an obligation to pass on the cash flows from the assets, and transfer substantially all the risks and rewards of ownership. Only in the event that derecognition is achieved are sales and any resultant gains recognised in the financial statements.
Partial derecognition occurs when we sell or otherwise transfer financial assets in such a way that some but not substantially all of the risks and rewards of ownership are transferred and control is retained. These financial assets are recognised on the balance sheet to the extent of our continuing involvement and an associated liability is also recognised. The net carrying amount of the financial asset and associated liability will be based on the measurement basis of the financial asset, either the amortised cost or the fair value of the rights and obligations retained by the entity.
Further disclosure of such transfers may be found in Note 16 on the Financial Statements of the Annual Report and Accounts 2017.

 
Securitisation regulatory treatment
For regulatory purposes, any reduction in RWAs that would be achieved by our own originated securitisations must receive the PRA’s permission and be justified by a commensurate transfer of credit risk to third parties. If achieved, the associated SPEs and underlying assets are not consolidated but exposures to them, including derivatives or liquidity facilities, are risk-weighted as securitisation positions.
For the majority of our securitisation non-trading book positions, we use the IRB approach, and within this principally the RBM, with lesser amounts on IAA and SFM. We also use the standardised approach for an immaterial amount of non-trading book positions. Securitisation positions in the trading book are overseen within Market Risk using the standardised approach.
Use of the IAA is limited to exposures arising from Regency Assets Limited related to liquidity facilities. Eligible ECAI rating methodology, which includes stress factors, is applied to each asset class in order to derive the equivalent rating level for each transaction. This methodology is verified by the internal credit function as part of the approval process for each new transaction. The performance of each underlying asset portfolio, including residential and commercial mortgages and re-securitisations, is monitored to confirm that the applicable equivalent rating level still applies and is independently verified. Our IAA approach is audited periodically by Internal Audit and reviewed by the PRA.
There was $0.5bn (2016: $0.7bn) of unrealised losses on Asset-backed securities (‘ABS’) in the year, also disclosed on page 145 of the Annual Report and Accounts 2017, which fully relates to assets within SPEs that are consolidated for regulatory purposes.
Analysis of securitisation exposures
HSBC’s involvement in securitisation activities reflects the following:
securitisation positions are not backed by revolving exposures other than trade receivables in Regency Assets Limited, which is unchanged from 2016;
facilities are not subject to early amortisation provisions (2016: nil);
$4.7bn positions held as synthetic transactions (2016: $4.7bn);
no assets awaiting securitisation (2016: nil);
total exposures include off-balance sheet exposure of $15.3bn (2016: $15.1bn), mainly relating to contingent liquidity lines provided to securitisation vehicles where we act as sponsor, with a small amount from derivative exposures where we are an investor. The off-balance sheet exposures are held in the non-trading book and the exposure types are residential mortgages, commercial mortgages, trade receivables and re-securitisations; and
no realised losses on securitisation asset disposals in the year (2016: nil).
Further details of our securitisation exposures may be found on page 145 of the Annual Report and Accounts 2017.

HSBC Holdings plc Pillar 3 2017
54


Pillar 3 Disclosures at 31 December 2017

Table 39: Securitisation exposure – movement in the year
 
 
Total at
1 Jan

Movement in year
Total at
31 Dec

 
 
As originator

As sponsor3

As investor

 
Footnotes
$bn

$bn

$bn

$bn

$bn

Aggregate amount of securitisation exposures
 
 
 
 
 
 
Residential mortgages
1
3.0


0.2

0.6

3.8

Commercial mortgages
1
3.6


0.1

(1.0
)
2.7

Credit Cards
 



1.2

1.2

Leasing
 


0.8

0.4

1.2

Loans to corporates or SMEs
 
4.9


0.3

(0.1
)
5.1

Consumer loans
 
1.1


1.7

1.8

4.6

Trade receivables
2
17.3


(1.0
)
(0.1
)
16.2

Other assets
 
0.8


0.4

(0.2
)
1.0

Re-securitisations
1
7.0

(0.5
)
(4.4
)
(0.3
)
1.8

2017
 
37.7

(0.5
)
(1.9
)
2.3

37.6

 
 
 
 
 
 
 
Aggregate amount of securitisation exposures
 
 
 
 
 
 
Residential mortgages
1
3.2



(0.1
)
3.1

Commercial mortgages
1
3.8



(0.2
)
3.6

Leasing
 
0.1



(0.1
)

Loans to corporates or SMEs
 
6.2



(1.3
)
4.9

Consumer loans
 
0.5



0.6

1.1

Trade receivables
2
20.4


(3.0
)
(0.1
)
17.3

Other assets
 
0.0



0.8

0.8

Re-securitisations
1
10.2

(0.4
)
(2.5
)
(0.4
)
6.9

2016
 
44.4

(0.4
)
(5.5
)
(0.8
)
37.7

1
Residential and Commercial mortgages and re-securitisations principally include exposures to Solitaire Funding Limited, Mazarin Funding Limited, Barion Funding Limited and Malachite Funding Limited and restructured on-balance sheet assets. The pools primarily comprise the senior tranches of retail mortgage backed securities, commercial mortgage backed securities, auto ABS, credit card ABS, student loans, collateralised debt obligations and also include bank subordinated debt.
2
Trade receivables largely relate to Regency Assets Limited and pools are senior with a maturity of less than 10 years.
3
The movements during 2017 are primarily attributable to a change in the presentation of overlapping exposures to Solitaire Funding Limited. Comparatives for 2016 have not been restated.
Table 40: Securitisation – asset values and impairments
 
 
2017
2016
 
 
Underlying assets1
Securitisation
exposures
impairment

Underlying assets1
Securitisation
exposures
impairment

 
 
Total3

Impaired and past due

Total

Impaired and past due

 
Footnotes
$bn

$bn

$bn

$bn

$bn

$bn

As originator
 
5.8

0.5

0.2

6.3

1.2

0.4

– loans to corporates and SMEs
 
5.0



5.0



– re-securitisations
2
0.8

0.5

0.2

1.3

1.2

0.4

As sponsor
 
21.1

0.4

0.1

22.1

0.1

0.1

– residential mortgages
 
0.3






– commercial mortgages
 
0.1

0.1

0.1




– leasing
 
0.8






– loans to corporates and SMEs
 
0.3

0.3





– consumer loans
 
1.9






– trade receivables
 
16.2



16.5



– re-securitisations
2
1.0



5.6

0.1

0.1

– other assets
 
0.5






At 31 Dec
 
26.9

0.9

0.3

28.4

1.3

0.5

1
Securitisation exposures may exceed the underlying asset values when HSBC provides liquidity facilities while also acting as derivative counterparty and a note holder in the SPE.
2
The amount of underlying assets reported for re-securitisations denotes the value of collateral within the re-securitisation vehicles.
3
As originator and sponsor, all associated underlying assets are held in the non-trading book. These assets are all underlying to traditional securitisations with the exception of ‘loans to corporates and SMEs’, which is underlying to a synthetic securitisation.

55
HSBC Holdings plc Pillar 3 2017


Market risk
Overview of market risk in global businesses
Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices, will reduce our income or the value of our portfolios.
Exposure to market risk
Exposure to market risk is separated into two portfolios:
Trading portfolios comprise positions arising from market-making.
Non-trading portfolios comprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments designated as available-for-sale (‘AFS’) and held to maturity, and exposures arising from our insurance operations.
 
Where appropriate, we apply similar risk management policies and measurement techniques to both trading and non-trading portfolios. Our objective is to manage and control market risk exposures in order to optimise return on risk while maintaining a market profile consistent within our established risk appetite.
The nature of the hedging and risk mitigation strategies performed across the Group corresponds to the market risk management instruments available within each operating jurisdiction. These strategies range from the use of traditional market instruments, such as interest rate swaps, to more sophisticated hedging strategies to address a combination of risk factors arising at portfolio level. For a discussion on hedging risk and monitoring the continuing effectiveness of hedges, refer to page 228 of the Annual Report and Accounts 2017.
The tables below reflect the components of capital requirement under the standardised approach table 41 and the internal model approach table 42 for market risk.

Table 41: Market risk under standardised approach
 
 
At 31 Dec
 
 
2017

2016

2017

 
 
RWAs

RWAs

Capital requirements

 
 
$bn

$bn

$bn

 
Outright products
 
 
 
1
Interest rate risk (general and specific)
2.2

1.5

0.2

2
Equity risk (general and specific)
0.1

1.7


3
Foreign exchange risk
0.2

0.3


4
Commodity risk
0.1



 
Options


 


5
Simplified approach



6
Delta-plus method



7
Scenario approach



8
Securitisation
1.8

1.5

0.1

9
Total
4.4

5.0

0.3

Table 42: Market risk under IMA
 
 
At 31 Dec 2017
 
 
RWAs

Capital required

 
 
$bn

$bn

1
VaR (higher of values a and b)
8.3

0.7

(a)
Previous day’s VaR
0.1


(b)
Average daily VaR
8.3

0.7

2
Stressed VaR (higher of values a and b)
14.3

1.1

(a)
Latest SVaR
0.1


(b)
Average SVaR
14.3

1.1

3
Incremental risk charge (higher of values a and b)
10.0

0.8

(a)
Most recent IRC value
0.7

0.1

(b)
Average IRC value
10.0

0.8

5
Other
1.9

0.2

6
Total
34.5

2.8




HSBC Holdings plc Pillar 3 2017
56


Pillar 3 Disclosures at 31 December 2017

Market risk governance
GB&M manages market risk, where the majority of the total VaR, SVaR and IRC of HSBC (excluding insurance) and almost all trading VaR resides, using risk limits approved by the GMB. For a discussion on market risk governance refer to page 115 of the Annual Report and Accounts 2017.
Market risk measures
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures while maintaining a market profile consistent with our risk appetite.
We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, VaR and stress testing.
Sensitivity analysis
We use sensitivity measures to monitor the market risk positions within each risk type. Sensitivity limits are set for portfolios, products and risk types, with the depth of the market being one of the principal factors in determining the level of limits set.
Value at risk
VaR is a technique that estimates the potential losses on risk positions in the trading portfolio as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and is calculated for all trading positions regardless of how we capitalise those exposures.
Where there is not an approved internal model, we use the appropriate local rules to capitalise exposures locally.
In addition, we calculate VaR for non-trading portfolios to have a complete picture of risk. Our models are predominantly based on historical simulation. VaR is calculated at a 99% confidence level for a one-day holding period. Where we do not calculate VaR explicitly, we use alternative tools as described in the stress testing section below.
Our VaR models derive plausible future scenarios from past series of recorded market rates and prices, taking into account inter-relationships between different markets and rates such as interest rates and foreign exchange rates. Our models use a mixed approach when applying changes in market rates and prices:
For equity, credit and foreign exchange risk factors, the potential movements are typically represented on a relative return basis.
For interest rates, a mixed approach is used. Curve movements are typically absolute, whereas volatilities are on a relative return basis.
We use the past two years as the data set in our VaR models, which is updated on a fortnightly basis, and these scenarios are then applied to the market baselines and trading positions on a daily basis. The models also incorporate the effect of option features on the underlying exposures.
The valuation approach used in our models values:
non-linear instruments using a full revaluation approach; and
linear instruments, such as bonds and swaps, using a sensitivity based approach.
The nature of the VaR models means that an increase in observed market volatility will lead to an increase in VaR even without any changes in the underlying positions.
 
VaR model limitations
Although a valuable guide to risk, VaR should always be viewed in the context of its limitations, for example:
the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature;
the use of a holding period assumes that all positions can be liquidated or the risks offset during that period. This may not fully reflect the market risk arising at times of severe illiquidity, when the holding period may be insufficient to liquidate or hedge all positions fully;
the use of a 99% confidence level by definition does not take into account losses that might occur beyond this level of confidence; and
VaR is calculated on the basis of exposures outstanding at close of business and therefore does not necessarily reflect intra-day exposures.
Risk not in VaR framework
The Risks not in VaR (‘RNIV’) framework captures risks from exposures in the HSBC trading book which are not captured well by the VaR model. Our VaR model is designed to capture significant basis risk such as CDS versus bond, asset swap spreads and cross-currency basis. Other basis risks which are not completely covered in VaR, such as the London interbank offered rate (‘Libor’) tenor basis, are complemented by our RNIV calculations and are integrated into our capital framework.
Risk factors are reviewed on a regular basis and either incorporated directly in the VaR models, where possible, or quantified through the VaR-based RNIV approach or a stress test approach within the RNIV framework. The severity of the scenarios is calibrated to be in line with the capital adequacy requirements. The outcome of the VaR-based RNIV is included in the VaR calculation and back-testing; a stressed VaR RNIV is also computed for the risk factors considered in the VaR-based RNIV approach.
Stress-type RNIVs include a gap risk exposure measure to capture risk on non-recourse margin loans and a de-peg risk measure to capture risk to pegged and heavily managed currencies.
Back-testing
We routinely validate the accuracy of our VaR models by back-testing them against both actual and hypothetical profit and loss. Hypothetical profit and loss excludes non-modelled items such as fees, commissions and revenues of intra-day transactions.
The actual number of profits or losses in excess of VaR over this period can therefore be used to gauge how well the models are performing.
We back-test VaR at various levels which reflect a full legal entity scope of HSBC, including entities that do not have local permission to use VaR for regulatory purposes. Back-testing using the regulatory hierarchy includes entities which have approval to use VaR in the calculation of market risk regulatory capital requirement.
HSBC submits separate back-testing results to regulators, including the PRA and the European Central Bank, based on applicable frequencies ranging from two business days after an exception occurs, to quarterly submissions.
In terms of the CRD IV rules, VaR back-testing loss, and not profit, exceptions count towards the multiplier determined by the PRA for the purposes of the capital requirement calculation for market risk. The multiplier does not get increased if there are less than five loss exceptions.

57
HSBC Holdings plc Pillar 3 2017


The graphs below show a one-year history for VaR back-testing exceptions against both actual and hypothetical profit and loss.
In 2017, the PRA VaR approved entities experienced exceptions against both actual and hypothetical profit and loss in December: a loss exception, driven by a margin loan; and a profit exception, driven by gains on Japanese yen cross currency swaps, and gains in strategic foreign exchange hedges.
 
There was no evidence of model errors or control failures.
The back-testing result excludes exceptions due from changes in fair value adjustments.
Comparison of VaR estimates with gains/losses
VaR back-testing exceptions against actual profit & loss ($m)
pillar3docu_chart-49868.jpg
 
Actual profit and loss
 
VaR
w
Back-testing profit exception
 
VaR back-testing exceptions against hypothetical profit & loss ($m)
pillar3docu_chart-55855.jpg
 
Hypothetical profit and loss
 
VaR
w
Back-testing profit exception
 


HSBC Holdings plc Pillar 3 2017
58


Pillar 3 Disclosures at 31 December 2017

Stress testing
Stress testing is an important procedure that is integrated into our market risk management framework to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. In such scenarios, losses can be greater than those predicted by VaR modelling.
Stress testing is implemented at legal entity, regional and overall Group levels. A set of scenarios is used consistently across all regions within the Group. Scenarios are tailored to capture the relevant events or market movements at each level. The risk appetite around potential stress losses for the Group is set and monitored against referral limits.
Market risk reverse stress tests are undertaken on the premise that there is a fixed loss. The stress testing process identifies which scenarios lead to this loss. The rationale behind the reverse stress test is to understand scenarios that are beyond normal business settings and could have contagion and systemic implications.
Stressed VaR and stress testing, together with reverse stress testing and the management of gap risk, provide management with insights regarding the ‘tail risk’ beyond VaR, for which HSBC’s appetite is limited.
The Market risk stress testing incorporates the historical and hypothetical events.
During 2017 we devised and ran stress hypothetical scenarios to
 
specific events including the French election and a potential North Korea conflict.
Market risk capital models
There are a number of measures which HSBC has permission to use in calculating regulatory capital which are listed in table below. For regulatory purposes, the trading book comprises all positions in CRD financial instruments and commodities which are held with trading intent, which are taken with the intention of benefiting from short-term gains or positions where it can be demonstrated that they hedge positions in the trading book. Trading book positions must either be free of any restrictive covenants on their tradability or be capable of being hedged.
A CRD financial instrument is defined as any contract that gives rise to both a financial asset to one party and a financial liability or equity instrument to another party.
HSBC maintains a trading book policy which defines the minimum requirements for trading book positions and the process for classifying positions as trading or non-trading book. Positions in the trading book are subject to market risk-based rules, i.e. market risk capital, computed using regulatory approved models. Otherwise, the market risk capital is calculated using the Standardised approach.
If any of the policy criteria are not met, then the position is categorised as a non-trading book exposure.
Model component
Confidence
level
Liquidity horizon
Model description and methodology
VaR
99%
10 day
Uses most recent two years’ history of daily returns to determine a loss distribution. The result is scaled, using the square root of 10, from one day to provide an equivalent 10-day loss.
Stressed VaR
99%
10 day
Stressed VaR is calibrated to a one-year period of stress observed in history.
IRC
99.9%
1 year
Uses a multi-factor Gaussian Monte-Carlo simulation, which includes product basis, concentration, hedge mismatch, recovery rate and liquidity as part of the simulation process. A minimum liquidity horizon of three months is applied and is based on a combination of factors, including issuer type, currency and size of exposure.
Options
n/a
n/a
Uses a standard charge scenario approach based on a spot volatility grid where, for each point on the grid, there is a full revaluation of the portfolio. The regulators prescribe the ranges, therefore there is no equivalence with confidence level and liquidity horizon.
1
Non-proprietary details are available in the Financial Services Register on the PRA website.
Table 43: IMA values for trading portfolios
 
 
At 31 Dec
 
 
2017

2016

 
 
$m

$m

VaR (10 day 99%)
 
 
1
Maximum value
319.1

327.1

2
Average value
197.0

229.6

3
Minimum value
163.7

186.4

4
Period end
228.2

215.7

Stressed VaR (10 day 99%)
 
 
5
Maximum value
439.7

454.0

6
Average value
284.7

389.9

7
Minimum value
193.3

269.7

8
Period end
251.3

269.7

Incremental Risk Charge (99.9%)
 
 
9
Maximum value
1,042.7

1,100.7

10
Average value
828.5

787.0

11
Minimum value
673.4

697.3

12
Period end
803.4

705.6


 

VaR
VaR used for regulatory purposes differs from VaR used for management purposes with key differences listed below.
VaR
Regulatory
Management
Scope
Regulatory approval (PRA)
Broader population of trading and non-trading book positions
Confidence interval
99%
99%
Liquidity horizon
10 day
1 day
Data set
Past 2 years
Past 2 years
The trading books which received approval from the regulator to be covered via an internal model are used to calculate VaR for regulatory purposes. Regulatory VaR levels contribute to the calculation of market risk RWAs.
The regulatory VaR table is based on the regulatory permissions received, plus aggregated sites. This differs from the daily VaR reported in the Annual Report and Accounts which shows a fully diversified view used for internal risk management.
There were no material changes in the VaR used for regulatory purposes and this is in line with expectation.


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HSBC Holdings plc Pillar 3 2017


Stressed VaR
Stressed VaR is primarily used for regulatory capital purposes and is integrated into the risk management process to ensure prudent capital management. Stressed VaR complements other risk measures by providing the potential losses under stressed market conditions.
Stressed VaR modelling follows the same approach as our VaR risk measure except as follows:
potential market movements employed for stressed VaR calculations are based on a continuous one-year period of stress for the trading portfolio;
the choice of period is based on the assessment at the Group level of the most volatile period in recent history and changed during 2017:
from (July 2007 to July 2008) to (July 2012 to July 2013) in March 2017;
to (April 2010 to April 2011) in June 2017; and
to (May 2008 to May 2009) in September 2017;
it is calculated to a 99% confidence using a 10-day holding period; and
it is based on an actual 10-day holding period, whereas Regulatory VaR is based on a one-day holding period scaled to 10 days.
The decrease in stressed VaR was from the inclusion of new entities which are now consolidated, and with it increased diversification benefits. This approval was under Article 325 permission from the PRA and included Indonesia, Singapore and the Middle East.
Incremental risk charge
The IRC measures the default and migration risk of issuers of traded instruments.
IRC risk factors include credit migration, default, product basis, concentration, hedge mismatch, recovery rate and liquidity. The PDs are floored to reflect the lack of historical data on defaults and a period of stress is used to calibrate the spread changes for the relevant ratings. The IRC model is validated quarterly by stressing key model parameters and reviewing the response of the model.
 
The IRC is a stand-alone charge generating no diversification benefit with other charges. We do not use weighted averages for calculating the liquidity horizon for the IRC measure. IRC relies on a range of liquidity horizons from three months, corresponding to the regulatory floor, to one year. A wide range of criteria can indicate the liquidity of a position. The liquidity horizon for the IRC measure depends on a set of factors such as issuer features, including rating, sector, geography and size of positions, including product, maturity and concentration.
The IRC transition matrices are calibrated using transition and default data published by three rating agencies (Standard & Poor’s, Moody’s and Fitch) as the starting point, in combination with internal rules for flooring. The average of the three matrices is computed for each sector, ignoring zero transition probabilities. The PDs are then floored: sovereign PDs are consistent with IRB, while a 3bp floor is applied to corporates’ and banks’ PDs.
The IRC correlation matrix is derived from historical CDS spreads data, covering the latest two-year VaR period. The returns estimation window is set equal to either three or 12 months, depending on the liquidity horizon of each obligor. First, each obligor is mapped to six sector/rating categories; then the correlation matrix is obtained by computing the arithmetic mean of correlations for each category.
The increase in the period end IRC measure was driven from the loss of hedging benefit from short positions as their residual maturity fell below their corresponding liquidity horizons for recognition within the IRC measure.
Prudent valuation adjustment
HSBC has documented policies and maintains systems and controls for the calculation of Prudent Valuation Adjustment (‘PVA’). Prudent value is an estimated conservative pricing with a 90% degree of certainty that would be received to sell an asset or paid to transfer a liability in orderly transactions occurring between market participants at the balance sheet date. HSBC’s methodology addresses fair value uncertainties arising from a number of sources; market price uncertainty, bid offer (‘close out’) uncertainty, model risk, concentration, administrative cost, unearned credit spreads (‘CVA’) and investing and funding costs (‘FFVA’).
Table 44: Prudential valuation adjustments
 
 
Equity

Interest rates

FX

Credit

Commodities

Total

Of which:
in the trading book

Of which:
in the banking book

 
 
$m

$m

$m

$m

$m

$m

$m

$m

Closeout uncertainty
 
(200
)
(391
)
(32
)
(182
)
(4
)
(809
)
(486
)
(323
)
– of which:
 








mid-market value
 
(111
)
(95
)
(7
)
(83
)
(3
)
(299
)
(135
)
(164
)
closeout cost
 
(19
)
(79
)
(7
)
(8
)
(1
)
(114
)
(101
)
(13
)
concentration
 
(70
)
(217
)
(18
)
(91
)

(396
)
(250
)
(146
)
Early termination
 



(6
)

(6
)
(6
)

Model risk
 
(30
)
(73
)
(5
)
(13
)

(121
)
(118
)
(3
)
Operational risk
 
(13
)
(24
)
(2
)
(13
)
(1
)
(53
)
(33
)
(20
)
Investing and funding costs
 

(72
)

(1
)
(1
)
(74
)
(74
)

Unearned credit spreads
 

(62
)
(4
)
(7
)
(1
)
(74
)
(74
)

Future administrative costs
 

(5
)

(4
)

(9
)
(9
)

Other
 








Total adjustment
 
(243
)
(627
)
(43
)
(226
)
(7
)
(1,146
)
(800
)
(346
)
PVA has decreased by 16% over 2017. PVA movements were driven by: (i) changes of exposure resulting from either new trades/unwinds including the disposal of some ABS legacy exposures, or risk profiles modification due to market movements; (ii) the reduction of observed price dispersion in line with spreads tightening and lower levels of market volatility; (iii) refinements in PVA methodologies reflecting the evolution of market modelling and pricing practices, notably in terms of CVA uncertainty
 
measurement and prudent exit cost of concentrated positions; (iv) the evolution of market infrastructure, notably in terms of market and trade data availability, enabling better price uncertainty measurements; (v) changes in CVA accounting fair value adjustment methodologies which resulted in related additional valuation adjustments; and (vi) position transfer between fair valued and accrued only books.


HSBC Holdings plc Pillar 3 2017
60


Pillar 3 Disclosures at 31 December 2017

Structural foreign exchange exposures
Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates whose functional currency is not the US dollar. An entity’s functional currency is normally that of the primary economic environment in which it operates.
Exchange differences on structural exposures are recognised in ‘Other comprehensive income’. We use the US dollar as our presentation currency in our consolidated financial statements because the US dollar and currencies linked to it form the major currency bloc in which we transact and fund our business.
Our consolidated balance sheet is, therefore, affected by exchange differences between the US dollar and all the non-US dollar functional currencies of underlying subsidiaries.
Our structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that our consolidated capital ratios and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange rates. We hedge structural foreign exchange exposures only in limited circumstances.
Details of our structural foreign exchange exposures are provided in the Market risk section, on page 152 of the Annual Report and Accounts 2017.
Interest rate risk in the banking book
Interest rate risk in the banking book (‘IRRBB’) is the potential adverse impact of changes in interest rates on earnings and capital. The component of IRRBB that can be economically neutralised in the market is transferred to BSM to manage, in accordance with internal transfer pricing rules. In its management of IRRBB, the Group aims to balance mitigating the effect of future interest rate movements which could reduce net interest income against the cost of hedging. The monitoring of the projected net
 
interest income and economic value of equity (‘EVE’) sensitivity under varying interest rate scenarios is a key part of this.
EVE represents the present value of the future banking book cash flows that could be distributed to equity providers under a managed run-off scenario, i.e. the current book value of equity plus the present value of future net interest income in this scenario. An EVE sensitivity is the extent to which the EVE will change due to a pre-specified movements in interest rates, where all other economic variables are held constant.
More details on our IRRBB may be found on page 116 of the Annual Report and Accounts 2017.
Operational risk
Overview and objectives
Operational risk is the risk to achieving our strategy or objectives as a result of inadequate or failed internal processes, people and systems, or from external events.
Operational risk is relevant to every aspect of our business. It covers a wide spectrum of issues, in particular legal, compliance, security and fraud. Losses arising from breaches of regulation and law, unauthorised activities, error, omission, inefficiency, fraud, systems failure or external events all fall within the definition of operational risk.
We have historically experienced operational risk losses in the following major categories:
mis-selling of payment protection insurance;
external criminal activities, including fraud;
breakdowns in processes/procedures due to human error, misjudgement or malice;
system failure or non-availability; and
breach of regulatory and/or legislative requirements.
Table 45: Operational risk RWAs
 
 
2017
2016
 
 
RWAs

Capital
required

RWAs

Capital
required

 
 
$bn

$bn

$bn

$bn

By global business
 
 
 
 
 
Retail Banking and Wealth Management
 
27.2

2.2

30.5

2.4

Commercial Banking
 
23.7

1.9

25.3

2.0

Global Banking and Markets
 
30.9

2.5

32.0

2.6

Global Private Banking
 
2.8

0.2

2.9

0.2

Corporate Centre
 
8.1

0.6

7.3

0.6

At 31 Dec
 
92.7

7.4

98.0

7.8

By geographical region
 
 
 
 
 
Europe
 
29.0

2.3

30.9

2.5

Asia
 
37.1

3.0

36.6

2.9

Middle East and North Africa
 
7.0

0.5

7.5

0.6

North America
 
12.1

1.0

12.8

1.0

Latin America
 
7.5

0.6

10.2

0.8

At 31 Dec
 
92.7

7.4

98.0

7.8

Requirements under CRD IV include a capital requirement for operational risk, utilising three levels of sophistication as stated on page 17. We have historically adopted, and currently use, the standardised approach in determining our operational risk capital requirements. Table 45 sets out our operational risk capital requirements by region and global businesses. We use an operational risk model for economic capital calculation purposes.
During 2017, our operational risk profile continued to be dominated by compliance risks as referred to in the ‘Top and emerging risks’ section on page 95 of the Annual Report and Accounts 2017and in the ‘Regulatory compliance risk management’ section on page 117 of the Annual Report and Accounts 2017. Operational risk losses in 2017 are lower than in 2016, reflecting a reduction in losses incurred relating to large
 
legacy conduct-related events. Conduct-related costs included in significant items are outlined on page 61 of the Annual Report and Accounts 2017.
The regulatory environment in which we operate is increasing the cost of doing business and could reduce our future profitability. In 2017 we continued our ongoing work to strengthen those controls that manage our most material risks. We further developed controls to help ensure that we know our customers, ask the right questions, monitor transactions and escalate concerns to detect, prevent and deter financial crime risk.

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HSBC Holdings plc Pillar 3 2017


We recognise that operational risk losses can be incurred for a wide variety of reasons, including rare but extreme events.
The objective of our operational risk management is to manage and control operational risk in a cost-effective manner and within our risk appetite, as defined by GMB.
Organisation and responsibilities
Responsibility for managing operational risk lies with HSBC’s employees. During 2017 we implemented a new operational risk management framework (‘ORMF’) and Group-wide risk management system. The new ORMF provides an end-to-end view of the non-financial risks, enhancing focus on the risks that matter the most and associated controls. It provides a platform to drive forward-looking risk awareness and assist management focus. It also helps the organisation understand the level of risk it is willing to accept.
Activity to strengthen our risk culture and better embed the use of the new ORMF, particularly the three lines of defence model, was a key focus in 2017.
The first line of defence owns the risk and is responsible for identifying, recording, reporting, managing the risks and ensuring that the right controls and assessments are in place to mitigate these risks. The second line of defence sets the policy and guidelines for managing the risks and provides advice, guidance and challenge to the first line of defence on effective risk management. The third line of defence is Internal Audit which independently ensures we are managing risk effectively.
More details on our ORMF may be found on page 117 of the Annual Report and Accounts 2017.
The Global Operational Risk Committee, which is a sub-committee of the GRMM, meets monthly to discuss key risk issues and review the effective implementation of the ORMF.
Operational risk is organised as a specific risk discipline within Global Risk. The Group Head of Operational Risk is responsible for establishing and maintaining the ORMF, monitoring the level of operational losses and the effectiveness of the internal control environment supported by their second line of defence functions. The Group Head of Operational Risk is accountable to the Group Chief Risk Officer in respect of this element of the overall enterprise-wide, risk management framework.
Measurement and monitoring
We have codified our ORMF in a high level standard, supplemented by detailed policies. These policies explain our approach to identifying, assessing, monitoring and controlling operational risk, and give guidance on mitigating actions to be taken when weaknesses are identified.
Monitoring operational risk exposure against risk appetite on a regular basis, and setting out our risk acceptance process, drives
 
risk awareness in a more forward-looking manner. It assists management in determining whether further action is required.
Risk scenario analysis across material legal entities provides a top down, forward-looking assessment of risks to help determine whether they are being effectively managed within our risk appetite or whether further management action is required.
In each of our subsidiaries, business managers are responsible for maintaining an appropriate level of internal control, commensurate with the scale and nature of operations. They are responsible for identifying and assessing risks, designing controls and monitoring the effectiveness of these controls. The ORMF helps managers to fulfil these responsibilities by defining a standard risk assessment methodology and providing a tool for the systematic reporting of operational loss data.
Operational risk and control assessment approach
Operational risk and control assessments are performed by individual business units and functions. The risk and control assessment process is designed to provide business areas and functions with a forward-looking view of operational risks, an assessment of the effectiveness of controls, and a tracking mechanism for action plans so that they can proactively manage operational risks within acceptable levels.
Appropriate means of mitigation and controls are considered. These include:
making specific changes to strengthen the internal control environment; and
investigating whether cost-effective insurance cover is available to mitigate the risk.
Recording
We use a Group-wide risk management system to record the results of our operational risk management process. Operational risk and control assessments, as described above, are input and maintained by business units. Business management monitor and follow up the progress of documented action plans.
Operational risk loss reporting
To ensure that operational risk losses are consistently reported and monitored at Group level, all Group companies are required to report individual losses when the net loss is expected to exceed $10,000 and to aggregate all other operational risk losses under $10,000. Losses are entered into the group-wide risk management system and are reported to Governance on a monthly basis.

HSBC Holdings plc Pillar 3 2017
62


Pillar 3 Disclosures at 31 December 2017

Other risks
Pension risk
We operate a number of pension plans throughout the world for our employees. Our plans are either defined benefit or defined contribution plans, which expose the Group to different types of risks. We have a global pension risk management framework and
 
accompanying global policies on the management of these risks, which is overseen by the Global Pensions Oversight Forum.
Details of our management of pension risk may be found in ‘Pension risk management’ on page 120 of the Annual Report and Accounts 2017.
Non-trading book exposures in equities
At 31 December 2017, we had equity investments in the non-trading book of $4.2bn (2016: $4.9bn). These consist of investments held for the purposes shown in table 46.
Table 46: Non-trading book equity investments
 
 
2017
2016
 
 
Available for sale

Designated at fair value

Total

Available for sale
Designated at fair value
Total
 
Footnote
$bn

$bn

$bn

$bn
$bn
$bn
Strategic investments
 
1.3


1.3

2.0
2.0
Private equity investments
 
1.0

0.3

1.3

1.2
0.2
1.4
Business facilitation
1
1.6


1.6

1.5
1.5
At 31 Dec
 
3.9

0.3

4.2

4.7
0.2
4.9
1
Includes holdings in government-sponsored enterprises and local stock exchanges.
We make investments in private equity primarily through managed funds that are subject to limits on the amount of investment. We risk-assess these commitments to ensure that industry and geographical concentrations remain within acceptable levels for the portfolio as a whole, and perform regular reviews to substantiate the valuation of the investments within the portfolio.
Exchange traded investments amounted to $0.7bn (2016: $0.9bn), with the remainder being unlisted. These investments are held at fair value in line with market prices and are mainly strategic in nature. The decrease in strategic investment equities was largely due to disposals of a number of investments.
On a regulatory consolidation basis, the net gain from disposal of equity securities amounted to $0.8bn (2016: $1.1bn), while impairment of AFS equities amounted to $0.1bn (2016: $0.0bn). Unrealised gains on equities of $0.9bn at 31 December 2017 were fully recognised in CET1.
Details of our accounting policy for AFS equity investments and the valuation of financial instruments may be found on page 191 of the Annual Report and Accounts 2017. A detailed description of the valuation techniques applied to private equity may be found on page 246 of the Annual Report and Accounts 2017.
Risk management of insurance operations
We operate an integrated bancassurance model that provides insurance products principally for customers with whom we have a banking relationship.
The insurance contracts we sell relate to the underlying needs of our banking customers, which we can identify from our point-of-sale contacts and customer knowledge. The majority of sales are of savings and investment products and term and credit life contracts.
By focusing largely on personal and small- and medium-sized enterprises (‘SMEs’) lines of business, we are able to optimise volumes and diversify individual insurance risks.
We choose to manufacture these insurance products in HSBC subsidiaries based on an assessment of operational scale and risk appetite. Manufacturing insurance allows us to retain the risks and rewards associated with writing insurance contracts by keeping part of the underwriting profit and investment income within the Group.
We have life insurance manufacturing subsidiaries in nine countries (Argentina, mainland China, France, Hong Kong, Malaysia, Malta, Mexico, Singapore and the UK). We also have a life insurance manufacturing associate in India.
 
Where we do not have the risk appetite or operational scale to be an effective insurance manufacturer, we engage with a handful of leading external insurance companies in order to provide insurance products to our customers through our banking network and direct channels. These arrangements are generally structured with our exclusive strategic partners and earn the Group a combination of commissions, fees and a share of profits. We distribute insurance products in all of our geographical regions.
Insurance products are sold through all global businesses, but predominantly by RBWM and CMB through our branches and direct channels worldwide.
The risk profile of our insurance manufacturing businesses is measured using an economic capital approach. Assets and liabilities are measured on a market value basis, and a capital requirement is defined to ensure that there is a less than one-in-200 chance of insolvency over a one-year time horizon, given the risks to which the businesses are exposed. The methodology for the economic capital calculation is largely aligned to the pan-European Solvency II insurance capital regulations.
Subsidiaries engaged in insurance activities are excluded from the regulatory consolidation by excluding assets, liabilities and post-acquisition reserves, leaving the investment of these insurance subsidiaries to be recorded at cost and deducted from CET1 subject to thresholds (amounts below the thresholds are risk-weighted).
Further details of the management of financial risks and insurance risk arising from the insurance operations are provided from page 118 of the Annual Report and Accounts 2017.
Liquidity and funding risk
Strategies and processes in the management of liquidity risk
HSBC has an internal liquidity and funding risk management framework (‘LFRF’) which aims to allow it to withstand very severe liquidity stresses. It is designed to be adaptable to changing business models, markets and regulations. The management of liquidity and funding is primarily undertaken locally (by country) in our operating entities in compliance with the Group’s LFRF, and with practices and limits set by the GMB through the RMM and approved by the Board. Our general policy is that each defined operating entity should be self-sufficient in funding its own activities.

63
HSBC Holdings plc Pillar 3 2017


Structure and organisation of the liquidity risk management function
The Group Treasurer, who reports to the Group Finance Director, has responsibility for the oversight of the LFRF. Asset, Liability and Capital Management (‘ALCM’) teams are responsible for the application of the LFRF at a local operating entity level.
The elements of the LFRF are underpinned by a robust governance framework, the two major elements of which are:
Group, regional and entity level asset and liability management committees (‘ALCOs’)
Annual internal liquidity adequacy assessment process (‘ILAAP’) used to validate risk tolerance and set risk appetite
Liquidity and funding are predominantly managed at a country level. Where appropriate, management may be expanded to cover a consolidated group of legal entities or narrowed to a principal office (branch) of a wider legal entity to reflect the management under internal or regulatory definitions.
The RMM reviews and agrees annually the list of countries, legal entities or consolidated groups it directly oversees and the composition of these entities (‘principal operating entities’). This list forms the basis of liquidity and funding risk disclosures.
Group Treasury/Asset, Liability and Capital Management
The Group Treasury team is responsible for setting the Group’s policy, proposing risk tolerance and providing review and challenge of the operating entities implementation. Regional and local ALCM teams are responsible for the implementation of group wide and local regulatory policy at a legal entity level.
Balance Sheet Management
Along with the Group’s Global Business Lines, the Balance Sheet Management (‘BSM’) teams form the first line of defence in the management of liquidity risk, ensuring continuous compliance with the firm’s risk appetite operating within their risk mandates.
Scope and nature of liquidity risk reporting and measurement
Where possible, the Group maintains standardised platforms utilising common data feeds in order to ensure consistency of standard internal and regulatory reporting and flexibility to deliver ad hoc requests.
Hedging and mitigating liquidity risk at HSBC
Management of liquidity and funding risk
Liquidity coverage ratio
The Liquidity Coverage Ratio (‘LCR’) aims to ensure that a bank has sufficient unencumbered high-quality liquid assets (‘HQLA’) to meet its liquidity needs in a 30 calendar day liquidity stress scenario. For the calculation of the LCR, HSBC follows the guidelines set by the European Commission.
The HSBC application of the LCR metric involves the following two key assumptions about the definition of operational deposits and the ability to transfer liquidity from non-EU legal entities:
we define operational deposits as transactional (current) accounts arising from the provision of custody services by HSBC Security Services or Global Liquidity and Cash Management, where the operational component is assessed to be the lower of the current balance and the separate notional values of debits and credits across the account in the previous calculation period; and
we assume no transferability of liquidity from non-EU entities other than to the extent currently permitted.
 
Net stable funding ratio
HSBC uses the NSFR as a basis for establishing stable funding around the Group. The NSFR requires institutions to maintain sufficient stable funding and reflects a bank’s long-term funding profile (funding with a term of more than one year).
Liquid assets of HSBC’s principal operating entities
Liquid assets are held and managed on a stand-alone operating entity basis. Most are held directly by each operating entity’s BSM department, primarily for the purpose of managing liquidity risk in line with the LFRF.
The liquid asset buffer may also include securities in held-to maturity portfolios. To qualify as part of the liquid asset buffer, held-to-maturity portfolios must have a deep and liquid repo market in the underlying security. Liquid assets also include any unencumbered liquid assets held outside BSM departments for any other purpose. The LFRF gives ultimate control of all unencumbered assets and sources of liquidity to BSM.
Overall adequacy of liquidity risk management at HSBC
All operating entities are required to manage liquidity risk and funding risks on a standalone basis in accordance with the LFRF, which includes the preparation of an Internal Liquidity Adequacy Assessment (ILAA) document, in order to ensure that:
liquidity resources are adequate, both as to the amount and quality;
there is no significant risk that liabilities cannot be met as they fall due;
a prudent structural funding profile is maintained;
adequate liquidity resources continue to be maintained; and
the operating entity’s liquidity risk framework is adequate and robust.
The key objectives of the ILAA process are to:
1.
demonstrate that all material liquidity and funding risks are captured within the internal framework;
2.
validate the operating entity's risk tolerance/appetite by demonstrating that reverse stress testing scenarios are acceptably remote and vulnerabilities have been assessed through the use of severe stress scenarios; and
3.
provide review and challenge of the operating entity’s ILAAP.
The final conclusion of the Group ILAAP, approved by the Board of Directors, is that each operating entity:
maintains liquidity resources which are adequate in both amount and quality at all times, and ensures that there is no significant risk that its liabilities cannot be met as they fall due; and
ensures its liquidity resources contain an adequate amount of HQLA and maintains a prudent funding profile.

HSBC Holdings plc Pillar 3 2017
64


Pillar 3 Disclosures at 31 December 2017

HSBC’s business strategy and overall liquidity risk profile
The key aspects of the internal Liquidity and Funding Risk Framework which is used to ensure that HSBC maintains an appropriate overall liquidity risk profile are:
stand-alone management of liquidity and funding by operating entity;
operating entity classification by inherent liquidity risk (‘ILR’) categorisation;
minimum LCR requirement depending on ILR categorisation;
minimum NSFR requirement depending on ILR categorisation;
legal entity depositor concentration limit;
three-month and 12-month cumulative rolling term contractual maturity limits covering deposits from banks, deposits from non-bank financial institutions and securities issued;
annual individual liquidity adequacy assessment by principal operating entity;
minimum LCR requirement by currency;
intra-day liquidity;
liquidity funds transfer pricing; and
forward-looking funding assessments.
The internal LFRF and the risk tolerance limits were approved by the RMM and the Board on the basis of recommendations made by the Group Risk Committee.
Concentration of funding and liquidity sources
Depositor concentration and term funding maturity concentration
The LCR and NSFR metrics assume a stressed outflow based on a portfolio of depositors within retail, corporate and financial deposit segments. The validity of these assumptions is challenged if the portfolio of depositors is not large enough to avoid depositor concentration.
Operating entities are exposed to term re-financing concentration risk if the current maturity profile results in future maturities being overly concentrated in any defined period.
At 31 December 2017, all principal operating entities were within the risk tolerance levels set for depositor concentration and term funding maturity concentration. These risk tolerances were established by the Board and are applicable under the LFRF.
Currency mismatch in the LCR
In times of stress it cannot automatically be assumed that one currency can always be converted for another, even if those currencies are ‘hard’ currencies. LCR must therefore be assessed by currency, if the currency is material.
In some currencies, convertibility is restricted by regulators and central banks and this restriction results in local currency not being convertible offshore or even onshore.
 
In the vast majority of cases, the only way to convert currencies for funding purposes is via deliverable foreign exchange (FX) swaps and, to a lesser extent, cross-currency repo. Access to FX Swaps markets can be impacted by both market wide stress and idiosyncratic stress. Idiosyncratic stress arises from the fact that settlement of the two currency legs occurs at different times during the day, exposing the counterparty who has to settle (pay) first to intra-day credit risk on the entire principal amount, until the other counterparty pays the other currency; this is often referred to as ‘Herstatt Risk’.
The Group’s internal liquidity and funding risk management framework requires all operating entities to monitor single currency LCR. Limits are set in consultation with Group Treasury and approved by Group Treasury before being approved by local ALCO.
Liquidity management across HSBC
The structure of the Group means that liquidity and funding risk cannot practically be managed on a consolidated group basis and can only be managed by entity on a standalone basis. The Group’s liquidity and funding risk framework requires all operating entities to manage liquidity and funding risk on a standalone basis in accordance with the Group’s liquidity and funding risk management framework and the liquidity and funding risk tolerances set out in the Group RAS.
The Group’s internal liquidity and funding risk management framework does not therefore seek to manage liquidity and funding risk on a consolidated basis, other than to ensure that the position of the consolidated group meets the minimum regulatory requirements.
Liquid assets of HSBC’s principal operating entities
The unweighted liquidity value of assets categorised as liquid for HSBC’s principal operating entities is shown on page 102 of the Annual Report and Accounts 2017. This information is used for the purposes of calculating the LCR metric for the Group for which the weighted value of assets is shown in the table on the following page. This reflects the stock of unencumbered liquid assets at the reporting date, using the regulatory definition of liquid assets. The amount recognised by entity at the Group level is different from the amount recognised at a solo entity level, reflecting where liquidity cannot be freely transferred across HSBC.

65
HSBC Holdings plc Pillar 3 2017


Table 47: Level and components of HSBC Group Consolidated Liquidity Coverage Ratio
 
Quarter ended
31 Dec 2017
Quarter ended
30 Sep 2017
Quarter ended
30 Jun 2017
Quarter ended
31 Mar 2017
 
Total unweighted value

Total weighted value

Total unweighted value

Total weighted value

Total unweighted value

Total weighted value

Total unweighted value

Total weighted value

 
$m

$m

$m

$m

$m

$m

$m

$m

Number of data points used in the calculation of averages



3
 
3
 
3
 
3
 
High quality liquid assets
 
 
 
 
 
 
 
 
Total high quality liquid assets (‘HQLA’)


517,539



491,993



461,074



440,755

Cash outflows
 
 
 
 
 
 
 
 
Retail deposits and small business funding
735,610

76,538

728,622

78,081

707,290

76,109

690,079

75,019

– of which:
 
 
 
 
 
 
 
 
stable deposits
282,723

13,976

234,705

11,566

231,742

11,433

221,561

10,924

less stable deposits
452,723

13,976

493,789

66,471

475,426

64,628

468,421

64,059

Unsecured wholesale funding
604,978

284,915

575,907

279,390

536,702

259,791

529,712

257,435

– operational deposits (all counterparties) and deposits in networks of cooperative banks
185,044

44,247

171,692

41,716

154,851

37,621

150,995

36,679

– non-operational deposits (all counterparties)
406,011

226,745

391,621

225,080

370,645

210,964

366,668

208,707

– unsecured debt
13,923

13,923

12,594

12,594

11,206

11,206

12,049

12,049

Secured wholesale funding


14,241



10,459



10,355



9,122

Additional requirements
298,207

89,605

296,919

91,164

285,983

85,095

274,957

76,835

– outflows related to derivative exposures and other collateral requirements
43,816

42,518

43,647

42,842

39,769

39,369

31,952

31,719

– outflows related to loss of funding on debt products








– credit and liquidity facilities
254,391

47,087

253,272

48,322

246,214

45,726

243,005

45,116

Other contractual funding obligations
92,239

40,551

79,111

41,054

66,281

30,465

71,119

36,993

Other contingent funding obligations
358,034

12,850

348,084

12,921

316,534

10,898

274,248

9,729

Total cash outflows


518,700



513,069



472,713



465,133

Cash inflows
 
 
 
 
 
 
 
 
Secured lending transactions (including reverse repos)
253,643

42,238

234,393

31,476

240,805

30,045

221,491

25,522

Inflows from fully performing exposures
111,306

81,653

104,485

78,836

98,880

74,419

96,923

73,592

Other cash inflows
77,731

46,905

83,233

51,245

72,131

42,282

70,609

45,226

(Difference between total weighted inflows and total weighted outflows arising from transactions in third countries where there are transfer restrictions or which are denominated in non-convertible currencies)












(Excess inflows from a related specialised credit institution)













Total cash inflows
442,680

170,796

422,111

161,557

411,816

146,746

389,023

144,340

Fully exempt inflows








Inflows Subject to 90% Cap








Inflows Subject to 75% Cap
412,897

170,796

416,462

161,557

406,669

146,746

384,822

144,340

Liquidity coverage ratio (Adjusted value)
 
 
 
 
 
 
 
 
Liquidity Buffer


517,539



491,993



461,074



440,755

Total net cash outflows


347,904



351,512



325,967



320,793

Liquidity coverage ratio (%)


148.8%



140.0%



141.5%



137.4%

Analysis of on-balance sheet encumbered and unencumbered assets and off-balance sheet collateral
On-balance sheet encumbered and unencumbered assets
The following table, summarises the total on-balance sheet assets capable of supporting future funding and collateral needs, and shows the extent to which they are currently pledged for this purpose. This disclosure aims to facilitate an understanding of available and unrestricted assets that could be used to support potential future funding and collateral needs.
Under ‘Off-balance sheet collateral’ below we discuss the off-balance sheet collateral received and re-pledged, and the level of available unencumbered off-balance sheet collateral.
Off-balance sheet collateral
The fair value of assets accepted as collateral that we are permitted to sell or repledge in the absence of default was $409bn at 31 December 2017 (2016: $269bn). The fair value of any such collateral actually sold or repledged was $242bn (2016: $157bn). We are obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard reverse repo, stock borrowing and derivative transactions.
 
The fair value of collateral received and re-pledged in relation to reverse repos, stock borrowing and derivatives is reported on a gross basis. The related balance sheet receivables and payables are reported on a net basis where required under IFRS offset criteria. As a consequence of reverse repo, stock borrowing and derivative transactions where the collateral received could be sold or re-pledged but had not been, we held $166bn (2016: $112bn) of unencumbered collateral available to support potential future funding and collateral needs at 31 December 2017.
Under the terms of our current collateral obligations under derivative contracts (which are ISDA compliant CSA contracts and contracts entered into for pension obligations), and based on an estimate of the positions at 31 December 2017, we calculate that we could be required to post additional collateral of up to $0.3bn (2016: $0.3bn) in the event of a one-notch downgrade in third-party agencies’ credit rating of HSBC’s debt. This would increase to $0.5bn (2016: $0.8bn) in the event of a two-notch downgrade.
For further details on liquidity and funding risk management, see page 113 onwards of the Annual Report and Accounts 2017.

HSBC Holdings plc Pillar 3 2017
66


Pillar 3 Disclosures at 31 December 2017

Table 48: Analysis of on-balance sheet encumbered and unencumbered assets
 
Assets encumbered as a result
of transactions with counterparties
other than central banks
Assets
positioned
at central
banks
(i.e. pre-positioned
plus
encumbered)

Unencumbered assets not
positioned at central banks
Total

 
As a
result of
covered bonds

As a
result of
securitisations

Other

Assets readily
available for
encumbrance

Other assets
capable
of being
encumbered

Reverse
repos/stock
borrowing
receivables
and derivative
assets

Assets that
cannot be
encumbered

 
$m

$m

$m

$m

$m

$m

$m

$m

$m

Cash and balances at central banks


7

128

172,567

206


7,716

180,624

Items in the course of collection from other banks







6,628

6,628

Hong Kong Government certificates of indebtedness







34,186

34,186

Trading assets


93,867

4,630

143,811

10,234

17,120

18,333

287,995

– treasury and other eligible bills


2,017

4,210

11,233

71


2

17,533

– debt securities


36,367

420

69,934

657


108

107,486

– equity securities


33,209


62,644

3,407



99,260

– loans and advances to banks


8,215



2,430

7,611

7,799

26,055

– loans and advances to customers


14,059



3,669

9,509

10,424

37,661

Financial assets designated at fair value




1,331

64


28,069

29,464

– treasury and other eligible bills




540



65

605

– debt securities




447



3,644

4,091

– equity securities




344

64


24,352

24,760

– loans and advances to banks and customers







8

8

Derivatives






219,818


219,818

Loans and advances to banks


3,599

5,699

1,906

56,542

1,160

21,487

90,393

Loans and advances to customers
4,990

8,296

7,851

69,768

11,923

834,177

3,719

22,240

962,964

Reverse repurchase agreements – non-trading






201,553


201,553

Financial investments

44

26,772

22,285

264,587

8,815


66,573

389,076

– treasury and other eligible bills


315

3,848

73,098

1,297


292

78,850

– debt securities

44

26,457

18,437

190,119

5,951


65,300

306,308

– equity securities




1,370

1,567


981

3,918

Prepayments, accrued income and other assets


2,876


5,527

25,647


33,141

67,191

Current tax assets







1,006

1,006

Interest in associates and joint ventures


310


55

22,101


278

22,744

Goodwill and intangible assets







23,453

23,453

Deferred tax







4,676

4,676

At 31 Dec 2017
4,990

8,340

135,282

102,510

601,707

957,786

443,370

267,786

2,521,771



67
HSBC Holdings plc Pillar 3 2017


Table 48: Analysis of on-balance sheet encumbered and unencumbered assets (continued)
 
 
Assets encumbered as a result
of transactions with counterparties
other than central banks
Assets positioned
at central banks
(i.e. pre- positioned plus encumbered)

Unencumbered assets not
positioned at central banks
Total

 
As a
result of
covered bonds

As a
result of
securitisations

Other

Assets readily
available for
encumbrance

Other assets
capable
of being
encumbered

Reverse
repos/stock
borrowing
receivables
and derivative
assets

Assets that
cannot be
encumbered

 
$m

$m

$m

$m

$m

$m

$m

$m

$m

Cash and balances at central banks


10

82

123,363

326


4,228

128,009

Items in the course of collection from other banks







5,003

5,003

Hong Kong Government certificates of indebtedness







31,228

31,228

Trading assets


62,962

2,504

131,420

7,419

10,207

20,613

235,125

– treasury and other eligible bills


981

2,150

11,309

11



14,451

– debt securities


34,144

354

59,231

318


7

94,054

– equity securities


2,645


59,394

1,565



63,604

– loans and advances to banks


10,532


1,331

1,910

5,386

5,610

24,769

– loans and advances to customers


14,660

0

155

3,615

4,821

14,996

38,247

Financial assets designated at fair value




835

20


23,901

24,756

– treasury and other eligible bills




150



54

204

– debt securities




442

0


3,747

4,189

– equity securities




243

20


20,021

20,284

– loans and advances to banks and customers




0



79

79

Derivatives






290,872


290,872

Loans and advances to banks

1

3,903

6,719

2,051

50,824

2,045

22,583

88,126

Loans and advances to customers
6,258

8,365

10,425

67,208

15,941

732,242

4,027

17,038

861,504

Reverse repurchase agreements – non-trading






160,974


160,974

Financial investments


16,537

17,983

331,154

10,765


60,358

436,797

– treasury and other eligible bills


537

3,766

93,566

1,143


214

99,226

– debt securities


16,000

14,217

236,003

7,904


58,780

332,904

– equity securities


0


1,585

1,718


1,364

4,667

Prepayments, accrued income and other assets


2,358


8,368

27,099


26,084

63,909

Current tax assets







1,145

1,145

Interest in associates and joint ventures


345


62

19,329


293

20,029

Goodwill and intangible assets







21,346

21,346

Deferred tax







6,163

6,163

At 31 Dec 2016
6,258

8,366

96,540

94,496

613,194

848,024

468,125

239,983

2,374,986


HSBC Holdings plc Pillar 3 2017
68


Pillar 3 Disclosures at 31 December 2017

Reputational risk
Reputational risk is the risk of failing to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by HSBC, our employees or those with whom we are associated. This might cause stakeholders to form a negative view of the Group and result in financial or non-financial effects or loss of confidence in the Group. Reputational risk relates to stakeholders’ perceptions, whether fact-based or otherwise. Stakeholders’ expectations change constantly and so reputational risk is dynamic and varies between geographical regions, groups and individuals. We have an unwavering commitment to operating at the high standards we set for ourselves in every jurisdiction. Any material lapse in standards of integrity, compliance, customer service or operating efficiency may represent a potential reputational risk.
For further details of our reputational risk management, see page 119 of the Annual Report and Accounts 2017.
Sustainability risk
Sustainability risk arises from the provision of financial services to companies or projects which indirectly result in unacceptable impacts on people or on the environment.
Sustainability risk is:
measured by assessing the potential sustainability effect of a customer’s activities and assigning a Sustainability Risk Rating to all high-risk transactions;
monitored quarterly by the RMM and monthly by the Group’s Sustainability Risk function; and
managed using sustainability risk policies covering project finance lending and sector-based sustainability policies for sectors and themes with potentially large environmental or social impacts.
For further details on sustainability risk management, see page 120 of the Annual Report and Accounts 2017.
Business risk
The PRA specifies that banks, as part of their ICAAP, should review their exposure to business risk.
Business risk is the potential negative effect on profits and capital from the Group not meeting our strategic objectives, as a result of unforeseen changes in the business and regulatory environment, exposure to economic cycles and technological changes.
 
We manage and mitigate business risk through our risk appetite, business planning and stress testing processes, so that our business model and planned activities are monitored, resourced and capitalised consistent with the commercial, economic and risk environment in which the Group operates, and that any potential vulnerabilities of our business plans are identified at an early stage so that mitigating actions can be taken.
Dilution risk
Dilution risk is the risk that an amount receivable is reduced through cash or non-cash credit to the obligor, and arises mainly from factoring and invoice discounting transactions.
Where there is recourse to the seller, we treat these transactions as loans secured by the collateral of the debts purchased and do not report dilution risk for them. For our non-recourse portfolio, we do not report any dilution risk, as we obtain an indemnity from the seller that indemnifies us against this risk. Moreover, factoring transactions involve lending at a discount to the face-value of the receivables which provides protection against dilution risk.
Remuneration
The Group’s remuneration policy, including the remuneration committee membership and activities, remuneration strategy, and tables showing remuneration details of HSBC’s Identified Staff and Material Risk Takers, is set out in the Directors’ Remuneration Report on page 141 of the Annual Report and Accounts 2017. An overview of our Group remuneration policy is available on our website (http://www.hsbc.com/our-approach/remuneration).

69
HSBC Holdings plc Pillar 3 2017


Appendix I
Additional tables
Table 49 sets out IRB exposures by obligor grade for central governments and central banks, institutions and corporates, all of which are assessed using our 23-grade CRR master scale. We benchmark the master scale against the ratings of external rating agencies. Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by the average of issuer-weighted historical default rates.
 
The correspondence between the agency long-run default rates and the PD ranges of our master scale is obtained by matching a smoothed curve based on those default rates with our master scale reference PDs. This association between internal and external ratings is indicative and may vary over time. In these tables, the ratings of S&P are cited for illustration purposes, although we also benchmark against other agencies’ ratings in an equivalent manner.
Table 49.a: Wholesale IRB exposure – by obligor grade – Central governments and central banks
 
CRR

PD range

Average net carrying values1

Undrawn commitments

Mapped external rating
 
 
%

$bn

$bn

 
Default risk
 
 
 
 
 
Minimal
0.1

0.000 to 0.010

195.2

0.7

AAA
1.1

0.011 to 0.028

70.6

0.8

AA+ to AA
1.2

0.029 to 0.053

23.3

0.5

AA- to A+
Low
2.1

0.054 to 0.095

9.3

0.1

A
2.2

0.096 to 0.169

10.1


A-
Satisfactory
3.1

0.170 to 0.285

2.4


BBB+
3.2

0.286 to 0.483

2.3


BBB
3.3

0.484 to 0.740

1.4


BBB-
Fair
4.1

0.741 to 1.022

1.0


BB+
4.2

1.023 to 1.407

1.0


BB
4.3

1.408 to 1.927

1.5


BB-
Moderate
5.1

1.928 to 2.620

0.7


BB-
5.2

2.621 to 3.579

1.8


B+
5.3

3.580 to 4.914

0.2

0.1

B
Significant
6.1

4.915 to 6.718

0.1

0.1

B
6.2

6.719 to 8.860



B-
High
7.1

8.861 to 11.402



CCC+
7.2

11.403 to 15.000



CCC+
Special Management
8.1

15.001 to 22.000



CCC+
8.2

22.001 to 50.000



CCC+
8.3

50.001 to 99.999



CCC to C
Default
9/10

100.000



Default
At 31 Dec 2017
 
 
320.9

2.3

 
For footnote, see page 71.

HSBC Holdings plc Pillar 3 2017
70


Pillar 3 Disclosures at 31 December 2017

Table 49.b: Wholesale IRB exposure – by obligor grade – Institutions
 
CRR

PD range

Average net carrying values1

Undrawn commitments

Mapped external rating
 
 
%

$bn

$bn

 
Default risk
 
 
 
 
 
Minimal
0.1

0.000 to 0.010

2.4


AAA
1.1

0.011 to 0.028

20.7

1.6

AA+ to AA
1.2

0.029 to 0.053

29.3

2.5

AA-
Low
2.1

0.054 to 0.095

17.2

2.6

A+ to A
2.2

0.096 to 0.169

10.8

3.9

A-
Satisfactory
3.1

0.170 to 0.285

4.2

1.0

BBB+
3.2

0.286 to 0.483

3.5

0.5

BBB
3.3

0.484 to 0.740

1.7

0.7

BBB-
Fair
4.1

0.741 to 1.022

1.3

0.4

BB+
4.2

1.023 to 1.407

0.5

0.2

BB
4.3

1.408 to 1.927

0.2

0.1

BB-
Moderate
5.1

1.928 to 2.620

0.2


BB-
5.2

2.621 to 3.579

0.1


B+
5.3

3.580 to 4.914



B
Significant
6.1

4.915 to 6.718



B-
6.2

6.719 to 8.860



B-
High
7.1

8.861 to 11.402



CCC+
7.2

11.403 to 15.000

0.1

0.1

CCC+
Special Management
8.1

15.001 to 22.000



CCC
8.2

22.001 to 50.000

0.1


CCC- to CC
8.3

50.001 to 99.999



C
Default
9/10

100.000



Default
At 31 Dec 2017
 
 
92.3

13.6

 
For footnote, see page 71.
Table 49.c: Wholesale IRB exposure – by obligor grade – Corporates²
 
 
 
CRR

PD range

Average net carrying values1

Undrawn commitments

Mapped external rating
 
 
%

$bn

$bn

 
Default risk
 
 
 
 
 
Minimal
0.1

0.000 to 0.010



 
1.1

0.011 to 0.028

27.7

10.4

AAA to AA
1.2

0.029 to 0.053

61.3

39.3

AA-
Low
2.1

0.054 to 0.095

82.2

53.1

A+ to A
2.2

0.096 to 0.169

101.5

65.6

A-
Satisfactory
3.1

0.170 to 0.285

112.8

70.9

BBB+
3.2

0.286 to 0.483

105.8

57.6

BBB
3.3

0.484 to 0.740

91.1

46.5

BBB-
Fair
4.1

0.741 to 1.022

75.0

34.4

BB+
4.2

1.023 to 1.407

49.0

23.6

BB
4.3

1.408 to 1.927

48.0

22.2

BB-
Moderate
5.1

1.928 to 2.620

71.5

28.9

BB-
5.2

2.621 to 3.579

23.6

10.2

B+
5.3

3.580 to 4.914

19.0

8.8

B
Significant
6.1

4.915 to 6.718

14.2

6.6

B-
6.2

6.719 to 8.860

7.6

2.8

B-
High
7.1

8.861 to 11.402

3.2

1.0

CCC+
7.2

11.403 to 15.000

1.8

0.5

CCC+
Special Management
8.1

15.001 to 22.000

3.4

1.8

CCC
8.2

22.001 to 50.000

1.3

0.5

CCC- to CC
8.3

50.001 to 99.999

0.3

0.1

C
Default
9/10

100.000

4.7

1.4

Default
At 31 Dec 2017
 
 
905.0

486.2

 
1
Average net carrying value are calculated by aggregating the net carrying values of the last five quarters and dividing by five.
2
Corporates excludes specialised lending exposures subject to supervisory slotting approach.

71
HSBC Holdings plc Pillar 3 2017


PD, LGD, RWA and exposure by country
The following tables set out the exposure-weighted average PD, exposure-weighted average LGD, RWAs and exposure by the
 
location of the principal operations of the lending subsidiary or branch.
Table 50.a: PD, LGD, RWA and exposure by country – wholesale IRB advanced approach all asset classes¹²
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 
2.15

36.0

91.8

181.0

– France
1.88

30.2

15.2

34.7

– Germany
0.16

41.6

0.3

1.5

– Switzerland
0.02

43.6

0.5

8.1

Asia
 
 
 
 
– Hong Kong
0.67

40.3

86.0

291.8

– Australia
0.67

43.6

9.1

24.9

– India
0.75

54.3

8.4

18.3

– Indonesia
4.40

58.5

5.5

6.4

– Mainland China
0.70

48.8

28.5

76.9

– Malaysia
1.00

47.4

6.9

15.6

– Singapore
0.49

42.0

10.2

40.5

– Taiwan
0.16

47.8

3.0

15.9

Middle East and North Africa
 
 
 
 
– Egypt
2.78

44.9

2.8

3.5

– Turkey
0.40

45.1

0.5

1.1

– UAE
0.09

38.7

1.5

9.1

North America
 
 
 
 
– US
1.27

34.5

44.7

130.1

– Canada
1.38

34.5

21.6

53.7

Latin America
 
 
 
 
– Argentina
1.66

45.1

1.5

1.5

– Mexico
0.19

44.5

4.3

9.0

 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK
2.18

35.4

79.6

170.9

– France
2.98

30.5

12.6

28.7

– Germany
0.24

42.1

0.3

1.1

– Switzerland
0.02

43.7

0.7

13.0

Asia
 
 
 
 
– Hong Kong
0.73

41.1

80.6

285.8

– Australia
0.81

43.1

7.6

20.7

– India
1.15

55.0

8.4

17.8

– Indonesia
7.46

52.7

4.8

6.2

– Mainland China
0.87

48.1

25.2

67.4

– Malaysia
1.09

46.7

6.1

13.2

– Singapore
0.70

42.3

9.2

35.6

– Taiwan
0.19

48.0

3.0

15.2

Middle East and North Africa
 
 
 
 
– Egypt
2.25

45.0

2.7

3.1

– Turkey
0.37

45.1

0.5

1.2

– UAE
0.14

36.6

1.8

11.2

North America
 
 
 
 
– US
1.51

35.7

50.8

144.1

– Canada
1.89

33.7

20.9

50.6

Latin America
 
 
 
 
– Argentina
2.25

45.3

1.6

1.5

– Mexico
0.90

44.5

2.6

7.0

1
Excludes specialised lending exposures subject to supervisory slotting approach.
2
Amounts shown by geographical region and country in this table are based on the location of principal operation of the lending subsidiary.

HSBC Holdings plc Pillar 3 2017
72


Pillar 3 Disclosures at 31 December 2017

Table 50.b: PD, LGD, RWA and exposure by country – wholesale IRB advanced approach central governments and central banks
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 
0.03

44.1

2.0

18.0

– France
0.02

45.0

0.2

1.7

– Germany
0.04

45.0

0.1

0.5

– Switzerland
0.01

45.0

0.3

6.8

Asia
 
 
 
 
– Hong Kong
0.01

44.5

4.6

89.8

– Australia
0.01

45.0

0.4

6.6

– India
0.07

45.0

1.4

6.8

– Indonesia
0.20

45.0

0.6

1.9

– Mainland China
0.02

45.0

2.1

29.0

– Malaysia
0.04

45.0

0.7

4.9

– Singapore
0.01

45.0

0.7

15.8

– Taiwan
0.02

45.0

0.6

10.1

Middle East and North Africa
 
 
 
 
– Egypt
2.25

45.0

2.3

2.2

– Turkey
0.42

45.0

0.5

0.9

– UAE
0.04

44.6

0.7

6.0

North America
 
 
 
 
– US
0.01

33.4

3.2

42.8

– Canada
0.02

33.2

1.8

15.9

Latin America
 
 
 
 
– Argentina
1.65

45.0

1.4

1.4

– Mexico
0.16

45.0

3.8

8.1

 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK
0.04

44.6

2.5

20.1

– France
0.06

45.0

0.2

1.8

– Germany
0.05

45.0

0.1

0.5

– Switzerland
0.01

45.0

0.5

11.7

Asia
 
 
 
 
– Hong Kong
0.01

44.5

5.5

111.9

– Australia
0.01

45.0

0.3

5.9

– India
0.07

45.0

1.4

6.1

– Indonesia
0.17

45.0

0.5

1.8

– Mainland China
0.02

45.0

1.9

26.1

– Malaysia
0.04

45.0

0.7

5.2

– Singapore
0.01

45.0

0.7

14.3

– Taiwan
0.02

45.0

0.5

8.9

Middle East and North Africa
 
 
 
 
– Egypt
2.95

45.0

2.4

2.2

– Turkey
0.44

45.0

0.4

0.8

– UAE
0.14

44.6

0.8

6.0

North America
 
 
 
 
– US
0.01

37.6

3.9

53.6

– Canada
0.02

31.4

2.1

16.6

Latin America
 
 
 
 
– Argentina
2.23

45.0

1.5

1.5

– Mexico
0.08

45.0

2.2

6.2



73
HSBC Holdings plc Pillar 3 2017


Table 50.c: PD, LGD, RWA and exposure by country – wholesale IRB advanced approach institutions
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 
0.21

37.4

3.5

12.1

– France
0.17

38.9

0.5

1.7

– Germany
0.13

39.4

0.2

0.9

– Switzerland
0.06

35.1

0.2

1.2

Asia
 
 
 
 
– Hong Kong
0.06

42.1

5.4

36.1

– Australia
0.07

41.8

0.5

2.6

– India
0.17

45.0

0.3

1.1

– Indonesia
0.43

49.7


0.1

– Mainland China
0.14

46.4

2.0

8.0

– Malaysia
0.18

47.5

0.5

1.8

– Singapore
0.12

42.0

0.6

3.6

– Taiwan
0.06

45.0


0.2

Middle East and North Africa
 
 
 
 
– Egypt
0.08

45.0

0.2

0.9

– Turkey
0.11

45.2


0.2

– UAE
0.18

45.3

0.3

0.8

North America
 
 
 

– US
0.11

44.6

1.4

6.9

– Canada
0.04

22.8

0.3

3.5

Latin America
 
 
 
 
– Argentina




– Mexico
0.45

45.0

0.3

0.6

 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK
0.24

31.6

2.2

10.4

– France
0.17

41.3

0.6

1.6

– Germany
0.16

39.0

0.1

0.5

– Switzerland
0.04

32.1

0.2

1.3

Asia
 
 
 
 
– Hong Kong
0.06

42.2

4.9

30.9

– Australia
0.05

41.0

0.5

2.8

– India
0.26

45.0

0.3

0.8

– Indonesia




– Mainland China
0.12

45.2

1.8

8.1

– Malaysia
0.38

48.5

0.4

0.9

– Singapore
0.08

43.9

0.7

4.9

– Taiwan
0.10

45.0

0.1

0.3

Middle East and North Africa
 
 
 
 
– Egypt
0.08

45.0

0.1

0.3

– Turkey
0.07

45.0


0.3

– UAE
0.08

45.4

0.2

0.9

North America
 
 
 
 
– US
0.31

42.4

1.0

2.5

– Canada
0.04

21.6

0.3

2.6

Latin America
 
 
 
 
– Argentina
0.06

45.0



– Mexico
0.50

45.0

0.3

0.4


HSBC Holdings plc Pillar 3 2017
74


Pillar 3 Disclosures at 31 December 2017

Table 50.d: PD, LGD, RWA and exposure by country – wholesale IRB advanced approach corporates¹
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value1

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 
2.56

34.9

86.3

150.9

– France
2.07

28.9

14.5

31.3

– Germany
1.82

45.0


0.1

– Switzerland
0.04

45.0


0.1

Asia
 
 
 
 
– Hong Kong
1.15

37.6

76.0

165.9

– Australia
1.06

43.3

8.2

15.7

– India
1.25

61.4

6.7

10.4

– Indonesia
6.33

64.6

4.9

4.4

– Mainland China
1.30

52.0

24.4

39.9

– Malaysia
1.69

48.7

5.7

8.9

– Singapore
0.92

39.7

8.9

21.1

– Taiwan
0.42

53.0

2.4

5.6

Middle East and North Africa
 
 
 
 
– Egypt
11.63

44.5

0.3

0.4

– Turkey
0.00

0.0



– UAE
0.21

20.9

0.5

2.3

North America
 
 
 
 
– US
2.04

34.1

40.1

80.4

– Canada
2.15

36.3

19.5

34.3

Latin America
 
 
 
 
– Argentina
1.95

46.7

0.1

0.1

– Mexico
0.65

29.2

0.2

0.3

 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK
2.63

34.3

74.9

140.4

– France
3.36

28.8

11.8

25.3

– Germany
2.71

45.4

0.1

0.1

– Switzerland




Asia
 
 
 
 
– Hong Kong
1.43

38.1

70.2

143.0

– Australia
1.38

42.7

6.8

12.0

– India
1.82

61.3

6.7

10.9

– Indonesia
10.48

55.8

4.3

4.4

– Mainland China
1.71

51.3

21.5

33.2

– Malaysia
1.94

47.7

5.0

7.1

– Singapore
1.49

39.5

7.8

16.4

– Taiwan
0.45

52.7

2.4

6.0

Middle East and North Africa
 
 
 
 
– Egypt
0.64

44.9

0.2

0.6

– Turkey
0.77

46.2

0.1

0.1

– UAE
0.16

23.9

0.8

4.3

North America
 
 
 
 
– US
2.45

34.4

45.9

88.0

– Canada
3.02

35.9

18.5

31.4

Latin America
 
 
 
 
– Argentina
3.10

59.2

0.1


– Mexico
15.62

34.7

0.1

0.4

1
Excludes specialised lending exposures subject to supervisory slotting approach.

75
HSBC Holdings plc Pillar 3 2017


Table 50.e: PD, LGD, RWA and exposure by country – wholesale IRB foundation approach all asset classes
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 
2.90

40.8

5.8

9.8

– France
3.22

45.0

0.4

0.4

– Germany
1.37

44.9

11.1

18.4

– Switzerland




Asia
 
 
 
 
– Hong Kong




– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE
4.50

44.8

7.9

12.3

North America
 
 
 
 
– US




– Canada




Latin America
 
 
 
 
– Argentina




– Mexico




 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK
1.94

41.3

4.4

8.2

– France
4.30

45.0

0.2

0.3

– Germany
0.90

44.8

10.1

15.6

– Switzerland




Asia
 
 
 
 
– Hong Kong




– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE
3.72

44.2

7.8

12.8

North America
 
 
 
 
– US




– Canada




Latin America
 
 
 
 
– Argentina




– Mexico





HSBC Holdings plc Pillar 3 2017
76


Pillar 3 Disclosures at 31 December 2017

Table 50.f: PD, LGD, RWA and exposure by country – wholesale IRB foundation approach central governments and central banks
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 




– France




– Germany




– Switzerland




Asia
 
 
 
 
– Hong Kong




– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE
0.05

45.0


0.1

North America
 
 
 
 
– US




– Canada




Latin America
 
 
 
 
– Argentina




– Mexico




 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK




– France




– Germany




– Switzerland




Asia
 
 
 
 
– Hong Kong




– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE
0.04

45.0


0.1

North America
 
 
 
 
– US




– Canada




Latin America
 
 
 
 
– Argentina




– Mexico





77
HSBC Holdings plc Pillar 3 2017


Table 50.g: PD, LGD, RWA and exposure by country – wholesale IRB foundation approach institutions
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 




– France




– Germany




– Switzerland




Asia
 
 
 
 
– Hong Kong




– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE
0.11

45.0

0.1

0.2

North America
 
 
 
 
– US




– Canada




Latin America
 
 
 
 
– Argentina




– Mexico




 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK




– France




– Germany




– Switzerland




Asia
 
 
 
 
– Hong Kong




– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE
0.28

45.0

0.1

0.2

North America
 
 
 
 
– US




– Canada




Latin America
 
 
 
 
– Argentina




– Mexico





HSBC Holdings plc Pillar 3 2017
78


Pillar 3 Disclosures at 31 December 2017

Table 50.h: PD, LGD, RWA and exposure by country – wholesale IRB foundation approach corporates
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 
2.90

40.8

5.8

9.8

– France
3.22

45.0

0.4

0.4

– Germany
1.37

44.9

11.1

18.4

– Switzerland




Asia
 
 
 
 
– Hong Kong




– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE
4.60

44.8

7.8

12.0

North America
 
 
 
 
– US




– Canada




Latin America
 
 
 
 
– Argentina




– Mexico




 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK
1.94

41.3

4.4

8.2

– France
4.30

45.0

0.2

0.3

– Germany
0.91

44.8

10.1

15.6

– Switzerland




Asia
 
 
 
 
– Hong Kong




– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE
3.81

44.2

7.7

12.5

North America
 
 
 
 
– US




– Canada




Latin America
 
 
 
 
– Argentina




– Mexico





79
HSBC Holdings plc Pillar 3 2017


Table 50.i: PD, LGD, RWA and exposure by country – retail IRB approach all asset classes
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 
1.48

30.9

23.8

180.7

– France
4.35

14.0

3.5

26.3

– Germany




– Switzerland
0.74

2.0

0.1

6.7

Asia
 
 
 
 
– Hong Kong
0.79

38.5

22.7

111.8

– Australia
0.91

10.4

0.9

14.1

– India




– Indonesia




– Mainland China




– Malaysia
4.56

11.8

1.3

5.0

– Singapore
0.91

21.8

1.1

6.3

– Taiwan
1.33

11.7

0.7

4.9

Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE




North America
 
 
 
 
– US
5.33

63.3

9.1

21.9

– Canada
0.80

19.4

2.4

22.0

Latin America
 
 
 
 
– Argentina




– Mexico




 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK
1.58

30.5

18.6

155.8

– France
5.06

14.6

2.8

22.7

– Germany




– Switzerland
0.73

2.2

0.2

8.1

Asia
 
 
 
 
– Hong Kong
0.87

39.2

20.2

102.3

– Australia
0.90

10.6

0.7

11.6

– India




– Indonesia




– Mainland China




– Malaysia
4.05

12.1

1.0

4.5

– Singapore
0.75

22.3

1.1

6.7

– Taiwan
1.20

11.5

0.5

4.1

Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE




North America
 
 
 
 
– US
9.67

67.3

18.5

29.8

– Canada
0.96

19.2

2.4

18.7

Latin America
 
 
 
 
– Argentina




– Mexico





HSBC Holdings plc Pillar 3 2017
80


Pillar 3 Disclosures at 31 December 2017

 
 
 
 
 
 
Table 50.j: PD, LGD, RWA and exposure by country – retail IRB approach – retail secured by mortgages on immovable property
non-SME
 
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

 
At 31 Dec 2017
%

%

$bn

$bn

 
Europe
 
 
 
 
 
– UK 
1.20

13.2

6.5

134.4

 
– France
6.27

14.0

0.7

3.7

 
– Germany




 
– Switzerland




 
Asia
 
 
 
 
 
– Hong Kong
0.65

10.0

12.7

69.2

 
– Australia
0.91

10.4

0.9

14.1

 
– India




 
– Indonesia




 
– Mainland China




 
– Malaysia
4.56

11.8

1.3

5.0

 
– Singapore
0.91

21.8

1.1

6.3

 
– Taiwan
1.33

11.7

0.7

4.9

 
Middle East and North Africa
 
 
 
 
 
– Egypt




 
– Turkey




 
– UAE




 
North America
 
 
 
 
 
– US
6.16

54.7

7.5

17.1

 
– Canada
0.69

17.6

1.9

20.1

 
Latin America
 
 
 
 
 
– Argentina




 
– Mexico




 
 
 
 
 
 
 
At 31 Dec 2016
 
 
 
 
 
Europe
 
 
 
 
 
– UK
1.33

12.2

5.4

114.9

 
– France
6.82

14.0

0.6

3.5

 
– Germany




 
– Switzerland




 
Asia
 
 
 
 
 
– Hong Kong
0.69

10.0

10.7

62.5

 
– Australia
0.90

10.6

0.7

11.6

 
– India




 
– Indonesia




 
– Mainland China




 
– Malaysia
4.05

12.1

1.0

4.5

 
– Singapore
0.75

22.3

1.1

6.7

 
– Taiwan
1.20

11.5

0.5

4.1

 
Middle East and North Africa
 
 
 
 
 
– Egypt




 
– Turkey




 
– UAE




 
North America
 
 
 
 
 
– US
11.01

59.5

14.6

23.3

 
– Canada
0.85

17.2

1.9

16.7

 
Latin America
 
 
 
 
 
– Argentina




 
– Mexico






81
HSBC Holdings plc Pillar 3 2017


Table 50.k: PD, LGD, RWA and exposure by country – retail IRB approach retail secured by mortgages on immovable property SME
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 




– France
7.71

25.8

0.4

0.6

– Germany




– Switzerland




Asia
 
 
 
 
– Hong Kong
0.77

11.4


0.6

– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE




North America
 
 
 
 
– US




– Canada
2.10

28.5

0.1

0.3

Latin America
 
 
 
 
– Argentina




– Mexico




 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK




– France
7.70

25.8

0.2

0.6

– Germany




– Switzerland




Asia
 
 
 
 
– Hong Kong
0.89

11.7


0.6

– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE




North America
 
 
 
 
– US




– Canada
2.10

29.6

0.1

0.3

Latin America
 
 
 
 
– Argentina




– Mexico





HSBC Holdings plc Pillar 3 2017
82


Pillar 3 Disclosures at 31 December 2017

Table 50.l: PD, LGD, RWA and exposure by country – retail IRB approach retail QRRE
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 
1.26

85.8

6.8

31.4

– France




– Germany




– Switzerland




Asia
 
 
 
 
– Hong Kong
1.01

100.2

8.1

34.0

– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE




North America
 
 
 
 
– US
1.39

93.6

0.9

3.5

– Canada
2.51

64.4

0.1

0.3

Latin America
 
 
 
 
– Argentina




– Mexico




 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK
1.14

85.5

5.4

28.0

– France




– Germany




– Switzerland




Asia
 
 
 
 
– Hong Kong
1.10

100.0

8.1

32.2

– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE




North America
 
 
 
 
– US
1.49

93.6

1.0

3.4

– Canada
2.72

60.7

0.1

0.3

Latin America
 
 
 
 
– Argentina




– Mexico





83
HSBC Holdings plc Pillar 3 2017


Table 50.m: PD, LGD, RWA and exposure by country – retail IRB approach other SME
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 
6.82

67.7

5.0

6.8

– France
19.77

30.4

0.8

2.3

– Germany




– Switzerland




Asia
 
 
 
 
– Hong Kong
0.17

15.9


0.1

– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE




North America
 
 
 
 
– US




– Canada
5.44

45.5

0.1

0.2

Latin America
 
 
 
 
– Argentina




– Mexico




 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK
7.71

66.6

3.8

6.1

– France
20.34

30.6

0.7

2.3

– Germany




– Switzerland




Asia
 
 
 
 
– Hong Kong
0.10

11.3


0.1

– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE




North America
 
 
 
 
– US




– Canada
4.33

48.4

0.1

0.2

Latin America
 
 
 
 
– Argentina




– Mexico





HSBC Holdings plc Pillar 3 2017
84


Pillar 3 Disclosures at 31 December 2017

Table 50.n: PD, LGD, RWA and exposure by country – retail IRB approach other non-SME
 
Exposure-
weighted
average PD

Exposure-
weighted
average LGD

RWAs

Exposure
value

At 31 Dec 2017
%

%

$bn

$bn

Europe
 
 
 
 
– UK 
2.44

80.6

5.5

8.1

– France
2.09

11.8

1.6

19.7

– Germany




– Jersey




– Switzerland
0.74

2.0

0.1

6.7

Asia
 
 
 
 
– Hong Kong
1.15

24.2

1.9

7.9

– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE




North America
 
 
 
 
– US
4.88

96.6

0.7

1.3

– Canada
1.06

30.8

0.2

1.1

Latin America
 
 
 
 
– Argentina




– Mexico




 
 
 
 
 
At 31 Dec 2016
 
 
 
 
Europe
 
 
 
 
– UK
2.05

81.8

4.0

6.8

– France
2.46

12.1

1.3

16.3

– Germany




– Jersey
0.52

2.6


1.1

– Switzerland
0.73

2.2

0.2

8.1

Asia
 
 
 
 
– Hong Kong
1.37

21.2

1.4

6.9

– Australia




– India




– Indonesia




– Mainland China




– Malaysia




– Singapore




– Taiwan




Middle East and North Africa
 
 
 
 
– Egypt




– Turkey




– UAE




North America
 
 
 
 
– US
8.66

96.5

2.9

3.1

– Canada
1.03

28.3

0.2

1.2

Latin America
 
 
 
 
– Argentina




– Mexico






85
HSBC Holdings plc Pillar 3 2017


Table 51: Retail IRB exposure – by internal PD band
 
PD range
Average net carrying values1

Undrawn commitments

 
%
$bn

$bn

At 31 Dec 2017
 
 
 
Secured by mortgages on immovable property
 
 
 
SME
 
1.5


Band 1
0.000 to 0.483
0.6


Band 2
0.484 to 1.022
0.2


Band 3
1.023 to 4.914
0.4


Band 4
4.915 to 8.860
0.2


Band 5
8.861 to 15.000
0.1


Band 6
15.001 to 50.000


Band 7
50.001 to 100.000


Secured by mortgages on immovable property
 
 
 
Non-SME
 
260.5

18.6

Band 1
0.000 to 0.483
213.0

16.9

Band 2
0.484 to 1.022
21.2

0.9

Band 3
1.023 to 4.914
18.2

0.7

Band 4
4.915 to 8.860
3.0


Band 5
8.861 to 15.000
0.5


Band 6
15.001 to 50.000
1.5

0.1

Band 7
50.001 to 100.000
3.1


Qualifying revolving retail exposures
 
120.2

104.7

Band 1
0.000 to 0.483
96.2

91.2

Band 2
0.484 to 1.022
10.3

7.1

Band 3
1.023 to 4.914
11.1

5.6

Band 4
4.915 to 8.860
1.4

0.5

Band 5
8.861 to 15.000
0.4

0.1

Band 6
15.001 to 50.000
0.5

0.1

Band 7
50.001 to 100.000
0.3

0.1

Other SME
 
10.2

4.2

Band 1
0.000 to 0.483
1.3

0.8

Band 2
0.484 to 1.022
1.8

0.9

Band 3
1.023 to 4.914
4.9

1.9

Band 4
4.915 to 8.860
1.1

0.3

Band 5
8.861 to 15.000
0.5

0.1

Band 6
15.001 to 50.000
0.2

0.1

Band 7
50.001 to 100.000
0.4

0.1

Other non-SME
 
53.1

16.0

Band 1
0.000 to 0.483
33.5

12.8

Band 2
0.484 to 1.022
8.2

1.6

Band 3
1.023 to 4.914
9.6

1.4

Band 4
4.915 to 8.860
0.9

0.1

Band 5
8.861 to 15.000
0.3


Band 6
15.001 to 50.000
0.2


Band 7
50.001 to 100.000
0.4

0.1

Total retail
 
445.5

143.5

Band 1
0.000 to 0.483
344.6

121.7

Band 2
0.484 to 1.022
41.7

10.5

Band 3
1.023 to 4.914
44.2

9.6

Band 4
4.915 to 8.860
6.6

0.9

Band 5
8.861 to 15.000
1.8

0.2

Band 6
15.001 to 50.000
2.4

0.3

Band 7
50.001 to 100.000
4.2

0.3

1
Average net carrying values are calculated by aggregating the net carrying values of the last five quarters and dividing by five.


HSBC Holdings plc Pillar 3 2017
86


Pillar 3 Disclosures at 31 December 2017

Table 52: IRB expected loss and CRAs – by exposure class
 
 
 
 
CRA
 
 
Expected loss

Balances

Charge for the year

 
 
$bn

$bn

$bn

1
Total IRB approach






2
Central governments and central banks
0.1



3
Institutions



4
Corporates
5.3

4.2

0.7

5
Retail
2.5

1.0

0.3

 
– Secured by mortgages on immovable property SME



 
– Secured by mortgages on immovable property non-SME
0.8

0.3


 
– Qualifying revolving retail
0.8

0.2

0.2

 
– Other SME
0.5

0.3


 
– Other non-SME
0.4

0.2

0.1

6
Total at 31 Dec 2017
7.9

5.2

1.0

 
 
 
 
 
1
Total IRB approach
 
 
 
2
Central governments and central banks
0.1



3
Institutions



4
Corporates
5.7

4.3

1.1

5
Retail
3.6

1.2

0.5

 
– Secured by mortgages on immovable property SME



 
– Secured by mortgages on immovable property non-SME
1.9

0.4

0.1

 
– Qualifying revolving retail
0.6

0.2

0.2

 
– Other SME
0.6

0.3


 
– Other non-SME
0.5

0.3

0.2

6
Total at 31 Dec 2016
9.4

5.5

1.6

 
 
 
 
 
1
Total IRB approach
 
 
 
2
Central governments and central banks
0.2



3
Institutions
0.1



4
Corporates
5.5

4.5

1.0

5
Retail
5.5

2.1

0.4

 
– Secured by mortgages on immovable property SME



 
– Secured by mortgages on immovable property non-SME
3.5

1.2


 
– Qualifying revolving retail
0.7

0.2

0.2

 
– Other SME
0.7

0.3


 
– Other non-SME
0.6

0.4

0.2

6
Total at 31 Dec 2015
11.3

6.6

1.4

 
 
 
 
 
1
Total IRB approach
 
 
 
2
Central governments and central banks
0.3



3
Institutions
0.3



4
Corporates
5.2

4.2

1.1

5
Retail
7.2

3.1

0.2

 
– Secured by mortgages on immovable property SME



 
– Secured by mortgages on immovable property non-SME
5.1

1.9

(0.1
)
 
– Qualifying revolving retail
0.7

0.3

0.1

 
– Other SME
0.7

0.4


 
– Other non-SME
0.7

0.5

0.2

6
Total at 31 Dec 2014
13.0

7.3

1.3


87
HSBC Holdings plc Pillar 3 2017


Table 53: Credit risk exposure – by geographical region
 
 
Exposure value
 
 
Europe

Asia

MENA

North
America

Latin
America

Total

 
 
$bn

$bn

$bn

$bn

$bn

$bn

IRB advanced approach
 
463.8

692.7

20.6

240.8

11.6

1,429.5

– central governments and central banks
 
29.9

190.8

14.5

61.5

10.5

307.2

– institutions
 
16.7

55.6

2.3

11.8

0.6

87.0

– corporates
 
202.5

303.0

3.8

123.6

0.5

633.4

– total retail
 
214.7

143.3


43.9


401.9

– of which:
 






secured by mortgages on immovable property SME
 
0.7

0.5


0.3


1.5

secured by mortgages on immovable property non-SME
 
138.1

100.8


37.2


276.1

qualifying revolving retail
 
31.4

34.0


3.8


69.2

other SME
 
9.1

0.1


0.2


9.4

other non-SME
 
35.4

7.9


2.4


45.7

IRB securitisation positions
 
25.9

2.8


4.0


32.7

IRB non-credit obligation assets
 
8.3

43.2

0.8

2.1

1.7

56.1

IRB foundation approach
 
30.7


15.4



46.1

– central governments and central banks
 


0.1



0.1

– institutions
 


0.2



0.2

– corporates
 
30.7


15.1



45.8

Standardised approach
 
220.8

86.3

39.7

15.3

22.0

384.1

– central governments and central banks
 
178.3

19.2

2.1

3.6

1.0

204.2

– institutions
 
0.5

0.1

1.8


0.1

2.5

– corporates
 
21.3

21.4

22.1

6.5

12.3

83.6

– retail
 
1.5

8.6

5.7

1.7

4.7

22.2

– secured by mortgages on immovable property
 
6.1

15.8

3.1

1.0

2.1

28.1

– exposures in default
 
1.0

0.5

1.0

0.3

0.3

3.1

– regional governments or local authorities
 


2.9


0.6

3.5

– public sector entities
 
0.1





0.1

– equity
 
1.2

13.3

0.2

1.0

0.3

16.0

– items associated with particularly high risk
 
3.3


0.1

0.3

0.1

3.8

– securitisation positions 
 
0.3

1.4



0.3

2.0

– claims in the form of CIU
 
0.5





0.5

– international organisations
 
2.2





2.2

– multilateral development banks
 


0.3



0.3

– other items
 
4.5

6.0

0.4

0.9

0.2

12.0

Total at 31 Dec 2017
 
749.5

825.0

76.5

262.2

35.3

1,948.5



HSBC Holdings plc Pillar 3 2017
88


Pillar 3 Disclosures at 31 December 2017

Table 53: Credit risk exposure – by geographical region (continued)
 
 
 
Exposure value
 
 
Europe

Asia

MENA

North
America

Latin
America

Total

 
 
$bn

$bn

$bn

$bn

$bn

$bn

IRB advanced approach
 
422.3

652.8

22.2

257.5

10.2

1,365.0

– central governments and central banks
 
37.2

205.4

14.0

73.6

9.2

339.4

– institutions
 
14.2

52.5

1.8

6.8

0.4

75.7

– corporates
 
183.0

264.5

6.4

128.6

0.6

583.1

– total retail
 
187.9

130.4


48.5


366.8

– of which:
 
 
 
 
 
 
 
secured by mortgages on immovable property SME
 
0.6

0.6


0.3


1.5

secured by mortgages on immovable property non-SME
 
118.5

90.6


39.9


249.0

qualifying revolving retail
 
28.0

32.2


3.8


64.0

other SME
 
8.4

0.1


0.2


8.7

other non-SME
 
32.4

6.9


4.3


43.6

IRB securitisation positions
 
29.0

0.8


4.0


33.8

IRB non-credit obligation assets
 
7.8

40.2

0.7

1.6

1.6

51.9

IRB foundation approach
 
26.1


16.7



42.8

– central governments and central banks
 


0.1



0.1

– institutions
 


0.3



0.3

– corporates
 
26.1


16.3



42.4

Standardised approach
 
172.2

85.8

41.3

15.6

19.2

334.1

– central governments and central banks
 
131.7

27.5

3.0

4.3

0.8

167.3

– institutions
 
0.3

0.2

1.4

0.2


2.1

– corporates
 
21.9

18.2

22.2

5.5

10.6

78.4

– retail
 
1.9

7.9

6.5

1.4

4.3

22.0

– secured by mortgages on immovable property
 
5.2

14.0

3.6

1.1

1.8

25.7

– exposures in default
 
1.0

0.4

1.2

0.3

0.4

3.3

– regional governments or local authorities
 


2.4


0.5

2.9

– public sector entities
 






– equity
 
1.4

12.1

0.2

1.1

0.4

15.2

– items associated with particularly high risk
 
2.8


0.1

0.4

0.1

3.4

– securitisation positions
 

0.8



0.1

0.9

– claims in the form of CIU
 
0.4


0.1



0.5

– international organisations
 
2.7





2.7

– multilateral development banks
 


0.2



0.2

– other items
 
2.9

4.7

0.4

1.3

0.2

9.5

Total at 31 Dec 2016
 
657.4

779.6

80.9

278.7

31.0

1,827.6



89
HSBC Holdings plc Pillar 3 2017


Table 54: Credit risk RWAs – by geographical region
 
 
RWAs
 
 
Europe

Asia

MENA

North
America

Latin
America

Total

 
 
$bn

$bn

$bn

$bn

$bn

$bn

IRB advanced approach
 
149.9

208.8

7.1

83.7

5.9

455.4

– central governments and central banks
 
3.4

14.8

5.1

5.3

5.3

33.9

– institutions
 
4.9

9.9

0.6

1.9

0.3

17.6

– corporates
 
114.2

157.3

1.4

65.0

0.3

338.2

– total retail
 
27.4

26.8


11.5


65.7

– of which:
 






secured by mortgages on immovable property SME
 
0.4



0.1


0.5

secured by mortgages on immovable property non-SME
 
7.1

16.8


9.3


33.2

qualifying revolving retail
 
6.8

8.1


1.1


16.0

other SME
 
5.8



0.1


5.9

other non-SME
 
7.3

1.9


0.9


10.1

IRB securitisation positions
 
13.0

0.2


0.5


13.7

IRB non-credit obligation assets
 
5.3

5.4

0.4

1.3

0.8

13.2

IRB foundation approach
 
18.8


9.6



28.4

– central governments and central banks
 






– institutions
 


0.1



0.1

– corporates
 
18.8


9.5



28.3

Standardised approach
 
38.9

69.8

30.6

15.7

19.5

174.5

– central governments and central banks
 
3.2

1.5

0.7

5.9

1.4

12.7

– institutions
 
0.2

0.1

0.8

0.0

0.1

1.2

– corporates
 
20.0

19.3

21.0

5.8

12.2

78.3

– retail
 
1.0

6.5

4.3

1.3

3.4

16.5

– secured by mortgages on immovable property
 
2.6

5.5

1.2

0.4

0.7

10.4

– exposures in default
 
1.3

0.6

1.3

0.3

0.4

3.9

– regional governments or local authorities
 


0.7


0.3

1.0

– public sector entities
 




0.1

0.1

– equity
 
2.6

31.8

0.2

1.0

0.5

36.1

– items associated with particularly high risk
 
5.1


0.1

0.4

0.1

5.7

– securitisation positions
 
0.3

1.1



0.2

1.6

– claims in the form of CIU
 
0.6





0.6

– international organisations
 






– multilateral development banks
 






– other items 
 
2.0

3.4

0.3

0.6

0.1

6.4

Total at 31 Dec 2017
 
225.9

284.2

47.7

101.2

26.2

685.2


HSBC Holdings plc Pillar 3 2017
90


Pillar 3 Disclosures at 31 December 2017

Table 54: Credit risk RWAs – by geographical region (continued)
 
 
 
RWAs
 
 
Europe

Asia

MENA

North
America

Latin
America

Total

 
 
$bn

$bn

$bn

$bn

$bn

$bn

IRB advanced approach
 
127.1

192.4

7.4

99.1

4.5

430.5

– central governments and central banks
 
3.9

15.9

5.3

6.4

3.9

35.4

– institutions
 
3.2

9.4

0.4

1.6

0.4

15.0

– corporates
 
98.4

143.4

1.7

70.3

0.2

314.0

– total retail
 
21.6

23.7


20.8


66.1

– of which:
 
 
 
 
 
 
 
secured by mortgages on immovable property SME
 
0.2



0.1


0.3

secured by mortgages on immovable property non-SME
 
6.0

14.1


16.4


36.5

qualifying revolving retail
 
5.4

8.2


1.1


14.7

other SME
 
4.4



0.1


4.5

other non-SME
 
5.6

1.4


3.1


10.1

IRB securitisation positions
 
20.5

0.1

0.0

0.3


20.9

IRB non-credit obligation assets
 
4.8

5.1

0.3

1.3

0.6

12.1

IRB foundation approach
 
16.1


9.8



25.9

– central governments and central banks
 






– institutions
 


0.1



0.1

– corporates
 
16.1


9.7



25.8

Standardised approach
 
37.3

62.4

31.5

17.9

17.2

166.3

– central governments and central banks
 
3.1

1.5

0.7

8.2

1.2

14.7

– institutions
 
0.1

0.2

0.6

0.1


1.0

– corporates
 
21.0

17.2

21.2

5.0

10.6

75.0

– retail
 
1.4

5.9

4.8

1.1

3.1

16.3

– secured by mortgages on immovable property
 
2.0

4.9

1.3

0.5

0.6

9.3

– exposures in default
 
1.3

0.5

1.5

0.6

0.4

4.3

– regional governments or local authorities
 


0.6


0.3

0.9

– public sector entities
 






– equity
 
2.7

29.1

0.2

1.1

0.5

33.6

– items associated with particularly high risk
 
4.2

0.0

0.2

0.6

0.1

5.1

– securitisation positions
 

0.7



0.2

0.9

– claims in the form of CIU
 
0.4

0.0

0.1



0.5

– international organisations
 






– multilateral development banks
 






– other items 
 
1.1

2.4

0.3

0.7

0.2

4.7

Total at 31 Dec 2016
 
205.8

260.0

49.0

118.6

22.3

655.7

Table 55: IRB exposure – credit risk mitigation
 
 
At 31 Dec 2017
 
 
Exposures unsecured: carrying amount

Exposures secured: carrying amount

Exposures secured
by collateral

Exposures secured
by financial guarantees

Exposures secured by credit derivatives

 
Footnote
$bn

$bn

$bn

$bn

$bn

Exposures under the IRB advanced approach
1
 
 
 
 
 
Central governments and central banks
 
289.2

18.9

18.1

0.8


Institutions
 
82.0

12.3

5.9

1.5

4.9

Corporates
 
539.5

378.7

273.5

97.2

8.0

Retail
 
188.3

279.3

256.6

22.7


Total
 
1,099.0

689.2

554.1

122.2

12.9

Exposures under the IRB foundation approach
1
 
 
 
 
 
Central governments and central banks
 





Institutions
 
0.2





Corporates
 
64.4

8.8

6.4

2.4


Total

 
64.6

8.8

6.4

2.4


1
This table includes both on and off balance sheet exposures



91
HSBC Holdings plc Pillar 3 2017


Table 56: Standardised exposure – credit risk mitigation
 
 
At 31 Dec 2017
 
 
Exposures unsecured: carrying amount

Exposures secured: carrying amount

Exposures secured
by collateral

Exposures secured
by financial guarantees

Exposures secured by credit derivatives

 
Footnote
$bn

$bn

$bn

$bn

$bn

Exposures under the standardised approach
1
 
 
 
 
 
Central governments and central banks
2
187.8

5.3

0.3

5.0


Institutions
 
2.4

1.1


1.1


Corporates
 
130.8

41.5

32.0

9.5


Retail
 
68.0

2.6

1.4

1.2


Secured by mortgages on immovable property
 
9.4

19.6

19.6



Exposures in default
 
2.9

0.5

0.5



Items associated with particularly high risk
3
1.3

0.1


0.1


Total
 
402.6

70.7

53.8

16.9


1
This table includes both on and off balance sheet exposures
2
Deferred tax assets are excluded from the exposure.
3
Equities are excluded from the exposure.
Table 57: Standardised exposure – by credit quality step
 
At 31 Dec 2017
At 31 Dec 2016
 
Original
exposure1

Exposure
value

RWAs

Original
exposure1

Exposure
value

RWAs

 
$bn

$bn

$bn

$bn

$bn

$bn

Central governments and central banks
 
 
 
 
 
 
Credit quality step 1
190.6

196.3

 
154.8

158.3

 
Credit quality step 2
0.8

1.2

 
1.3

1.6

 
Credit quality step 3
0.9

1.1

 
1.0

1.3

 
Credit quality step 4
0.2


 
0.3

0.1

 
Credit quality step 5
0.4

0.4

 
0.3

0.3

 
Credit quality step unrated
5.2

5.2

 
5.7

5.7

 
 
198.1

204.2

12.7

163.4

167.3

14.6

Institutions
 
 
 
 
 
 
Credit quality step 1
0.4

0.4

 
0.8

0.8

 
Credit quality step 2
2.8

1.8

 
0.6

0.3

 
Credit quality step 4


 
0.5

0.5

 
Credit quality step 5


 
0.1

0.1

 
Credit quality step unrated
0.3

0.3

 
0.3

0.3

 
 
3.5

2.5

1.2

2.3

2.0

0.9

Corporates
 
 
 
 
 
 
Credit quality step 1
3.4

3.7

 
2.0

2.2

 
Credit quality step 2
5.2

3.7

 
4.6

2.9

 
Credit quality step 3
1.9

1.9

 
2.6

1.7

 
Credit quality step 4
1.7

1.4

 
4.5

3.0

 
Credit quality step 5
0.3

0.2

 
1.0

0.5

 
Credit quality step 6
0.3

0.3

 
0.4

0.1

 
Credit quality step unrated
160.0

72.4

 
145.3

67.9

 
 
172.8

83.6

78.3

160.4

78.3

75.0

1
Figures presented on an ‘obligor basis’.


HSBC Holdings plc Pillar 3 2017
92


Pillar 3 Disclosures at 31 December 2017

Table 58: Changes in stock of general and specific credit risk adjustments
 
 
Accumulated specific credit risk adjustments

Accumulated general credit risk adjustments

 
 
$bn

$bn

1
Opening balance at 31 Dec 2016
8.6


2
Increases due to amounts set aside for estimated loan losses during the period
4.7


3
Decreases due to amounts reversed for estimated loan losses during the period
(2.7
)

4
Decreases due to amounts taken against accumulated credit risk adjustments
(3.2
)

 
Recoveries on credit risk adjustments written off in previous years1

0.6


5
Transfers between credit risk adjustments


6
Impact of exchange rate differences


7
Business combinations, including acquisitions and disposals of subsidiaries


8
Other adjustments
0.1


9
Closing balance at 31 Dec 2017
8.1


10
Recoveries on credit risk adjustments recorded directly to the statement of profit or loss


11
Specific credit risk adjustments directly recorded to the statement of profit or loss


1
Under IAS 39 HSBC follows a disclosure convention where recoveries on credit risk adjustment written off in previous years are first added back into accumulated credit risk adjustments before being released to the statement of profit and loss.
Table 59: Changes in stock of defaulted loans and debt securities
 
 
 
Gross carrying value

 
 
Footnote
$bn

1
Defaulted loans and debt securities at 31 Dec 2016
 
17.9

2
Loans and debt securities that have defaulted since the last reporting period
 
6.4

3
Returned to non-defaulted status
 
(2.0
)
4
Amounts written off
 
(2.6
)
5
Other changes
1
(0.8
)
7
Repayments
 
(3.8
)
6
Defaulted loans and debt securities at 31 Dec 2017
 
15.1

1
Other changes include foreign exchange and assets held for sale in default.


93
HSBC Holdings plc Pillar 3 2017


Table 60: IRB – Credit risk exposures by portfolio and PD range
 
Original on-balance sheet gross exposure

Off-balance sheet exposures pre-CCF

Average CCF

EAD post-CRM and post-CCF

Average PD

Number of obligors

Average LGD

Average maturity

RWAs

RWA density

Expected loss

Value adjustments and provisions

PD scale
$bn

$bn

%

$bn

%

 
%

years

$bn

%

$bn

$bn

AIRB – Central government and central banks
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
292.5

2.1

39.8

294.3

0.02

255

42.5

2.07

24.8

8.4


 
0.15 to <0.25
2.2


43.0

2.3

0.22

8

42.8

1.71

0.9

39.1


 
0.25 to <0.50
2.2


74.3

2.3

0.37

11

45.0

1.15

1.1

48.4


 
0.50 to <0.75
2.5



2.6

0.63

11

45.0

1.40

1.7

67.5


 
0.75 to <2.50
5.9


28.5

5.7

1.62

54

45.0

1.11

5.3

93.2

0.1

 
2.50 to <10.00
0.5

0.2

1.5


4.35

12

45.1

4.70

0.1

179.5


 
10.00 to <100.00











 
100.00 (Default)











 
Sub-total
305.8

2.3

38.1

307.2

0.06

351

42.6

2.04

33.9

11.0

0.1


 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Institutions
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
71.5

10.6

45.9

76.9

0.05

2,857

40.9

1.35

11.2

14.6


 
0.15 to <0.25
2.2

1.0

40.9

2.6

0.22

344

45.3

1.20

1.1

41.4


 
0.25 to <0.50
3.3

0.5

47.1

3.5

0.37

270

44.7

0.82

1.9

54.5


 
0.50 to <0.75
2.2

0.7

44.3

2.5

0.63

192

41.8

1.32

1.8

69.3


 
0.75 to <2.50
1.2

0.7

47.6

1.5

1.15

282

46.1

1.52

1.5

98.2


 
2.50 to <10.00
0.4


19.2


4.35

54

45.8

0.55


144.7


 
10.00 to <100.00

0.1

23.2


12.61

32

50.0

1.29

0.1

239.0


 
100.00 (Default)




100.00

2

76.7

1.00


81.2


 
Sub-total
80.8

13.6

45.4

87.0

0.11

4,033

41.3

1.33

17.6

20.2



 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Corporate – Specialised Lending (excluding Slotting)1
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
1.4

1.1

34.3

1.8

0.10

409

30.1

3.31

0.5

26


 
0.15 to <0.25
1.5

0.8

30.9

1.6

0.22

431

32.3

3.91

0.7

44


 
0.25 to <0.50
0.9

0.3

43.4

1.0

0.37

232

32.4

3.55

0.6

54


 
0.50 to <0.75
0.9

0.2

51.8

1.0

0.63

254

23.3

4.18

0.5

52


 
0.75 to <2.50
1.9

0.8

47.4

2.3

1.33

487

30.1

3.55

1.7

79


 
2.50 to <10.00
0.4

0.1

36.2

0.5

4.85

232

23.8

3.24

0.4

87


 
10.00 to <100.00
0.3

0.1

46.0

0.3

24.77

88

22.1

3.02

0.4

127


 
100.00 (Default)
0.1

0.2

70.7

0.3

100.00

133

30.6

4.49

0.3

127

0.1

 
Sub-total
7.4

3.6

40.2

8.8

4.46

2,266

29.4

3.63

5.1

59

0.1


 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Corporate – Other
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
105.1

155.2

38.2

202.5

0.08

9,655

40.3

2.20

45.6

23

0.1

 
0.15 to <0.25
50.9

63.9

36.3

82.0

0.22

9,463

36.5

1.92

29.6

36

0.1

 
0.25 to <0.50
47.0

51.2

36.3

72.7

0.37

10,194

38.0

2.07

35.5

49

0.1

 
0.50 to <0.75
45.4

41.6

32.4

57.0

0.63

9,375

37.4

1.97

34.7

61

0.1

 
0.75 to <2.50
140.5

97.9

31.9

133.5

1.37

44,281

37.7

2.05

109.3

82

0.7

 
2.50 to <10.00
33.5

26.2

33.7

30.8

4.17

11,455

38.8

1.97

36.4

118

0.5

 
10.00 to <100.00
5.0

3.6

39.8

4.8

21.79

2,202

37.8

1.90

8.6

179

0.4

 
100.00 (Default)
5.0

1.0

33.5

5.2

100.00

2,429

46.1

2.11

9.8

190

2.1

 
Sub-total
432.4

440.6

35.8

588.5

1.75

99,054

38.6

2.07

309.5

53

4.1

3.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale AIRB – Total at 31 Dec 20172
882.5

460.1

36.1

1,047.6

1.11

105,704

40.0

2.01

379.3

37

4.3

3.4


HSBC Holdings plc Pillar 3 2017
94


Pillar 3 Disclosures at 31 December 2017

Table 60: IRB – Credit risk exposures by portfolio and PD range (continued)
 
Original on-balance sheet gross exposure

Off-balance sheet exposures pre-CCF

Average CCF

EAD post-CRM and post-CCF

Average PD

Number of obligors

Average LGD

Average maturity

RWAs

RWA density

Expected loss

Value adjustments and provisions

PD scale
$bn

$bn

%

$bn

%

 
%

years

$bn

%

$bn

$bn

AIRB – Secured by mortgages on immovable property SME
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
0.4


100.0

0.4

0.06

1,291

10.6



2


 
0.15 to <0.25


100.0


0.18

1,741

17.0



7


 
0.25 to <0.50
0.2


100.0

0.2

0.32

5,164

16.1



7


 
0.50 to <0.75
0.1


117.1

0.1

0.60

3,884

26.2



19


 
0.75 to <2.50
0.3


149.6

0.3

1.60

11,459

27.4


0.1

33


 
2.50 to <10.00
0.4


102.0

0.4

5.06

5,183

24.3


0.2

60


 
10.00 to <100.00
0.1


249.6

0.1

17.72

858

26.3


0.1

104


 
100.00 (Default)


78.2


100.00

1,215

24.2


0.1

216


 
Sub-total
1.5


122.5

1.5

4.26

30,795

20.8


0.5

35



 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Secured by mortgages on immovable property non-SME
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
161.7

12.9

91.2

177.0

0.06

1,007,985

14.6


9.9

6


 
0.15 to <0.25
26.9

1.2

81.9

28.1

0.21

121,136

16.0


3.1

11


 
0.25 to <0.50
24.6

2.9

43.9

25.9

0.37

110,580

17.4


4.3

17


 
0.50 to <0.75
11.2

0.4

100.2

11.7

0.63

51,845

15.7


2.2

19


 
0.75 to <2.50
21.8

1.0

72.4

22.6

1.31

98,817

17.0


6.5

29


 
2.50 to <10.00
5.9

0.2

96.6

6.1

4.53

27,756

11.3


2.3

38


 
10.00 to <100.00
2.1

0.1

98.8

2.3

26.58

21,434

18.5


2.8

120

0.1

 
100.00 (Default)
2.4


69.5

2.4

100.00

20,590

24.7


2.1

86

0.7

 
Sub-total
256.6

18.7

82.5

276.1

1.44

1,460,143

15.3


33.2

12

0.8

0.3

 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Qualifying revolving retail exposures
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
5.5

68.1

47.1

37.4

0.07

12,974,761

93.5


1.7

5


 
0.15 to <0.25
1.4

13.2

44.0

7.2

0.21

2,294,812

94.9


0.8

11


 
0.25 to <0.50
2.2

10.2

42.5

6.4

0.37

1,829,719

93.6


1.2

19


 
0.50 to <0.75
2.1

4.3

49.8

4.2

0.60

1,104,290

93.4


1.1

27


 
0.75 to <2.50
5.8

7.1

47.9

9.0

1.39

2,143,093

91.5


4.4

48

0.1

 
2.50 to <10.00
3.0

1.5

59.4

3.9

4.79

773,854

89.9


4.4

114

0.3

 
10.00 to <100.00
0.8

0.3

58.1

1.0

30.07

281,160

91.6


2.2

225

0.3

 
100.00 (Default)
0.1


12.2

0.1

100.00

33,075

83.7


0.2

161

0.1

 
Sub-total
20.9

104.7

46.6

69.2

1.15

21,434,764

93.1


16.0

23

0.8

0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Other SME
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
0.1

0.2

44.9

0.2

0.09

92,804

62.2



12


 
0.15 to <0.25
0.2

0.2

51.1

0.3

0.22

70,783

60.6


0.1

23


 
0.25 to <0.50
0.4

0.4

51.4

0.6

0.38

130,411

62.9


0.2

33


 
0.50 to <0.75
0.5

0.6

67.7

0.9

0.63

164,640

61.0


0.4

42


 
0.75 to <2.50
2.2

1.4

59.1

3.0

1.55

384,599

59.0


1.7

57


 
2.50 to <10.00
2.5

1.2

57.3

3.2

4.80

195,235

55.4


2.1

67

0.1

 
10.00 to <100.00
0.5

0.2

53.6

0.6

18.36

80,752

69.8


0.7

112

0.1

 
100.00 (Default)
0.5

0.1

90.6

0.6

100.00

18,209

39.2


0.7

116

0.3

 
Sub-total
6.9

4.3

58.2

9.4

9.84

1,137,433

57.7


5.9

63

0.5

0.3

 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Other non-SME
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
9.2

6.5

32.2

11.9

0.08

453,740

21.9


0.7

6


 
0.15 to <0.25
6.5

3.6

35.6

8.1

0.21

359,875

28.2


1.1

13


 
0.25 to <0.50
6.3

2.7

29.4

7.3

0.37

318,434

30.5


1.5

21


 
0.50 to <0.75
4.8

1.4

28.4

5.3

0.61

178,341

27.3


1.2

24


 
0.75 to <2.50
8.5

0.7

27.9

8.9

1.34

332,213

26.5


3.0

33


 
2.50 to <10.00
2.9

0.9

26.1

3.2

4.24

194,512

34.4


1.8

57

0.1

 
10.00 to <100.00
0.6


21.2

0.6

24.44

84,817

49.3


0.6

107

0.1

 
100.00 (Default)
0.3

0.1

11.3

0.4

100.00

40,604

46.2


0.2

49

0.2

 
Sub-total
39.1

15.9

31.5

45.7

1.83

1,962,536

27.3


10.1

22

0.4

0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Retail AIRB – Total at 31 Dec 2017
325.0

143.6

50.0

401.9

1.64

26,025,671

31.1


65.7

16

2.5

1.0



95
HSBC Holdings plc Pillar 3 2017


Table 60: IRB – Credit risk exposures by portfolio and PD range (continued)
 
Original on-balance sheet gross exposure

Off-balance sheet exposures pre-CCF

Average CCF

EAD post-CRM and post-CCF

Average PD

Number of obligors

Average LGD

Average maturity

RWAs

RWA density

Expected loss

Value adjustments and provisions

PD scale
$bn

$bn

%

$bn

%

 
%

years

$bn

%

$bn

$bn

FIRB – Central government and central banks
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15



0.1

0.05

1

45.0

4.48


31


 
0.15 to <0.25











 
0.25 to <0.50











 
0.50 to <0.75











 
0.75 to <2.50











 
2.50 to <10.00











 
10.00 to <100.00











 
100.00 (Default)











 
Sub-total



0.1

0.05

1

45.0

4.48


31



 
 
 
 
 
 
 
 
 
 
 
 
 
FIRB – Institutions
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
0.2


0.8

0.2

0.11

4

45.0

2.13

0.1

29


 
0.15 to <0.25











 
0.25 to <0.50











 
0.50 to <0.75











 
0.75 to <2.50











 
2.50 to <10.00











 
10.00 to <100.00











 
100.00 (Default)











 
Sub-total
0.2


0.8

0.2

0.11

4

45.0

2.13

0.1

29



 
 
 
 
 
 
 
 
 
 
 
 
 
FIRB – Corporate – Other
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
9.5

12.7

44.3

14.9

0.08

1,144

45.0

2.47

4.1

27


 
0.15 to <0.25
3.0

6.1

42.1

5.6

0.22

1,259

44.1

2.33

2.7

47


 
0.25 to <0.50
4.4

6.1

32.7

6.3

0.37

1,319

44.1

1.88

3.6

56


 
0.50 to <0.75
3.0

4.6

24.0

4.2

0.63

1,091

42.9

2.19

3.1

75


 
0.75 to <2.50
8.5

10.0

25.8

10.7

1.36

3,663

43.1

1.75

9.7

92

0.1

 
2.50 to <10.00
2.5

2.0

30.9

3.0

4.67

1,059

43.7

2.03

4.4

144

0.1

 
10.00 to <100.00
0.3

0.3

30.3

0.4

21.37

184

41.4

1.10

0.7

192


 
100.00 (Default)
0.6

0.2

38.6

0.7

100.00

279

43.8

1.68



0.3

 
Sub-total
31.8

42.0

34.9

45.8

2.52

9,998

44.0

2.13

28.3

62

0.5

0.5

 
 
 
 
 
 
 
 
 
 
 
 
 
FIRB – Total at 31 Dec 2017
32.0

42.0

34.9

46.1

2.51

10,003

44.0

2.13

28.4

62

0.5

0.5

1
Slotting exposures are disclosed in Table 61: Specialised lending.
2
The Wholesale AIRB Total includes Non-credit obligation assets amounting to $56.1bn of Original exposure and EAD, and $13.2bn of RWAs.

HSBC Holdings plc Pillar 3 2017
96


Pillar 3 Disclosures at 31 December 2017

Table 60: IRB – Credit risk exposures by portfolio and PD range (continued)
 
Original on-balance sheet gross exposure

Off-balance sheet exposures pre-CCF

Average CCF
EAD post-CRM and post-CCF

Average PD
Number of obligors

Average LGD
Average maturity

RWAs

RWA density
Expected loss

Value adjustments and provisions

PD scale
$bn

$bn

%
$bn

%
 
%
years

$bn

%
$bn

$bn

AIRB – Central government and central banks
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
326.6

1.9

60.5
327.7

0.02
417

42.9
2.05

26.0

8

 
0.15 to <0.25
2.2


27.5
2.3

0.22
19

43.9
1.48

0.8

37

 
0.25 to <0.50
2.0


42.3
2.0

0.37
33

43.5
1.36

0.9

49

 
0.50 to <0.75
0.5


50.1
0.5

0.63
15

45.0
1.49

0.4

69

 
0.75 to <2.50
3.7

0.1

26.7
3.7

1.35
35

45.0
1.27

3.4

91

 
2.50 to <10.00
3.2


76.5
3.2

3.49
20

45.0
1.07

3.9

123
0.1

 
10.00 to <100.00


50.2

10.00
4

47.0
0.55


189

 
100.00 (Default)



100.00
11

88.0
5.00



 
Sub-total
338.2

2.0

59.1
339.4

0.07
554

43.0
2.02

35.4

10
0.1


 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Institutions
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
62.5

16.3

30.5
67.7

0.05
2,772

40.2
1.34

10.2

15

 
0.15 to <0.25
2.0

2.0

26.4
2.5

0.22
384

44.7
0.72

0.9

37

 
0.25 to <0.50
2.5

0.6

30.9
2.7

0.37
278

44.9
0.69

1.5

54

 
0.50 to <0.75
0.8

0.2

53.1
0.9

0.63
175

44.7
1.15

0.7

73

 
0.75 to <2.50
1.8

1.1

28.8
1.9

1.11
270

42.2
0.98

1.6

83

 
2.50 to <10.00


21.7

4.37
57

41.7
0.37


161

 
10.00 to <100.00

0.2

17.4

26.64
44

53.2
1.53

0.1

307

 
100.00 (Default)



100.00
5

45.0
2.54


295

 
Sub-total
69.6

20.4

30.1
75.7

0.12
3,985

40.6
1.29

15

20


 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Corporate – Specialised Lending (excluding Slotting)1
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
0.9

0.4

62.7
1.2

0.13
614

26.5
3.43

0.3

27

 
0.15 to <0.25
0.9

0.3

45.5
1.0

0.22
659

25.4
3.85

0.4

36

 
0.25 to <0.50
0.4

0.1

58.4
0.4

0.37
296

30.7
3.73

0.2

52

 
0.50 to <0.75
0.4

0.1

31.0
0.4

0.63
250

26.0
4.29

0.2

58

 
0.75 to <2.50
0.7

0.5

34.5
0.9

1.25
523

40.2
3.63

0.9

105

 
2.50 to <10.00
0.1


56.5
0.1

3.57
91

26.2
4.99

0.1

102

 
10.00 to <100.00
0.1


62.0
0.1

18.58
114

27.2
1.56

0.2

134

 
100.00 (Default)
0.1


94.7
0.1

100.00
159

53.3
3.22


11
0.1

 
Sub-total
3.6

1.4

47.7
4.2

4.36
2,706

30.3
3.66

2.3

56
0.1

0.1

 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Corporate – Other
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
105.5

144.3

37.9
186.0

0.08
10,931

38.1
2.26

41.4

22
0.1

 
0.15 to <0.25
39.2

55.0

38.8
67.0

0.22
9,588

39.3
2.04

26.6

40
0.1

 
0.25 to <0.50
45.3

48.8

36.4
69.6

0.37
10,306

39.2
2.08

34.9

50
0.1

 
0.50 to <0.75
43.1

38.7

33.4
55.0

0.63
9,322

37.5
1.95

33.5

61
0.1

 
0.75 to <2.50
120.2

89.8

31.9
123.5

1.37
42,812

37.2
2.00

99.7

81
0.6

 
2.50 to <10.00
32.7

27.3

34.4
31.9

4.59
11,786

36.5
1.99

36.3

114
0.5

 
10.00 to <100.00
5.6

4.8

39.8
6.4

19.65
2,459

36.5
2.05

11.1

174
0.5

 
100.00 (Default)
6.0

0.8

51.5
6.4

100.00
2,583

41.9
2.24

6.0

93
2.5

 
Sub-total
397.6

409.5

36.2
545.8

2.15
99,787

38.1
2.10

289.5

53
4.5

3.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale AIRB – Total at 31 Dec 2016
809.0

433.3

36.0
1,017.0

1.27
107,032

40.0
2.00

354.3

36
4.7

3.5


97
HSBC Holdings plc Pillar 3 2017


Table 60: IRB – Credit risk exposures by portfolio and PD range (continued)
 
Original on-balance sheet gross exposure

Off-balance sheet exposures pre-CCF

Average CCF
EAD post-CRM and post-CCF

Average PD
Number of obligors

Average LGD
Average maturity

RWAs

RWA density
Expected loss

Value adjustments and provisions

PD scale
$bn

$bn

%
$bn

%
 
%
years

$bn

%
$bn

$bn

AIRB – Secured by mortgages on immovable property SME
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
0.3


100.0
0.4

0.07
1,249

10.5


2

 
0.15 to <0.25
0.1


100.0
0.1

0.17
200

17.9


7

 
0.25 to <0.50
0.2


37.7
0.1

0.32
1,012

16.4


10

 
0.50 to <0.75
0.1

0.1

100.0
0.1

0.63
585

26.0


19

 
0.75 to <2.50
0.3


95.0
0.3

1.63
1,792

28.9

0.1

29

 
2.50 to <10.00
0.4


102.3
0.4

5.26
1,928

24.4

0.2

32

 
10.00 to <100.00
0.1


86.0
0.1

17.47
414

26.5


50

 
100.00 (Default)


97.8

100.00
138

26.2


48

 
Sub-total
1.5

0.1

97.7
1.5

4.01
7,318

21.1

0.3

21


 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Secured by mortgages on immovable property non-SME
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
137.7

11.5

92.3
151.4

0.06
900,158

14.1

8.0

5

 
0.15 to <0.25
24.4

1.1

81.0
25.5

0.21
106,945

16.5

2.7

11

 
0.25 to <0.50
22.0

2.3

43.8
23.1

0.37
120,044

22.0

4.6

20

 
0.50 to <0.75
12.0

0.4

96.0
12.4

0.61
56,427

15.9

2.2

18

 
0.75 to <2.50
23.1

1.1

61.8
23.9

1.33
129,916

22.0

8.8

37
0.1

 
2.50 to <10.00
6.4

0.2

93.6
6.6

4.76
36,051

20.0

4.7

71
0.1

 
10.00 to <100.00
2.2

0.1

98.3
2.3

27.26
24,716

27.4

3.9

171
0.2

 
100.00 (Default)
3.8


78.5
3.8

100.00
35,131

39.7

1.6

42
1.5

 
Sub-total
231.6

16.7

82.9
249.0

2.14
1,409,388

16.6

36.5

15
1.9

0.5

 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Qualifying revolving retail exposures
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
4.9

62.5

47.4
34.4

0.07
11,894,411

93.7

1.5

4

 
0.15 to <0.25
1.3

12.0

44.0
6.5

0.21
1,824,704

95.0

0.8

11

 
0.25 to <0.50
2.1

9.0

42.9
5.9

0.37
1,732,829

93.3

1.0

17

 
0.50 to <0.75
2.0

4.0

50.2
3.9

0.60
1,069,619

93.4

1.0

26

 
0.75 to <2.50
5.5

6.6

47.3
8.6

1.39
1,991,102

91.4

4.0

48
0.1

 
2.50 to <10.00
2.9

1.4

57.8
3.7

4.78
679,874

89.9

4.2

112
0.2

 
10.00 to <100.00
0.8

0.3

55.7
0.9

28.87
268,254

91.7

2.1

219
0.3

 
100.00 (Default)
0.1


6.3
0.1

100.00
26,142

36.0

0.1

148

 
Sub-total
19.6

95.8

46.8
64.0

1.14
19,486,935

93.1

14.7

23
0.6

0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Other SME
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
0.1

0.1

67.4
0.2

0.10
82,891

39.9


9

 
0.15 to <0.25
0.2

0.2

53.4
0.3

0.22
91,588

61.2

0.1

22

 
0.25 to <0.50
0.3

0.4

51.2
0.6

0.38
141,288

63.1

0.2

32

 
0.50 to <0.75
0.4

0.5

66.5
0.8

0.63
157,268

58.0

0.3

38

 
0.75 to <2.50
2.0

1.3

60.8
2.8

1.58
427,912

58.8

1.5

55

 
2.50 to <10.00
2.3

0.8

69.9
2.8

4.90
201,537

53.6

1.8

64
0.1

 
10.00 to <100.00
0.5

0.1

70.1
0.6

17.66
69,516

66.6

0.6

106
0.1

 
100.00 (Default)
0.6

0.1

94.5
0.6

100.00
21,873

39.5


3
0.3

 
Sub-total
6.4

3.5

63.4
8.7

10.84
1,193,873

56.1

4.5

52
0.5

0.3

 
 
 
 
 
 
 
 
 
 
 
 
 
AIRB – Other non-SME
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
9.5

6.1

34.4
11.9

0.07
442,581

20.0

0.5

5

 
0.15 to <0.25
6.0

2.7

35.8
7.3

0.20
393,748

31.2

1.0

14

 
0.25 to <0.50
5.4

2.9

29.6
6.3

0.36
276,509

29.9

1.2

19

 
0.50 to <0.75
4.0

1.2

29.1
4.5

0.60
176,642

29.3

1.1

24

 
0.75 to <2.50
8.7

0.6

31.7
9.1

1.37
345,838

28.9

3.2

35

 
2.50 to <10.00
2.8

1.0

26.8
3.2

4.31
188,614

39.5

1.9

61
0.1

 
10.00 to <100.00
0.7


17.1
0.8

25.11
79,970

65.7

1.1

138
0.1

 
100.00 (Default)
0.4


52.1
0.5

100.00
58,697

55.4

0.1

13
0.3

 
Sub-total
37.5

14.5

32.6
43.6

2.26
1,962,599

28.7

10.1

23
0.5

0.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Retail AIRB – Total at 31 Dec 2016
296.6

130.6

50.3
366.8

2.19
24,060,113

32.3

66.1

18
3.5

1.3


HSBC Holdings plc Pillar 3 2017
98


Pillar 3 Disclosures at 31 December 2017

Table 60: IRB – Credit risk exposures by portfolio and PD range (continued)
 
Original on-balance sheet gross exposure

Off-balance sheet exposures pre-CCF

Average CCF
EAD post-CRM and post-CCF

Average PD
Number of obligors

Average LGD
Average maturity

RWAs

RWA density
Expected loss

Value adjustments and provisions

PD scale
$bn

$bn

%
$bn

%
 
%
years

$bn

%
$bn

$bn

FIRB – Central government and central banks
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15


75.0
0.1

0.04
1

45.0
5.00


32

 
0.15 to <0.25







 
0.25 to <0.50







 
0.50 to <0.75







 
0.75 to <2.50







 
2.50 to <10.00







 
10.00 to <100.00







 
100.00 (Default)







 
Sub-total


75.0
0.1

0.04
1

45.0
5.00


32


 
 
 
 
 
 
 
 
 
 
 
 
 
FIRB – Institutions
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
0.1


45.2
0.1

0.06
2

45.0
2.75


23

 
0.15 to <0.25


20.7

0.22

45.0
3.82


62

 
0.25 to <0.50
0.1


75.0
0.2

0.37
1

45.0
1.71

0.1

55

 
0.50 to <0.75







 
0.75 to <2.50







 
2.50 to <10.00







 
10.00 to <100.00







 
100.00 (Default)







 
Sub-total
0.2


46.6
0.3

0.26
3

45.0
2.09

0.1

43


 
 
 
 
 
 
 
 
 
 
 
 
 
FIRB – Corporate – Other
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to <0.15
8.6

12.2

40.5
13.5

0.09
1,316

44.6
2.45

3.8

28

 
0.15 to <0.25
3.1

5.7

39.2
5.3

0.22
1,303

44.9
2.22

2.4

46

 
0.25 to <0.50
4.5

5.2

32.2
6.1

0.37
1,549

42.8
1.96

3.5

57

 
0.50 to <0.75
3.3

5.2

30.9
4.9

0.63
1,140

43.4
1.98

3.6

72

 
0.75 to <2.50
6.7

9.7

26.5
9.0

1.35
2,817

43.1
1.67

8.3

91
0.1

 
2.50 to <10.00
2.3

2.2

28.2
2.8

4.65
1,312

42.9
1.90

3.8

138
0.1

 
10.00 to <100.00
0.2

0.2

15.2
0.3

15.99
180

41.4
0.90

0.4

175

 
100.00 (Default)
0.4

0.1

45.8
0.5

100.00
414

44.9
1.43


0.2

 
Sub-total
29.1

40.5

33.9
42.4

1.95
10,031

43.8
2.07

25.8

61
0.4

0.4

 
 
 
 
 
 
 
 
 
 
 
 
 
FIRB – Total at 31 Dec 2016
29.3

40.5

34.0
42.8

1.94
10,035

43.8
2.1

25.9

61
0.4

0.4

1
Slotting exposures are disclosed in Table 61 Specialised lending.
2
The Wholesale AIRB Total includes Non-credit obligation assets amounting to $51.9bn of Original exposure and EAD, and $12.1bn of RWAs.

99
HSBC Holdings plc Pillar 3 2017


Table 61: Specialised lending on slotting approach¹
 

On-balance sheet amount

Off-balance sheet amount

Risk weight

Exposure amount

RWAs

Expected
loss

Regulatory categories
Remaining maturity
$bn

$bn

%

$bn

$bn

$bn

Category 1
Less than 2.5 years
12.2

1.6

50

13.2

6.7


Equal to or more than 2.5 years
12.9

2.0

70

14.3

10.0

0.1

Category 2
Less than 2.5 years
3.3

0.2

70

3.3

2.4


Equal to or more than 2.5 years
2.8

0.4

90

3.0

2.7


Category 3
Less than 2.5 years
0.4


115

0.4

0.4


Equal to or more than 2.5 years
0.9

0.1

115

0.8

0.9


Category 4
Less than 2.5 years
0.1


250

0.1

0.2


Equal to or more than 2.5 years
0.1


250

0.1

0.3


Category 5
Less than 2.5 years
0.3



0.6


0.3

Equal to or more than 2.5 years
0.3



0.3


0.2

Total at 31 Dec 2017
Less than 2.5 years
16.3

1.8

 
17.6

9.7

0.3

Equal to or more than 2.5 years
17.0

2.5

 
18.5

13.9

0.3

 
 
 
 
 
 
 
 
Category 1
Less than 2.5 years
9.1

1.5

50

9.9

5.0


Equal to or more than 2.5 years
12.6

1.5

70

13.7

9.5

0.1

Category 2
Less than 2.5 years
2.9

0.4

70

3.1

2.1


Equal to or more than 2.5 years
2.8

0.1

90

2.8

2.5


Category 3
Less than 2.5 years
0.5


115

0.5

0.6


Equal to or more than 2.5 years
0.9


115

0.9

1.0


Category 4
Less than 2.5 years
0.3


250

0.3

0.8


Equal to or more than 2.5 years
0.1


250

0.1

0.3


Category 5
Less than 2.5 years
0.5



0.8


0.5

Equal to or more than 2.5 years
0.3



0.4


0.2

Total at 31 Dec 2016
Less than 2.5 years
13.3

1.9

 
14.6

8.5

0.5

Equal to or more than 2.5 years
16.7

1.6

 
17.9

13.3

0.3

1
High volatility commercial real estate (‘HVCRE’) exposures and risk weighted assets are not included in the above table. The value of exposures and RWAs under HVCRE was nil at 31 December 2017 (31 Dec 2016: EAD $0.6bn; RWA $0.4bn).

Table 62: Analysis of counterparty credit risk (CCR) exposure by approach (excluding centrally cleared exposures)
 
 
 
Notional

Replacement cost

Potential future exposure

EEPE

Multiplier

EAD
post-CRM

RWAs

 
 
Footnote
$bn

$bn

$bn

$bn

$bn

$bn

$bn

1
Mark to market
 
14,404.8

17.2

44.5



61.7

25.2

4
Internal Model Method
 
12,898.8



15.9

1.4

22.2

9.7

 
– of which:
 














6
derivatives and long settlement transactions
 
12,898.8



15.9

1.4

22.2

9.7

9
Financial collateral comprehensive method (for SFTs)
 
677.1





47.6

8.7

11
Total at 31 Dec 2017
 
27,980.7

17.2

44.5

15.9

1.4

131.5

43.6

Table 63: Credit valuation adjustment (CVA) capital charge
 
 
At 31 Dec 2017
At 31 Dec 2016
 
 
EAD
post-CRM

RWAs

EAD
post-CRM

RWAs

 
 
$bn

$bn

$bn

$bn

1
Total portfolios subject to the Advanced CVA capital charge
9.4

2.8

12.8

3.5

2
– VaR component (including the 3 × multiplier)


0.7

 
0.8

3
– stressed VaR component (including the 3 × multiplier)


2.1

 
2.7

4
All portfolios subject to the Standardised CVA capital charge
36.6

6.7

41.6

10.9

5
Total subject to the CVA capital charge
46.0

9.5

54.4

14.4


HSBC Holdings plc Pillar 3 2017
100


Pillar 3 Disclosures at 31 December 2017

Table 64: Standardised approach – CCR exposures by regulatory portfolio and risk weights
 
Risk weight
0%

10%

20%

50%

75%

100%

150%

Others

Total credit exposure

Of which unrated

1
Central governments and central banks
7.5








7.5

6.3

2
Regional government or local authorities


















 
3
Public sector entities


















 
4
Multilateral development banks


















 
5
International organisations


















 
6
Institutions



0.1





0.1

0.1

7
Corporates





1.9



1.9

1.7

8
Retail


















 
9
Institutions and corporates with a short-term credit assessment


















 
10
Other items


















 
 
Total at 31 Dec 2017
7.5



0.1


1.9



9.5

8.1

 
 
 
 
 
 
 
 
 
 
 
 
1
Central governments and central banks
7.3








7.3

4.3

2
Regional government or local authorities
 
 
 
 
 
 
 
 
 
 
3
Public sector entities
 
 
 
 
 
 
 
 
 
 
4
Multilateral development banks
 
 
 
 
 
 
 
 
 
 
5
International organisations
 
 
 
 
 
 
 
 
 
 
6
Institutions



0.2





0.2

0.2

7
Corporates



0.1


2.5



2.6

2.3

8
Retail
 
 
 
 
 
 
 
 
 
 
9
Institutions and corporates with a short-term credit assessment
 
 
 
 
 
 
 
 
 
 
10
Other items
 
 
 
 
 
 
 
 
 
 
 
Total at 31 Dec 2016
7.3



0.3


2.5



10.1

6.8


101
HSBC Holdings plc Pillar 3 2017


Table 65: IRB – CCR exposures by portfolio and PD scale
 
EAD
post-CRM

Average
PD
Number of obligors

Average
LGD
Average maturity

RWAs

RWA
density
PD scale
$bn

%
 
%
years

$bn

%
AIRB – Central Government
and Central Banks
 
 
 
 
 
 
 
0.00 to <0.15
10.9

0.03
92

45.0
0.96

0.7

6
0.15 to <0.25
0.2

0.22
9

45.0
2.83

0.1

49
0.25 to <0.50
0.1

0.37
5

45.0
1.96


58
0.50 to <0.75

0.63
6

45.0
1.01


63
0.75 to <2.50
0.3

1.72
9

45.0
1.42

0.4

102
2.50 to <10.00
1.0

3.59
2

45.0
0.46

1.2

123
10.00 to <100.00




100.00 (Default)




Sub-total
12.5

0.42
123

45.0
1.00

2.4

19
 
 
 
 
 
 
 
 
AIRB – Institutions
 
 
 
 
 
 
 
0.00 to <0.15
46.8

0.06
3,973

45.3
1.34

9.8

21
0.15 to <0.25
3.9

0.22
331

46.1
1.55

2.0

50
0.25 to <0.50
2.1

0.37
93

45.0
1.13

1.3

59
0.50 to <0.75
0.7

0.63
91

46.3
1.24

0.5

76
0.75 to <2.50
0.7

1.23
164

45.4
1.41

0.7

107
2.50 to <10.00

6.00
22

25.7
1.75

0.1

187
10.00 to <100.00

12.67
13

54.7
2.57


279
100.00 (Default)

100.00
1

45.0
1.00


Sub-total
54.2

0.12
4,688

45.4
1.34

14.4

27
 
 
 
 
 
 
 
 
AIRB – Corporates
 
 
 
 
 
 
 
0.00 to <0.15
31.4

0.07
5,025

44.2
1.84

7.2

23
0.15 to <0.25
5.8

0.22
1,726

47.9
1.40

2.7

46
0.25 to <0.50
3.8

0.37
1,053

45.3
2.09

2.4

62
0.50 to <0.75
2.9

0.63
936

46.0
1.38

2.1

76
0.75 to <2.50
6.8

1.36
3,065

45.8
1.48

6.9

102
2.50 to <10.00
0.6

4.53
566

46.3
1.99

1.0

152
10.00 to <100.00
0.1

20.58
86

47.3
1.20

0.2

263
100.00 (Default)
0.1

100.00
22

43.4
4.41


Sub-total
51.5

0.65
12,479

45.0
1.74

22.5

44
 
 
 
 
 
 
 
 
AIRB – Total at 31 Dec 2017
118.2

0.45
17,290

53.4
1.30

39.3

33
 
 
 
 
 
 
 
 
FIRB – Corporates
 
 
 
 
 
 
 
0.00 to <0.15
2.3

0.07
520

40.3
1.98

0.6

25
0.15 to <0.25
0.3

0.22
159

45.0
1.78

0.1

44
0.25 to <0.50
0.2

0.37
151

45.0
1.75

0.1

59
0.50 to <0.75
0.1

0.63
97

45.0
1.93

0.1

75
0.75 to <2.50
0.7

1.55
516

45.0
1.61

0.8

114
2.50 to <10.00
0.1

4.38
82

45.0
1.64

0.1

142
10.00 to <100.00

10.22
9

45.0
1.00


187
100.00 (Default)

100.00
5

45.0
1.10


FIRB – Total at 31 Dec 2017
3.7

0.54
1,539

45.0
1.99

1.8

50
 
 
 
 
 
 
 
 
Total (all portfolios) at 31 Dec 2017
121.9

0.38
18,829

45.0
546.39

41.1

34

HSBC Holdings plc Pillar 3 2017
102


Pillar 3 Disclosures at 31 December 2017

Table 65: IRB – CCR exposures by portfolio and PD scale (continued)
 
EAD
post-CRM

Average
PD

Number of obligors

Average
LGD

Average maturity

RWAs

RWA
density

PD scale
$bn

%

 
%

years

$bn

%

AIRB – Central Government
and Central Banks
 
 
 
 
 
 
 
0.00 to <0.15
11.7

0.04

104

45.3

1.00

1.1
8

0.15 to <0.25
0.2

0.22

4

45.0

1.00

0.1
32

0.25 to <0.50

0.37

5

45.0

0.20


38

0.50 to <0.75

0.63

5

45.0

0.20


55

0.75 to <2.50

1.34

12

41.2

2.80


111

2.50 to <10.00
0.4
4.20

3

45.0

0.90

0.5
125

10.00 to <100.00







100.00 (Default)







Sub-total
12.3
0.19

133

45.3

1.00

1.7
13

 
AIRB – Institutions
 
 
 
 
 
 
 
0.00 to <0.15
48.5
0.06

3,473

45.2

1.30

10.8
22

0.15 to <0.25
5.9
0.22

295

46.9

1.60

3.0
51

0.25 to <0.50
1.6
0.37

133

45.0

1.40

0.9
61

0.50 to <0.75
0.7
0.63

69

45.0

0.60

0.5
70

0.75 to <2.50
0.6
1.07

144

45.1

1.50

0.6
104

2.50 to <10.00
0.1
4.64

31

45.0

2.30

0.1
186

10.00 to <100.00
0.1
28.13

17

53.4

2.10

0.2
329

100.00 (Default)







Sub-total
57.5
0.14

4,162

45.3

1.40

16.1
28

 
 
 
 
 
 
 
 
AIRB – Corporates
 
 
 
 
 
 
 
0.00 to <0.15
30.9
0.07

5,839

41.6

1.90

7.5
24

0.15 to <0.25
7.3
0.22

1,870

46.3

1.90

3.7
51

0.25 to <0.50
3.4
0.37

1,131

47.1

1.70

2.1
62

0.50 to <0.75
3.3
0.63

968

43.3

1.40

2.6
79

0.75 to <2.50
5.7
1.35

3,112

46.3

1.40

6.1
107

2.50 to <10.00
0.7
4.24

693

47.6

1.70

1.2
171

10.00 to <100.00
0.1
24.67

121

49.9

2.00

0.3
300

100.00 (Default)
0.1
100.00

46

45.4

4.20



Sub-total
51.5
0.66

13,780

43.8

1.80

23.5
46

 
 
 
 
 
 
 
 
AIRB – Total at 31 Dec 2016
121.3

34.00

18,075

44.5

1.50

41.3

34

 
 
 
 
 
 
 
 
FIRB – Corporates
 
 
 
 
 
 
 
0.00 to <0.15
4.2

0.06

553

45.0

1.90

0.9

23

0.15 to <0.25
0.3

0.22

137

45.0

2.20

0.1

48

0.25 to <0.50
0.3

0.37

160

45.0

1.70

0.2

58

0.50 to <0.75
0.4

0.63

96

45.0

1.70

0.3

73

0.75 to <2.50
0.3

1.35

496

45.0

2.20

0.3

108

2.50 to <10.00

4.61

79

45.0

2.00

0.1

151

10.00 to <100.00

13.52

10

45.0

1.00


218

100.00 (Default)

100.00

7

45.0

1.20



FIRB – Total at 31 Dec 2017
5.5

0.20

1,538

45.0

1.91

1.9

35

 
 
 
 
 
 
 
 
Total (all portfolios) at 31 Dec 2016
126.8

0.33

19,613

44.5

1.52

43.2

34


103
HSBC Holdings plc Pillar 3 2017


Table 66: Impact of netting and collateral held on exposure values
 
 
Gross positive fair value or net carrying amount

Netting benefits

Netted current credit exposure

Collateral held

Net credit exposure

 
 
$bn

$bn

$bn

$bn

$bn

1
Derivatives
628.3

469.0

159.3

41.8

117.5

2
SFTs
679.3


679.3

633.2

46.1

4
Total at 31 Dec 2017
1,307.6

469.0

838.6

675.0

163.6

Table 67: Composition of collateral for CCR exposure
 
 
Collateral used in derivative transactions
Collateral used in SFTs
 
 
Fair value of
collateral received
Fair value of
posted collateral
Fair value of collateral received

Fair value of posted collateral

 
 
Segregated

Unsegregated

Segregated

Unsegregated

 
 
$bn

$bn

$bn

$bn

$bn

$bn

1
Cash – domestic currency

5.9

1.4

3.5

72.6

96.3

2
Cash – other currencies

34.7

4.9

28.7

186.1

269.6

3
Domestic sovereign debt

5.4


5.3

83.3

77.1

4
Other sovereign debt

7.6


11.2

219.9

166.6

5
Government agency debt

0.2


1.1

12.0

4.6

6
Corporate bonds

0.6


0.4

39.2

17.1

7
Equity securities

0.4



46.3

45.0

8
Other collateral

0.2


0.3

1.6

1.2

9
Total at 31 Dec 2017

55.0

6.3

50.5

661.0

677.5

 
 
 
 
 
 
 
 
1
Cash – domestic currency

5.2

2.0

3.0

42.9

73.1

2
Cash – other currencies

38.9

4.7

32.4

148.7

227.5

3
Domestic sovereign debt

4.2


7.1

64.5

49.1

4
Other sovereign debt

8.9


9.4

186.7

131.9

5
Government agency debt

0.3


0.2

7.8

2.3

6
Corporate bonds

0.4



23.7

11.1

7
Equity securities




39.5

34.4

8
Other collateral

0.1


0.2

2.0

7.6

9
Total at 31 Dec 2016

58.0

6.7

52.3

515.8

537.0

Table 68: Exposures to central counterparties
 
 
At 31 Dec 2017
At 31 Dec 2016
 
 
EAD post-CRM

RWAs

EAD post-
CRM

RWAs

 
 
$bn

$bn

$bn

$bn

1
Exposures to QCCPs (total)
42.3

1.4

34.0

1.2

2
Exposures for trades at QCCPs (excluding initial margin and default fund contributions)
28.5

0.6

20.7

0.4

3
– OTC derivatives
18.0

0.4

10.4

0.2

4
– exchange-traded derivatives
8.1

0.2

7.2

0.1

5
– securities financing transactions
2.4


3.1

0.1

6
– netting sets where cross-product netting has been approved




7
Segregated initial margin
6.3


6.7


8
Non-segregated initial margin
7.5

0.1

6.6

0.1

9
Pre-funded default fund contributions

0.7


0.7

10
Unfunded default fund contributions




11
Exposures to non-QCCPs (total)


0.3

0.4

12
Exposures for trades at non-QCCPs (excluding initial margin and default fund contributions)


0.3

0.4

13
– OTC derivatives


0.3

0.4

14
– exchange-traded derivatives




15
– securities financing transactions




16
– netting sets where cross-product netting has been approved




17
Segregated initial margin




18
Non-segregated initial margin




19
Pre-funded default fund contributions




20
Unfunded default fund contributions






HSBC Holdings plc Pillar 3 2017
104


Pillar 3 Disclosures at 31 December 2017

Table 69: Securitisation exposures in the non-trading book
 
 
 
Bank acts as originator
Bank acts as sponsor
Bank acts as investor
 
 
 
Traditional

Synthetic

Sub-total

Traditional

Synthetic

Sub-total

Traditional

Synthetic

Sub-total

 
 
Footnote
$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

$bn

1
Retail (total)
 
0.8


0.8

18.2


18.2

6.0


6.0

2
– residential mortgage
 



0.3


0.3

2.6


2.6

3
– credit card
 






1.0


1.0

4
– other retail exposures
 



17.9


17.9

2.4


2.4

5
– re-securitisation
 
0.8


0.8







6
Wholesale (total)
 

4.7

4.7

2.7


2.7

2.8


2.8

7
– loans to corporates
 

4.7

4.7

0.4


0.4

0.1


0.1

8
– commercial mortgage
 



0.1


0.1

2.0


2.0

9
– lease and receivables
 



0.8


0.8

0.4


0.4

10
– other wholesale
 



0.4


0.4

0.3


0.3

11
– re-securitisation
 



1.0


1.0




 
Total at 31 Dec 2017
 
0.8

4.7

5.5

20.9


20.9

8.8


8.8

 
 
 
 
 
 
 
 
 
 
 
 
1
Retail (total)
 
1.3


1.3

17.3


17.3

2.7


2.7

2
– residential mortgage
 



0.1


0.1

2.3


2.3

3
– credit card
 









4
– other retail exposures
 



17.2


17.2

0.4


0.4

5
– re-securitisation
1
1.3


1.3







6
Wholesale (total)
 

4.7

4.7

5.4


5.4

3.8


3.8

7
– loans to corporates
 

4.7

4.7







8
– commercial mortgage
 






2.9


2.9

9
– lease and receivables
 









10
– other wholesale
 






0.8


0.8

11
– re-securitisation
 



5.4


5.4

0.1


0.1

 
Total at 31 Dec 2016
 
1.3

4.7

6.0

22.7


22.7

6.5


6.5

1
In the comparative period, $1.2bn of traditional re-securitisation exposure originated by the Group has been reallocated from wholesale to retail.
Table 70: Securitisation exposures in the trading book
 
 
At
 
 
31 Dec 2017
31 Dec 2016
 
 
Bank acts as investor1
Bank acts as investor1
 
 
Traditional

Synthetic

Sub-total

Traditional

Synthetic

Sub-total

 
 
$bn

$bn

$bn

$bn

$bn

$bn

1
Retail (total)
1.6


1.6

1.5


1.5

2
– residential mortgage
0.9


0.9

0.6


0.6

3
– credit card
0.2


0.2




4
– other retail exposures
0.5


0.5

0.9


0.9

5
– re-securitisation






6
Wholesale (total)
0.9


0.9

1.0


1.0

7
– loans to corporates



0.1


0.1

8
– commercial mortgage
0.6


0.6

0.7


0.7

9
– lease and receivables






10
– other wholesale
0.3


0.3

0.1


0.1

11
– re-securitisation



0.1


0.1

 
Total (all portfolios)
2.5


2.5

2.5


2.5

1
HSBC does not act as originator or sponsor for securitisation exposures in the trading book.

105
HSBC Holdings plc Pillar 3 2017


Table 71: Securitisation exposures in the non-trading book and associated capital requirements – bank acting as originator or sponsor
 
 
Exposure values (by risk weight bands)
 
Exposure values (by regulatory approach)
 
 
≤20% RW

>20% to 50% RW

>50% to 100% RW

>100% to 1,250% RW

1,250% RW1

 
IRB RBM (including IAA)

IRB SFA

SA

1,250%

 
 
$bn

$bn

$bn

$bn

$bn

 
$bn

$bn

$bn

$bn

2
Traditional securitisation
18.6

1.4

0.2

0.5

0.8

 
20.2


0.6

0.8

3
Securitisation
18.4

0.7

0.2

0.3

0.2

 
19.1


0.6

0.2

4
– retail underlying
17.4

0.3

0.1

0.3

0.1

 
17.8


0.3

0.1

5
– wholesale
1.0

0.4

0.1


0.1

 
1.3


0.3

0.1

6
Re-securitisation
0.2

0.7


0.2

0.6

 
1.1



0.6

7
– senior
0.2





 
0.1




8
– non-senior

0.7


0.2

0.6

 
1.0



0.6

9
Synthetic securitisation
4.3


0.4



 
4.7




10
Securitisation
4.3


0.4



 
4.7




11
– retail underlying





 




12
– wholesale
4.3


0.4



 
4.7




13
Re-securitisation





 




14
– senior





 




15
– non-senior





 




1
Total at 31 Dec 2017
22.9

1.4

0.6

0.5

0.8

 
24.9


0.6

0.8

 
 
 
 
 
 
 
 
 
 
 
 
2
Traditional securitisation
16.7

2.0

0.2

0.2

4.9

 
18.9


0.2

4.9

3
Securitisation
16.7

0.4

0.1

0.1


 
17.2


0.2


4
– retail underlying
16.7

0.4

0.1

0.1


 
17.2


0.2


5
– wholesale





 




6
Re-securitisation

1.6

0.1

0.1

4.9

 
1.7



4.9

7
– senior





 




8
– non-senior

1.6

0.1

0.1

4.9

 
1.7



4.9

9
Synthetic securitisation
4.3


0.4



 
4.7




10
Securitisation
4.3


0.4



 
4.7




11
– retail underlying





 




12
– wholesale
4.3


0.4



 
4.7




13
Re-securitisation





 




14
– senior





 




15
– non-senior





 




1
Total at 31 Dec 2016
21.0

2.0

0.6

0.2

4.9

 
23.6


0.2

4.9

1
The movements in 1,250% risk-weighted positions during 2017 are primarily attributable to a change in the presentation of overlapping exposures to Solitaire Funding Limited. Comparatives for 2016 have not been restated.


HSBC Holdings plc Pillar 3 2017
106


Pillar 3 Disclosures at 31 December 2017

Table 71: Securitisation exposures in the non-trading book and associated capital requirements – bank acting as originator or sponsor
(continued)
 
 
RWAs (by regulatory approach)
 
Capital charge after cap
 
 
IRB RBM (including IAA)

IRB SFA

SA

1,250% 1

 
IRB RBM (including IAA)

IRB SFA

SA

1,250%

 
 
$bn

$bn

$bn

$bn

 
$bn

$bn

$bn

$bn

2
Traditional securitisation
3.3


0.4

7.1

 
0.2



0.6

3
Securitisation
2.3


0.4

1.4

 
0.1



0.2

4
– retail underlying
2.1


0.3

0.7

 
0.1



0.1

5
– wholesale
0.2


0.1

0.7

 



0.1

6
Re-securitisation
1.0



5.7

 
0.1



0.4

7
– senior




 




8
– non-senior
1.0



5.7

 
0.1



0.4

9
Synthetic securitisation
0.8



0.3

 
0.1




10
Securitisation
0.8



0.3

 
0.1




11
– retail underlying




 




12
– wholesale
0.8



0.3

 
0.1




13
Re-securitisation




 




14
– senior




 




15
– non-senior




 




1
Total at 31 Dec 2017
4.1


0.4

7.4

 
0.3



0.6

 
 
 
 
 
 
 
 
 
 
 
2
Traditional securitisation
2.6


0.2

58.8

 
0.2



1.2

3
Securitisation
1.6


0.2


 
0.1




4
– retail underlying
1.6


0.2


 
0.1




5
– wholesale




 




6
Re-securitisation
1.0



58.8

 
0.1



1.2

7
– senior




 




8
– non-senior
1.0



58.8

 
0.1



1.2

9
Synthetic securitisation
0.9



0.4

 
0.1




10
Securitisation
0.9



0.4

 
0.1




11
– retail underlying




 




12
– wholesale
0.9



0.4

 
0.1




13
Re-securitisation




 




14
– senior




 




15
– non-senior




 




1
Total at 31 Dec 2016
3.5


0.2

59.2

 
0.3



1.2

1
The movements in 1,250% risk-weighted positions during 2017 are primarily attributable to a change in the presentation of overlapping exposures to Solitaire Funding Limited. Comparatives for 2016 have not been restated.


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Table 72: Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor
 
 
Exposure values (by risk weight bands)
 
Exposure values (by regulatory approach)
 
 
≤20% RW

>20% to 50% RW

>50% to 100% RW

>100% to 1,250% RW

1,250% RW

 
IRB RBM (including IAA)

IRB SFA

SA

1,250%

 
 
$bn

$bn

$bn

$bn

$bn

 
$bn

$bn

$bn

$bn

2
Traditional securitisation
6.7

0.5

1.6


0.1

 
7.2


1.4

0.1

3
Securitisation
6.7

0.5

1.6


0.1

 
7.2


1.4

0.1

4
– retail underlying
4.5

0.4

1.1


0.1

 
4.5


1.4

0.1

5
– wholesale
2.2

0.1

0.5



 
2.7




6
Re-securitisation





 




7
– senior





 




8
– non-senior





 




9
Synthetic securitisation





 




10
Securitisation





 




11
– retail underlying





 




12
– wholesale





 




13
Re-securitisation





 




14
– senior





 




15
– non-senior





 




1
Total at 31 Dec 2017
6.7

0.5

1.6


0.1

 
7.2


1.4

0.1

 
 
 
 
 
 
 
 
 
 
 
 
2
Traditional securitisation
4.9

0.3

1.2


0.1

 
5.6


0.8

0.1

3
Securitisation
4.9

0.2

1.1


0.1

 
5.4


0.8

0.1

4
– retail underlying
2.5

0.1



0.1

 
2.4


0.1

0.1

5
– wholesale
2.4

0.1

1.1



 
3.0


0.7


6
Re-securitisation

0.1

0.1



 
0.2




7
– senior


0.1



 
0.1




8
– non-senior

0.1




 
0.1




9
Synthetic securitisation





 




10
Securitisation





 




11
– retail underlying





 




12
– wholesale





 




13
Re-securitisation





 




14
– senior





 




15
– non-senior





 




1
Total at 31 Dec 2016
4.9

0.3

1.2


0.1

 
5.6


0.8

0.1


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Table 72: Securitisation exposures in the non-trading book and associated capital requirements – bank acting as investor
(continued)
 
 
 
RWAs (by regulatory approach)
 
Capital charge after cap
 
 
IRB RBM (including IAA)

IRB SFA

SA

1,250%

 
IRB RBM (including IAA)

IRB SFA

SA

1,250%

 
 
$bn

$bn

$bn

$bn

 
$bn

$bn

$bn

$bn

2
Traditional securitisation
1.9


1.2

0.9

 
0.1


0.1

0.1

3
Securitisation
1.9


1.2

0.9

 
0.1


0.1

0.1

4
– retail underlying
1.0


1.2

0.7

 


0.1

0.1

5
– wholesale
0.9



0.2

 
0.1




6
Re-securitisation




 




7
– senior




 




8
– non-senior




 




9
Synthetic securitisation




 




10
Securitisation




 




11
– retail underlying




 




12
– wholesale




 




13
Re-securitisation




 




14
– senior




 




15
– non-senior




 




1
Total at 31 Dec 2017
1.9


1.2

0.9

 
0.1


0.1

0.1

 
 
 
 
 
 
 
 
 
 
 
2
Traditional securitisation
1.2


0.7

1.3

 
0.1


0.1

0.1

3
Securitisation
1.1


0.7

1.1

 
0.1


0.1

0.1

4
– retail underlying
0.3



1.0

 



0.1

5
– wholesale
0.8


0.7

0.1

 
0.1


0.1


6
Re-securitisation
0.1



0.2

 




7
– senior




 




8
– non-senior
0.1



0.2

 




9
Synthetic securitisation




 




10
Securitisation




 




11
– retail underlying




 




12
– wholesale




 




13
Re-securitisation




 




14
– senior




 




15
– non-senior




 




1
Total at 31 Dec 2016
1.2


0.7

1.3

 
0.1


0.1

0.1



109
HSBC Holdings plc Pillar 3 2017


Appendix II
Asset encumbrance
The following is the disclosure of on-balance sheet encumbered and unencumbered assets, and off-balance sheet collateral (represented by median values of monthly data points in 2017) based on the requirement in Part Eight of CRD IV. The related Guideline, issued by the EBA on 27 June 2014, was implemented by the PRA through Supervisory Statement SS11/14.
Table 73: A – Assets
 
 
Carrying amount of encumbered assets

Fair value of encumbered assets

Carrying amount of unencumbered assets

Fair value of unencumbered assets

 
 
$m

$m

$m

$m

010
Assets of the reporting institution
165,531


2,249,300


030
Equity instruments
24,652

24,652

71,969

71,883

040
Debt securities
80,914

81,458

376,331

374,601

120
Other assets
3,080


366,369


Table 73: B – Collateral received
 
 
Fair value of encumbered
collateral received or own debt securities issued

Fair value of collateral received or own debt securities issued available for encumbrance

 
 
$m

$m

130
Assets of the reporting institution
179,125

169,547

150
Equity instruments
17,111

15,663

160
Debt securities
162,014

153,873

230
Other collateral received

1,271

240
Own debt securities issued other than own covered bonds or ABSs


Table 73: C – Encumbered assets/collateral received and associated liabilities
 


Matching liabilities, contingent liabilities or securities lent
Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered
 
 
$m
$m
010
Carrying amount of selected financial liabilities
215,729
300,150
Importance of encumbrance
We are a deposit-led bank and hence the majority of our funding is from customer current accounts and customer savings deposits payable on demand or at short notice. Given this structural unsecured funding position we have little requirement to fund ourselves in secured markets, and therefore our overall low level of encumbrance reflects this position. However, we do provide collateralised financing services to clients as part of our GB&M business model, providing cash financing or specific securities,
 
and these result in off-balance sheet encumbrance. The other sources which contribute to encumbrance are securities pledged in derivative transactions, mostly for hedging purposes, issuance of asset-backed securities, and covered bond programmes in France and Australia. HSBC Holdings ALCO reviews the asset encumbrance of the institution as a whole quarterly and any events changing the asset encumbrance level are examined.
For details on balance sheet encumbered and unencumbered assets, please refer to Table 48.


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Pillar 3 Disclosures at 31 December 2017

Appendix III
Summary of disclosures withheld

CRD IV reference
Description
Rationale
448(a)
Key assumptions (including assumptions regarding loan prepayments and behaviour of non-maturity deposits) on their exposure to interest rate risk on positions not included in the trading book.
Assumptions regarding fixed term loan repayments and term behaviouralisation of non-maturity deposits and capital drive HSBC’s structural interest rates positioning and market hedging requirements.
These assumptions are proprietary and their disclosure could give key business strategy information to our competitors.


111
HSBC Holdings plc Pillar 3 2017


Other Information
Abbreviations
The following abbreviated terms are used throughout this document.
Currencies
 
$
United States dollar
 
 
A
 
ABCP
Asset-backed commercial paper
ABS1
Asset-backed security
AFS1
Available-for-sale
AIRB1
Advanced internal ratings based approach
ALCM
Asset, Liability and Capital Management
ALCO
Asset and Liability Management Committee
AT1 capital
Additional tier 1 capital
AVA
Additional value adjustment
 
 
B
 
BCBS
Basel Committee on Banking Supervision
 
 
 
 
BSM
Balance Sheet Management
 
 
C
 
CCB1
Capital conservation buffer
CCF1
Credit conversion factor
CCP
Central counterparty
CCR1
Counterparty credit risk
CCyB1
Countercyclical capital buffer
CDS1
Credit default swap
CET11
Common equity tier 1
CIU
Collective investment undertakings
CML1
Consumer and Mortgage Lending (US)
CRA1
Credit risk adjustment
CRD IV1
Capital Requirements Regulation and Directive
CRE1
Commercial real estate
CRM
Credit risk mitigation/mitigant
CRR1
Customer risk rating
CSA1
Credit Support Annex
CVA
Credit valuation adjustment
CVC
Conduct and Values Committee
 
 
D
 
D-SIB
Domestic systemically important bank
DPA
Deferred prosecution agreement
E
 
EAD1
Exposure at default
EBA
European Banking Authority
EC
European Commission
ECA
Export Credit Agency
ECAI1
External Credit Assessment Institution
EEA
European Economic Area
EL1
Expected loss
EU
European Union
EVE1
Economic value of equity
 
 
F
 
FFVA
Funding Fair Value Adjustment
FIRB1
Foundation internal ratings based approach
Fitch
Fitch Ratings
FPC1
Financial Policy Committee (UK)
FSB
Financial Stability Board
FSVC
Financial System Vulnerabilities Committee
 
 
G
 
GAC
Group Audit Committee
GB&M
Global Banking and Markets, a global business
GMB
Group Management Board
GPB
Global Private Banking, a global business
 
 
 
 
 
GRC
Group Risk Committee
Group
HSBC Holdings together with its subsidiary undertakings
G-SIB1
Global systemically important bank
G-SII
Global systemically important institution
 
 
H
 
HKMA
Hong Kong Monetary Authority
Hong Kong
The Hong Kong Special Administrative Region of the People’s Republic of China
HSBC
HSBC Holdings together with its subsidiary undertakings
HVCRE
High volatility commercial real estate
 
 
I
 
IAA1
Internal Assessment Approach
ICAAP1
Internal Capital Adequacy Assessment Process
ICG
Individual capital guidance
IFRSs
International Financial Reporting Standards
ILAA
Individual Liquidity Adequacy Assessment
ILR
Inherent Liquidity Risk
IMA
Internal Models Approach
IMM1
Internal Model Method
IMR
Independent Model Review
IRB1
Internal ratings based approach
IRC1
Incremental risk charge
IRRBB
Interest rate risk in the banking book
 
 
L
 
LCR
Liquidity Coverage Ratio
LFRF
Liquidity and Funding Risk Framework
LGD1
Loss given default
Libor
London interbank offered rate
 
 
M
 
MDB1
Multilateral Development Bank
MENA
Middle East and North Africa
MOC
Model Oversight Committee
Moody’s
Moody’s Investor Service
MPE
Multiple point of entry
MREL
Minimum requirements for own funds and eligible liabilities
 
 
N
 
NCOA
Non-credit obligation asset
NSFR
Net Stable Funding Ratio
 
 
O
 
ORMF
Operational risk management framework
OTC1
Over-the-counter
 
 
P
 
PD1
Probability of default
PFE1
Potential future exposure
PIT1
Point-in-time
PRA1
Prudential Regulation Authority (UK)
PVA1
Prudent valuation adjustment
 
 
Q
 
QCCP
Qualifying Central Counterparty
 
 
R
 
RAS
Risk appetite statement
RBM1
Ratings Based Method
RBWM
Retail Bank and Wealth Management, a global business
Retail IRB1
Retail internal ratings based approach
RMM
Risk Management Meeting of the GMB
RNIV
Risks not in VaR
 
 

HSBC Holdings plc Pillar 3 2017
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Pillar 3 Disclosures at 31 December 2017

 
 
RWA1
Risk-weighted asset
 
 
S
 
SA/STD1
Standardised approach
SA-CCR
Standardised approach for counterparty credit risk
S&P
Standard and Poor’s rating agency
SFM1
Supervisory Formula Method
SFT1
Securities Financing Transactions
SIC
Securities Investment Conduit
SME
Small- and medium-sized enterprise
SPE1
Special Purpose Entity
SRB1
Systemic Risk Buffer
SSFA/SFA
Simplified supervisory formula approach
SVaR
Stressed Value at risk
 
 
T
 
TLAC1
Total Loss Absorbing Capacity
TTC1
Through-the-cycle
T1 capital
Tier 1 capital
T2 capital
Tier 2 capital
 
 
U
 
UK
United Kingdom
US
United States
 
 
V
 
VaR1
Value at risk
1
Full definition included in the Glossary published on HSBC website www.hsbc.com

113
HSBC Holdings plc Pillar 3 2017


Cautionary statement regarding forward-
looking statements
The Pillar 3 Disclosures at 31 December 2017 contain certain forward-looking statements with respect to HSBC’s financial condition, results of operations, capital position and business.
Statements that are not historical facts, including statements about HSBC’s beliefs and expectations, are forward-looking statements. Words such as ‘expects’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably possible’, variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statements.
Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC’s Directors, officers or employees to third parties, including financial analysts.
Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These include, but are not limited to:
changes in general economic conditions in the markets in which we operate, such as continuing or deepening recessions and fluctuations in employment beyond those factored into consensus forecasts; changes in foreign exchange rates and interest rates; volatility in equity markets; lack of liquidity in wholesale funding markets; illiquidity and downward price pressure in national real estate markets; adverse changes in central banks’ policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over-indebted countries; adverse    changes in the funding status of public or private defined
 
benefit pensions; and consumer perception as to the continuing availability of credit and price competition in the market segments we serve;
changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities; initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; changes in bankruptcy legislation in the principal markets in which we operate and the consequences thereof; general changes in government policy that may significantly influence investor decisions; extraordinary government actions as a result of current market turmoil; other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for our products and services; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies, including securities firms; and
factors specific to HSBC, including discretionary RWA growth and our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; our success in addressing operational, legal and regulatory, and litigation challenges; and the other risks and uncertainties we identify in ‘top and emerging risks’ on pages 95 to 106 of the Annual Report and Accounts 2017.
Contacts
Enquiries relating to HSBC’s strategy or operations may be directed to:
Richard O’Connor
Global Head of Investor Relations
HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Hugh Pye
Head of Asia Pacific Investor Relations
The Hongkong and Shanghai Banking Corporation Limited
1 Queen’s Road Central
Hong Kong
 
 
Telephone: +44 (0) 20 7991 6590
Telephone: +852 2822 4908
 
 
Email: investorrelations@hsbc.com
Email: investorrelations@hsbc.com.hk

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Pillar 3 Disclosures at 31 December 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
HSBC Holdings plc
 
 

By:    /s/ Iain J Mackay
Name:    Iain J. Mackay
Title:    Group Finance Director
Date:    21 February 2018
 
 




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