HSBC : Pillar 3 Disclosures at 31 December 2018

HSBC Holdings plc

Pillar 3 Disclosures at 31 December 2018

AppendicesContents

Introduction Key metrics

Regulatory framework for disclosures Pillar 3 disclosures

Regulatory developments Accounting developments Risk management

Linkage to the Annual Report and Accounts 2018

Capital and RWAs

Capital management Own funds Leverage ratio

Pillar 1 capital requirements and RWA flow Pillar 2 and ICAAP

Credit risk

Overview and responsibilities Credit risk management Credit risk models governance Credit quality of assets

Risk mitigation

Global risk Wholesale risk Retail risk

Model performance Counterparty credit risk Counterparty credit risk management Securitisation

HSBC securitisation strategy HSBC securitisation activity Monitoring of securitisation positions Securitisation accounting treatment Securitisation regulatory treatment Analysis of securitisation exposures Market risk

Overview of market risk in global businesses Market risk governance

Market risk measures Market risk capital models Prudent valuation adjustment Structural foreign exchange exposures Interest rate risk in the banking book Operational risk

Overview and objectives Organisation and responsibilities Developments during 2018

Measurement and monitoring Other risks

Pension risk

Non-trading book exposures in equities Risk management of insurance operations Liquidity and funding risk

Reputational risk Sustainability risk Business risk Dilution risk Remuneration

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• I Additional tables

• II Asset encumbrance

• III Summary of disclosures withheld

Other Information

Abbreviations

Cautionary statement regarding forward-looking statements Contacts

Certain defined terms

Page 76 102 102

103 105 105

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.

Tables

• 1 Key metrics (KM1/IFRS9-FL)

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

• 3 Reconciliation of balance sheets - financial accounting to regulatory scope of consolidation

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

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

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

• 7 Own funds disclosure

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

• 9 Leverage ratio common disclosure (LRCom)

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

• 11 Overview of RWAs (OV1)

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

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

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

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

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

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

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

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

• 20 Credit risk exposure - summary (CRB-B)

• 21 Geographical breakdown of exposures (CRB-C)

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

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

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

• 25 Credit risk mitigation techniques - overview (CR3)

• 26 Standardised approach - credit conversion factor ('CCF') and credit risk mitigation ('CRM') effects (CR4)

• 27 Standardised approach - exposures by asset class and risk weight (CR5)

• 28 IRB - Effect on RWA of credit derivatives used as CRM techniques (CR7)

• 29 Credit derivatives exposures (CCR6)

• 30 Wholesale IRB credit risk models

• 31 IRB models - estimated and actual values (wholesale)

• 32 IRB models - corporate PD models - performance by CRR grade

• 33 Material retail IRB risk rating systems

• 34 IRB models - estimated and actual values (retail)

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

Ref Page

Ref Page

a

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

• 37 Counterparty credit risk exposure - by exposure class, product and geographical region

• 38 Counterparty credit risk - RWAs by exposure class, product and geographical region

• 39 Securitisation exposure - movement in the year

• 40 Securitisation - asset values and impairments

  11 13 14 16 16 17 18 18 19 19 21 23 24

• 41 Market risk under standardised approach (MR1)

• 42 Market risk under IMA (MR2-A)

  a b

• 43 IMA values for trading portfolios (MR3)

• 44 Prudential valuation adjustments (PV1)

• 45 Operational risk RWAs

  b a

• 46 Non-trading book equity investments

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

  a

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

  b

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• 49 Wholesale IRB exposure - by obligor grade

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

• 51 Retail IRB exposure - by internal PD band

• 52 IRB expected loss and CRAs - by exposure class

• 53 Credit risk RWAs - by geographical region

• 54 IRB exposure - credit risk mitigation

• 55 Standardised exposure - credit risk mitigation

• 56 Standardised exposure - by credit quality step

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

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

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• 59 IRB - Credit risk exposures by portfolio and PD range (CR6)

  a

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• 60 Specialised lending on slotting approach (CR10)

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

  33 34 35 36 37 37 38 41 42 42 46 49 51

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

• 63 Standardised approach - CCR exposures by regulatory portfolio and risk weights (CCR3)

• 64 IRB - CCR exposures by portfolio and PD scale (CCR4)

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

  b

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

• 67 Exposures to central counterparties (CCR8)

  b

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

• 69 Securitisation exposures in the trading book (SEC2)

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

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

• 72 Asset encumbrance

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The Group has adopted the EU's regulatory transitional arrangements for International Financial Reporting Standard ('IFRS') 9 Financial instruments. A number of tables in this document report under this arrangement as follows:

• a. Some figures for 2018 (indicated with ^) within this table have been prepared on an IFRS 9 transitional basis.

• b. All figures within this table have been prepared on an IFRS 9 transitional basis.

All other tables report numbers on the basis of full adoption of IFRS 9.

Introduction

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

At

Ref*

Ref* Footnotes	31 Dec 2018	30 Sep 2018 30 Jun 2018 31 Mar 2018 1 Jan 2018 31 Dec1 2017
Available capital ($bn) 2
1 Common equity tier 1 ('CET1') capital ^	121.0	123.1 122.8 129.6 127.3 126.1
2 CET1 capital as if IFRS 9 transitional arrangements had not been applied	120.0	122.1 121.8 128.6 126.3 N/A
3 Tier 1 capital ^	147.1	149.3 147.1 157.1 152.1 151.0
4 Tier 1 capital as if IFRS 9 transitional arrangements had not been applied	146.1	148.3 146.1 156.1 151.1 N/A
5 Total regulatory capital ^	173.2	178.1 176.6 185.2 183.1 182.4
6 Total capital as if IFRS 9 transitional arrangements had not been applied	172.2	177.1 175.6 184.2 182.1 N/A
Risk-weighted assets ('RWAs') ($bn)
7 Total RWAs	865.3	862.7 865.5 894.4 872.1 871.3
8 Total RWAs as if IFRS 9 transitional arrangements had not been applied	864.7	862.1 864.9 893.8 871.6 N/A
Capital ratios (%) 2
9 CET1 ^	14.0	14.3 14.2 14.5 14.6 14.5
10 CET1 as if IFRS 9 transitional arrangements had not been applied	13.9	14.2 14.1 14.4 14.5 N/A
11 Total tier 1 ^	17.0	17.3 17.0 17.6 17.4 17.3
12 Tier 1 as if IFRS 9 transitional arrangements had not been applied	16.9	17.2 16.9 17.5 17.3 N/A
13 Total capital ^	20.0	20.7 20.4 20.7 21.0 20.9
14 Total capital as if IFRS 9 transitional arrangements had not been applied	19.9	20.6 20.3 20.6 20.9 N/A
Additional CET1 buffer requirements as a percentage of RWA (%)
Capital conservation buffer requirement	1.88	1.88 1.88 1.88 N/A 1.25
Countercyclical buffer requirement	0.56	0.45 0.46 0.34 N/A 0.22
Bank G-SIB and/or D-SIB additional requirements	1.50	1.50 1.50 1.50 N/A 1.25
Total of bank CET1 specific buffer requirements	3.94	3.83 3.84 3.72 N/A 2.72
Total capital requirement (%)
Total capital requirement 3	10.9	11.5 11.5 11.5 N/AN/A
CET1 available after meeting the bank's minimum capital requirements 4	7.9	7.8 7.7 8.0 N/A 8.0
Leverage ratio 5
15 Total leverage ratio exposure measure ($bn) ^	2,614.9	2,676.4 2,664.1 2,707.9 2,556.4 2,557.1
16 Leverage ratio (%) ^	5.5	5.4 5.4 5.6 5.6 5.6
17 Leverage ratio as if IFRS 9 transitional arrangements had not been applied (%)	5.5	5.4 5.3 5.5 5.6 N/A
Liquidity Coverage Ratio ('LCR') 6
Total high-quality liquid assets ($bn)	567.2	533.2 540.2 533.1 N/A 512.6
Total net cash outflow ($bn)	368.7	334.1 341.7 338.5 N/A 359.9
LCR ratio (%) 7	153.8	159.6 158.1 157.5 N/A 142.2

• * The references in this, and subsequent tables, identify the lines prescribed in the relevant European Banking Authority ('EBA') template where applicable and where there is a value.

• 1 Figures presented as reported under IAS 39 'Financial instruments: recognition & measurement' at 31 December 2017.

• 2 Capital figures and ratios are reported on the CRD IV transitional basis for additional tier 1 and tier 2 capital in accordance with articles 484-92 of the Capital Requirements Regulation.

• 3 Total capital requirement is defined as the sum of Pillar 1 and Pillar 2A capital requirements set by the Prudential Regulation Authority ('PRA'). Our Pillar 2A requirement at 31 December 2018, as per the PRA's Individual Capital Guidance based on a point in time assessment, was 2.9% of RWAs, of which 1.6% was met by CET1. On 1 January 2019, our Pillar 2A requirement increased to 3.0% of RWAs, of which 1.7% must be met by CET1.

• 4 The minimum requirements represent the total capital requirement to be met by CET1.

• 5 Leverage ratio is calculated using the CRD IV end point basis for additional tier 1 capital.

• 6 The EU's regulatory transitional arrangements for IFRS 9 'Financial instruments' in article 473a of the Capital Requirements Regulation do not apply to liquidity coverage measures.

7 LCR is calculated as at the end of each period rather than using average values. Refer to page 132 of the Annual Report and Accounts 2018 for further detail.

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

Reported balance using IFRS 9 transitional arrangements

Expected credit losses ('ECL') reversed under transitional arrangements for IFRS 9 - Standardised ('STD') approach - Internal ratings based ('IRB') approach Tax impacts

Changes in amounts deducted from CET1 for deferred tax assets and significant investments - amounts deducted from CET1 for deferred tax assets - amounts deducted from CET1 for significant investments

Reported balance excluding IFRS 9 transitional arrangements

At 31 Dec 2018
CET1 $bn	Tier 1 $bn	Total own funds $bn
121.0	147.1	173.2
(1.2)	(1.2)	(1.2)
(1.2)	(1.2)	(1.2)
-	-	-
0.3	0.3	0.3
(0.1)	(0.1)	(0.1)
-	-	-
(0.1)	(0.1)	(0.1)
120.0	146.1	172.2

Regulatory framework for disclosures

HSBC is supervised on a consolidated basis in the United Kingdom ('UK') by the Prudential Regulation Authority ('PRA'), which receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. Individual banking subsidiaries are directly regulated by their local banking supervisors, who set and monitor their local capital adequacy requirements. In most jurisdictions, non-banking financial subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.

At a consolidated group level, we calculated capital for prudential regulatory reporting purposes throughout 2018 using the Basel III framework of the Basel Committee ('Basel') as implemented by the European Union ('EU') in the amended Capital Requirements Directive and Regulation ('CRD IV'), and in the PRA's Rulebook for the UK banking industry. The regulators of Group banking entities outside the EU are at varying stages of implementation of the Basel Committee's framework, so local regulation in 2018 may have been on the basis of Basel I, II or III.

The Basel Committee's framework is structured around three 'pillars': the Pillar 1 minimum capital requirements and Pillar 2 supervisory review process are complemented by Pillar 3 market discipline. The aim of Pillar 3 is to produce disclosures that allow market participants to assess the scope of application by banks of the Basel Committee's framework and the rules in their jurisdiction, their capital condition, risk exposures and risk management processes, and hence their capital adequacy. Pillar 3 requires all material risks to be disclosed to provide a comprehensive view of a bank's risk profile.

The PRA's final rules adopted national discretions in order to accelerate significantly the transition timetable to full 'end point' CRD IV compliance.

Pillar 3 disclosures

HSBC's Pillar 3 Disclosures at 31 December 2018 comprise information required under Pillar 3, both quantitative and qualitative. They are made in accordance with Part 8 of the Capital Requirements Regulation within CRD IV and the European Banking Authority's ('EBA') final standards on revised Pillar 3 disclosures issued in December 2016. These disclosures are supplemented by specific additional requirements of the PRA and discretionary disclosures on our part.

The Pillar 3 disclosures are governed by the Group's disclosure policy framework as approved by the Group Audit Committee ('GAC'). Information relating to the rationale for withholding certain disclosures is provided in Appendix III.

In our disclosures, to give insight into movements during the year, we provide comparative figures for the previous year or period, analytical review of variances and 'flow' tables for capital requirements.

Where disclosures have been enhanced, or are new, we do not generally restate or provide prior year comparatives. Wherever specific rows and columns in the tables prescribed by the EBA or Basel are not applicable or immaterial to HSBC's activities, we omit them and follow the same approach for comparative disclosures.

We publish comprehensive Pillar 3 disclosures annually on the HSBC websitewww.hsbc.com, concurrently with the release of our Annual Report and Accounts 2018. Similarly, a separate Pillar 3 document is also published at half-year concurrently with the release of our Interim Report disclosure. Quarterly earnings releases also include regulatory information in line with the guidelines on the frequency of regulatory disclosures.

Pillar 3 requirements may be met by inclusion in other disclosure media. Where we adopt this approach, references are provided to the relevant pages of the Annual Report and Accounts 2018 or other locations.

We continue to engage in the work of the UK authorities and industry associations to improve the transparency and comparability of UK banks' Pillar 3 disclosures.

Regulatory developments

The UK's withdrawal from the EU

In August 2018, Her Majesty's Treasury ('HMT') commenced the process of 'onshoring' the current EU legislation to ensure that there is legal continuity in the event of the UK leaving the EU. This involved the publication of draft Statutory Instruments across a wide range of financial services legislation; this included the key prudential legislation for banking groups: the Capital Requirements Regulation and Capital Requirements Directive.

One of the key effects of onshoring will be to treat the EU in the same manner as the EU currently treats non-European Economic Area countries. Under the draft provisions published by HMT, the PRA will be given the power to grant transitional provisions to delay the implementation of these changes for up to two years, should the UK leave the EU without an agreement on 29 March 2019.

The Bank of England ('BoE') and the PRA published a package of consultations in October and December 2018, setting out the changes required to the PRA's rules and technical standards as a result of the UK's withdrawal. It also included proposals on the exercise of the transitional powers; however the precise scope of these remains uncertain.

There are certain pieces of EU legislation that are in progress, but are not yet live, that will not enter automatically into UK law if it withdraws from the EU without an agreement. The Financial Services (Implementation of Legislation) Bill is currently progressing through the UK Parliament to empower HMT to make regulations in the UK to bring into force certain specified EU legislation that remains in progress on 29 March 2019.

RWAs and leverage ratio

Basel Committee

In December 2017, Basel published revisions to the Basel III framework. The final package includes:

• • widespread changes to the risk weights under the standardised approach to credit risk;

• • a change in the scope of application of the internal ratings based ('IRB') approach to credit risk, together with changes to the IRB methodology;

• • the replacement of the operational risk approaches with a single methodology;

• • an amended set of rules for the credit valuation adjustment ('CVA') capital framework;

• • an aggregate output capital floor that ensures that banks' total RWAs are no lower than 72.5% of those generated by the standardised approaches; and

• • changes to the exposure measure for the leverage ratio, together with the imposition of a leverage ratio buffer for global systemically important banks ('G-SIB'). This will take the form of a tier 1 capital buffer set at 50% of the G-SIB's RWAs capital buffer.

Further refinements to the leverage ratio exposure measure for centrally cleared derivatives and disclosure of daily-average exposure measures are also under consideration.

Following a recalibration, Basel published the final changes to the market risk RWA regime, the Fundamental Review of the Trading book ('FRTB'), in January 2019. The new regime contains a more clearly defined trading book boundary, the introduction of an internal models approach based upon expected shortfall models, capital requirements for non-modellable risk factors, and a more risk-sensitive standardised approach that can serve as a fall-back for the internal models method.