Response to consultation on methodology for global systemically important institutions
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By contrast, the template treats liabilities of a UK banking group’s Brazilian bank subsidiary in Brazilian currency to domestic Brazilian clients and counterparties as cross-jurisdictional. In our view, this imposes an illogical EU-centric classification of business activities; there appears no reason why non-EU ‘home country’ activity should be assessed for the weight of its market impact, but not such activity within the EU home country.
This inflates considerably the total ‘cross-jurisdictional’ liabilities of a group such as HSBC that operates with a holding company and subsidiary operating bank structure, with a punitive impact on the G-SII score. UK domiciled banks are similarly and further disadvantaged in respect of lending within the Eurozone area vis-à-vis their EU domiciled competitors. We would like to see the template instructions changed to reflect these issues.
At the same time, during a crisis there is likely to be wariness amongst G-SII about re-circulating those funds into the inter-bank market, particularly to non G-SIIs – this would potentially increase the level of key indicators – with the result of potentially constraining the flow of funds to non G-SIIs at a critical time. Perceptions of such risks are likely to be self-fulfilling, pushing market liquidity provision back to the central banks that will be the recipients of deposit inflows from the G-SIIs.
Disclosure requirements
One area of notable difference from the Basel Committee framework is disclosure – the granularity of the format in these proposals is more onerous, we believe, than that envisaged under other regulatory regimes, to the disadvantage of European headquartered G-SIIs. We think it important that rules for disclosure, as for assessment, be applied consistently, allowing better comparisons and the fostering of market discipline.
That said, as far as we are aware there is no evidence that the market sets any value upon this data set. If such interest were to emerge, we would prefer to see it articulated and developed through initiatives such as the Enhanced Disclosure Task Force, which we fully support.
Regarding the extension of the scope of disclosure requirements to institutions with exposures exceeding EUR200bn, we suggest that the proposals be clarified to spell out an exception to that rule, in order to reflect guidance we have received from both yourselves and the PRA. This is that, for a banking group headquartered in the EU, where G-SII reporting and disclosure take place at group consolidated level, an operating entity of that group also domiciled in the EU would be exempted from the G-SII reporting and disclosure requirements set out in these RTS and ITS, notwithstanding it may exceed the EUR 200bn exposures threshold and score at or above the 130bp threshold referred to in Article 5.3 of the draft RTS.
In the HSBC Group’s case, this would exempt HSBC Bank plc. We unfortunately cannot definitively conclude from the definition in Article 2.1 of the draft RTS that HSBC Bank plc would be excluded from the set of ‘Relevant entities’. Our rationale for believing they should be is that we presume such an operating entity will be covered in due course by D-SIB requirements.
Conclusions
As currently structured, we remain unconvinced that the proposed methodology and indicators provide an appropriate assessment of the risks that our group presents to the global financial system.
We believe that, in the majority of respects, HSBC is close to the place that the authorities’ reforms would like systemically important institutions to reach – with higher capital ratios, a better funding structure, stronger liquidity and a simpler business model, further supported in the case of HSBC, by virtue of operating through strongly capitalised and funded legal entities capable of being separated if required.
There are fundamental differences between the structure and business models of institutions. These have important consequences for resolvability which are yet to be reflected in these proposals. As the regulatory framework evolves, it is important that this analysis be undertaken, if there are to be proper incentives for banking groups to adopt or retain more resilient and resolvable structures, thereby reducing the impacts on the global financial system in the remote event that they were to get into severe difficulties.
(Question relating to the draft RTS) Are the timelines for the identification process and the coming into force of the buffer requirement adequate, and do they allow for sufficient time for adjusting to it?
A3. Yes, in our view these timelines would be adequate, provided national supervisors do not accelerate the implementation of systemic capital buffers.(Question relating to the draft Guidelines) Are the template and the instructions clear and sufficiently comprehensive for enabling institutions to complete the disclosure process?
A4. Generally, they are. However, we strongly question, in respect of the data collection template definition of cross-jurisdictional liabilities, why only local currency exposures to obligors in the home EU jurisdiction of the group parent entity are excluded from the calculation.By contrast, the template treats liabilities of a UK banking group’s Brazilian bank subsidiary in Brazilian currency to domestic Brazilian clients and counterparties as cross-jurisdictional. In our view, this imposes an illogical EU-centric classification of business activities; there appears no reason why non-EU ‘home country’ activity should be assessed for the weight of its market impact, but not such activity within the EU home country.
This inflates considerably the total ‘cross-jurisdictional’ liabilities of a group such as HSBC that operates with a holding company and subsidiary operating bank structure, with a punitive impact on the G-SII score. UK domiciled banks are similarly and further disadvantaged in respect of lending within the Eurozone area vis-à-vis their EU domiciled competitors. We would like to see the template instructions changed to reflect these issues.
(Question relating to the impact assessment) Do you agree with our analysis of the impact of the proposals in this CP? If not, can you provide any evidence or data that would explain why you disagree or might further inform our analysis of the likely impacts of the proposals?
A6. We do not entirely agree. We believe there is a real danger that the identification of G-SIIs will lead to market distortions. In particular, there is a risk of contraction of depositor preference in any crisis. This is likely to arise given the perceived advantages of and protection from criticism from depositing funds with a G-SII, particularly if the depositing party has fiduciary responsibilities for managing monies.At the same time, during a crisis there is likely to be wariness amongst G-SII about re-circulating those funds into the inter-bank market, particularly to non G-SIIs – this would potentially increase the level of key indicators – with the result of potentially constraining the flow of funds to non G-SIIs at a critical time. Perceptions of such risks are likely to be self-fulfilling, pushing market liquidity provision back to the central banks that will be the recipients of deposit inflows from the G-SIIs.
Disclosure requirements
One area of notable difference from the Basel Committee framework is disclosure – the granularity of the format in these proposals is more onerous, we believe, than that envisaged under other regulatory regimes, to the disadvantage of European headquartered G-SIIs. We think it important that rules for disclosure, as for assessment, be applied consistently, allowing better comparisons and the fostering of market discipline.
That said, as far as we are aware there is no evidence that the market sets any value upon this data set. If such interest were to emerge, we would prefer to see it articulated and developed through initiatives such as the Enhanced Disclosure Task Force, which we fully support.
Regarding the extension of the scope of disclosure requirements to institutions with exposures exceeding EUR200bn, we suggest that the proposals be clarified to spell out an exception to that rule, in order to reflect guidance we have received from both yourselves and the PRA. This is that, for a banking group headquartered in the EU, where G-SII reporting and disclosure take place at group consolidated level, an operating entity of that group also domiciled in the EU would be exempted from the G-SII reporting and disclosure requirements set out in these RTS and ITS, notwithstanding it may exceed the EUR 200bn exposures threshold and score at or above the 130bp threshold referred to in Article 5.3 of the draft RTS.
In the HSBC Group’s case, this would exempt HSBC Bank plc. We unfortunately cannot definitively conclude from the definition in Article 2.1 of the draft RTS that HSBC Bank plc would be excluded from the set of ‘Relevant entities’. Our rationale for believing they should be is that we presume such an operating entity will be covered in due course by D-SIB requirements.
Conclusions
As currently structured, we remain unconvinced that the proposed methodology and indicators provide an appropriate assessment of the risks that our group presents to the global financial system.
We believe that, in the majority of respects, HSBC is close to the place that the authorities’ reforms would like systemically important institutions to reach – with higher capital ratios, a better funding structure, stronger liquidity and a simpler business model, further supported in the case of HSBC, by virtue of operating through strongly capitalised and funded legal entities capable of being separated if required.
There are fundamental differences between the structure and business models of institutions. These have important consequences for resolvability which are yet to be reflected in these proposals. As the regulatory framework evolves, it is important that this analysis be undertaken, if there are to be proper incentives for banking groups to adopt or retain more resilient and resolvable structures, thereby reducing the impacts on the global financial system in the remote event that they were to get into severe difficulties.