Brexit and HSBC's risk reduction bonuses

15 March 2017/No Comments
By Nick Dunbar

Regulatory capital is a key driver for large banks, but none makes more of a fuss about this than HSBC. In presentations to shareholders, the bank measures its own performance according to return on risk-weighted assets, giving HSBC a self-declared incentive to reduce RWAs as much as possible.

It shouldn’t be a surprise that among the banks in the Risky Finance pillar 3 database, HSBC showed the biggest RWA decrease in 2016, with a reduction of 24%. The bank also led the pack in terms of decrease in exposure at default, and credit RWA density (the ratio of RWAs to exposures).

Top global banks ranked by change in credit exposures and risk-weighted assets. Screenshot of interactive bank data visualisation tool available to subscribers.

HSBC senior management like to claim that these decreases are part of a grand strategic plan to reduce RWAs, and the bank’s remuneration committee has rewarded them handsomely for it, in the form of bonuses. But how much effort was actually involved?

The strongest argument is where reductions are the result of divestments and run-offs of capital-intensive non-core assets. Management might also try to claim credit for another big contributor to the reduction resulting from assiduous lobbying of its lead regulator. They certainly can’t brag about the last factor, resulting from a political accident out of their control.

One needs to drill down into HSBC’s Pillar 3 filings to understand these three separate factors. Risky Finance has prepared a chart showing the changes in HSBC’s credit exposures and RWAs for five geographical regions, with a breakdown by Basel approach.

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