HSBC sees no capital savings from Basel II
HONG KONG - The Basel II upgrade of bank capital adequacy rules is unlikely to result in capital savings for the UK banking group HSBC on a group-wide basis, a top HSBC executive said in early February.
David Sheldon, chairman of HSBC's subsidiary, the Hong Kong and Shanghai Banking Corporation, said that's because of the distribution of HSBC's assets internationally - it's one of the world's largest banking groups - and its conservative approach to ensuring it remains strongly capitalised.
In Canada, for instance, where HSBC is implementing the advanced internal ratings-based (IRB) approach to measuring credit risk there will be capital savings, Sheldon said. However, the bank expects any capital savings that may arise in Hong Kong, for instance, to be offset by additional capital requirements for operational risk.
But from his perspective the overall aim of Basel II is first and foremost to nurture a stronger risk management culture, Sheldon told a conference on Basel II organised by the Hong Kong Monetary Authority.
He said not all banks are showing the same degree of readiness or willingness towards Basel II. In Asia banks are in four categories: those well on the way to adoption; those willing but lagging behind the leaders; those adopting a `watch and wait' approach; and those going at their own slow pace, apparently unaware of the progress being made elsewhere.
HSBC has some 1,000 people in various places around the world engaged in some aspect of preparing for Basel II.
"Our aim is straightforward. We intend to derive the maximum business benefits - with emphasis on the plural - from the adoption of Basel II," Sheldon said.
But he added the bank recognises it's an evolutionary process. In Hong Kong the banks expects to be 85% compliant over three years. It also knows that it won't be feasible to introduce an IRB framework across all 76 jurisdictions in which HSBC operates.
"I do not see all banks in all markets in Asia embracing Basel II, both because of the complexity of the new rules and because of the diversity within the region."
And Basel II isn't a cure-all for risks. Good loans still go unexpectedly bad.
"I do, however, expect risk management will be one of the defining characteristics by which both banks and banking systems will be judged going forward," Sheldon said.
Last year, HSBC group chairman John Bond said the bank expected its regulation costs, which were around $400 million in 2003, to rise further as new rules such as Basel II came into force. HSBC officials declined to estimate how much implementing Basel II would cost the group.
