HSBC Bank Malta p.l.c.

Pillar 3 Disclosures at 31 December 2021

Pillar 3 Disclosures at 31 December 2021

Contents

Page

Additional regulatory disclosures

2

Introduction

2

Risk management

5

Our risk management framework

5

Basis of Consolidation

8

Capital management

10

Leverage ratio

16

Credit risk

18

Additional disclosures on measures applied in response to the Covid-19 outbreak

24

Risk mitigation

27

Counterparty credit risk

30

Market Risk

32

Non-Financial Risk ('NFR') - previously known as Operational Risk

33

Other risks

35

Liquidity and funding

37

Business risk

41

Dilution risk

41

Remuneration policy

41

  • HSBC Bank Malta p.l.c. Pillar 3 2021

Additional regulatory disclosures

Introduction

Regulatory framework for Pillar 3 disclosures

Under the European Central Bank ('ECB') Single Supervisory Mechanism ('SSM'), HSBC Bank Malta p.l.c. falls under the direct supervision of both the ECB, as well as the Malta Financial Services Authority ('MFSA') via the Joint Supervisory Team ('JST'), the latter consisting of representatives of the ECB and MFSA.

The two regulatory bodies receive information on the capital adequacy requirements for HSBC Bank Malta p.l.c. as an entity. At a consolidated level, we calculate capital for prudential regulatory reporting purposes using the Basel III framework of the Basel Committee on Banking Supervision (the 'Basel Committee') as implemented by the European Union ('EU') in the amended Capital Requirements Regulation and Directive collectively known as CRR/CRD.

The Basel Committee's framework is structured around three 'pillars': the Pillar 1 minimum capital requirements, Pillar 2 in relation to supervisory review process which is complemented by Pillar 3 that concerns 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, hence their capital adequacy. Pillar 3 requires all material risks to be disclosed to provide a comprehensive view of a bank's risk profile.

These Additional Regulatory Disclosures ('ARDs') are aimed at providing the local group's stakeholders further insight to the local group's capital structure, adequacy and risk management practices. The disclosures outlined below have been prepared by the local group in accordance with the Pillar 3 quantitative and qualitative disclosure requirements as governed by Banking Rule BR/07: Publication of Annual Report and Audited Financial Statements of Credit Institutions authorised under the Banking Act, 1994, issued by the MFSA. Banking Rule BR/07 follows the disclosure requirements of Directive 2013/36/EU (Capital Requirements Directive - Pillar 1) and EU Regulation No 575/2013 (Capital Requirements Regulation - Pillar 2) of the European Parliament and of the Council of 26 June 2013.

During 2019 the EU published a legislation aimed at reducing risks and enhancing the resilience in the banking sector across the EU. The rules within capital requirements regulation ('CRR2') were also revised along with the capital requirements directive ('CRD V'). The leverage ratio, own funds requirements and eligible liabilities, counterparty credit risk and the net stable funding ratio were subject to the changes implemented by CRR2. The revised regulation gives more clarity on the banks' obligations to disclose on forborne, performing and non-performing exposures, non-financial guarantees received including collateral, and disclosures on remuneration. In order to promote market discipline and move towards a worldwide standardised approach, during 2021 the EBA adopted new guidelines 'Final draft implementing technical standards on public disclosures by institutions of the information referred to in Titles II and III of Part Eight of Regulation (EU) No 575/2013. 'The revised standards which are entirely binding became effective as from 28 June 2021 and incorporate the changes introduced under CRR2, aligning the disclosures framework with the standards under Basel Pillar 3.

As outlined in the requirements of banking regulations, these disclosures are not subject to an external audit, except to the extent that any disclosures are equivalent to those made in the Financial Statements, which have been prepared in accordance with the International Financial Reporting Standards ('IFRS') as adopted by the EU. The local group, comprising HSBC Bank Malta p.l.c. along with its subsidiary HSBC Global Asset Management (Malta) Ltd., through its internal verification procedures, is satisfied that these ARDs are presented fairly.

Pillar 3 disclosures

Purpose

HSBC Bank Malta p.l.c.'s Pillar 3 disclosures at 31 December 2021 comprise all information required under Pillar 3, both quantitative and qualitative. They are made in accordance with the relevant articles of Part 8 of the CRR and the European Banking Authority's ('EBA') final standards on revised Pillar 3 disclosures.

In light of the fact that the local group is considered a significant subsidiary of HSBC Holdings plc within the local market, and subject to consolidated supervision at the level of HSBC Holdings plc, the local group is exempt from full disclosure requirements laid down in Part Eight of the CRR.

The Pillar 3 disclosures are governed by the Group's disclosure policy framework. The disclosure policy sets out the governance, control and assurance requirements for publication of the document. While the disclosure statement is not required to be externally audited, the document has been subject to an internal review process in accordance with the banks' financial reporting and governance processes.

Basis of preparation

The financial information contained in this disclosure has been prepared on a consolidated basis (please refer to note 3a 'Basis of Consolidation'). In our disclosures, we provide comparative figures for the previous year to facilitate the analysis. Key ratios and figures are reflected throughout the Pillar 3 2021 disclosures. Where disclosures have been enhanced or are new, we do not generally restate or provide prior year comparatives.

The Pillar 3 disclosure for HSBC Bank Malta p.l.c. is available on the HSBC websites, www.hsbc.com or www.hsbc.com.mt, simultaneously. This Pillar 3 disclosure includes regulatory information complementing the financial and risk information presented there and is in line with the requirements of regulatory disclosures.

The information published within this document have been prepared as per the EBAs reporting framework 3.0 issued in March 2021 and effective from June 2021. The new reporting framework aims at facilitating the institutions' compliance with disclosure requirements and improving the consistency and quality of the information disclosed. The updates are mainly driven by changes during the adoption process of Implementing Technical Standards ('ITS') on supervisory reporting and the ITS on public disclosures.

HSBC Bank Malta p.l.c. Pillar 3 2021

2

Pillar 3 Disclosures at 31 December 2021

As a result of the new reporting framework, the following quantitative tables which were published in the Additional Regulatory Disclosures until December 2020, have been dropped for the reporting of December 2021, either because the requirement to disclose no longer exists or because the table is replaced by another table.

Additional Regulatory Disclosures

At 31 December 2020

At 31 December 2021

Total and average net amount of exposures (EU CRB-B)

Dropped as requirement no longer exists

Geographical breakdown of exposures ( EU CRB-C)

Dropped. Covered by template EU CQ4

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

Dropped. Covered by template EU CQ5

Maturity of exposures (EU CRB-E)

Dropped. Covered by template EU CR1

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

Dropped. Covered by template EU CQ5

Credit quality of exposures by geography (EU CR1-C)

Dropped. Covered by template EU CQ4

Ageing of past-due exposures (EU CR1-D)

Dropped. Covered by template EU CQ3

Non-performing and forborne exposures (EU CR1-E)

Dropped. Covered by template EU CR1

Changes in the stock of general and specific credit risk adjustments (EU CR2-A)

Dropped as requirement no longer exists

Changes in the stock of defaulted and impaired loans and debt securities (EU CR2-B)

Dropped. Covered by template EU CR2

In all tables where the term 'capital requirements' is used, this represents the minimum total capital charge set at 8% of Risk Weighted Assets ('RWAs') by article 92 of the Capital Requirements Regulation. Table name references and row numbering in tables identify those prescribed in the relevant EBA guidelines where applicable and where there is a value.

Regulatory Developments

Covid-19

The Covid-19 outbreak has created an unprecedented challenge to the global economy. Governments, central banks and regulatory authorities have responded to this challenge with a number of measures related to customer support, operational capacity and amendments to the transitional IFRS9 extension agreement, capital and liquidity frameworks which are now being gradually removed.

In the second half of 2021, the ECB ended its restrictions on capital distribution as well as the liquidity relief allowing banks to operate below 100 per cent of the Liquidity Coverage Ratio ('LCR'). The ECB further announced in February 2022 that banks are expected to operate again above their capital buffers and Pillar 2 guidance defined by the Supervisory Review and Evaluation Process ('SREP') from 01 January 2023.

The Basel III Reforms

The Basel Committee on Banking Supervision ('Basel') completed the Basel III Reforms in July 2020 when it published the final revisions to the Credit Valuation Adjustment ('CVA') framework. In October 2021, the European Commission ('EC') published a first draft of the rules implementing the reforms in the EU ('CRR3' or 'CRD6'). The rules will now be subject to an extensive negotiation process with the EU Council and Parliament before they are finalised. The EC has proposed an implementation date of 1 January 2025 with an output floor phased-in until 2030.

The draft rules include some significant deviations from the Basel III Reforms. These include:

  • on the credit risk side, a new strategic investment category benefitting from a more favourable treatment and a phase-in for credit conversion factors of unconditionally cancellable commitments. It is also proposed that the SME and infrastructure supporting factors are maintained;
  • the retention of the option to neutralise the impact of past losses on operational risk RWAs;
  • the retention of the exemptions from the CVA capital charges that currently apply;
  • options to mitigate the impact and timing of implementation of the new market risk framework, should other jurisdictions make amendments.

The EC's proposals also enhance the focus on Environmental Social and Governance ('ESG') risks with the European Banking Authority's ('EBA') report on a dedicated prudential treatment being brought forward by two years to 2023 and banks required to identify, disclose and manage ESG risks at an individual level.

Environmental Social and Governance ('ESG') related disclosures requirements

In November 2021, the ECB published a report on its supervisory review of banks' approaches to manage climate risk in which it concludes that banks are not close to meeting its expectations on climate risk and that progress is slow. An updated report is expected in the first quarter of 2022 with additional feedback from the ECB. A full review will occur in 2022 alongside the ECB's stress test on climate-related risk.

Article 8 of the EU's Taxonomy Regulation requires undertakings, including banks, to report how and to what extent their activities qualify as environmentally sustainable. These disclosures will be made for the first time in early 2022 based on December 2021 data.

In January 2022 the EBA published its final draft Implementing Technical Standard ('ITS') on Pillar 3 disclosures on ESG risks. The ITS introduced a set of templates on qualitative and quantitative data which requires the disclosure of prudential information on ESG risks, transition and physical risks. The first disclosures will be made in early 2023 based on December 2022 data.

EBA Stress Test

In 2021, HSBC Bank Malta p.l.c. has been selected to participate in the ECB 2021 SSM SREP Stress Test, leveraging of the EBA methodology and requirements. The stress test which forms part of Malta's Supervisory Review and Evaluation Process ('SREP') is identical in all aspects to the full EBA Stress Testing Submission. HSBC Bank Malta p.l.c. has elected an early adoption of the SREP decision related to the Pillar 2 guidance which takes effect from 01 March 2022.

  • HSBC Bank Malta p.l.c. Pillar 3 2021

Minimum own funds and eligible liability issuance

In December 2021, HSBC Bank Malta p.l.c. entered into an unsecured loan agreement amounting to € 60 million with HSBC Bank plc. This unsecured loan has been recognised as a "borrowing from group undertakings" and was entered into to meet the interim target of the minimum own funds and eligible liabilities ('MREL') as set by the Single Resolution Board ('SRB'). The unsecured loan is considered an eligible liability with a 10-year maturity with an early repayment option on the 9th year in favour of HSBC Bank Malta p.l.c.

Other developments

In August 2021, the EU adopted technical standards on the contractual recognition of stay powers for contracts governed by third- country law. Subsequently, the EU also adopted standards on the impracticability of recognition of bail-in powers for the same type of contracts. Finally, the EU adopted an ITS for banks to notify the above to their supervisory authorities. In September 2021, the EBA published its final guidelines to assess breaches of the Large Exposure limits which applied from 1 January 2022.

In November 2021, the EBA published its final draft Regulatory Technical Standards ('RTS') specifying the types of factors and conditions to be considered for the assessment of the appropriateness of risk weights and of minimum loss given default values for real estate exposures. Furthermore, in December 2021, the EBA published its final draft RTS on credit risk adjustment for defaulted exposures under the standardised approach, which now takes into account discounts for banks buying non-performing loans.

Also in November 2021, the EBA published its final draft ITS on the Interest Rate Risk in the Banking Book ('IRRBB') Pillar 3 disclosures. Furthermore, in December 2021, it launched three consultations specifying technical aspects of the IRRBB revised framework. The EBA is consulting on its guidelines on IRRBB and credit spread risk arising from non-trading book activities, as well as on technical standards on the IRRBB standardised approach and IRRBB supervisory outlier test.

The EC launched a consultation in December 2021 on the macro-prudential framework for the EU's banking sector covering notably the overall design and functioning of the buffer framework.

HSBC Bank Malta p.l.c. Pillar 3 2021

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HSBC Bank Malta plc published this content on 15 March 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 15 March 2022 14:41:08 UTC.