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Pillar 3 Disclosures at 31 December 2022

Pillar 3 Disclosures at 31 December 2022

Contents

Page

Additional regulatory disclosures

2

Introduction

2

Risk management

5

Regulatory Balance Sheet 2022

8

Capital management

11

Leverage ratio

19

Credit risk

22

Covid-19 reporting

31

Risk mitigation

33

Counterparty credit risk

35

Market Risk

37

Non-Financial Risk (‘NFR’) – previously known as Operational Risk

38

Other risks

40

Liquidity and funding

42

Business risk

47

Dilution risk

47

Remuneration policy

47

ESG Risks

48

Appendix I

66

  • HSBC Bank Malta p.l.c. Pillar 3 2022

Additional regulatory disclosures

Introduction

Regulatory framework for Pillar 3 disclosures

HSBC Bank Malta p.l.c. falls under the Single Supervisory Mechanism (‘SSM’) of the European Central Bank (‘ECB’) through the Joint Supervisory Team (‘JST’), which consists of representatives from both the ECB and the Malta Financial Services Authority (‘MFSA’). HSBC Bank Malta p.l.c. is under the direct supervision of both the JST and MFSA. Information regarding HSBC Bank Malta p.l.c.’s capital adequacy requirements as an entity is received by the two regulatory bodies.

The Basel III framework of the Basel Committee on Banking Supervision (the ‘Basel Committee’) as implemented by the European Union (the ‘EU’) in the amended Capital Requirements Regulation and Directive, collectively referred to as CRR/CRD IV, is used to calculate capital for prudential regulatory reporting purposes at a consolidated level. The local group, comprises HSBC Bank Malta p.l.c. and its subsidiary HSBC Global Asset Management (Malta) Ltd. HSBC Life Assurance (Malta) Ltd is excluded from the regulatory scope of consolidation by eliminating assets, liabilities and post-acquisition reserves, leaving the investment of the insurance subsidiary to be recorded at cost and deducted from CET1 subject to thresholds (amounts below the thresholds are risk-weighted at 250%).

The Basel III framework consists of three ‘pillars’. Pillar 1 measures minimum capital requirements for the credit, market and operational risks that banks face. Pillar 2 ‘supervisory review’, focuses on the fundamentals of the supervisory review procedure and emphasizes the necessity of a qualitative approach to bank supervision. An Internal Capital Adequacy Assessment Process (‘ICAAP’) is required by banks to estimate their own capital. Through the Supervisory Review and Evaluation Process (‘SREP’), the Regulator conducts supervisory reviews of the ICAAP and Internal Liquidity Adequacy Assessment Process (‘ILAAP’). Pillar 3 ‘market discipline’, mandates that banks publish a variety of qualitative and quantitative disclosures to the market in order to provide additional information regarding the capital structure, capital adequacy and risk management practices.

Disclosure requirements are an integral part of the Basel framework. These disclosures meet the requirements of Article 433 of Part Eight of EU Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending regulation (EU) No 575/2013 (Capital Requirements Regulation 2 – ‘CRR 2’), in conjunction 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. In instances where information pertaining to Pillar 3 requirements is contained in other parts of the Annual Report, a reference has been added.

The EBA adopted updated guidelines in 2021, namely the ‘Final Draft implementing technical standards on public disclosures of information referred to in Titles II and III of Part Eight of Regulation (EU) No. 575/2013 by institutions’. The disclosure framework in the EU is now in line with Basel Pillar 3 standards which bring the regulatory changes made by the revised CRR II into effect. The entirety of this regulation became legally binding 28 June 2021.

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 Annual Financial Statements, which have been prepared in accordance with the International Financial Reporting Standards (‘IFRS’) as adopted by the EU. The local group through its internal verification procedures is satisfied that these Additional Regulatory Dislcosures are presented fairly.

Pillar 3 disclosures

Purpose

HSBC Bank Malta p.l.c.’s Pillar 3 disclosures at 31 December 2022 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 II (Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013) and the European Banking Authority’s (‘EBA’) guidelines on Pillar 3 disclosures.

In light of the fact that the local group is considered a significant subsidiary of HSBC Continental Europe within the local market and subject to consolidated supervision at the level of both HSBC Continental Europe as well as 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 HSBC Holdings plc (‘the Group’) disclosure policy framework. The disclosure policy sets out the governance, control and assurance requirements for publication of the Pillar 3 disclosure document. While the disclosure statement is not required to be externally audited, this document has been subject to an internal review process in accordance with the banks’ financial reporting and governance processes.

Basis of preparation

The prudential consolidation in the statement of capital is based on CRR, whereas the consolidation of HSBC Bank Malta p.l.c.’s financial statements is based on IFRS. For accounting purposes, HSBC Bank Malta p.l.c including its subsidiary are subject to full consolidation; For regulatory reporting purposes, HSBC Life Assurance (Malta) Ltd is not consolidated as it does not fall in the CRR regime. 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 2022 disclosures. Where disclosures have been enhanced or are new, we do not generally restate or provide prior year comparatives.

Information relating to the rationale for withholding certain disclosures is provided in Appendix I.

In line with Article 434 of the CRR, 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 therein and is in line with the requirements of regulatory disclosures.

HSBC Bank Malta p.l.c. Pillar 3 2022

2

Pillar 3 Disclosures at 31 December 2022

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.

The following quantitative tables are introduced and disclosed as from December 2022 complementing the ESG reporting guidelines.

Additional Regulatory Disclosures

At 31 December 2022

Template 1: Banking book – Climate change transition risk: Credit quality of exposures by sector, emissions and residual maturity

Template 2: Banking book – Climate change transition risk: Loans collateralised by immovable property – Energy efficiency of the collateral

Template 5: Banking book – Climate change physical risk: Exposures subject to physical risk

Template 10 – Other climate change mitigating actions that are not covered in the EU Taxonomy

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.

Regulatory Developments

The Basel III Reforms

The Basel Committee on Banking Supervision (‘Basel’) completed the Basel III Reforms in July 2020. The reforms make significant changes to the way firms calculate risk-weighted assets (‘RWAs’) across all risk types and include the implementation of an RWA floor for banks that use internal models to calculate RWAs. In October 2021, the European Commission (‘EC’) published a first draft of the rules implementing the reforms in the EU (‘CRR3’ or ‘CRD6’) with a proposed implementation date of 1 January 2025 but an output floor phased-in until 2030. The draft rules include some significant deviations from the Basel III Reforms, mainly on the application of internal models, the latter do not apply to HSBC Bank Malta p.l.c. as the bank applies the standardised approach for its reporting.

Among the changes introduced under the revised reforms and that apply to the standardised approach include:

  • a new strategic investment category benefitting from a more favourable treatment and a phase-in of the 10% credit conversion factors for unconditionally cancellable commitments when calculating credit risk. It is also proposed that the Small Medium-size Enterprise (‘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 credit valuation adjustment (‘CVA’) capital charges; and
  • options to mitigate the impact and timing of implementation of the new market risk framework, should other jurisdictions make amendments.

In November 2022, the Council agreed its positions on the proposals from the Commission. In January 2023, the EU Parliament adopted its own amendments to those proposals. The three institutions are now about to enter trilogue negotiations to agree on a final version of the text. The current proposed implementation date is 1 January 2025.

Crypto Assets

In December 2022, Basel finalized its rules on the capital treatments for banks’ exposures to crypto assets, which are scheduled for implementation by 1 January 2025. The EU has yet to consult on their implementation.

Interest Rate Risk in the Banking Book (‘IRRBB’)

In October 2022, the European Banking Authority (‘EBA’) published final standards and guidelines on the treatment of interest rate risk and credit spread risk in the banking book. They reflect the final rules issued by Basel, implemented in 2019, and will replace the guidelines applicable under the Supervisory Review and Evaluation Process (‘SREP’) element of Pillar 2. The guidelines will apply from 30 June 2023, except for the part on credit spread risk, which will apply from 31 December 2023.

Environmental Social and Governance (‘ESG’) related disclosures requirements

In the EU, regulators continue to publish multiple proposals and discussion papers on ESG topics and there has also been growing interest and work underway by regulators on the extent to which climate risks are captured and dealt with in the prudential framework.

In April 2022, the European Financial Reporting Advisory Group launched a consultation on European Sustainability Reporting Standards (‘ESRS’) exposure drafts, the first set of standards required under the Corporate Sustainability Reporting Directive (‘CSRD’) and cover environmental, social and governance matters. The ESRS was finalised in November 2022 and the EU Commission is expected to adopt the final standards in June 2023. The CSRD entered into force in January 2023 and strengthens the existing rules on non-financial reporting introduced in the Accounting Directive by the 2014 Non-financial Reporting Directive. It also broadens the scope for EU entities and includes non-EU entities, subject to meeting certain criteria.

In May 2022, the European Banking Authority (‘EBA’) published a discussion paper which explored whether and how environmental risks are to be incorporated into the prudential framework. The responses to the discussion paper will be used by the EBA to finalise its report on this topic.

In August 2022, the European Parliament published draft amendments to the European Commission’s proposed implementation of the reforms (‘CRR3’ or ‘CRD6’) including additional EU-specific reforms covering ESG risk. These draft amendments will be subject to negotiation with the European Parliament, Council and Commission before final rules are published.

In November 2022, the European Central Bank (‘ECB’) published the results of its thematic review of banks’ ability to adequately identify and manage climate and environmental risks. Based on the results of the review, the ECB has set staggered deadlines for banks to achieve full alignment with its supervisory expectations outlined in its 2020 guide on climate-related and environmental risks by the end of 2024 including full integration in the Internal Capital Adequacy Assessment Process (‘ICAAP’) and stress testing. Intermediate steps include adequate categorization and impact assessment of climate and environmental risks by March 2023 at the latest, and inclusion by the end of 2023 of those risks in their governance, strategy, and risk management.

  • HSBC Bank Malta p.l.c. Pillar 3 2022

Minimum own funds and eligible liability issuance

A workshop was held with the SRB on the 14 September 2022 and the final target MREL including Combined Buffer Requirement was set at 23.98% of Total Risk Exposure Amount. These requirements are to be fulfilled by 1 January 2024.

HSBC Bank Malta p.l.c. becomes a subsidiary of HSBC Continental Europe

On 30 November 2022, HSBC Europe B.V. transferred its direct shareholding in HSBC Bank Malta p.l.c. to HSBC Continental Europe (‘HBCE’). As a result of this transaction, HBCE holds a direct shareholding of 70.0295% in HSBC Bank Malta p.l.c.

The transaction occurred in the context of a corporate restructuring by HSBC Group to comply with the obligation under Article 21(b) of Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures (CRD V) for non-EU headquartered banking groups like the HSBC Group to have an intermediate parent undertaking (‘EU IPU’) in the EU by 30 December 2023.

Depositor Compensation Scheme

In October 2022, Legal Notice (‘LN’) 262 (Banking Act (Cap. 371); Depositor Compensation Scheme (Amendment No. 2) Regulations, 2022) was published and became legally binding on Maltese banks. The LN confirmed the 70% cash contribution and 30% payment commitment ratios mandated under Directive 2014/49/EU and revised down the Flat Contribution on covered deposits from 1.3% to 1.1% applicable for year 2022. The Flat Contribution percentage rate will be re-adjusted to its original 1.3% through a phased approach (1.2% applicable for year 2023 and 1.3% – for year 2024).

Covid

The European Banking Authority (the ‘EBA’) released its COVID measures closure report on 16 December 2022. This report provides an overview of the policy measures implemented during the pandemic, their status, and the path out of policy support. The Guidelines on COVID reporting and disclosure subject to measures applied in response to the COVID crisis were also repealed by the EBA with effect from 1 January 2023, in accordance with the proportionate approach to supervisory reporting and in light of the decrease in the volume of loans subject to payment moratoria and public guarantees.

Similarly, the Malta Financial Services Authority issued a communication through circular on 16 January 2023, repealing Banking Rule BR/23 on the Reporting and Disclosure of Exposures Subject to Measure Applied in Response to the COVID Crisis (the ‘Rule’), with effect from 1 January 2023.

HSBC Bank Malta p.l.c. Pillar 3 2022

4

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