Basel 2 Pocket Guide

1. BASEL 2 POCKET GUIDE PILLAR 1 Angelina Jiang, ACCA Regulatory Reporting Key Definitions (cont'd) Market Risk LTV 2 Definitions Market risk is the risk that the value of an investment will decrease due to moves in market factors, namely Bermuda include S&P, Fitch and Moody's. ECAI ratings can be applied under the Standardized Approach to Credit Risk in respect of claims on Bank has adopted the Simple Approach of the CRM techniques (pp.18). LTV CRM techniques ECAI equity risk, interest risk, currency risk and commodity risk. The Bank is exempt from reporting under Market Risk Methodologies (see pp.22 for the rationale). p Sovereigns (pp.6), claims on Public Sector Entities (pp.8), claims on Banks and Securities Firms (pp.5), and claims on Corporates (pp.9). Credit Risk Mitigation ("CRM") Loan to Value ("LTV") ratio expresses the amount of a first mortgage lien as a % of the total appraised value of a real property. As 1 of the key risk factors assessed by the Bank when qualifying borrowers for a mortgage, LTV ratio is one of the qualifying External Credit Assessment Institution ("ECAI") is an agency recognized by both Basel 2 and the local regulator. Eligible ECAI in techniques can be applied by the Bank to reduce or transfer the Credit Risk of a transaction. The LTV ratio is one of the qualifying criteria in assessing Credit Risk associated with a Residential Mortgage (pp.12 ‐ 13). Operational Risk Market Risk RWA Calculator Capital & Capital Ratio 4 RWA Calculator Note that assets, liabilities and capital relating to the Bank's insurance entities (HSBC Insurance (Bermuda) Ltd) should be excluded from Basel 2 Pillar 1 calculations. Insurance entities are regulated separately under the Insurance Act 1978 and its related amendments and regulations. 5. Consider RWA Arising from Operational Risk 6. Consider RWA Arising from Market Risk 7. Bringing it All Together 8. Calculate Capital and Capital Adequacy Ratio pp.19 ‐ 21 pp.22 pp.23 ‐ Capital pp.24 ‐ Corporate Finance ‐ Capital Adequacy Ratio ‐ Trading & Sales pp.25 ‐ Retail Banking ‐ Commercial Banking ‐ Payment & Settlement ‐ Agency Services Operational Risk Risk g Adequacy Ratio ‐ Agency Services ‐ Asset Management ‐ Retail Brokerage

2. Key Definitions Basel 2 Operational Risk 1 Definitions As the second of the Basel Accord, Basel 2 is a recommendation on Operational risk is the risk of loss resulting from inadequate internal Credit Risk, Operational Risk and Market Risk. The Minimum Capital Adequacy Ratio under Pillar 1 is 8%. Credit Risk Standardized Approach Standardized Approach 1 The Bank has adopted the Basel 2 is a recommendation on banking laws and regulation, and an international standard that banking regulators use to regulate how much capital banks need to set aside. Basel 2 is live in Bermuda with effect from 1 January, 2009. Credit risk is the risk of loss due to a debtor's non‐payment of a loan or other line of credit. resulting from inadequate internal processes, people and systems, or from external events. Adequacy Ratio under Pillar 1 is 8%. The Bank has adopted the Standardized Approach to Operational Risk where activities are divided into 8 business lines (pp 20 Pillar 1 The Bank has adopted the Standardized Approach to Credit Risk where its measurement is supported by external credit assessments issued by ECAIs (pp.2). Pillar 1 deals with the maintenance of regulatory capital calculated for 3 major risks that the Bank faces: divided into 8 business lines (pp.20 ‐ 21). The Capital Charge for each business line is calculated by multiplying Gross Income with a Beta assigned to that business line. Credit Risk 3 RWA Calculator Every business transaction that the Bank enters into will have an impact on the Bank's Risk Weighted Assets ("RWAs"), and ultimately, the Capital Adequacy Ratio ("CAR"). It is therefore important for Business Functions to be aware of how the RWA of a given transaction is calculated and consider its implication. 1. Allocate the T i 2. Determine the 3. Consider CRM T h i 4. Calculate Risk W i h d A ‐ Banks pp.5 ‐ obtain ECAI credit pp.17 ‐ 18 RWA = Exposure x RW% ‐ Sovereign pp.6 ratings pp.5 ‐ 9, or pp.23 ‐ MDBs pp.7 ‐ assess qualification ‐ PSEs pp.8 of criteria pp.10 ‐ 16 ‐ Corporates pp.9 Transaction to One of the Asset Classes Below 2. Determine the Appropriate Risk Weighting ("RW") Techniques to Reduce Risk Weightings Weighted Assets ("RWA") Arising from Credit Risk ‐ Retail Loans pp.10 ‐ 11 ‐ Residential Mortgages pp.12 ‐ 13 ‐ Commercial Mortgages pp.14 ‐ Past Due Loans pp.15 ‐ Other Assets pp.16 Banks and Securities Firms Sample Transactions Business Function: GBM ‐ Money Market placed with banks ‐ Loans and advances to banks ‐ Nostro balances with banks Mapping Table 5 Banks Include banks (and banks' holding co. who do not process banking license) and financial institutions such as Ginnie Mae and Fannie Mae. The Risk Weightings, subject to a floor of 20%, reflect the counterparties' credit ratings issued by ECAIs. Also, claims with different Residual Maturity are subject to different Risk Weightings. ‐ Debt Securities (note: exposure = Book Value) issued by banks Mapping Table ECAIs Selected S&P Fitch Moody's > 3 mths < 3 mths Contact for ECAI ratings: ALM AAA to AA‐ AAA to AA‐ Aaa to Aa3 20% 20% ‐ Fitch A+ to A‐ A+ to A‐ A1 to A3 50% 20% ‐ S&P ‐ Moody's Mapping Rule BB+ to BB‐ BB+ to BB‐ Ba1 to Ba3 100% 50% B+ to B B+ to B B1 to B3 100% 50% BBB+ to BBB‐ ECAI Residual Maturity Where 3 credit ratings result in 3 different Risk Weightings the higher BBB+ to BBB‐ Baa1 to Baa3 50% 20% B+ to B‐ B+ to B‐ B1 to B3 100% 50% CCC+ and below Caa1 and below different Risk Weightings, the higher of the 2 lowest Risk Weightings is to be applied. 150% 150% CCC+ and below

7. Sovereigns Sample Transactions Business Function: GBM, CMB ‐ US Government T‐bills (rated AAA) ‐ Loan to Bermuda Gov. (rated AA‐) ECAI Selected Contact for ECAI ratings: CRM ‐ S&P Mapping Table Public Sector Entities (PSEs) Sample Transaction Business Function: CMB ‐ Loan to Corporation of Hamilton ECAI Selected Contact for ECAI ratings: CRM ‐ S&P ‐ The Bermuda Housing Corporation ‐ Small Business Development Corporation Mapping Table Retail Loans Sample Transaction Business Function: PFS, CMB, PB ‐ Personal Loans ‐ Auto Loans ‐ Personal Overdraft facilities Qualifying Criteria for 75% RW ‐ Credit Cards ‐ Loans to SMEs Contact for RW Assessment: CRM to be cont'd in pp.11 Include claims on individuals and small businesses. Retail Loans are Risk Weighted at 75% should all of the following criteria be met, or at 100% if otherwise. Individual Person or Persons Small Businesses Product Type ‐ Revolving credits, LOCs (including Credit Cards, Overdraft) ‐ Small Business facilities and commitments‐ Personal Term Loans, Leases (e.g. Installment Loans, Auto Loans, Leases, Student Loans, Personal Finance) EXCLUDING Securities (bonds, equities) and Mortgage Loans that qualify for Residential Mortgages Granularity No aggregate exposure to a single counterparty can exceed 0.2% of the overall regulatory retail portfolio Include regional governments and local authorities, and bodies responsible to, or are carrying out non‐commercial functions on behalf of regional governments or local authorities, as well as bodies owned by the central or regional government or local authorities which perform regulatory or other non‐commercial functions. For instance, The Risk Weightings of claims on PSEs reflect the counterparties' credit ratings issued by ECAIs. S&P Credit Ratings AAA to AA‐ A+ to A‐ BBB+ to BBB‐ BB+ and below Unrated Risk Weighting 20% 50% 100% 150% 150% Claims on Sovereigns include loans to the Bermuda Government or other foreign governments, and Debt Securities issued by Sovereigns. The Risk Weightings reflect the counterparties' credit ratings issued by ECAIs, with the exception of claims on the Bermuda Government that are both denominated and funded in BMD, which are allocated a lower Risk Weighing, i.e. one category lower than the applicable weighting if otherwise. Loans to Currency Funded in AAA to AA‐ A+ to A‐ BBB+ to BBB‐ Bermuda Gov. Non‐BMD Non‐BMD 0% 20% 50% Bermuda Gov. BMD BMD 0% 0% 50% 100% 150% 100% BB+ to B‐ Below B‐ Unrated 20% 50% 100% 50% Other Sovereigns Any Currency Any Currency 0% 20% 6 Sovereigns8 Public Sector Entities10 Retail Loans 100% 150% 100%

8. Multilateral Development Banks ("MDBs") Sample Transactions ‐ World Bank Group (IBRD and IFC) ‐ Asian Development Bank ‐ African Development Bank ‐ European Bank for Reconstruction and Development ‐ Inter‐American Development Bank ‐ European Investment Bank ‐ European Investment Fund ‐ Nordic Investment Bank ‐ Caribbean Development Bank ‐ Islamic Development Bank ‐ Council of Europe Development Bank Corporates Sample Transaction Business Function: CIB, CMB, HSS, AFS ‐ Loans to CIB and CMB clients ‐ Overdraft to AFS clients ‐ Term Lending to CMB clients ECAIs Selected Contact for ECAI ratings: CRM ‐ S&P Mapping Table Retail Loans (cont'd) Qualifying Criteria for 75% RW (cont'd) Installment Installments may not exceed 50% of income As mentioned in pp.10, Retail Loans are Risk Weighted at 100% if any of the above criteria is not met. Low Value Maximum aggregated unsecured loans to a single counterparty can not exceed an absolute threshold of $1 million The Bank currently does not have any claims on MDBs. However, information is included here in case of transactions in the future. S&P Credit Ratings Risk Weighting AAA to AA‐ 20% A+ to A‐ BBB+ to BB‐ Below BB‐ Very high quality MDBs qualify for 0% Risk Weighting given their high credit ratings, the quality and commitment of their shareholders and their highly prudent stance. Very high quality MDBs include: In the case of MDBs other than those listed above, their Risk Weightings reflect the counterparties' credit ratings issued by ECAIs. 11 Retail Loans9 Corporates7 MDBs Repayment N/A Repayment of small business loans up to $1 million must be dependent on income from business, not salary of the borrower Individual Person or Persons Small Businesses Claims on Corporates include loans to Corporates and insurance claims from insurance companies. The Risk Weightings reflect the counterparties' credit ratings issued by ECAIs. However, as most of the Bank's Corporate clients are local companies that are not rated by ECAIs, i.e. "unrated" per Mapping Table below, the actual Risk Weightings would therefore be 100%. Unrated 50% 100% 150% 100%

13. Residential Mortgages Sample Transaction Business Function: PFS, PB ‐ Housing Loans Contact for RW Assessment: CRM RW 35% RW 50% RW 75% RW 100% Commercial Mortgages Sample Transaction Business Function: CIB, CMB Contact for RW Assessment: CRM 2. Either one of the following 2 conditions is met: Other Assets Sample Transaction Business Function: All Tangible Fixed Assets, RW 100% ‐ Property, plant and equipment ‐ Holdings of listed securities ‐ Investment in private equity ‐ Accrued interest ‐ Prepayments Equity, RW 100% ‐ Any other debtors Contact for RW Assessment: ‐ Equity & High Risk Assets ALM ‐ Others Regulatory Reporting High Risk Assets, RW 150% Other Assets, RW 0 ‐ 150% Include accrued interest, prepayments and debtors. The Risk Weightings reflect the counterparties' credit ratings issued by ECAIs. Unallocated amounts are Risk Weighted at 100%. Include investments in venture capital, private equity, and investment funds that hold such investments. √ √ Residential properties refer to properties that are either occupied by the borrower or rented to individuals. Residential Mortgages are Risk Weighted at 35% should all of the following criteria be met, or at 50%, 75% or 100% according to the table below. 1. "Fully Secured" (LTV ≤ 80%) by mortgages on residential properties √ √ X X 2. That are or will be occupied by the borrower or rented √ √ √ X 3. That are secured by a "First Mortgage Charge" 12 Residential Mortgages14 Commercial Mortgages16 Other Assets Include land, premises, plant and equipment, and all other fixed assets held for own use, including finance leases. Other interest in land that is not occupied or used should also be included. Generally refers to holdings of securities that are listed on one or more stock exchanges. Holdings of HSBC plc shares must be excluded from here and form part of the Capital Deduction (pp.24). √ √ Commercial property lending generally qualifies for a standard 100% Risk Weighting (this is how the Bank's Commercial Mortgages are Risk Weighted now), unless they meet the following criteria and a Risk Weighting of 50% applies. ‐ All facilities with CRE GHO advanced purpose codes 1. The Bermuda Monetary Authority is satisfied that an established well developed market exists; OR 2.2 a) Losses stemming from commercial real estate lending up to the lower of 50% of the market value or 60% of the LTV based on mortgage lending value not exceed 0.5% of the outstanding loans in any single year, and 2.1 Mortgages on office and/or multipurpose commercial premises and/or multi‐tenanted commercial property for tranches that do not exceed the lower of 50% of market value or 60% of mortgage lending value of the property securing the loan (except for Past Due Loan which need to be reclassified, see pp.15) 2.2 b) Overall losses stemming from the commercial real estate lending must not exceed 0.3% of the outstanding loans in any single year.

14. Residential Mortgages (cont'd) cont'd from pp.12 RW 35% RW 50% RW 75% RW 100% Past Due Loans Sample Transaction Business Function: CIB, CMB, PFS ‐ "Impaired" Commercial Loan ‐ "Impaired" Residential Mortgage Contact for RW Assessment: CRM Credit Risk Mitigation ("CRM") techniques Sample Transaction Business Function: CIB, CMB, PB 2. A loan exposure may be guaranteed by a 3rd party. Eligible Financial Collateral prescribed by Basel 2 generally include: ‐ Cash ‐ Gold ‐ Debt Securities Contact for RW Assessment: CRM ‐ Equities ‐ Shares of mutual funds which meet certain criteria However, note that for CRM techniques to be applied, certain preconditions must be met. 17 Credit Risk Mitigation techniques15 Past Due Loans 1. Exposures may be collateralized, fully or partially, by first priority claims in the form of cash or securities. 3. The Bank may use a credit derivative to offset various forms of credit risks. RW 150% Secured Loan Specific provision ≥ 20% of the outstanding loan amount Specific provision < 20% of the outstanding loan amount Unsecured Loan and Past Due 90 Days Specific provision ≥ 20% of the outstanding loan amount RW 75% (applies to the portion where LTV is > 80%) RW 100% The loan must be classified as "Past Due" after 90 days have passed since a payment is missed. Under Basel 2, Past Due Loans are Risk Weighted between 50% and 150%, depending upon whether the loan is secured or not, and the % of specific provision already made against the outstanding loan amount. Here, a secured loan with an adequate % of specific provision is perceived as "less risky" hence is assigned a lower Risk Weighting under Basel 2. RW 50% RW 100% 13 Residential Mortgages At the time when this Pocket Guide was created, majority of the Bank's Residential Mortgages (more than 90%) are Risk Weighted at 35%, with the remainder (less than 10%) being Risk Weighted at 75% and 100%. The Credit Risk of a transaction may be reduced or transferred as a result of the various CRM techniques applied by the Bank, for instance: ‐ Intra‐group Reverse Repos collateralized with US Government T‐ bills (a Reverse Repo is, in substance, a "collateralized loan") ‐ Insurance Guarantees collateralized by securities ‐ Standby Letters of Credit collateralized by Cash or Fixed Deposits with the Bank Specific provision < 20% of the outstanding loan amount 4. The Bank's systems hold adequate LTV information √ X √ X Basel 2 Treatment (the relevant Risk Weightings apply to total loan exposures, unless otherwise stated) RW 35% RW 50%

19. Credit Risk Mitigation ("CRM") techniques (cont'd) The Simple Approach General Rules RW 0% RW 0% OTC Daily Operational Risk (cont'd) Beta to be cont'd on pp.21 Market Risk Basel 2 Treatment 5% de minimis threshold Nevertheless, Market Risk arising from FX Forwards is being converted into RWAs and reported under the Credit Risk section, by applying 100% Risk Weighting to the "Net Short Open Position". The Bermuda Monetary Authority permits the Bank, whose total Market Risk component remains below the 5% de minimis level, to be exempt from reporting under the Basel 2 Market Risk Methodologies (i.e. Standardized Approach to Market Risk). Equity Risk Interest Rate Risk Currency Risk Commodity Risk According to Trading Book Policy, Trading Book positions normally does not exceed 5% of the Bank's total business. The Bank is therefore exempt from Trading Book capital requirement under the 5% de minimis threshold rule. The following table illustrates the 8 primary business lines prescribed under the Standardized Approach to Operational Risk and their associated Betas. Primary Business Line 2ndary Business Line Activity Group 1. Corporate Finance 18% Corporate Finance M&A, underwriting, privatizations, securitization, research, debt (government, high yield), equity, syndications, IPO, secondary private placements. Municipal / Government Finance Merchant Banking Advisory Services 2. Trading & Sales 18% The Bank is exempt from reporting under Market Risk MethodologiesMarket risk is the risk that the value of an investment will decrease due to moves in market factors, including Sales Fixed income, equity, FX, commodities, credit, funding, own position securities, lending and repos, brokerage, debt, price brokerage. Market Making Proprietary Positions Treasury 22 Market Risk20 Operational Risk Debt Securities Issuer Sovereigns or PSEs that qualify for 0% RW Transaction vs. Collateral In Same Currency In Same Currency 3. Retail Banking 12% Retail Banking Retail lending and deposits, banking services, trust and estates. The Bank has adopted the Simple Approach to CRM techniques. Under the Simple Approach, the Risk Weighting of the collateral substitutes the Risk Weighting of the counterparty, provided that the Risk Weighting of the collateral is lower than that of the counterparty. The substitution is only applied to the collateralized portion of the exposure, and is generally subject to a Risk Weighting floor of 20%. If the criteria listed on the left are met, Risk Weightings can be further reduced to 10%, even to 0%. 18 Credit Risk Mitigation techniques Note that the reduced Risk Weightings can only be applied to the collateralized portion of the transaction. Current Market Value Discounted by 20% RW 10% Transaction Type OTC Marked‐To‐Market Collateral Cash Cash or Deposit or Debt Sec

20. Operational Risk Take the following steps to to calculate RWAs from Operational Risk: Step 1 Step 2 Step 3 Step 4 Beta 12% Risk Weighted Assets ‐ Bringing it All Together Credit Risk Operational Risk Market Risk = Primary Business Line 7. Asset Management 8. Retail Brokerage See pp.19 for a step‐by‐step guide to calculate Total Operational Risk RWA Total RWA of the Bank = Total Credit Risk RWA + Total Operational Risk RWA 4. Commercial Banking 15% Commercial Banking Project finance, real estate, export finance, trade finance, factoring, leasing, lending, guarantees, bills of exchange. 5. Payment & Settlement 18% 3. Retail Banking 12% Private Banking Private lending and deposits, banking services, trust and estates, investment advice. Card Services Merchant / commercial / corporate cards, private labels and retail. 6. Agency Services 15% Custody Escrow, depository receipts, securities lending Corporate Agency Issuer and paying agents Corporate Trust Repeat Step 1 and Step 2 for each of previous 3 completed financial years where Audited Financial Statements have been prepared. Multiply the average of the total Capital Charge for the previous 3 years by 12.5 (12.5 is the reciprocal of 8%, the Minimum Capital Adequacy Ratio prescribed by the Bermuda Monetary Authority) to derive the Risk Weighted Assets arising from Operational Risk. 12% Discretionary Fund Management Pooled, segregated, retail, institutional, closed, open, private equity. Non‐discretionary Fund Management Pooled, segregated, retail, institutional, closed, open. External Clients Payments and collections, funds transfer, clearing and settlement. 2ndary Business Line Activity Group ¹See definitions of Asset Classes in pp.5 ‐ 16. 23 Risk Weighted Assets ‐ Bringing it All Together21 Operational Risk19 Operational Risk NIL as the Bank is exempt from reporting under Market Risk Methodologies (see pp.22 for the rationale) Credit Risk RWA of an Asset Class¹ ∑ (Exposure of each transaction X Respective Basel 2 RW%²) ∑ (Credit Risk RWA of each Asset Class) Total Credit Risk RWA = ²See Basel 2 RWs for each Asset Class in pp.5 ‐ 16. Retail Brokerage Execution and full service Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The Bank has adopted the Standardized Approach to calculate the Risk Weighted Assets arising from Operational Risk. Allocate Total Gross Income of the Bank (defined as the sum of Net Interest Income and Net Non‐interest Income) to 8 primary business lines (pp.20 ‐ 21). Multiply Gross Income of each business line by the respective Beta (pp.20‐21) to obtain the Capital Charge required for that business line. Sum these up to get the total Capital Charge for the Bank.

25. Tier 1 ‐ Core Capital Tier 2 ‐ Supplementary Capital Capital Deduction ‐ Investments in Subsidiaries ‐ Ordinary Share Capital ‐ Share Premium ‐ Retained Earnings ‐ General Provisions ‐ Less: Goodwill ‐ Less: Other Intangible Assets Tier 3 ‐ Short‐term Capital Other Capital Bermuda Monetary Authority Bank for International Settlements www.bma.bm/document‐centre/basel‐II.asp www.bis.org/publ/bcbs107.htm HSBC Acumen eLearning Modules Financial Services Authority (UK) An Introduction to Basel II Basel II Full Handbook ‐ Glossary Basel II ‐ The Standardized Approach www.acumennet.com/hsbc/login.aspx 24 Capital www.fsahandbook.info/FSA/html/handbook/Glos sary Capital Deductions of the Bank include: Tier 3 Capital, such as subordinated short‐term debt is not applicable to the Bank. Total Regulatory Capital = Tier 1 + Tier 2 ‐ Capital Deductions + Tier 3 + Other Capital ‐ Off balance sheet items of a capital nature ‐ Investment in Capital of other banks (e.g. holdings of HSBC plc shares) Any other capital that does not qualify for the Tier 1, 2 or 3 Capital. 26 References Revised Framework for Regulatory Capital Assessment (30 December, 2008) Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework (June 2004) Guidance Notes on Completion of PIR for Banks (30 June, 2008) www.bma.bm/document‐centre/reportforms‐ guidelines/banking.asp Tier 1 Capital is the core measure of the Bank's financial strength from a regulator's point of view. The Bank's Tier 1 Capital comprises of: Tier 2 Capital is a measure of the Bank's financial strength with regard to the 2nd most reliable form of financial capital, from a regulator's point of view. The applicable Tier 2 Capital of the Bank is:

26. Total Regulatory Capital¹ ¹See pp.24 for the definition and the calculation of Tier 1 Capital and Total Regulatory Capital. ²See pp.23 for the calculation of Total Risk Weighted Assets ("RWA"). Key Contacts Angelina Jiang (x6957) Regulatory Reporting To obtain ECAI ratings Jaco Juul (x6646) Credit Risk Management Olga Zhukova (x5152) Assets & Liabilities Management David Ayres (x6168) Moses Mwanandimai Management Reporting Management Reporting Pablo Sovran (x5144) Angelina Jiang (x6957) Regulatory Reporting Regulatory Reporting Total RWA² 27 Key Contacts25 Capital Adequacy Ratio 8% 10% 12% Pillar 1 Minimum Capital Adequacy Ratio, below which the Bank loses its banking license. Pillar 2 Minimum Capital Adequacy Ratio (until August 2009), below which the Bank needs to prepare a capital plan to the regulator. HSBC's internal Ratio per Risk Appetite, below which, the Board of Directors needs to be notified. T H A N K Y O U To provide feedback for this Pocket Guide To enquire about Operational Risk To enquire about Basel 2 in general Tier 1 Capital Ratio = Total Tier 1 Capital¹ Capital Adequacy Ratio = Total RWA²

27. Tier 1 ‐ Core Capital Tier 2 ‐ Supplementary Capital Capital Deduction ‐ Investments in Subsidiaries ‐ Ordinary Share Capital ‐ Share Premium ‐ Retained Earnings ‐ General Provisions ‐ Less: Goodwill ‐ Less: Other Intangible Assets Tier 3 ‐ Short‐term Capital Other Capital Bermuda Monetary Authority Bank for International Settlements www.bma.bm/document‐centre/basel‐II.asp www.bis.org/publ/bcbs107.htm HSBC Acumen eLearning Modules Financial Services Authority (UK) An Introduction to Basel II Basel II Full Handbook ‐ Glossary Basel II ‐ The Standardized Approach www.acumennet.com/hsbc/login.aspx 24 Capital www.fsahandbook.info/FSA/html/handbook/Glos sary Capital Deductions of the Bank include: Tier 3 Capital, such as subordinated short‐term debt is not applicable to the Bank. Total Regulatory Capital = Tier 1 + Tier 2 ‐ Capital Deductions + Tier 3 + Other Capital ‐ Off balance sheet items of a capital nature ‐ Investment in Capital of other banks (e.g. holdings of HSBC plc shares) Any other capital that does not qualify for the Tier 1, 2 or 3 Capital. 26 References Revised Framework for Regulatory Capital Assessment (30 December, 2008) Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework (June 2004) Guidance Notes on Completion of PIR for Banks (30 June, 2008) www.bma.bm/document‐centre/reportforms‐ guidelines/banking.asp Tier 1 Capital is the core measure of the Bank's financial strength from a regulator's point of view. The Bank's Tier 1 Capital comprises of: Tier 2 Capital is a measure of the Bank's financial strength with regard to the 2nd most reliable form of financial capital, from a regulator's point of view. The applicable Tier 2 Capital of the Bank is:

28. Total Regulatory Capital¹ ¹See pp.24 for the definition and the calculation of Tier 1 Capital and Total Regulatory Capital. ²See pp.23 for the calculation of Total Risk Weighted Assets ("RWA"). Key Contacts Angelina Jiang (x6957) Regulatory Reporting To obtain ECAI ratings Jaco Juul (x6646) Credit Risk Management Olga Zhukova (x5152) Assets & Liabilities Management David Ayres (x6168) Moses Mwanandimai Management Reporting Management Reporting Pablo Sovran (x5144) Angelina Jiang (x6957) Regulatory Reporting Regulatory Reporting Total RWA² 27 Key Contacts25 Capital Adequacy Ratio 8% 10% 12% Pillar 1 Minimum Capital Adequacy Ratio, below which the Bank loses its banking license. Pillar 2 Minimum Capital Adequacy Ratio (until August 2009), below which the Bank needs to prepare a capital plan to the regulator. HSBC's internal Ratio per Risk Appetite, below which, the Board of Directors needs to be notified. T H A N K Y O U To provide feedback for this Pocket Guide To enquire about Operational Risk To enquire about Basel 2 in general Tier 1 Capital Ratio = Total Tier 1 Capital¹ Capital Adequacy Ratio = Total RWA²

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