Risk Management
(The information set out below ending at the end of this page forms an integral part of the audited financial statements as described in the Accounting Policies section of the Financial Statements on page 160.)
Capital Management
It is HBOS’s policy to maintain a strong capital base to support the development of its business and to meet regulatory capital requirements at all times.
HBOS recognises the impact on shareholder returns of the level of equity capital employed and seeks to maintain a prudent balance between the advantages and flexibility afforded by a strong capital position and the higher returns on equity possible with greater leverage.
The Group’s capital is managed via the Board through the Group Business Plan, with the objective of maintaining both the optimal amount of capital and the most appropriate mix between the different components of capital. The day-to-day management of the Group’s capital is delegated to the Group Capital Committee.
The Group’s policy is to issue capital in a range of different forms and also from diverse sources to spread the investor base. HBOS plc raises the non-equity Tier 1 capital and subordinated debt for all the Group’s businesses, with the exception of Clerical Medical which is permitted to raise capital separately as part of the overall Group capital plan to spread the investor base for subordinated debt.
The principal forms of capital are included in the following balances on the consolidated balance sheet: called up share capital, share premium account, other reserves, retained earnings and other borrowed funds. Capital also includes collective impairment allowances held in respect of loans and advances.
Capital Requirements
The FSA supervises HBOS on a consolidated basis and, as such, receives information on the capital adequacy of, and sets capital requirements for, HBOS as a whole. Individual banking and insurance subsidiaries are directly regulated by either the FSA or their local supervisors, who set their capital adequacy requirements.
In implementing the EU’s Banking Consolidation Directive
(Basel I), the FSA requires each bank and banking group
to maintain an individually prescribed ratio of total capital to
risk weighted assets, taking into account both balance sheet assets and off-balance sheet transactions.
The Group must at all times monitor and demonstrate compliance with the relevant regulatory capital requirements of the FSA. The Group has in place processes and controls to monitor the Group’s capital adequacy and no breaches were reported to the FSA during the year. HBOS’s capital is divided into two tiers:
- Tier 1 capital comprises shareholders’ funds, innovative Tier 1 securities and minority interests, after adjusting for items reflected in shareholders’ funds which are treated differently for the purposes of capital adequacy. The book values of goodwill and intangible assets are deducted in arriving at Tier 1 capital.
- Tier 2 capital comprises qualifying subordinated loan capital, collective impairment allowances, and unrealised gains arising on the fair valuation of equities held as available for sale.
Various limits are applied to elements of the capital base. The amount of innovative Tier 1 securities cannot exceed 15 per cent of overall Tier 1 capital, qualifying Tier 2 capital cannot exceed Tier 1 capital, and qualifying dated subordinated loan capital may not exceed 50 per cent of Tier 1 capital. There are also limitations on the amount of collective impairment allowances which may be included as part of Tier 2 capital. From the total of Tier 1 and Tier 2 capital the carrying amounts of unconsolidated investments (eg, insurance company investments), investments in the capital of banks, and certain regulatory items are deducted.
Movements in Tier 1 capital and the Capital structure of the Group are given in the Group Finance Director’s Report on pages 76 and 77 respectively.
(End of information that forms an integral part of the audited financial statements.)
Risk weighted assets are categorised as either trading book or banking book and risk weighted assets are determined accordingly. Banking book risk weighted assets are measured by means of a hierarchy of risk weightings classified according to the nature of each asset and counterparty, taking into account any eligible collateral or guarantees. Banking book off-balance sheet items giving rise to credit, foreign exchange or interest rate risk are assigned weights appropriate to the category of the counterparty, taking into account any eligible collateral or guarantees. Trading book risk weighted assets are determined by taking into account market-related risks such as foreign exchange, interest rate and equity position risks and counterparty risk.