HSBC Alters Debt-Issuance Strategy on Fed Bank-Failure Plan

  • HSBC Holdings Plc alone will issue TLAC-eligible debt in 2016
  • Fed plan seeks to avert threats to U.S. financial stability

HSBC Holdings Plc altered its strategy for issuing loss-absorbing debt required by regulators to comply with rules proposed by the Federal Reserve for large foreign banks operating in the U.S.

Under the rules on total loss-absorbing capacity, or TLAC, approved by Group of 20 leaders in November, the world’s most systemically important banks, like HSBC, must have liabilities and instruments “readily available for bail-in” equivalent to at least 16 percent of risk-weighted assets by 2019. The Fed proposed that foreign banks would have to issue eligible debt “internally, from the U.S. operations to the foreign parent,” rather than sell it to external investors.

HSBC has said that its holding company will be the “sole issuer of external TLAC debt” in 2016, and this will be “downstreamed” within the group in line with the U.S. proposal. That’s a change from its previous intention to issue from regional holding companies, “one in Europe-Asia, one in the United States,” Iain Mackay, HSBC’s group finance director, said on an earnings call last month.

“In the short term, one of the reasons that we are doing it out of the holding company as opposed to intermediate holding companies is the U.S. –- the Fed’s proposal on TLAC,” Mackay said. The bank will issue the senior debt from the holding company “until there is greater regulatory clarity around exactly how the international community wants to go at this,” he said.

TLAC Shortfall

The Financial Stability Board, created by the G-20 in the aftermath of the crisis, designed the TLAC rules to make sure giant lenders can be wound down and recapitalized in an orderly way, without taxpayer bailouts. In addition to the 16 percent minimum, rising to 18 percent in 2022, a leverage ratio requirement will also be imposed. The banks’ shortfall under the 18 percent minimum ranges from 457 billion euros to 1.1 trillion euros ($1.2 trillion), depending on the instruments considered, according to the FSB.

The Fed proposed long-term debt and TLAC requirements for their U.S. operations “to mitigate the threats to U.S. financial stability from the failure of a large foreign bank.” The internal-issuance requirement would help ensure that these units “could be recapitalized and kept operating in the event of resolution of the foreign bank by its home resolution authority,” according to the Fed.

Funding Costs

HSBC may have to issue as much as $80 billion of debt through 2018 to meet its TLAC requirement, of which about $51 billion will come from refinancing maturing notes, according to a company presentation. At the top end of that range, the costs to the bank would be about $800 million, Mackay said.

The 2019 TLAC deadline also means that funding costs will rise, Mackay said.

“While the regulators hold everybody’s feet to the fire, to the 2019 compliance date,” Mackay said, “if we have to go at higher rates, then obviously there’s going to be a slightly higher cost for us.”

HSBC this week demonstrated its ability to shift large amounts of debt with the sale of $7 billion of five- and 10-year bonds, the biggest issue of debt by a foreign financial institution into the U.S. market this year. 

The Fed’s plan to have foreign firms issue TLAC only from parent companies may also compromise HSBC’s “multiple-point-of-entry” resolution strategy, Mackay said. This approach has also been adopted by lenders with decentralized business models such as the Spanish and French banks.

“If everything has got to be done out of a parent company, and that is the level at which you’re going to push losses back to as opposed to recognize losses at the intermediate holding company or the operating company, then I think that may conceptually be a challenge” to multiple-point-of-entry resolution, he said.

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