Banking: Principles, Practice, and Regulation

Banking: Principles, Practice, and Regulation


HSBC is among the most significant banking and financial services associations in the world. HSBC Holdings plc shares are apprehended by more than 220000 shareholders in 121 countries. The HSBC offers a complete range of monetary services to more than one hundred million clients where it is organized within four business groups including commercial, retail, global banking, and markets as well as wealth management. Hence, HSBC is one of the most internationally active banks having subsidiaries in more than sixty-seven countries across all the continents. Subsidiaries can be defined as the separate entities which belong to a parent bank. One of the HSBC subsidiaries is the HSBC Bank Australia Limited. HSBC began its operations in Australia in 1965 and was given a commercial banking warrant in 1986 (Steve, 2017, para.3). Since that time the bank has made tremendous moves making the life of their customers more comfortable.

The aim of this paper is analyzing the credit risk and capital strength of the HSBC Bank Australia Limited as well as explaining why credit risks and capital strength measures are essential for banks. Additionally, the paper will discuss the performance of two of the bank’s business areas as well as explaining why the United Kingdom introduced ring-fencing and its effects on HSBC.

Analysis of Credit Risk and Capital Strength for The HSBC Bank Australia Limited in Comparison to The Country’s Banking Sector

Credit risk refers to the likelihood danger of loss resultant from a borrower’s catastrophe in repaying a loan. Traditionally, credit risk refers to the menace in which a lender may not obtain the billed interest and principal resulting in interrupted cash flows and amplified collection costs.  Despite being terrible in knowing precisely who might default on obligations, proper assessment, and credit risk management lessen the severity loss (Cranston, 2018, p.72) For instance, payment in interests from the issuer or defaulter of a debt responsibility are considered investor’s or lender’s reward for assuming credit risk.

Credit risk is computed on the borrower’s ability to repaying. For lenders to assess the credit risk on customer’s loan, they check at the five C’s which include character, capacity, capital, conditions, and collateral (Akhter & Daly, 2017, p197). Various companies have established individual departments which are responsible for assessing credit risks for potential and current customers. For instance, technology has provided businesses with the ability to quickly analyzing data used to evaluate a customer’s risk profile. Therefore, HSBC is useful in analyzing and evaluating its credit risk measures to ensure that it remains competitive in the global market. The fact is true upon looking and evaluating its data and information as it is indicated below.

From the above chart, it is clear that HSBC is aiming at growing its top line in the future through its exertions on high-growth regions while reallocating capital more efficiently and keeping costs low. For instance, HSBC is aiming to continue with the ongoing push into the key Asian growth markets (Valdez & Molyneux, 2015, p58). Therefore, Asia is estimated to remain HSBC key growth area where the bank is expected to invest more considerably in garnering more business in the economy growing region.

Credit risk about HSBC Bank Australia can be termed as the financial loss menace when a customer fails meeting a payment obligation under a contract. The practice arises from trade finance and direct lending and off-balance sheet exposures like market and non-market associated transactions as well as the HSBC holdings of debt securities. Among the risks which HSBC engages the credit risk appears to be the one generating the most significant regulatory capital requirement (Trofis, 2018, para.6). For credit risk with approval from PRA’s, the HSBC group accepted the IRB progressive approach for many of its business, with the remaining either IRB foundations or standardized criteria. For instance, HSBC is having a rollout plan for extending coverage of advanced method in the coming years meaning that residue exposures will be left on the standardized approach.

On capital strength, HSBC Bank Australia is successful since it provides advice together with suggestions to other companies about international business. The bank has branches around the world and clients from the various environmental and cultural regions. Therefore, the bank has the expertise of following organic and effective growth. The HSBC expertise in developing natural and active extension can be evident upon analysis of its data as well as facts and figures.


The above chart is an indication that HSBC is leveraging leadership position in the global transaction banking industry for boosting revenues in the high-margin business. Since HSBC is ranked first in global transaction banking, it is clear that the banking giant should make most of its geographical diversification for growing own Trade Finance and Securities Services operations (Kapan & Minoiu, 2013, p84). Therefore, there will be a positive impact on customers balances for bank’s trade finance operation, the high-profit margins which are realized in such businesses also help profit margins for HSBC’s Global Banking and Markets division.

Why Credit Risk and Capital Strength Measures Are Important for Banks

Capital strength for banks is tightly regulated worldwide to ensure the stability of financial systems as well as the global economy and offer additional protection for depositors. Therefore, monitoring of the economic conditions for banks is much important since banks should deal with liquidity mismatch between their liabilities and assets.

Credit risk measure is an essential aspect for any bank and is taken as the proportion of loan loss reserves to the gross entire loans’ portfolio. For instance, credit risk measure is an indication of how much of the entire loan portfolio has been offered with the corresponding reserve although it has not been charged off. Therefore, there is an implication that the more the credit ratio, the lesser is the loan quality.

Moreover, credit risk is found in many activities where success depends on counterpart performance. For instance, credit risk occurs any time bank funds are committed, extended, invested or exposed by implied or actual contractual arrangements whether reflected off or on the balance sheet. Therefore, banks may face credit risks in several fiscal instruments other than credits inclusive of receptions, trade financing, bonds, overseas exchange contacts, equities, fiscal futures, interbank transactions, choices, settlement of operations as well as the extension of guarantees and commitments.

Capital adequacy ratio is another important aspect since it measures a bank’s monetary strength which is articulated as the proportion of its principal to the risk-weighted credit acquaintance in loans form. Capital adequacy proportion can also be defined as capital risk-weighted resources ratio where it can be used in protecting depositors and promoting efficiency and stability of financial systems (Brian, 2018, para.4). Therefore, the rationale for instituting standards for capital adequacy ratio is that banks have to hold a minimum level of shareholders equity which depends on riskiness and loan amount.

Credit risk management involves assessing the risk for each potential loan and analyzing the amount of risk incurred by the whole portfolio. Therefore, the process is vital to individual investors dealing in bonds and to banks issuing loans as a significant part of doing business. Furthermore, credit risks are an essential measure for banks since it deals with evaluating each portfolio at periodic intervals for judging the quality assets held in the collection and protecting them from losing values through proper corrective action time.

Besides, regulatory issues are another important measure for banks. For instance, the regulator needs all sorts of reasons for managing credit risks. Thus, if one cannot control the credit risks /she might lose the waiver or even become audited. The other important for credit risks is that banks need to manage their risk exposure, market and credit risks. Thus, if the bank cannot control their credit risks, then it can be termed to be sitting on massive credit exposure whereas the senior management does not have a clue that the bank has such positions.

Banking in Australia is dominated by four major banks which include National Australia Bank, New Zealand Banking Group, Commonwealth Bank of Australia, and Westpac Banking Corporation. Besides, there are several small banks as well as foreign banks doing business in Australia. HSBC is one of the largest and central foreign banks in Australia (Buckley & Ooi, 2015, p256). Despite being an international bank HSBC Bank Australia remains very competitive and among the best. Therefore, the bank continuous to show tremendous growth in providing better services to the customers which ensures broad client base when compared to other banks.

Part C

Performance of Commercial Banking

Commercial banking is also referred to as institutional or business and relates to banking of products and services which are designed for institutions, corporations and even sometimes government as opposed to banking of products which are offered to individual consumers. HSBC commercial banking operates in various countries including Australia where it connects businesses to opportunities and helps them in thriving and growing (Apergis & Cooray, 2015, p151). For instance, HSBC Australia works with many customers ranging from minor enterprises to mid-market firms as well as big multinationals which offers them with the required tools for effective functioning.

The above shows the performance of commercial banking for HSBC group in the last three years. From the chart, the data and information are derived in because HSBC commercial Banking (‘CMB’) serves about 1.7 million clients in fifty-three nations (Avkiran, 2015, p147). The clients range from minor initiatives which are absorbed on their local markets to corporates operational globally.

Besides, HSBC Australia is considered the fifth biggest corporate bank in the Australian market and is positioned for expansion in the future. Therefore, HSBC offer for strong product and coverage across Australia means that the company has a competitive edge for international corporates searching for a bank which suits their requirements.

Lastly, international trade is considered to be part of HSBC’s DNA. For instance, the bank was founded in the last 150 years ago for the financing of trade between Europe and Asia means that the Asia-pacific regions remain central to the bank strategy (Cohen & Scatigna, 2016, p58).  Therefore, it is much evidence that Australia’s growth has been linked to its close ties with Asian economies considering that 70% of Australian exports are intended for Asia, particularly China. Due to such relationship Australia has gained a reputation as a landing place for companies aiming at extending trade links with Asian markets or even investing in a developed economy with acute exposure to the Asian growth story.

HSBC group works with many customers ranging from minor initiatives to mid-market firms as well as large corporations providing them with needed tools for effective functioning. The HSBC group has the monetary strength for supporting their clients with working capital, project finance or gaining, term loans together with the expertise of helping them of raising money from the bond and stock markets (Ferran et al., 2014, p12). Experts in four fields reinforce the HSBC relationship managers. The first field is the international trade and receivables finance which offers services or funds for suppliers and buyers through the trade sequence. Therefore, suppliers and buyers are helped inefficient working capital, managing trade risks and funding of supply chain.

The other field where relationship managers get support is on the global liquidness and cash administration. In this field, trades are given greater controller over their groups and cash as well as helping them inefficient management of their liquidity. For instance, the HSBC e-banking platform ensures that customers are making continuous payments between currencies and countries.

The other field where specialists support HSBC relationship managers is on global banking in which commercial clients are provided with access to a variety of capital funding including debt, advisory services, or equity. Besides, insurance and savings are the last fields where specialists support relationship managers. The field provides business and fiscal protection, employee benefits, trade assurance, and corporate affluence management as well as various marketable risk assurance products.

Global Banking and Markets

Global Banking and Markets is more focused on the building partnerships with the corporate, government as well as institutional clients for helping in achieving consistent and long-term performance. For instance, the HSBC Bank Australia Limited uses the organization’s international network for connecting emerging markets together with mature markets as well as covering key growth areas.

HSBC Global Banking and Markets is involved in the provision of financial products and services to governments, institutions, and corporates all over the world. The HSBC serves approximately 4100 clients in more than fifty countries where it provides a range of transaction banking, HSBC securities services, advisory, financing and capital markets (Clarke et al., 2014, p53). Firsts, HSBC banking relationship managers always specializes in business sectors. For instance, the bank uses its global expertise together with local knowledge in connecting to services and products which meet their financial needs.




The following is a chart indicating the global banking and markets for the HSBC group in the last three years.


The other factor providing profitability for HSBC group is their markets. They are considering that HSBC markets are one of the largest and of their kind all over the world the group has maintained a competitive nature in the Australian market. The group specializes in foreign exchange, equities/debt, structured derivatives, credits, and rates as well as equity together with equity-linked capital markets. The other profitability factor is on global research. The HSBC research team provides high-quality analysis and research to many investors around the world where it covers equities, economics, climate change, currencies, and fixed income.

HSBC security services is another factor providing profitability in global banking and markets. HSBC provides fund administration, insurance, together with loan agency services. Besides, The last element is marketing operations (Anginer et al., 2014, p34). On this aspect, the HSBC group manages settlement activity together with risk and controller after completing transactions while still guaranteeing regulatory agreement for clients all over the globe.

Part D

Reason for Establishing Ring Fencing in The UK And How the Regulations Have Affected HSBC

Ring-fencing happens after a portion of the company’s profits, and assets are financially separated without necessary being worked like a separate entity. The United Kingdom established ring-fencing with the aim of remaining competitive in the global market. Therefore, the law required all the UK largest banks to distinct retail lending from asset banking. According to the Independent Commission on Banking, ring-fencing will back financial firmness by making banking groups simple and easy to resolution (Vipul, 2018, para.5). Thus, if the ring-fenced or non-ring-fenced section of bank flops, it will be much more comfortable in logically managing the catastrophe without the requirement for a régime bail-out. Together with certifying that UK taxpayers are not liable for bank flops, ring-fencing means few and less monetary calamities in the coming years which is an advantage for the entire UK economy.

The following are the overall structural changes that will occur due to ring-fencing

For banks to implement ring-fencing, there is a need for restructuring activities and adopting different legal systems and ways of operation. For instance, complying with ring-fencing raises various complications which cover the operative, management and legal aspects of operating a bank. HSBC has complied with the ring-fencing regulations where it has taken multiple steps. First, the HSBC separated the retail banking operations from own investment and wholesale divisions meaning that there was the change in the way the bank is structured in the United Kingdom including the forming of a new ring-fenced bank HSBC UK. Consequently, on 21 May 2018, the bank transferred their customers and most of the business clients in the United Kingdom from HSBC Bank plc to HSBC UK was allowed by the High Court in the Sanction Hearing.

Ring-fencing has led to changes in the global banking and marketing clients. For instance, there was a vast majority transformation of HSBC worldwide banking and markets clients. GBM clients might remain banking with HSBC Bank plc together with benefiting from the international network as well as HSBC UK where necessary. Similarly, HSBC UK customers shall continue benefiting from global network and investment banking solutions. Additionally, the ring-fencing program includes fundamental rebranding by UK banks to ensure that it is clear for clients the section of the bank involved. An example is a pronouncement by HSBC that HSBC UK with its new Birmingham head office shall be its ring-fenced bank as conflicting to the non-fenced HSBC Bank PLC.RBS, leading to the resurrection of branding NatWest Markets for own non-ring-fenced bank.  Besides, ring-fencing led to the changing of qualification declaration for the HSBC bank (Marcus, 2019, para.6). First, the ring-fencing rule is an indication that any identity continuing banking with HSBC Bank plc and is not a Relevant Financial Institution has to go via a prerequisite process for confirmation that it meets specific principles. Consequently, for partnership and corporates, there was established standards used for determining the clients who are to stay a portion of HSBC Bank Plc. The process is the only exercise for remaining clients where it is founded on the last fiscal accounts. Therefore, for any corporate group to remain part of the HSBC Bank plc at least one of their entities should have a turnover equal or more significant than GBP6.5m, Balance sheet total not to be less than GBP3.26m and a minimum of fifty workers.



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