Banking: Principles, Practice, and Regulation

Banking: Principles, Practice, and Regulation

Introduction

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

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