BoE floor could double capital charges on HSBC’s UK home loans

New rules could forcibly push up residential mortgage portfolio’s 5% risk density

HSBC’s capital requirements for internally modelled UK residential mortgages could more than double to £995 million ($1.38 billion) under an incoming Bank of England (BoE) 10% risk-weight floor, according to Risk Quantum analysis. 

The lender reported £6.2 billion of risk-weighted assets (RWAs) for performing retail mortgages covered by the internal ratings-based (IRB) approach as of end-June, equivalent to 5% of the exposures’ face value. A risk density of 10% – as per the weighted average minimum outlined by the BoE – would have doubled RWAs to £12.4 billion, forcing the bank to set aside £502 million more in loss-absorbing equity, which has to be at least 8% of RWAs.

 

 

This would have cost HSBC UK 110 basis points of Common Equity Tier 1 ratio, and the group 20bp.

NatWest was the only other major home lender in the country – also including Barclays, Santander UK and Lloyds – whose internally modelled residential mortgage portfolio at end-June had total risk density below the incoming floor, at 8.1%.

The incoming BoE minimum would have inflated NatWest’s RWAs by £3.6 billion, increasing associated capital requirements by £290 million to £1.5 billion. This would have cost the UK unit 60bp of CET1 ratio, and the group 40bp.

What is it?

In July 2021, the BoE’s Prudential Regulatory Authority (PRA) agreed to introduce a 10% exposure-weighted average risk-density floor on banks’ residential UK mortgages’ IRB portfolios. Defaulted exposures are excluded from the calculation.

The new rule will come into force on January 1, 2022.

The figures used in the analysis come from the CR6 tables (CR4 in Santander’s case) in Pillar 3 reports issued by the banking groups’ ring-fenced UK subsidiaries. The risk-density figures are calculated as total RWAs to total exposures, rather than weighted averages, and are thus not an exact predictor of the BoE floor’s impact.  

Why it matters

In its final form, the BoE’s intervention is milder than what originally proposed – policymakers initially wanted a 7% risk-weight floor on any individual IRB residential mortgage. That proposal was killed following consultations, meaning banks will still be able to retain exposures with single-digit risk density, as long as the portfolio’s exposures-weighted average density is 10% or more. The PRA said it will examine single-exposure risk parameters carefully as it implements Basel IV reforms.

At a macroeconomic level, the new rule underscores regulators’ heightened worries around housing markets worldwide, which may have turned too hot for their comfort. In the UK, tax breaks for first-time buyers, a glut of savings accrued during stay-at-home orders and changing work patterns supercharged an already-frantic mortgage market. And with existing borrowers using pent-up savings to repay outstandings early, banks were more than happy to tap fresh demand. This confluence of factors made it all the more urgent to ensure the boom is not, in fact, a bubble.

It's not just regulators in Threadneedle Street who have such worries. In the Netherlands, another of Europe’s frothiest housing markets, hefty new floors on internal-model residential mortgages will apply from January 2022. The measure, originally put forward in late 2019, had been frozen indefinitely during the pandemic, but Dutch regulators quickly reversed course in June, noting that “banks are still taking insufficient account of the systemic risk of a housing market correction, while overheating and risky borrowing behaviour are on the rise among homebuyers”.

Get in touch 

Like Risk Quantum? Sign up for free to our daily newsletter and check @RiskQuantum for the latest updates. 

If you have any thoughts on our latest analysis or want to suggest other ways to present and analyse the data, you can email us.

Tell me more

Top UK banks’ RWAs rose in Q2, reversing downward trend

Credit risk exposures shrink share of top UK banks’ RWAs

Riskiness of internationally-active UK banks edged up in 2020

View all bank stories

  • LinkedIn  
  • Save this article
  • Print this page  

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact [email protected] or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact [email protected] to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: