Retained Earnings and Regulatory Capital Requirements

9 Months Ended

Sep. 30, 2020

Retained Earnings Note Disclosure [Abstract]

Retained Earnings and Regulatory Capital Requirements

Bank dividends are one of the sources of funds used for payment of shareholder dividends and other HSBC USA cash needs. Approval from the Office of the Comptroller of the Currency ("OCC") is required if the total of all dividends HSBC Bank USA declares in any year exceeds the cumulative net income for that year, combined with the net income for the two preceding years reduced by dividends attributable to those years. OCC approval also is required for a reduction of permanent capital of HSBC Bank USA. Under a separate restriction, payment of dividends is prohibited in amounts greater than undivided profits then on hand, after deducting actual losses and bad debts. Bad debts are debts due and unpaid for a period of six months unless well secured, as defined, and in the process of collection.

In March 2020, the FRB announced it had reduced its reserve requirement to zero percent. Prior to the announcement, HSBC Bank USA was required to maintain reserve balances either in the form of vault cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. At December 31, 2019, HSBC Bank USA was required to maintain $2,475 million of reserve balances with the Federal Reserve Bank which were reported within interest bearing deposits with banks on the consolidated balance sheet.

We are subject to regulatory capital rules issued by U.S. banking regulators including Basel III (the "Basel III rule"). A bank or bank holding company's failure to meet minimum capital requirements can result in certain mandatory actions and possibly additional discretionary actions by its regulators. The following table summarizes the capital amounts and ratios of HSBC USA and HSBC Bank USA, calculated in accordance with the Basel III rule at September 30, 2020 and December 31, 2019:


	September 30, 2020												December 31, 2019
	Capital Amount		Well-Capitalized Ratio⁽¹⁾			Actual Ratio		Capital Amount		Well-Capitalized Ratio⁽¹⁾			Actual Ratio
	(dollars are in millions)
Common equity Tier 1 ratio:
HSBC USA	$	15,808	4.5	%	⁽²⁾	14.2	%	$	15,876	4.5	%	⁽²⁾	13.1	%
HSBC Bank USA	18,054		6.5			16.5		18,043		6.5			15.2
Tier 1 capital ratio:
HSBC USA	17,073		6.0			15.3		17,141		6.0			14.1
HSBC Bank USA	20,554		8.0			18.8		20,543		8.0			17.3
Total capital ratio:
HSBC USA	20,641		10.0			18.5		19,743		10.0			16.3
HSBC Bank USA	23,220		10.0			21.2		22,724		10.0			19.2
Tier 1 leverage ratio:
HSBC USA	17,073		4.0		⁽²⁾	8.4		17,141		4.0		⁽²⁾	9.9
HSBC Bank USA	20,554		5.0			10.2		20,543		5.0			12.0
Supplementary leverage ratio ("SLR"):
HSBC USA	17,073		3.0		⁽³⁾	7.6		17,141		3.0		⁽³⁾	6.9
HSBC Bank USA	20,554		3.0		⁽³⁾	9.2		20,543		3.0		⁽³⁾	8.4
Risk-weighted assets:⁽⁴⁾
HSBC USA	111,467							121,407
HSBC Bank USA	109,565							118,618
Adjusted quarterly average assets:⁽⁵⁾
HSBC USA	202,252							173,270
HSBC Bank USA	202,404							170,722
Total leverage exposure:⁽⁶⁾
HSBC USA	225,722							247,590
HSBC Bank USA	223,754							244,008

⁽¹⁾HSBC USA and HSBC Bank USA are categorized as "well-capitalized," as defined by their principal regulators. To be categorized as well-capitalized under regulatory guidelines, a banking institution must have the ratios reflected in the above table, and must not be subject to a directive, order, or written agreement to meet and maintain specific capital levels.

⁽²⁾There are no common equity Tier 1 or Tier 1 leverage ratio components in the definition of a well-capitalized bank holding company. The ratios shown are the regulatory minimums.

⁽³⁾There is no SLR component in the definition of a well-capitalized banking institution. The ratios shown are the regulatory minimums.

⁽⁴⁾Calculated using the generally-applicable Standardized Approach.

⁽⁵⁾Represents the Tier 1 leverage ratio denominator which reflects quarterly average assets adjusted for amounts permitted to be deducted from Tier 1 capital.

⁽⁶⁾Represents the SLR denominator which includes adjusted quarterly average assets plus certain off-balance sheet exposures.

In 2019, the FRB and the other federal banking agencies jointly finalized rules to implement the Economic Growth, Regulatory Relief and Consumer Protection Act ("Relief Act") that tailor the application of the enhanced prudential standards for large bank holding companies and foreign banking organizations (the "Tailoring Rules"). Under the Tailoring Rules, Category III firms and their depository institution subsidiaries such as HSBC North America and HSBC Bank USA are permitted to opt-out of the requirement to recognize most elements of AOCI in regulatory capital. As a result, HSBC North America and HSBC Bank USA, made a one-time election to opt-out of the requirement to include all components of AOCI (with the exception of accumulated net gains and losses on cash flow hedges related to items that are not carried at fair value on the consolidated balance sheet) in common equity Tier 1 capital, effective beginning with March 31, 2020 reporting. At December 31, 2019, HSBC North America and HSBC Bank USA were required to include all components of AOCI in regulatory capital.

In response to the COVID-19 pandemic, the federal banking agencies issued a final rule that provides the option to transition in the regulatory capital impacts of the new current expected credit loss accounting standard over a five-year period. HSBC North America and HSBC Bank USA have elected the five-year transition option and, as a result, beginning in 2020, our capital ratios are reported in accordance with the transition rules in the final rule. Accordingly, during 2020 and 2021, we will exclude from regulatory capital the change in retained earnings resulting from adoption of the new accounting standard on January 1, 2020 as well as 25 percent of the change in the allowance for credit losses recognized between January 1, 2020 and December 31, 2021. Beginning January 1, 2022, the excluded impacts will be phased in to regulatory capital over a three-year transition period and will be fully reflected at January 1, 2025.

Also in response to the COVID-19 pandemic, the FRB issued a final rule adopting a temporary change to the calculation of the SLR that permits bank holding companies such as HSBC North America and HSBC USA, to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the denominator of their SLR. This change, which took effect April 1, 2020, will remain in place until March 31, 2021 and is designed to allow banking institutions to expand their balance sheets to accommodate increased customer deposits while continuing to provide credit to companies and households. The federal banking agencies have also issued a final rule that permits depository institutions such as HSBC Bank USA to exclude temporarily U.S. Treasury securities and deposits at Federal Reserve Banks from the denominator of their SLR. This change took effect June 1, 2020 and will remain in place until March 31, 2021.

- Definition

The entire disclosure for regulatory capital requirement for depository and lending institutions. Institutions include, but not are not limited to, finance company, insured depository institution, bank holding company, savings and loan association holding company, bank and savings institution not federally insured, mortgage company, foreign financial institution and credit union.

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