HSBC Central Bank Mandatory Reserves Coverage
On October 27, 2023, MIGA issued a guarantee for up to US 1,820 million for the equity investments by HSBC Holdings plc (HSBC) in its subsidiary in Mexico, HSBC Mexico S.A., Institución de Banca Múltiple, Grupo Financiero HSBC (HSBC Mexico, or the Bank) relating to HSBC Mexico’s banking operations in Mexico (the Project). The MIGA guarantee is expected to provide regulatory capital relief to HSBC on a consolidated level by reducing the amount of Risk Weighted Assets (RWAs). The tenor of the proposed guarantee is expected to be up to 8 years.
UK-headquartered HSBC is one of the largest global financial institutions in the world in terms of market capitalization with retail and commercial operations in countries across Asia, Europe, Latin America, and North America. Its subsidiary banks abroad are required to maintain reserves at the central banks in their respective jurisdictions. Mandatory reserves contribute to HSBC’s overall RWA at the consolidated level, resulting in less headroom for other assets at a given level of capital.
HSBC Mexico provides retail, small and medium enterprise (SME), and corporate finance services to clients in Mexico. The Project will support the Bank’s eligible climate finance projects. MIGA expects most of the transactions within the Bank’s climate finance portfolio to be medium-risk transactions, with environmental and social (E&S) risks and impacts that can be addressed through mitigation measures; transactions with significant E&S risks and impacts are expected to be limited in number. This Project has thus been categorized as FI-2 in accordance with MIGA’s Policy on Environmental and Social Sustainability (2013).
The main E&S aspects of this Project relate to HSBC Mexico’s ability, through its policies, procedures and practices, to identify, assess, and manage the E&S risks and impacts associated with its lending activities and the management of labor matters. MIGA analysed HSBC Mexico’s portfolio for types of transactions, tenor, size, industry sectors, and exposure to MIGA’s Exclusion List. MIGA also analysed HSBC Mexico’s E&S risk management procedures for lending activities in line with the requirements of Performance Standard 1: Assessment and Management of Environmental and Social Risks and Impacts (PS1), and the HSBC Mexico’s labor practices in line with the requirements of Performance Standard 2: Labor and Working Conditions (PS2).
As of December 2022, HSBC Mexico’s portfolio included the following business segments – retail loans (mortgages and consumer loans), 51%; corporate finance, 34%; trade finance, 10%; SME and microfinance, 3%; and non-banking financial institutions and financial services, 2%. The main sectors supported include manufacturing; wholesale and retail trade/repair of motor vehicles and motorcycles; real estate; and extractives, mining, and quarrying. HSBC Mexico currently has limited exposure to activities on the MIGA Exclusion List. The Bank has limited exposure to coal-related projects and oil and gas activities. HSBC has developed group policies for phasing out coal and new oil and gas projects.
In relation to E&S risk management, HSBC has adopted the Equator Principles and is also a signatory to other global responsible finance initiatives. As a subsidiary of HSBC, HSBC Mexico implements the HSBC sustainability risk policies which have been incorporated into the E&S risk management process at HSBC Mexico. The sustainability risk policies currently include the following HSBC policies: (i) Agricultural Commodities Policy; (ii) Chemicals Industry Policy; (iii) Energy Policy (including oil and gas, power and utilities, and nuclear); (iv) Forestry Policy; (v) Mining and Metals Policy; (vi) World Heritage and Ramsar Wetlands Policy; (vii) Thermal Coal Policy (Phase-Out Policy); and (viii) Defense Equipment Policy (together the “HSBC Sustainability Risk Policies” or “Policies”).
These Policies reflect amongst other aspects, the E&S issues associated with the sectors and activities in scope, the scope of application, good practice standards, as well as certain prohibited and restricted activities. E&S screening questionnaires have been developed for various sectors and activities. Although these questionnaires do not cover activities on the MIGA Exclusion List, the questionnaires reflect exclusions covered by the HSBC Sustainability Risk Policies and also include some references to applicable E&S laws. Transactions in sectors covered by the HSBC Sustainability Risk Policies are screened for E&S risks and impacts, and where required, action plans are developed to address identified gaps. Where applicable, E&S covenants such as compliance with applicable local E&S laws, are included in credit agreements with clients. Annual monitoring assessments are also conducted by the Bank on such transactions in scope of the HSBC Sustainability Risk Policies. The application of the Performance Standards is limited to Equator Principles transactions; the Equator Principles thresholds however differ from the MIGA requirements for applying the Performance Standards.
For the purposes of the MIGA guarantee, HSBC Mexico will be required to assess eligible climate finance projects against: (i) MIGA Exclusion List; (ii) applicable E&S laws and regulations in Mexico; and (iii) the Performance Standards (for eligible transactions in line with MIGA thresholds). HSBC Mexico will also be required to develop and implement an external communication mechanism for receiving and addressing E&S concerns raised by third parties regarding projects financed by HSBC Mexico.
HSBC Mexico has emergency response procedures which are in line with the requirements of PS1. HSBC Mexico also has labor policies and procedures that are consistent with PS2. Amongst other aspects, HSBC Mexico has labor policies and procedures that address terms of employment, recruitment, renumeration, benefits, grievance management and non-discrimination.
For the proposed guarantee, HSBC Mexico will be required to report annually to MIGA regarding its climate finance portfolio, detailing the implementation of the E&S procedures as well as labor practices.
The aim of MIGA’s proposed guarantee is to help HSBC reduce the risk-weighting of some of its assets, which would lead to a reduction in HSBC’s RWAs on a consolidated group basis. The RWA capacity that is freed up is expected to support HSBC Mexico’s lending activities to eligible climate finance projects.3
The proposed Project is aligned with the World Bank Group country engagement strategy in Mexico, by way of supporting more rapid and more inclusive growth, and MIGA’s FY21-23 Strategy and Business Outlook under its strategic directions of demonstrating leadership on the global issue of climate change.