August 5, 2021

Mr. Michael Roberts

President & Chief Executive Officer 

HSBC North America Holdings, Inc. 

452 Fifth Avenue, 5th Floor 

New York, NY 10018 

Subject: Response to request for reconsideration of the stress capital buffer requirement, 

pursuant to the Board’s capital plan rule 

Dear Mr. Roberts: 

This letter is in response to the request by HSBC North America Holdings, Inc. 

(“HNAH”), for reconsideration of the stress capital buffer requirement provided to 

HNAH by the Board on June 24, 2021. For the reasons stated below, the Board has 

affirmed the stress capital buffer requirement previously provided to HNAH. In addition, 

with respect to the request by HNAH for an informal hearing in connection with the 

request for reconsideration, the Board has not ordered an informal hearing. 

I. Background 

The Board’s capital plan rule1

 establishes the Board’s process for determining the 

stress capital buffer requirement applicable to a firm subject to the capital plan rule. 

Pursuant to that rule, the Board generally will provide a firm with notice of its stress 

capital buffer requirement by June 30 of each year in which the firm submits an annual 

capital plan.

2

 On June 24, 2021, the Board provided HNAH with notice that its stress 

1

 12 CFR 225.8. 

2

 12 CFR 225.8(h)(1). 
- 2 - 

capital buffer requirement associated with its 2021 annual capital plan submission is 

7.5 percent.

3

 

The capital plan rule permits a firm to request reconsideration of the stress capital 

buffer requirement within 15 calendar days of receiving notice of the requirement.4 

HNAH requested reconsideration of its stress capital buffer requirement on July 6, 2021. 

A request for reconsideration may include a request for an informal hearing on the firm’s 

request for reconsideration.5 HNAH’s request for reconsideration included a request for 

an informal hearing. The capital plan rule generally provides that the Board will notify a 

firm of the Board’s decision to affirm or modify the firm’s stress capital buffer 

requirement within 30 calendar days of receipt of the firm’s request for reconsideration, 

or within 30 days of the conclusion of an informal hearing regarding such a request.6

In each year in which a firm submits an annual capital plan, the Board generally 

will provide the firm with a final stress capital buffer requirement, as well as 

confirmation of the firm’s final planned capital distributions for that year, by August 31.7

 

Unless otherwise determined by the Board, the final planned capital distributions and 

final stress capital buffer requirement for a given year become effective October 1 of that 

year.

8

 A stress capital buffer requirement that becomes effective will remain effective 

until superseded.9

II. Stress Testing Framework

The stress capital buffer requirement is established based, in part, on the results of 

a supervisory stress test conducted by the Board. Specifically, a firm’s stress capital 

buffer requirement is the greater of 2.5 percent or the following calculation: (1) the 

difference between the firm’s starting and minimum projected common equity tier 1 

(CET1) capital ratios under the severely adverse scenario in the Board’s supervisory 

stress test plus (2) the sum of the dollar amount of the firm’s planned common stock 

3

 See email regarding 2021 Stress Test Results (June 24, 2021).

4

 12 CFR 225.8(h)(2)(i) and (i)(2).

5

 12 CFR 225.8(i)(3)(ii).

6

 12 CFR 225.8(i)(5). 

7

 12 CFR 225.8(h)(4)(i). 

8

 12 CFR 225.8(h)(4)(ii)(A). 

9

 12 CFR 225.8(h)(4)(ii)(B). 
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dividends for each of the fourth through seventh quarters of the planning horizon10 as a 

percentage of risk-weighted assets.

11 The stress capital buffer requirement provided to 

HNAH on June 24, 2021, was calculated based on 2021 supervisory stress test results 

released by the Board.12

The results of the Board’s supervisory stress tests are projected using a set of 

models developed or selected by the Federal Reserve that take as inputs (1) the 

supervisory scenarios created by the Federal Reserve and (2) firm-provided data on the 

firm’s financial condition and risk characteristics. To provide firms and the public with 

10 The planning horizon is the period of at least nine consecutive quarters over which the 

relevant projections extend, beginning with the quarter preceding the quarter in which the 

firm submits its capital plan.

11 12 CFR 225.8(f)(2). 

12 See Board of Governors of the Federal Reserve System, Dodd-Frank Act Stress Test 

2021: Supervisory Stress Test Results (June 2021), available at

https://www.federalreserve.gov/publications/files/2021-dfast-results-20210624.pdf. On 

February 5, 2019, the Board released materials intended to increase the transparency of 

the stress testing program. 

See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190205a.htm. 

First, the Board updated the Policy Statement on the Scenario Design Framework for 

Stress Testing (“Scenario Policy Statement”) to provide additional information regarding 

the path of home price variables, in particular, reducing uncertainty about the path of 

these variables in the severely adverse scenario. See 12 CFR part 252, Appendix A. 

Second, the Board adopted a final Stress Testing Policy Statement to provide additional 

information about the Board’s principles and policies with regard to the development and 

validation of supervisory stress test models. See 12 CFR part 252, Appendix B. As 

described in the Stress Testing Policy Statement, material changes to the supervisory 

stress test models are phased in over two years to reduce year-over-year volatility 

stemming from updates to the supervisory models. The Stress Testing Policy Statement 

defines a model change as highly material if its use results in a change in the CET1 ratio 

of 50 basis points or more for one or more firms, relative to the model used in prior 

years’ supervisory exercises. See 12 CFR part 252, Appendix B, at 2.3. This approach 

contributes to the stability of the results of the supervisory stress test by ensuring that 

changes in model projections primarily reflect changes in underlying risk factors and 

scenarios, year over year. Third, the Board provided additional information about the 

models used in the supervisory stress test. See 84 Fed. Reg. 6784 (Feb. 28, 2019). The 

Board is committed to continuing to provide additional information, including modeled 

loss rates by loan and borrower characteristics, about its stress test models, as it has done 

most recently for its corporate loan and credit card models. 
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greater transparency regarding the Board’s process for designing supervisory scenarios 

for stress testing, the Board first finalized the Scenario Policy Statement in 2013. 

Consistent with the principles described in the Stress Testing Policy Statement, 

the Federal Reserve designed the system of models so they would result in projections 

that are (1) from an independent supervisory perspective; (2) forward-looking; 

(3) consistent and comparable across covered companies; (4) generated from simple 

approaches, where appropriate; (5) robust and stable; (6) conservative; and (7) able to 

capture the effect of economic stress.13

The Federal Reserve’s models rely on detailed portfolio data provided by firms 

but generally do not rely on models or estimates provided by firms, consistent with the 

modeling principle that emphasizes an independent perspective. 

The Federal Reserve generally develops its models under an industry-level 

approach that is calibrated using data from many financial institutions. This approach 

reflects modeling principles that favor models resulting in consistent, comparable, and 

forward-looking projections. The Federal Reserve models the response of specific 

portfolios and instruments to variations in macroeconomic and financial-scenario 

variables such that differences across firms are driven by differences in firm-specific 

input data, as opposed to differences in model parameters and specifications. As a result, 

two firms with the same portfolio receive the same results for that portfolio in the 

supervisory stress test, facilitating the comparability of results. In addition, the industrylevel approach promotes a forward-looking stress test, as it results in models that do not 

assume that historical patterns will necessarily continue into the future for individual 

firms. These policies also help to ensure that consistent and comparable supervisory 

models are forward-looking, robust, and stable.14

13 12 CFR part 252, Appendix B, at 1. 

14 While the Federal Reserve limits the use of firm-specific fixed effects and the use of 

dummy variables indicating a loan vintage or specific year, it makes exceptions where 

appropriate. For example, the Federal Reserve may use firm-specific indicator variables, 

firm-provided estimates, or third-party models or data in instances in which it is not 

possible or appropriate to create a supervisory model for use in the stress test, including 

when supervisory data are insufficient to support an independently modeled estimate of 

losses or revenues. However, the Federal Reserve does not adjust supervisory projections 

for individual firms or implement firm-specific overlays in the supervisory stress test. 

This policy ensures that the supervisory stress test results are determined solely by 
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III. Discussion

As required by the Board’s capital plan rule, HNAH’s request for reconsideration 

of its stress capital buffer requirement included a detailed explanation of why it contends 

that reconsideration should be granted.15 

To ensure that review of HNAH’s request would be conducted with an 

independent perspective, a group of experts within the Federal Reserve System, who are 

independent of the staff who developed the models, analyzed the arguments made by 

HNAH in favor of reconsideration of its stress capital buffer requirement.

16 With respect 

to each of the issues raised in the request of HNAH, the experts considered whether the 

request pointed to any errors in the firm’s stress test results and whether each stress test 

model identified in the firm’s request is operating as intended, within the bounds of the 

Board’s published policies. The information in this letter regarding the Board’s stress 

testing policies and supervisory modeling practices was previously publicly disclosed, 

consistent with the Board’s practice to increase the transparency of the stress testing 

program.17

In its request, HNAH argues that the Federal Reserve’s models overstated 

commercial real estate (“CRE”) losses under the stress test conditions, which HNAH 

asserts materially increased the firm’s stress capital buffer requirement. Specifically,

HNAH argues that (1) the Federal Reserve’s models inflated the risk of its CRE portfolio, 

resulting in a heightened CRE loss rate; (2) the projected CRE loss rate is procyclical, 

whereas a through-the-cycle loss rate should have been used; and (3) the proposed stress 

supervisory models and firm-specific input data. The Federal Reserve has instituted a 

policy of not using additional input data submitted by one or more of the covered 

companies unless comparable data can be collected from all the firms that have material 

exposure in a given area. 

15 See 12 CFR 225.8(i)(3)(i).

16 This group is composed of staff members from across the Federal Reserve System 

who are subject-matter experts and are not involved in supervisory modeling. This 

group’s model validation process includes reviews of model performance; conceptual 

soundness; and the processes, procedures, and controls used in model development, 

implementation, and the production of results. See Board of Governors of the Federal 

Reserve System, Dodd-Frank Act Stress Test 2021: Supervisory Stress Test Methodology

at 5–6 (April 2021), available at https://www.federalreserve.gov/publications/files/2021-

april-supervisory-stress-test-methodology.pdf. 

17 See supra note 12. 
- 6 - 

capital buffer requirement does not reflect reductions in 

CRE exposures. With respect to each of these arguments, the Board has assessed 

HNAH’s stress test results and the Federal Reserve’s models for errors. Through this 

assessment, the Board did not identify any errors in HNAH’s stress test results and has 

determined that the models operated as intended, within the bounds of the Board’s 

published policies. 

As discussed above, HNAH’s request for reconsideration included a request for 

an informal hearing. The Board has determined not to grant HNAH’s request for an 

informal hearing regarding its request for reconsideration.18 The informal hearing 

process is intended to ensure that a firm is able to present its arguments to the Federal 

Reserve and to provide an opportunity for both the firm and the Federal Reserve to ask 

any questions regarding the request, including questions regarding disputed issues of 

material fact. Since the submission of HNAH’s request, Federal Reserve staff has met 

with representatives from HNAH. The firm described its arguments for reconsideration 

in these meetings, and both the firm and Federal Reserve staff had the opportunity to ask 

questions. Federal Reserve staff also offered to hold additional meetings. In light of this 

process, the Board does not believe it is necessary to order an informal hearing regarding 

HNAH’s request. 

1. CRE Portfolio Risk

HNAH asserts that the Federal Reserve’s models do not appropriately reflect the 

characteristics of the firm’s CRE portfolio, and consequently overstate the portfolio’s 

risk. The Board investigated the firm’s assertion and determined that the CRE model, as 

adjusted in light of the COVID event, operated as intended, within the bounds of the 

Board’s published policies.19 The CRE model projects loan losses based on specific 

18 See 12 CFR 225.8(i)(4)(i) (providing that the Board has sole discretion regarding 

whether to order an informal hearing). 

19 The Federal Reserve’s approach to modeling losses on CRE portfolios in its stress test 

is detailed in its supervisory stress test methodology disclosure. See Dodd-Frank Act 

Stress Test 2021: Supervisory Stress Test Methodology, supra note 16, at 16, 27–29. As 

it had done in the December 2020 stress test, the Federal Reserve made a targeted 

adjustment to its CRE loss model for the 2021 supervisory stress test in light of the 

disruption caused by the COVID event, which set a lower bound on collateral recovery 

rates for loans backed by hotel properties. See Dodd-Frank Act Stress Test 2021: 

Supervisory Stress Test Results, supra note 12, at 19–20. This adjustment had the effect

of reducing the sensitivity of the model to specific portfolio factors. 
- 7 - 

portfolio characteristics (for example, property type, geography, maturity, and loan-tovalue ratio). The Board’s investigation concluded that the composition of the firm’s CRE 

portfolio accounts for its relatively high projected loss rate. The model is consistent with 

the Board’s published methodology disclosures and is in line with the Stress Testing 

Policy Statement’s principles of consistency and comparability, simplicity, and adoption 

of industry-level projections.20 The Board has determined that it will follow its published 

principles for stress testing with regard to the projection of CRE losses. 

2. Procyclicality, Volatility, and Transparency

HNAH asserts that the increase in its stress capital buffer requirement and 

projected CRE loss rate amounts to procyclical regulation that produces a volatile capital 

framework. The Federal Reserve takes these policy concerns seriously, given their 

implications for the performance of the capital framework. The Board has implemented 

policies designed to mitigate volatility and avoid adding procyclicality to the stress 

testing framework.21 In addition, the Board continues to consider additional policies to 

mitigate stress test volatility. The concerns raised by HNAH do not reflect errors or 

issues with the modeling approach that would warrant reconsideration. 

3. Incorporation of Changes in CRE Exposures

HNAH requests that the Board take account of the 

reductions to the CRE exposures in reconsidering its stress capital buffer requirement. 

The Federal Reserve generally bases the final stress test results on data filed by 

established regulatory reporting deadlines and projects that a firm takes actions to 

maintain its current level of assets over the projection horizon. These practices, in part, 

contribute to consistency and comparability across firms and are consistent with the 

Policy Statement.22 With respect to this request, the Federal Reserve will follow its 

stated methodology of declining to make firm-specific assumptions regarding balance 

20 See 12 CFR part 252, Appendix B, at 1.3, 1.4, and 2.4; Dodd-Frank Act Stress Test 

2021: Supervisory Stress Test Methodology, supra note 16, at 16. 

21 For example, the principles of simplicity and comparability and a policy of gradual 

phase-in of material model changes are explicitly intended to reduce volatility and 

improve transparency. The methodology for specifying the stress scenarios is designed 

to avoid adding procyclicality to the financial system. 12 CFR part 252, Appendices A 

and B.

22 See Dodd-Frank Act Stress Test 2021: Supervisory Stress Test Methodology, supra 

note 16, at 7, 14. 
- 8 - 

sheet trends. Further, given the Federal Reserve’s standard practice of basing stress test 

results on the data filed by the relevant reporting deadline, it will not consider changes to 

HNAH’s CRE portfolio made after December 31, 2020. 

IV. Conclusion 

After consideration of the Board’s stress testing policies and all relevant facts, 

including the information provided in the request, and consistent with the Board’s 

regulations, the Board has determined to affirm the stress capital buffer requirement 

provided to HNAH on June 24, 2021. The Board notes that it is focused on continuously 

improving the stress testing framework, including the Board’s supervisory models. With 

regard to the arguments raised by HNAH in the request for reconsideration, the Board has 

directed Federal Reserve staff to investigate and address, as appropriate, the risk 

sensitivity of the commercial real estate model to see if any future improvements can be 

made. In evaluating any of its supervisory models, the Board follows the processes for 

development, implementation, and validation of its supervisory models, as outlined in the 

Board’s Stress Testing Policy Statement. 

The final stress capital buffer requirement for HNAH is 7.5 percent. The Board 

hereby confirms that the planned capital distributions HNAH submitted as part of its 

2021 capital plan submitted on April 5, incorporating any adjustments made pursuant to 

12 CFR 225.8(h)(2), are final. HNAH’s final stress capital buffer requirement and final 

planned capital distributions are effective October 1, 2021. The Federal Reserve supports 

banking organizations that choose to use their capital buffers to lend and undertake other 

supportive actions in a safe and sound manner.23 When using their buffers, banking 

organizations may make capital distributions up to prescribed limits, which include 

automatic limitations in the capital framework, as well as any additional limitations 

determined by the Board.24

23 See Interagency Statement on the Use of Capital and Liquidity Buffers 

(March 17, 2020), available at 

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200317a.htm. 

24 A “capital buffer” refers to capital held above regulatory minimum 

requirements. Banking organizations with regulatory capital ratios that are below their 

capital buffer requirement face gradual restrictions on capital distributions and 

discretionary bonus payments. See 12 CFR 217.11(c). These restrictions encourage 

banking organizations to conserve capital within the organization as they lend to 

households and businesses and as their capital levels approach minimum regulatory 
- 9 - 

Please contact Julie Anthony at (202) 475-6682 with any questions. 

Sincerely yours, 

(Signed) Ann E. Misback

Ann E. Misback 

Secretary of the Board

cc: Jacki Hitchings, Assistant Vice President

Federal Reserve Bank of Chicago

capital requirements. Capital buffers were designed to provide banking organizations 

with the means to support the economy in adverse situations and to allow banking 

organizations to continue to serve households and businesses.