Banking major HSBC is looking to boost profits in the investment banking division with aggressive plans to package more loans into bonds and sell them to investors in the United States. Clearly, the largest bank in Europe wants more repackaged loans from Asia, Africa and the Middle East to be sold as bonds.

“Given our global footprint, we are able to originate assets from all over the world, repackage them, and then offer them to the U.S. investor base,” said Thierry Roland, HSBC's head of global banking and markets for the Americas. He claimed that more investors are coming forward to buy emerging market’s assets.

“Our risk appetite to do business in the United States is greater now,” said Roland.

For European banks, many new regulations in the past few years have made retaining loans on their balance sheet very expensive as they affect the amount of capital to be set aside to cover potential losses, reports Reuters.

Loan model

HSBC has been pursuing an “originate and hold” approach to loans in contrast to the “originate and distribute” model of securitised debt that was the villain of 2007-08 financial crisis, when many of the bonds were toxic mortgages and given to risky US borrowers. The risk of the products did not reflect in the ratings assigned to them.

HSBC’s 2003 takeover of Household International had landed the bank in trouble as the target bank had a poor credit history and was a subprime lender, as revealed later when the housing market crashed. Since then, the bank has cleansed the book and got rid off around US$100 billion (approx. AU$138 billion) of crisis-period loans.

UK stress test

Meanwhile, HSBC was one among the leading British banks that passed a stress test administered by the Central bank of England for evaluating strengths against future financial crises.

“With today's announcement, the basic amount of capital our system requires is settled," Bank of England Governor Mark Carney said.

Carney dispelled the fears of some banks that they were being forced to go further than what was required by international rules. He acknowledged that excess capital requirements can dampen growth, while setting out plans for top banks including HSBC, Lloyds and Barclays after the stress test. Two banks - RBS and Standard Chartered could pass the rest only after taking remedial action.

The focus of the test was emerging markets and trading risks. Both Royal Bank of Scotland and Standard Chartered passed the test after shoring up their capital ratios above the minimum 3 per cent level.

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