HSBC Loses $400 Million to Private Credit Fraud

HSBC took a $400 million expected credit loss (ECL) in the first quarter due to what it called “fraud-related, secondary, securitization exposure with a financial sponsor in the UK” in the bank’s Corporate and Institutional Banking (CIB) business, according to a Tuesday (May 5) earnings release.

The bank’s private credit related exposure totals $22 billion, or about 2% of its loan book, according to a presentation released Tuesday. Within that category, its securitization financing exposure totals $3 billion.

HSBC’s total private markets exposure totals $111 billion, per the presentation.

HSBC Group Chief Financial Officer Pam Kaur said during a Tuesday earnings call: “I will emphasize that we regard the Stage 3 charge this quarter as idiosyncratic and not representative of the risks in the wider portfolio. We have completed a full review of the highest risk areas in our portfolio and have not identified any comparable fraud concerns.”

Kaur said HSBC has updated its risk appetite, is incorporating lessons in its due diligence processes, and remains comfortable in private credit, though this area is not a significant growth driver in its plan.

HSBC is comfortable with its private credit related exposure remaining within 2% of the bank’s balance sheet, Kaur said.

“I’ve always said that in this ecosystem, no one is immune to second-order exposures, which is where we have risk hedged from financial sponsors,” Kaur said. “Clearly, as a learning, what we are working on is looking at very specifically some of the additional due diligence processes we may carry, even where we are relying on the due diligence of financial sponsors.”

“In terms of concentrations, we are also looking at any specific concentrations on individual counterparties in this space, but remain comfortable overall,” Kaur said.

This news came a day after Paul S. Atkins, chairman of the U.S. Securities and Exchange Commission, said the SEC is investigating allegations of fraud in private credit markets.

“There’s been allegations of fraud, and obviously I can’t talk about any specific cases, but we are investigating that as well,” Atkins said.

Atkins said the Financial Stability Oversight Council, which includes the SEC, doesn’t see private credit markets as a systemic risk but is monitoring them.