HSBC 2004 Annual Report Download - page 137

135
Risk management
All HSBC’ s activities involve analysis, evaluation,
acceptance and management of some degree of risk
or combination of risks. The most important types of
risk are credit risk (which includes country and
cross-border risk), liquidity risk, market risk,
reputational risk and operational risk. Market risk
includes foreign exchange, interest rate and equity
price risks.
HSBC’s risk management policies are designed
to identify and analyse these risks, to set appropriate
risk limits and controls, and to monitor the risks and
limits continually by means of reliable and up-to-date
administrative and information systems. HSBC
continually modifies and enhances its risk
management policies and systems to reflect changes
in markets and products and in best practice risk
management processes. Training, individual
responsibility and accountability, together with a
disciplined, conservative and constructive culture of
control, lie at the heart of HSBC’s management of
risk.
The Group Management Board, under authority
delegated by the Board of Directors, formulates high
level Group risk management policy. A separately
constituted Risk Management Meeting monitors risk
and receives reports which allow it to review the
effectiveness of HSBC’ s risk management policies.
Credit risk management
Credit risk is the risk that financial loss arises from
the failure of a customer or counterparty to meet its
obligations under a contract. It arises principally
from lending, trade finance, treasury and leasing
activities. HSBC has dedicated standards, policies
and procedures to control and monitor all such risks.
Within Group Head Office, a separate function,
Group Credit and Risk, is mandated to provide high-
level centralised management of credit risk for
HSBC worldwide. Group Credit and Risk is headed
by a Group General Manager who reports to the
Group Chief Executive, and its responsibilities
include the following:
• Formulating credit policies. These are embodied
in HSBC standards with which all HSBC’s
operating companies are required to comply in
formulating and recording in dedicated manuals
their own more detailed credit policies and
procedures. All such credit policies and
procedures are monitored by Group Credit
and Risk.
• Establishing and maintaining HSBC’s large
credit exposure policy. This policy sets controls
over the maximum level of HSBC’s exposure to
customers, customer groups and other risk
concentrations in an approach which is designed
to be more conservative than internationally
accepted regulatory standards. All operating
companies within HSBC are required to adopt
this approach.
• Issuing lending guidelines to HSBC’s operating
companies on the Group’s attitude towards, and
appetite for lending to, inter alia, specified
market sectors, industries and products. Each
HSBC operating company and major business
unit is required to base its own lending
guidelines on HSBC’s standards, regularly
update them and disseminate them to all credit
and marketing executives.
• Undertaking an independent review and
objective assessment of risk. Group Credit and
Risk assesses all commercial non-bank credit
facilities originated by HSBC’s operating
companies in excess of designated limits, prior
to the facilities being committed to customers.
Operating companies may not confirm credit
approval without this concurrence. Renewals
and reviews of commercial non-bank facilities
over designated levels are subject to the same
process.
• Controlling exposures to banks and other
financial institutions. HSBC’s credit and
settlement risk limits to counterparties in the
finance and government sectors are approved
centrally to optimise the use of credit
availability and avoid excessive risk
concentration. A dedicated unit within Group
Credit and Risk controls and manages these
exposures globally using centralised systems
and automated processes.
• Controlling cross-border exposures. Country
and cross-border risk is managed by a dedicated
unit within Group Credit and Risk using
centralised systems, through the imposition of
country limits with sub-limits by maturity and
type of business. Country limits are determined
by taking into account economic and political
factors, and applying local business knowledge.
Transactions with countries deemed to be high
risk are considered case-by-case.
• Controlling exposures to selected industries.
Group Credit and Risk controls HSBC’s
exposure to the shipping and aviation sectors,
and closely monitors exposures to other
industries such as telecommunications,
automobiles, insurance and real estate. Where
necessary, restrictions are imposed on new