HSBC 2006 Annual Report Download - page 227

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proceeds at the end of their lease terms. Provision is
made to the extent that the carrying values of leased
assets are impaired through residual values not being
fully recoverable.
The net book value of equipment leased to
customers on operating leases by the Group includes
projected residual values at the end of current lease
terms, to be recovered through re-letting or disposal
in the following periods:
(Unaudited) 2006 2005
US$m US$m
Within 1 year ............................. 200 355
Between 1-2 years ..................... 414 152
Between 2-5 years ..................... 379 313
More than 5 years ...................... 1,996 1,684
Total exposure ........................... 2,989 2,504
Operational risk management
(Unaudited)
Operational risk is the risk of loss arising from fraud,
unauthorised activities, error, omission, inefficiency,
systems failure or external events. It is inherent in
every business organisation and covers a wide
spectrum of issues.
HSBC manages this risk through a controls-
based environment in which processes are
documented, authorisation is independent and
transactions are reconciled and monitored. This is
supported by an independent programme of periodic
reviews undertaken by Internal Audit, and by
monitoring external operational risk events, which
ensure that HSBC stays in line with industry best
practice and takes account of lessons learned from
publicised operational failures within the financial
services industry.
HSBC has codified its operational risk
management process by issuing a high level
standard, supplemented by more detailed formal
guidance. This explains how HSBC manages
operational risk by identifying, assessing,
monitoring, controlling and mitigating the risk,
rectifying operational risk events, and implementing
any additional procedures required for compliance
with local regulatory requirements. The processes
undertaken to manage operational risk are
determined by reference to the scale and nature of
each HSBC operation. The HSBC standard covers
the following:
• operational risk management responsibility is
assigned to senior management within each
business operation;
• information systems are used to record the
identification and assessment of operational
risks and to generate appropriate, regular
management reporting;
• assessments are undertaken of the operational
risks facing each business and the risks inherent
in its processes, activities and products. Risk
assessment incorporates a regular review of
identified risks to monitor significant changes;
• operational risk loss data is collected and
reported to senior management at the business
unit level. Aggregate operational risk losses are
recorded and details of incidents above a
materiality threshold are reported to Group
Head Office. A regular report on operational
losses is made to Group Audit Committee and
the Risk Management Meeting; and
• risk mitigation, including insurance, is
considered where this is cost-effective.
In each of HSBC’s subsidiaries, local
management is responsible for implementing HSBC
standards on operational risk throughout their
operations and, where deficiencies are evident,
rectifying them within a reasonable timeframe.
Subsidiaries acquired by HSBC are required to
assess, plan and implement the standard’s
requirements within an agreed timescale.
HSBC maintains and tests contingency facilities
to support operations in the event of disasters.
Additional reviews and tests are conducted in the
event that any HSBC office is affected by a business
disruption event to incorporate lessons learned in the
operational recovery from those circumstances.
HSBC has requested all country managers to prepare
plans for the operation of their businesses, with
reduced staffing levels, should a flu pandemic occur.
Legal litigation risk
(Unaudited)
Each operating company is required to implement
policies, procedures and guidelines in respect of the
management and control of legal risk which conform
to HSBC standards. Legal risk falls within the
definition of operational risk and includes
contractual risk, legislative risk, intellectual property
risk and litigation risk. Litigation risk is the risk of:
• failing to act appropriately in response to a
claim made against any HSBC company; or
• being unable to successfully defend a claim
brought against any HSBC company; or
• HSBC being unable to take action to enforce its
rights through the courts.
HSBC has a dedicated global legal function
which is responsible for managing legal risk. This