HSBC 2008 Annual Report Download - page 254

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Residual value risk > Operational risk > Legal risk / Security and fraud risk // Pension risk
252
Residual value risk
(Unaudited)
A significant part of a lessor’s return from operating
leases is dependent upon its management of residual
value risk. This arises from operating lease
transactions to the extent that the values recovered
from disposing of leased assets or re-letting them at
the end of the lease terms (the ‘residual values’)
differ from those projected at the inception of the
leases. The business regularly monitors residual
value exposure by reviewing the recoverability of
the residual value projected at lease inception. This
entails considering the potential of re-letting of
operating lease assets and their projected disposal
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:
Residual values
(Unaudited)
2008 2007
US$m US$m
Within 1 year ........................... 108 155
Between 1-2 years .................... 59 243
Between 2-5 years .................... 530 713
More than 5 years .................... 1,549 1,892
Total exposure ......................... 2,246 3,003
Operational risk
(Unaudited)
Operational risk is the risk of loss arising through
fraud, unauthorised activities, error, omission,
inefficiency, systems failure or from external events.
It is inherent to every business organisation and
covers a wide spectrum of issues. The terms ‘error’,
‘omission’ and ‘inefficiency’ include process
failures, systems/machine failures and human error.
The objective of HSBC’s operational risk
management is to manage and control operational
risk in a cost effective manner within targeted levels
of operational risk consistent with the Group’s risk
appetite, as defined by the Group Management
Board.
A formal governance structure provides
oversight over the management of operational risk.
A Global Operational Risk and Control Committee,
which reports to the Risk Management Meeting,
meets quarterly to discuss key risk issues and review
the effective implementation of the Group’s
operational risk management framework.
In each of HSBC’s subsidiaries, business
managers are responsible for maintaining an
acceptable level of internal control, commensurate
with the scale and nature of operations. They are
responsible for identifying and assessing risks,
designing controls and monitoring the effectiveness
of these controls. The operational risk management
framework helps managers to fulfil these
responsibilities by defining a standard risk
assessment methodology and providing a tool for the
systematic reporting of operational loss data.
A centralised database is used to record the
results of the operational risk management process.
Operational risk self-assessments are input and
maintained by the business unit. To ensure that
operational risk losses are consistently reported and
monitored at Group level, all Group companies are
required to report individual losses when the net loss
is expected to exceed US$10,000.
Further details of the HSBC approach to
Operational Risk Management can be found in the
Capital and Risk Management Interim Pillar 3
Disclosures 2008.
Legal risk
(Unaudited)
Each operating company is required to implement
procedures to manage legal risk that conform to
HSBC standards. Legal risk falls within the
definition of operational risk and includes
contractual risk, dispute risk, legislative risk and
non-contractual rights risk.
• Contractual risk is the risk that the rights and/or
obligations of an HSBC company within a
contractual relationship are defective.
• Dispute risk is the risk that an HSBC company
is subject to when it is involved in or managing
a potential or actual dispute.
• Legislative risk is the risk that an HSBC
company fails to adhere to the laws of the
jurisdictions in which it operates.
• Non-contractual rights risk is the risk that an
HSBC company’s assets are not properly owned
or are infringed by others, or an HSBC company
infringes another party’s rights.
HSBC has a global legal function to assist
management in controlling legal risk. The function
provides legal advice and support in managing
claims against HSBC companies, as well as in
respect of non-routine debt recoveries or other