HSBC 2010 Annual Report Download - page 89

87
Overview Operating & Financial Review Governance Financial Statements Shareholder Information
Managing risk
(Unaudited)
The continued growth in our business in 2010 was
achieved while ensuring risks were assumed in a
measured manner and in line with our appetite for
such risks. This approach is encapsulated within our
risk appetite framework. It is approved by the Group
Risk Committee and the Board.
The framework is maintained at Group,
regional, global business and customer group levels,
operating through governance bodies, processes and
metrics designed to assist in risk management. Risk
appetite statements define, at various levels of the
business, the qualitative and quantitative expressions
of the risks which HSBC is prepared to embrace in
alignment with its strategy and business plans.
Quantitative metrics are assigned to five key
categories: earnings, capital and liquidity,
impairments and expected losses, risk category
and diversification and scenario stress testing.
Measurement against the metrics serves to:
• guide underlying business activity, ensuring it
is aligned to risk appetite statements;
• determine risk-adjusted remuneration;
• enable the key underlying assumptions to be
monitored and, where necessary, adjusted
through subsequent business planning cycles;
and
• promptly identify business decisions needed to
mitigate risk.
Report of the Group Risk Committee
Further commentary on risk appetite, risk governance and
stress testing can be found within the Report of the Group Risk
Committee, on pages 197 to 201 of the Governance section.
The diversification of our lending portfolio
across our regions, together with our broad range of
customer groups and products, ensure that we are not
dependent on a few countries or markets to generate
income and growth. Our geographical diversification
also provides impetus to our strategies for growth in
faster-growing markets and those with international
connectivity.
During 2010, the financial markets were
dominated by concerns over sovereign debt. In
addition, the perception that the world economic
recovery remained fragile created volatility in certain
financial markets. Further quantitative easing from
the US temporarily boosted market confidence, but
inflationary pressures remained an issue, especially
in the UK and some emerging markets.
With an ever-changing economic and financial
environment, we pro-actively review our risk profile
and, where appropriate, introduce new risk
measures. Stress testing will continue to evolve
to ensure that it considers prevailing concerns.
Our insurance operations are managed with
regard to the effects on financial markets of
prevailing economic conditions such as the low
yields available on fixed-interest investments and
continuing high unemployment rates, particularly in
the US and Europe.
Capital and liquidity
We maintained a strong balance sheet during 2010
while reducing the overall risk in our portfolio. Our
balance sheet assets grew by 4% during the year
while our credit risk-weighted assets fell by 1.4%.
This was achieved, in part, by concentrating on our
growth in core portfolios and running off those that
were not core to our business.
In addition, we reduced our loan impairment
charges and other credit risk provisions from
US$26.5bn in 2009 to US$14.0bn in 2010, reflecting
the general improvement in the credit quality of our
portfolio.
Preserving our strong capital position has long
been, and will remain, a key priority for HSBC. We
are equipped to respond to the capital requirements
imposed by Basel III, which are discussed further
on pages 181 and 182, and to sustain future growth.
We have adopted a holistic approach to testing the
sensitivities of our capital plans against a number
of scenarios; our approach to scenario stress testing
analysis is discussed below.
We continue to maintain a strong liquidity
position and are well positioned for the new
regulatory landscape. The run-off of the HSBC
Finance portfolio and the continuing moderation of
market conditions in 2010 contributed to our strong
liquidity position.
Risk governance
(Unaudited)
Our strong risk governance reflects the importance
placed by the Board on shaping the Group’s risk
strategy and managing risks effectively. It is
supported by a clear policy framework of risk
ownership, by the cascading from the GMB of
balanced scorecards that align business and risk
objectives, and by the accountability of all officers for
identifying, assessing and managing risks within the
scope of their assigned responsibilities. This personal
accountability, reinforced by the governance structure,
experience and mandatory learning, helps to foster
throughout HSBC a disciplined and constructive
culture of risk management and control.