HSBC 2010 Annual Report Download - page 90

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Challenges and uncertainties > Business operations / Macro-economic and geopolitical
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Scenario stress testing
We conduct a range of Group stress testing scenarios
including, but not limited to, severe global economic
downturn, country, sector and counterparty failures,
and a variety of projected major operational risk
events. The outcomes of the stress scenarios are used
to assess the potential impact on demand for
regulatory capital against its supply. We also
participate, where appropriate, in scenario analyses
requested by regulatory bodies.
In addition to the suite of risk scenarios
considered for the Group, each major HSBC
subsidiary conducts regular macro-economic and
event-driven scenario analyses specific to its region.
Stress testing is also used by the market risk
discipline to evaluate the potential impact on
portfolio values of events or movements in a set
of financial variables.
Challenges and uncertainties
(Unaudited)
The top and emerging risks identified through our
risk management processes and outlined in the
Report of the Group Risk Committee on page 199,
present challenges and uncertainties as we carry out
our activities. These are considered in further detail
below.
Business operations, governance and
control
Operational risks are inherent in our
business
We are exposed to many types of operational risk,
including fraudulent and other criminal activities
(both internal and external), breakdowns in
processes or procedures, or systems failure or
unavailability. We are also subject to the risk of
disruption to our business arising from events that
are wholly or partially beyond our control (for
example: natural disasters, acts of terrorism,
epidemics and transport or utility failures) which
may give rise to losses in service to customers and/or
economic loss to HSBC. All of these risks are also
applicable where we rely on external suppliers or
vendors to provide services to us and our customers.
The reliability and security of our information
and technology infrastructure and its customer
databases, for example to combat internet fraud, are
crucial to maintaining our banking applications and
processes and to protecting the HSBC brand. Critical
system failure, any prolonged loss of service
availability or any material breach of data security,
particularly involving confidential customer data,
could cause serious damage to our ability to serve
our clients, could breach regulations under which we
operate and could cause long-term damage to our
business and brand. Information security and the
management of increasing operational complexity
are two of the key emerging operational risks that we
face.
We are subject to legal and compliance risks,
which could have an adverse effect on the
Group
Legal and compliance risks arise from a variety of
sources with the potential to cause harm to HSBC
and our ability to operate. These issues require us to
deal appropriately with potential conflicts of interest;
regulatory requirements; ethical issues; anti-money
laundering laws and regulations; privacy laws;
information security policies; sales and trading
practices; and the conduct of companies with which
we are associated. Failure to address these issues
appropriately may give rise to additional legal and
compliance risk to HSBC, with an increase in the
number of litigation claims and the amount of
damages asserted against us, or subject us to
regulatory enforcement actions, fines or penalties or
reputational damage.
We are subject to tax-related risks in the
countries in which we operate
We are subject to the substance and interpretation of
tax laws in all countries in which we operate. Failure
to respond to changes in tax rates and comply with
procedures required by tax authorities could lead to
increased tax charges, including financial or
operating penalties.
Liquidity and funding risks are inherent in
our business
HSBC’s business model is founded upon having
ready access to financial resources whenever required
to meet our obligations and grow our business. To this
end, our entities seek to maintain a diversified and
stable funding base comprising core retail and
corporate customer deposits and institutional
balances, and certain entities augment this with
amounts of long-term wholesale funding. In addition,
we hold portfolios of highly liquid assets to enable us
to respond to unusual liquidity requirements. We
continue to maintain a strong liquidity position,
moving into the new regulatory landscape.
Where markets become illiquid, the value at
which financial instruments can be realised is highly
uncertain, and capital resources may shrink as
valuations decline. Rating agency downgrades of