HSBC 2011 Annual Report Download - page 237

235
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Our risk appetite framework is underpinned by
the following core characteristics:
Risk appetite: core characteristics
• Strong balance sheet
• Strong brand
• Healthy capital position
• Conservative liquidity management
• Risk must be commensurate with sustainable returns
• Robust Group structure of separate legal entities
• The global businesses should produce sustainable long-term
earnings growth
• Risk diversification
These core characteristics are applied to define
the Risk Appetite Statements on a Group-wide,
global business and regional level. The relevant
strategic and operational objectives, within which we
expect businesses and regions to operate, are
expressed quantitatively across the following
dimensions:
Strategic and operational objectives
Earnings 1. Generate sustainable economic profit commensurate with the risks taken
2. Maintain capital in excess of regulatory and internal Economic Capital requirements
3. Maintain a strong tier 1 ratio comprising a high proportion of core tier 1
4. Maintain a well diversified funding structure with a particular focus on advances to core funding ratios
Capital and liquidity
5. Off-balance sheet vehicles should not be material in size relative to the total balance sheet
Impairments and
expected losses
6. Manage impairments and expected losses within the Group’s tolerance
7. Manage all risk categories within the risk appetite
8. Harness benefits from business diversification to generate non-volatile and sustainable earnings
Risk category and
diversification
9. Compete for business with international customers where market connectivity is critical; businesses with
local customers where we have local scale, and products where global scale is critical to effectiveness
Scenario and stress
testing
10. Use robust and appropriate scenario stress testing to assess the potential impact on the Group’s capital
adequacy and strategic plans
Top and emerging risks
Identifying and monitoring top and emerging risks is
integral to our approach to risk management. We
define a ‘top risk’ as being a current, emerged risk
which has arisen across any of our risk categories,
regions or global businesses and has the potential to
have a material impact on our financial results or our
reputation and the sustainability of our long-term
business model, and which may form and crystallise
within a one year horizon. We consider an ‘emerging
risk’ to be one which has large uncertain outcomes
which may form and crystallise beyond a one year
horizon and, if it were to crystallise, could have a
material effect on our long-term strategy.
The GRC discusses top and emerging risks with
management at each of its meetings. Current top and
emerging risks, which are summarised below, are
viewed as falling under three broad categories:
macro-economic and geopolitical; macro-prudential,
regulatory and legal risks to our business model; and
risks related to our business operations, governance
and internal control systems.
Further details of top and emerging risks
identified through our risk management processes
are set out on page 99.