HSBC 2012 Annual Report Download - page 126

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Managing risk
124
Managing risk
(Unaudited)
Risks faced by HSBC
All of our activities involve, to varying degrees, the
analysis, evaluation, acceptance and management of
risks or combinations of risks. These are described in
the table below.
Risk culture
All staff are required to identify, assess and
manage risk within the scope of their assigned
responsibilities. Our global standards set the tone
from the top and are central to our approach to
balancing risk and reward. Personal accountability
is reinforced by our HSBC Values, with staff
expected to act with courageous integrity in
conducting their duties and being:
• dependable, doing the right thing;
• open to different ideas and culture; and
• connected to our customers, regulators and each
other.
Staff are supported by a disclosure line which
enables them to raise concerns in a confidential
manner. We also have in place a suite of mandatory
training to ensure a clear and consistent attitude is
communicated to staff; our mandatory training not
only focuses on the technical aspects of risk but also
on our attitude towards risk and the behaviours
expected by our policies.
Our risk culture is reinforced by our approach to
remuneration, which is discussed in the Report of the
Remuneration Committee on page 347. Individual
awards are based on the achievement of both
financial and non-financial (relating to our values)
objectives which are aligned to our global strategy.
Risk governance and ownership
An established risk governance framework and
ownership structure ensures oversight of and
accountability for the effective management of risk
at Group, regional and global business levels. The
governance structure for the management of risk is
set out in the report of the Group Risk Committee on
page 323, with similar arrangements in place in
major operating subsidiaries. This structure has been
augmented by the establishment of the Financial
System Vulnerabilities Committee, details of which
are set out on page 328. Our risk management
framework fosters the continuous monitoring of the
risk environment and an integrated evaluation of
risks and their interactions. Integral to our risk
management framework are risk appetite, stress
testing and the identification of top and emerging
risks, all of which are discussed below.
Description of risks
Risks Arising from Measurement, monitoring and management of risk
Credit risk
The risk of financial loss if a
customer or counterparty fails
to meet an obligation under a
contract.
Credit risk arises principally
from direct lending, trade
finance and leasing business,
but also from certain other
products such as guarantees
and derivatives.
Credit risk:
• is measured as the amount which could be lost if a customer or
counterparty fails to make repayments. In the case of derivatives, the
measurement of exposure takes into account the current mark to
market value to HSBC of the contract and the expected potential
change in that value over time caused by movements in market rates;
• is monitored within limits, approved by individuals within a
framework of delegated authorities. These limits represent the peak
exposure or loss to which HSBC could be subjected should the
customer or counterparty fail to perform its contractual obligations;
and
• is managed through a robust risk control framework which outlines
clear and consistent policies, principles and guidance for risk
managers.
Liquidity and funding risk
The risk that we do not have
sufficient financial resources
to meet our obligations as they
f
all due or that we can only do
so at excessive cost.
Liquidity risk arises from
mismatches in the timing of
cash flows.
Funding risk arises when the
liquidity needed to fund
illiquid asset positions cannot
be obtained at the expected
terms and when required.
Liquidity and funding risk:
• is measured using internal metrics including stressed operational cash
flow projections, coverage ratio and advances to core funding ratios;
• is monitored against the Group’s liquidity and funding risk framework
and overseen by regional Asset and Liability Management
Committees (‘ALCO’s), Group ALCO and the Risk Management
Meeting; and
• is managed on a stand-alone basis with no reliance on any Group
entity (unless pre-committed) or central bank unless this represents
routine established business as usual market practice.