HSBC 2013 Annual Report Download - page 33

31
Risk identification
We identify and monitor risks continuously. This process
and the results of our stress testing program, give rise to
the classification of certain key risks as top or emerging.
Changes in our assessment of top and emerging risks
may result in adjustments to our risk appetite and,
potentially, our business strategy.
Primary risk categories monitored include credit,
liquidity and funding, market, operational and
reputational risk. Operational risk encompasses a wide
range of risks including compliance, legal, security and
fraud, and fiduciary risk.
Risk appetite
The Risk Appetite Statement describes the types and
levels of risk that we are prepared to accept in executing
our strategy. The Statement is approved by the ARC on
the advice of the RMC. It is a key component of our
risk management framework and informs our annual
operating plan.
Global lines of business are required to align their risk
appetite statements with the bank’s overall risk appetite
statement.
Quantitative and qualitative metrics are assigned to
key categories. Measurement against the metrics:
– guides underlying business activity, ensuring it is
aligned to risk appetite statements;
– informs risk-adjusted remuneration;
– enables the key underlying assumptions to be
monitored and, where necessary, adjusted through
subsequent business planning cycles; and
– promptly identifies business decisions needed to
mitigate risk.
Mapping our risk profile
Risks are assumed by our Global lines of business in
accordance with their risk appetite and are managed at
both the bank and the Global line of business level. All
risks are recorded and monitored through our risk mapping
process, which describes our risk profile by category.
Stress testing
Our stress testing and scenario analysis program is
central to our risk management.
We conduct stress-testing scenarios which reflect
our business strategy and resultant risk exposures.
The results of the stress tests are used to assess the
potential demand for regulatory capital under the
various scenarios including but not limited to adverse
macro-economic events, catastrophic events and a
variety of projected operational risk events. We also
participate, where appropriate, in scenario analyses
requested by regulatory bodies.
The results of scenarios subject to stress testing
in 2013 demonstrated that the bank would remain
satisfactorily capitalized after taking account of assumed
management actions.
Credit risk
Credit risk is the risk of financial loss if a customer or
counterparty fails to an obligation under contract. It
arises principally from direct lending, trade finance and
the leasing business, but also from other products such
as guarantees and credit derivatives and from holding
assets in the form of debt securities.
Credit risk management
The bank’s principal objectives of credit risk
management are:
– to maintain a strong culture of responsible lending,
supported by a robust risk policy and control
framework;
– to both partner with and challenge businesses
in defining and implementing and continually
re-evaluating our risk appetite under actual and
scenario conditions; and
– to ensure there is independent, expert scrutiny of
credit risks, their costs and their mitigation.
Credit risk is managed in accordance with the bank’s
credit policy, which is established in consultation with
HSBC Group and approved by the ARC. Risk limits
and credit authorities are delegated to senior credit
management staff. Credit exposures in excess of certain
levels or other specific risk attributes are referred for
concurrence to HSBC Group to ensure they remain
within HSBC Group’s global risk limits.
The bank places the highest importance on the
integrity and quality of its credit portfolio and has
stringent policies to avoid undue concentration of risk.
Our RMC and ARC meet regularly to review portfolio
credit quality, geographic, product and industry
distributions, large customer concentrations, adequacy
of loan impairment allowances and rating system
performance. Policies relating to large customer limits
and industry, product and geographic concentration are
approved by the ARC, in line with HSBC Group policy.