HSBC 2014 Annual Report Download - page 27

HSBC BANK PLC
Strategic Report: Principal Risks and Uncertainties
25
Principal Risks and Uncertainties
The group continuously monitors and identifies risks.
This process, which is informed by its risk factors and the
results of its stress testing programme, gives rise to the
classification of certain principal risks. Changes in the
assessment of principal risks may result in adjustments
to the group’s business strategy and, potentially, its risk
appetite.
Our principal banking risks are credit risk, operational
risk, market risk, liquidity and funding risk, compliance
risk and reputational risk. We also incur insurance risk.
The exposure to these risks and our risk management are
explained in more detail in the Risk section of the Report
of the Directors on pages 31 to 83.
Next to these principal banking risks we have identified
further principal risks which have the potential to have a
material impact on our financial results or reputation
and the sustainability of our long-term business model.
During 2014 a number of changes to those risks have
been made to reflect its revised assessment of their
effect on the group.
Macro-economic and geopolitical risks
Economic outlook and government intervention
Global economic growth remained weak in 2014.
Oil and commodity prices have declined significantly
since the middle of 2014 as a result of increasing global
demand-supply imbalances. The precipitous fall in
energy prices over such a short span of time changes
both the nature and the distribution of risks. It sharpens
fiscal and financing challenges for energy exporters, and
although it brings benefits for oil importers, it also
accentuates deflationary risks among some of these
(particularly in the eurozone). The prospect of low oil
prices for a prolonged period also may reduce
investment in exploration and thus poses the danger of
significantly reducing future supply.
The economic recovery in the eurozone is still at risk.
Deflationary pressures persist as a result of low oil prices
and despite much looser monetary policy. Acceleration
in the structural reform agenda could also accentuate
deflationary pressures in the short term.
Potential impact on the group
• Our results could be adversely affected by a
prolonged period of low or negative interest rates,
low inflation levels or deflation and/or low oil prices.
Mitigating actions
• We closely monitor economic developments in key
markets to ensure trends are identified, the
implications for specific customers, customer
segments or portfolios are assessed and appropriate
mitigating action is taken as circumstances evolve.
Increased geopolitical risk in certain regions
Our operations are exposed to risks arising from political
instability and civil unrest in many parts of the world,
which may have a wider effect on regional stability, the
stability of the European Union (‘EU’) membership and
regional and global economies.
Geopolitical risk increased during 2014. Military escalation
and/or civil war remain a possibility in Ukraine, while
sanctions targeting the Russian government, institutions
and individuals, together with falling oil prices, have had
an adverse effect on the Russian economy.
In the Middle East, the civil war in Syria has been
complicated by the seizure of parts of Iraq and Syria by
Islamic State, a terrorist group. Elsewhere in the region,
chaos in Libya, ongoing tensions between Israel and
Palestine and fraught negotiations over Iran’s nuclear
programme are combining to increase risks to stability.
Civil unrest and demonstrations in a number of countries
during 2014, including Turkey, have also contributed to
geopolitical risk as governments took measures to
contain them.
A number of emerging and developed markets will hold
elections in 2015, which could lead to further market
volatility. In addition, a sustained period of low oil prices
may affect stability in countries that rely heavily on oil
production as a significant source of revenue.
Potential impact on the group
• Our results are subject to the risk of loss from
unfavourable political developments, currency
fluctuations, social instability and changes in
government policies on matters such as
expropriation, authorisations, international
ownership, interest-rate caps, foreign exchange
transferability and tax in the jurisdictions in which
we operate.
• Actual conflict could put our staff in harm’s way
and bring physical damage to our assets.
Mitigating actions
• We continuously monitor the geopolitical outlook,
in particular in countries where we have material
exposures and/or a physical presence.
• Our internal credit risk rating of sovereign
counterparties takes these factors into account and
drives our appetite for conducting business in those
countries. Where necessary, we adjust our country
limits and exposures to reflect our risk appetite and
mitigate risks as appropriate.
Macro-prudential, regulatory and legal risks
to our business model
Financial service providers face increasingly stringent
and costly regulatory and supervisory requirements,
particularly in the areas of capital and liquidity
management, conduct of business, operational
structures and the integrity of financial services delivery.
Increased government intervention and control over
financial institutions, both on a sector-wide basis and
individually, together with measures to reduce systemic
risk, may significantly alter the competitive landscape
locally, regionally and/or globally for some or all of the
group’s businesses. These measures may be introduced
as formal requirements in a supra-equivalent manner
and to differing timetables by different regulatory
regimes.