HSBC 2014 Annual Report Download - page 34

HSBC BANK PLC
Report of the Directors: Risk
32
Risk appetite
The Group’s risk appetite is set out in the Group’s Risk
Appetite Statement, which describes the types and levels
of risk that the group is prepared to accept in executing
its strategy. Quantitative and qualitative metrics are
assigned to nine key categories: earnings, capital,
liquidity and funding, securitisations, cost of risk, intra-
group lending, strategic investments, risk categories and
risk diversification and concentration. 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.
The risk appetite statement is approved by the HSBC
Board following advice from the Risk Committee, and is a
key component of the risk management framework. It is
central to the annual planning process, in which global
businesses, geographical regions and functions are
required to articulate their risk appetite statements.
These are aligned with the Group strategy, and provide a
risk profile of each global business, region or function in
the context of the individual risk categories.
Stress testing
The group’s stress testing and scenario analysis
programme is central to the monitoring of top and
emerging risks. This is achieved by the undertaking of
internal as well as regulatory driven stress test exercises
during the year.
The major activities of the group’s stress test programme
during 2014 were focused on the completion of the PRA
concurrent stress test, the ECB comprehensive
assessment and contribution to the Group’s European
Banking Authority (‘EBA’) stress testing exercise. As part
of the group’s stress testing framework, a number of
macroeconomic and event driven scenarios specific to
the European region were considered and reported to
senior management. These are based on analysis under a
range of scenarios including: a Scottish Independence
Scenario, a UK exit of the European Union scenario and a
move to Negative Interest Rates in the UK and/or the
eurozone.
The group also conducts Reverse Stress Testing. Reverse
stress tests require a firm to assess scenarios and
circumstances that would render its business model
unviable, thereby identifying potential business
vulnerabilities
Reverse stress testing is used as part of the risk
management process to help inform management
actions and contingency plans to mitigate against
potential stresses and vulnerabilities which the group
might face.
Areas of special interest
(Unaudited)
During 2014, there were a number of particular areas of
focus as a result of the effect they have on the group.
Whilst these areas may already have been identified as
principal risks, further details of the actions taken during
the year are provided below.
Financial crime compliance and regulatory
compliance
In recent years, we have experienced increasing levels of
compliance risk as regulators and other agencies pursued
investigations into historical activities, and we continued
to work with them in relation to existing issues. This has
included the matters giving rise to the DPAs reached
with US authorities in relation to investigations regarding
inadequate compliance with anti-money laundering and
sanctions law, and the related undertaking with the FSA
(the ‘FCA Direction’). The work of the Monitor, who
has been appointed to assess HSBC’s progress against
our various obligations, including the DPAs, is discussed
on page 9.
We continue to respond to a number of investigations by
the FCA into the possible mis-selling in the UK of certain
products, including sales of PPI, of interest rate hedging
products for SMEs and of wealth management products.
In addition, we also remain subject to a number of other
regulatory proceedings including investigations and
reviews by various national regulatory, competition
and enforcement authorities relating to certain past
submissions made by panel banks and the process for
making submissions in connection with the setting of
Libor and other interbank offered and benchmark
interest rates. There are also investigations in progress
into activities related to foreign exchange, precious
metals and credit default swaps. Details of these
investigations and legal proceedings can be found on
note 37.
It is clear from both our own and wider industry
experience that the level of activity among regulators
and law enforcement agencies in investigating possible
breaches of regulations has increased, and that the
direct and indirect costs of such breaches can be
significant. Coupled with a substantial rise in the volume
of new regulation, much of which has some element of
extra-territorial reach, and the geographical spread
of our businesses, we believe that the level of inherent
compliance risk that we face as a Group will continue to
remain high for the foreseeable future.
Further information about the Group’s compliance risk
management may be found on page 76.
Regulatory Stress Tests
The frequency and granularity of information required by
supervisors in relation to regulatory stress testing has
increased and as part of the Group, HSBC Bank plc is
subject to regulatory stress testing exercises in the
United Kingdom and Europe.