HSBC 2006 Annual Report Download - page 173

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the management of their credit, liquidity and market
risk along with insurance risk, is discussed
separately in ‘Risk management of insurance
operations’ section.
Credit risk
Credit risk management
(Audited)
Credit risk is the risk of financial loss if a customer
or counterparty fails to meet an obligation under a
contract. It arises principally from lending, trade
finance, treasury and leasing business. Credit risk
also arises when issuers of debt securities are
downgraded and, as a result, the value of HSBC’s
holdings of assets falls. HSBC has standards,
policies and procedures dedicated to controlling and
monitoring risk from all such activities.
Within Group Head Office, a specialised
function, Group Credit and Risk, is mandated to
provide high-level centralised management of credit
risk for HSBC worldwide. Group Credit and Risk is
headed by a Group General Manager who reports to
the Group Chief Executive. Its responsibilities
include the following:
• Formulating Group credit policies and
monitoring compliance with them. These
policies are embodied in the HSBC standards
with which all HSBC’s operating companies are
required to comply, and consistent with which
they must formulate and record in instruction
manuals their detailed credit policies and
procedures.
• Issuing policy guidelines to HSBC’s operating
companies on the Group’s attitude toward, and
appetite for, credit risk exposure to specified
market sectors, activities and banking products.
Each HSBC operating company and major
business unit is required to base its own lending
guidelines on HSBC’s standards, to regularly
update them and disseminate them to its credit
and lending executives. Group Credit and Risk
controls HSBC’s exposures to the automotive
and hedge fund sectors, and closely monitors
exposures to others such as real estate and
securities houses. When necessary, restrictions
are imposed on new business or exposures in
HSBC’s operating companies are capped.
• Undertaking an independent review and
objective assessment of risk. Group Credit and
Risk assesses all commercial non-bank credit
facilities and exposures – including those
embedded in derivatives – that are originated,
renewed or reviewed by HSBC’s operating
companies in excess of designated limits, prior
to the facilities being committed to customers or
transactions being undertaken. Operating
companies may not confirm credit approval
without this concurrence.
• Monitoring the performance and management of
retail portfolios across the Group and reviewing
whether any adverse trends are being managed
appropriately by Group businesses.
• Controlling centrally exposures to sovereign
entities, banks and other financial institutions.
HSBC’s credit and settlement risk limits to
counterparties in these sectors are approved
centrally and globally managed by a dedicated
unit within Group Credit and Risk, to optimise
the use of credit availability and avoid excessive
risk concentration.
• Managing exposures to debt securities by
establishing controls in respect of the liquidity
of securities held for trading purposes and
setting issuer limits for securities not held for
trading. Separate portfolio limits are established
for asset-backed securities and similar
instruments.
• Maintaining HSBC’s policy on large credit
exposures, controlling these to ensure that
exposure to any individual counterparty or
group of closely related counterparties, or to
individual geographic areas or industry sectors,
does not become excessive in relation to the
Group’s capital base and is kept within internal
and regulatory limits. The approach is designed
to be more conservative than internationally
accepted regulatory standards. A dedicated unit
within Group Credit and Risk manages this
process, and also monitors HSBC’s intra-Group
exposures to ensure that they are maintained
within regulatory limits. The FSA has
announced changes to the regime for managing
intra-Group exposures, which will operate by
reference to a ‘UK Integrated Group’ and a
‘Wider Integrated Group’. HSBC is developing
plans to adopt the new regime in accordance
with the FSA’s transition timetable.
• Controlling cross-border exposures, through the
imposition of country limits with sub-limits by
maturity and type of business. Country limits
are determined by taking into account economic
and political factors, and applying local business
knowledge. Transactions with countries deemed
to be high risk are considered case by case.
• Maintaining and developing HSBC’s risk
ratings in order to categorise exposures