HSBC 2009 Annual Report Download - page 205

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granular level of management reporting. A
uniform credit application process for banks is
operational throughout the Group and a similar
corporate credit application system covers
almost all Group corporate business by value;
• providing advice and guidance to HSBC’s
operating companies, to promote best practice
throughout the Group on credit-related matters
such as sustainability risk, new products and
training; and
• acting on behalf of HSBC Holdings as the
primary interface, for credit-related issues, with
external parties including the Bank of England,
the FSA, local regulators, rating agencies,
corporate analysts, trade associations and
counterparts in the world’s major banks and
non-bank financial institutions.
Each HSBC operating company is required to
implement credit policies, procedures and lending
guidelines that meet local requirements while
conforming to Group standards. Credit approval
authorities are delegated by the Board of Directors of
HSBC Holdings to the most senior Chief Executive
Officers, who receive commensurate delegations
from their own boards. In each major subsidiary, a
Chief Risk Officer or Chief Credit Officer reports to
the local Chief Executive Officer or Chief Operating
Officer on credit-related issues, while maintaining a
direct functional reporting line to the GCRO.
Credit quality
(Audited)
Each operating company is responsible for the
quality and performance of its credit portfolios and
for monitoring and controlling all credit risks in
them, including those subject to central approval by
Group Risk. This includes managing its own risk
concentrations by market sector, geography and
product. Local systems are in place throughout the
Group to enable operating companies to control and
monitor exposures by customer and retail product
segments. A Credit Review and Risk Identification
team reports directly to each regional Chief Risk
Officer, and reviews the robustness and effectiveness
of key risk measurement, monitoring and control
activities.
HSBC’s credit risk rating systems and processes
differentiate exposures in order to highlight those
with greater risk factors and higher potential severity
of loss. In the case of individually significant
accounts, risk ratings are reviewed regularly and any
amendments are implemented promptly. Within the
Group’s retail businesses, risk is assessed and
managed using a wide range of risk and pricing
models to generate portfolio data.
HSBC’s historical risk rating system based on a
judgemental assessment of the likelihood and impact
of delinquency was superseded in 2008 for financial
reporting purposes and, for all significant risk
management decisions employing credit risk ratings,
by a more risk-sensitive and granular methodology.
This facilitates the IRB approach under Basel II
adopted by the Group to support calculation of its
minimum credit regulatory capital requirement.
For further details, see ‘Credit quality of financial
instruments’ on page 225.
Special attention is paid to problem exposures,
which are subject to more frequent and intensive
review and reporting, in order to accelerate remedial
action. Where appropriate, HSBC’s local operating
companies maintain or establish specialist units to
provide customers with support in order to help them
avoid default wherever possible.
Periodic risk-based audits of operating
companies’ credit processes and portfolios are
undertaken by HSBC’s Internal Audit function.
Audits include consideration of the adequacy and
clarity of credit policy/procedure manuals; an
overview of homogeneous portfolios of similar
assets to assess the quality of the loan book and other
exposures; consideration of any oversight or review
work performed by credit risk management functions
and the adequacy of impairment calculations; a
review of analytical model governance and
implementation; a review of management objectives
and a check that Group and local standards and
policies are adhered to in the approval and
management of credit facilities.
Individually significant accounts are reviewed
on a sample basis to ensure that risk ratings are
appropriate, that credit and collection procedures
have been properly followed and that where
deterioration is evident, impairment allowances are
raised in accordance with the Group’s established
procedures. Internal Audit discusses with
management any risk ratings it considers to
be inappropriate; after discussion, its final
recommendations for revised ratings must
then be adopted.
Impairment assessment
(Audited)
When impairment losses occur, HSBC reduces the
carrying amount of loans and advances through the
use of an allowance account. When impairment of
available-for-sale financial assets and held-to-
maturity financial investments occurs, the carrying