HSBC 2011 Annual Report Download - page 102

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Top and emerging risks
100
Increased geopolitical risk in certain regions
We are subject to geopolitical risks in the countries
in which we operate. During 2011, these were
particularly heightened in the Middle East and in
certain parts of Asia.
In the Middle East, the ‘Arab Spring’ has spread
across the region, leading to political instability in a
number of countries. In Asia, tensions persist in
certain areas following leadership and regime
changes which pose a threat of instability and
potential conflict.
Potential impact on HSBC
• 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 bring
about loss of life amongst our staff and physical
damage to our assets.
• We have increased our monitoring of the
geopolitical and macro-economic outlook, in
particular in countries where we have material
exposures and 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
appetite and mitigate these risks as appropriate.
Macro-prudential, regulatory and legal risks
to our business model
• Regulatory developments affecting our
business model and Group profitability
• Regulatory investigations and
requirements relating to conduct of
business and financial crime negatively
affecting our results and brand
• Dispute risk
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, together with
measures to reduce systemic risk, may significantly
alter the competitive landscape. These measures may
be introduced as formal requirements in a supra-
equivalent manner and to differing timetables across
regulatory regimes.
Regulatory developments affecting our
business model and Group profitability
There are several key regulatory changes which are
likely to have an effect on our activities. These are
set out below:
Basel III/CRD IV
– Derivatives and central counterparty clearing:
measures have been introduced to give effect to
the G20 commitments designed to reduce
systemic risk and volatility relating to
derivatives trading. The G20 agreed that all
standardised over-the-counter (‘OTC’)
derivatives were to be exchange traded where
appropriate, reported to trade repositories and
centrally cleared by the end of 2012. Higher
capital requirements under Basel III will be
imposed for bilateral (uncleared) transactions
to incentivise the use of clearing.
– Quality of capital: The Capital Requirement
Directive (‘CRD IV’) requires a further
strengthening and harmonisation of the criteria
for eligibility of capital instruments with an
emphasis on common equity as the principal
component of tier 1 capital.
– Capital buffers: CRD IV proposals comprise a
capital conservation buffer of 2.5% of RWAs to
be built up during periods of economic growth,
aimed at ensuring the capacity to absorb losses
in stressed periods that may span a number of
years, and a countercyclical capital buffer of up
to an additional 2.5% to be built up in periods in
which credit growth exceeds GDP growth.
– Counterparty credit risk: requirements for
managing and capitalising counterparty credit
risk are to be strengthened. In particular, an
additional capital charge for potential
losses associated with the deterioration in the
creditworthiness of individual counterparties,
the capital valuation adjustment, will be
introduced.
– Liquidity and funding: a new minimum
standard, the liquidity coverage ratio, designed
to improve the short-term resilience of a bank’s
liquidity risk profile, will be introduced after
an observation and review period in 2015. To
promote resilience by creating incentives for
banks to fund their activities with more stable
sources of funding, the European Commission
will consider proposing a net stable funding