HSBC 2011 Annual Report Download - page 192

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Credit risk
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with a global perspective and on the design and effectiveness of primary and secondary controls, carrying out
oversight audits via sampling of global/regional control frameworks, themed audits of key or emerging risks and
project audits to assess major change initiatives.
Impairment assessment
(Audited)
It is our policy that each operating company in HSBC creates allowances for impaired loans promptly and
consistently.
For details of our impairment policies on loans and advances and financial investments, see Notes 2g and 2j on the
Financial Statements on pages 297 and 301, respectively.
Write-off of loans and advances
For details of our policy on the write-off of loans and advances, see Note 2g on the Financial Statements on page 297.
In HSBC Finance, the carrying amounts of residential mortgage and second lien loans in excess of net realisable
value are written off at or before the time foreclosure is completed or settlement is reached with the borrower. If there
is no reasonable expectation of recovery, and foreclosure is pursued, the loan is normally written off no later than the
end of the month in which the loan becomes 180 days contractually past due.
Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due,
the standard period being the end of the month in which the account becomes 180 days contractually delinquent.
Write-off periods may be extended, generally to no more than 360 days past due but in very exceptional
circumstances exceeding that figure, in a few countries where local regulation or legislation constrain earlier write-
off, or where the realisation of collateral for secured real estate lending extends to this time.
In the event of bankruptcy or analogous proceedings, write-off may occur earlier than at the periods stated above.
Collections procedures may continue after write-off.
Cross-border exposures
We assess the vulnerability of countries to foreign currency payment restrictions, including economic and political
factors, when considering impairment allowances on cross-border exposures. Impairment allowances are assessed in
respect of all qualifying exposures within vulnerable countries unless these exposures and the inherent risks are:
• performing, trade-related and of less than one year’s maturity;
• mitigated by acceptable security cover which is, other than in exceptional cases, held outside the country
concerned;
• in the form of securities held for trading purposes for which a liquid and active market exists, and which are
measured at fair value daily; and
• performing facilities with a principal (excluding security) of US$1m or below and/or with maturity dates shorter
than three months.
Concentration of exposure
(Audited)
Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic
characteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas or
industry sectors, so that their collective ability to meet contractual obligations is uniformly affected by changes in
economic, political or other conditions. We use a number of controls and measures to minimise undue concentration
of exposure in our portfolios across industry, country and global businesses. These include portfolio and counterparty
limits, approval and review controls, and stress testing.
Wrong-way risk is an aggravated form of concentration risk and arises when there is a strong correlation between the
counterparty’s probability of default and the mark-to-market value of the underlying transaction. We use a range of
procedures to monitor and control wrong-way risk, including requiring entities to obtain prior approval before
undertaking wrong-way risk transactions outside pre-agreed guidelines.