HSBC 2015 Annual Report Download - page 113

HSBC HOLDINGS PLC
111
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
• Physical conflicts or terrorist attacks could expose our
staff to physical risk and/or result in physical damage to
our assets and disruption to our operations.
• The effect of a UK exit from the EU on HSBC would
depend on the manner in which the exit occurs.
A disorderly exit could force changes to HSBC’s operating
model, affect our ability to access ECB and high value
euro payments, and affect our transaction volumes due
to possible disruption to global trade flows.
Mitigating actions
• We continuously monitor the geopolitical outlook,
in particular in countries where we have material
exposures and/or a physical presence.
• Our internal credit risk ratings of sovereign counterparties
take geopolitical factors into account and drive our
appetite for conducting business in those countries.
Where necessary, we adjust our country limits and
exposures to reflect our risk appetite and mitigate risks
as appropriate.
• We run internal stress tests and scenario analyses,
including reverse stress tests, on our portfolios that take
into account geopolitical scenarios, such as conflicts in
countries where we have a significant presence, or
political developments that could disrupt our operations,
including the potential effect of a UK exit on our business
model.
Turning of the credit cycle
The long-anticipated move by the US Federal Reserve Board
(‘FRB’) to raise interest rates and the slowdown in mainland
China’s economy, which is expected to continue, have
increased risk aversion in global markets. This tendency
has deepened since the turn of 2016, with market volatility
increasing. In 2015, emerging markets experienced net
capital outflows for the first time since 1988, with several
major currencies at decade-plus lows against the US dollar
and global corporate defaults rose to the highest since 2009.
2016 could see an intensification of these trends and the
appearance of stress in a wide array of credit segments,
particularly if monetary policy is tightened quickly, sentiment
regarding China worsens and oil prices fail to recover. The
combination of these factors with substantial amounts of
external refinancing being due in emerging markets in
2016-18 increases the risk of sharper and more protracted
volatility.
Potential impact on HSBC
• Impairment allowances or losses could begin to rise from
their historical lows in 2014 and 2015 if the credit quality
of our customers is affected by less favourable global
economic conditions in some markets.
• There may be impacts on the delinquency and losses in
some portfolios which may be impacted by worsening
macroeconomic conditions and their possible effects on
particular geographies or industry sectors.
• Particular portfolios such as oil and gas may come under
particular strain which is partly cyclical and partly driven
by geopolitical concerns.
Mitigating actions
• We closely monitor economic developments in key
markets and sectors, taking portfolio actions where
necessary including enhanced monitoring or reducing
limits and exposures.
• We stress test those portfolios of particular concern to
identify sensitivity to loss, with management actions
taken to control appetite where necessary.
• Where customers are either individually or collectively
assessed, regular portfolio reviews are undertaken for
sensitive portfolios to ensure that individual customer
or portfolio risks are understood and that the level of
facilities offered and our ability to manage through any
downturn are appropriate.
Regulatory developments with adverse impact on
business model and profitability
Financial service providers continue to face stringent
and costly regulatory and supervisory requirements,
particularly in the areas of capital and liquidity management,
conduct of business, financial crime, operational structures
and the integrity of financial services delivery. Government
intervention and control over financial institutions both on a
sector-wide basis and individually, together with measures
to reduce systemic risk, may significantly affect the
competitive landscape locally, regionally and/or globally
for some or all of the Group’s businesses. These measures
may be introduced with different, potentially conflicting
requirements and to differing timetables by different
regulatory regimes. Regulatory changes may affect our
activities, both of the Group as a whole and of some or all
of our principal subsidiaries. These changes include:
• the UK’s Financial Services (Banking Reform) Act 2013,
which requires the ring-fencing of our UK retail banking
activities from wholesale banking, together with the
structural separation of other activities required by
US legislation and rules (including the Volcker Rule
implemented in December 2013 under the Dodd-Frank
Act), and potential further changes under the European
Commission’s Banking Structural Reform Regulation
which proposes similar structural reform for larger EU
banks as well as structural changes in other jurisdictions;
• revisions in the regime for the operation of capital
markets, notably mandatory central clearing of over
the counter (‘OTC’) derivatives and mandatory margin
requirements for non-cleared derivatives under the
Dodd-Frank Act, the EU’s European Market Infrastructure
Regulation (‘EMIR’) and similar local measures being
progressed in Hong Kong, Singapore and Canada;