HSBC 2005 Annual Report Download - page 119

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subsidiary, management includes a Chief Credit and
Risk Officer who reports to the local Chief
Executive Officer on credit-related issues. All Chief
Credit and Risk Officers have a functional reporting
line to the Group General Manager, Group Credit
and Risk. Each operating company is responsible for
the quality and performance of its credit portfolios
and for monitoring and controlling all credit risks in
its portfolios, including those subject to central
approval by Group Credit and 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 counterparty.
Special attention is paid to problem loans. When
appropriate, specialist units are established by
HSBC’s operating companies to provide customers
with support in order to help them avoid default
wherever possible, thereby maximising recoveries
for HSBC.
Regular audits of operating companies’ credit
processes are undertaken by HSBC’s Internal Audit
function. Audits include a consideration of the
completeness and adequacy of credit manuals and
lending guidelines; an in-depth analysis of a
representative sample of accounts; an overview of
homogeneous portfolios of similar assets to assess
the quality of the loan book and other exposures; and
a check that Group standards and policies are
adhered to in the extension and management of
credit facilities. Individual accounts are reviewed to
ensure that risk grades are appropriate, that credit
and collection procedures have been properly
followed and that, when an account or portfolio
evidences deterioration, impairment allowances are
raised in accordance with the Group’s established
processes. Internal Audit discuss with management
risk ratings they consider to be inappropriate, and
their subsequent recommendations for revised grades
must then be assigned to the facilities concerned.
Collateral and other credit enhancements
Loans and advances (Audited IFRS 7 information)
When appropriate, operating companies are required
to implement guidelines on the acceptability of
specific classes of collateral or credit risk mitigation,
and determine valuation parameters. Such
parameters are expected to be conservative,
reviewed regularly and supported by empirical
evidence. Security structures and legal covenants are
subject to regular review to ensure that they continue
to fulfil their intended purpose and remain in line
with local market practice. While collateral is an
important mitigant to credit risk, it is HSBC’s policy
to establish that loans are within the customer’s
capacity to repay rather than to rely excessively on
security. In certain cases, depending on the
customer’s standing and the type of product,
facilities may be unsecured. The principal collateral
types are as follows:
• in the personal sector, mortgages over
residential properties;
• in the commercial and industrial sector, charges
over business assets such as premises, stock and
debtors;
• in the commercial real estate sector, charges
over the properties being financed; and
• in the financial sector, charges over financial
instruments such as debt securities and equities
in support of trading facilities.
Other securities (Audited IFRS 7 information)
Collateral held as security for financial assets other
than loans and advances is determined by the nature
of the instrument. Debt securities, treasury and other
eligible bills are generally unsecured with the
exception of asset backed securities and similar
instruments, which are secured by pools of financial
assets.
The ISDA Master Agreement is HSBC’s
preferred agreement for documenting derivatives
activity. It provides the contractual framework
within which dealing activity across a full range of
over-the-counter (‘OTC’), products is conducted and
contractually binds both parties to apply close-out
netting across all outstanding transactions covered
by an agreement, if either party defaults or following
other pre-agreed termination events. It is common
for the parties to execute a Credit Support Annex
(‘CSA’) in conjunction with the ISDA Master
Agreement, a practice HSBC encourages. Under a
CSA, collateral is passed between the parties to
mitigate the market contingent counterparty risk
inherent in the outstanding positions.
Settlement risk arises in any situation where a
payment in cash, securities or equities is made in the
expectation of a corresponding receipt in cash,
securities or equities. Daily Settlement Limits are
established for each counterparty, to cover the
aggregate of all settlement risk arising from HSBC’s
investment banking and markets transactions on any
single day. Settlement risk on many transactions,
particularly those involving securities and equities, is
substantially mitigated when effected via Assured
Payment Systems, or on a delivery versus payment
basis.