HSBC 2006 Annual Report Download - page 174

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Credit risk > Credit risk management
172
meaningfully and facilitate focused management
of the attendant risks. Historically, HSBC’s risk
rating framework has consisted of a minimum of
seven grades, taking into account the risk of
default and the availability of security or other
credit risk mitigation. A more sophisticated risk-
rating framework for banks and other customers,
based on default probability and loss estimates
and comprising up to 22 categories, is now used
in all major business units for the credit
assessment of individually significant
customers. It is increasingly being used for
credit portfolio reporting at subsidiary level;
work continues on integrating the framework
into reporting structures to enable Board and
external reporting on the new basis in 2008.
This approach allows a more granular analysis
of risk and trends. Rating methodology is based
upon a wide range of financial analytics together
with market data-based tools which are core
inputs to the assessment of counterparty risk.
Although automated risk-rating processes are
increasingly in use, for the larger facilities
ultimate responsibility for setting risk grades
rests in each case with the final approving
executive.
• Reviewing the performance and effectiveness of
operating companies’ credit approval processes.
Regular reports are provided to Group Credit
and Risk on the credit quality of local portfolios
and corrective action is taken where necessary.
• Reporting to senior executives on aspects of the
HSBC credit risk portfolio. These executives, as
well as the Risk Management Meeting, the
Group Audit Committee and the Board of
Directors of HSBC Holdings, receive a variety
of regular reports covering:
– risk concentrations and exposure to market
sectors;
– large customer group exposures;
– retail portfolio performance on a regional
basis;
– specific segments of the portfolio, e.g. real
estate, banks, and the automotive and hedge
fund sectors, as well as ad hoc reviews;
– emerging market debt and impairment
allowances;
– large impaired accounts and impairment
allowances;
– country limits, cross-border exposures and
impairment allowances; and
– causes of unexpected loss and lessons to be
learned.
• Managing and directing credit risk management
systems initiatives. HSBC has a centralised
database of large corporate, sovereign and bank
facilities and is constructing a database covering
all the Group’s credit assets. A systems-based
credit application process for bank lending is
operational throughout the Group and an
electronic corporate credit application system is
deployed in all of the Group’s major businesses.
• Providing advice and guidance to HSBC’s
operating companies in order to promote best
practice throughout the Group on credit-related
matters such as:
– regulatory developments;
– implementing environmental and social
responsibility policies;
– risk modelling;
– collective impairment allowances;
– new products;
– training courses; and
– credit risk reporting.
• Acting on behalf of HSBC Holdings as the
primary interface, for credit-related issues, with
external parties including the Bank of England,
the FSA, rating agencies, corporate analysts,
trade associations and counterparts in the
world’s major banks and non-bank financial
institutions.
Each operating company is required to
implement credit policies, procedures and lending
guidelines which conform to HSBC Group
standards, with credit approval authorities delegated
from the Board of Directors of HSBC Holdings to
the relevant Chief Executive Officer. In each major
subsidiary, management includes a Chief Credit
Officer or Chief Risk Officer who reports to the local
Chief Executive Officer on credit-related issues and
has 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 retail product segments.