HSBC 2007 Annual Report Download - page 200

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Credit risk > Credit risk management
198
Officer (‘GCRO’), who is a member of both GMB
and RMM and reports to the Group Finance Director
within an integrated Finance and Risk function.
Similar structures involving the creation of local Chief
Risk Officers are being extended to all major Group
subsidiaries and customer groups during 2008. The
Group Finance Director represents Finance and Risk
on the HSBC Holdings Board.
Primary responsibility for managing risk at
operating entity level lies with the respective boards
and Chief Executive Officers, as custodians of the
relevant balance sheets. In turn, Group Risk has
functional responsibility for the principal financial risk
types, namely: retail and wholesale credit, market,
operational and security/fraud risks. Within this
structure, it establishes Group policy, exercises
Group-wide oversight and provides reporting and
analysis of portfolio composition on a global and a
regional basis to senior management. Group Risk
co-ordinates the further development of the risk
appetite, economic capital and stress-testing
frameworks. In addition, the GCRO is a member of
the Group Portfolio Oversight Committee, chaired by
the Group Treasurer, which governs the Group’s
portfolio management activities for the wholesale
business sector.
HSBC’s risk management policies, encapsulated
in the Group Standards Manual and cascaded in a
hierarchy of policy manuals throughout the Group, are
designed to support the formulation of risk appetite,
guide employees and establish procedures for
monitoring and controlling risks, with timely and
reliable reporting to management. HSBC regularly
reviews and updates its risk management policies and
systems to reflect changes in markets, products and
emerging best practice.
It is the responsibility of all Group officers to
identify, assess and manage risk within the scope of
their assigned responsibilities. Personal
accountability, reinforced by the Group’s governance
structure and instilled by training, helps to foster
throughout the Group a disciplined and constructive
culture of risk management and control.
Credit risk
Credit risk management
(Audited)
Credit risk is the risk of financial loss if a customer
or counterparty fails to meet an obligation under a
contract. It arises principally from direct lending,
trade finance and leasing business, but also from
certain off-balance sheet products such as guarantees
and credit derivatives, and from the Group’s
holdings of assets in the form of debt securities.
HSBC has standards, policies and procedures
dedicated to monitoring and managing risk from
such activities.
Within Head Office, the Group Risk function
provides high-level centralised oversight and
management of credit risk for HSBC worldwide. Its
responsibilities include:
• Formulating Group credit policy. Compliance,
subject to approved dispensations, is mandatory
for all HSBC’s operating companies, which
must formulate and record in local instruction
manuals their detailed credit policies and
procedures, consistent with Group policy.
• Guiding HSBC’s operating companies on the
Group’s appetite for, and attitude to, credit risk
exposure to specified market sectors, activities
and banking products. Group Risk controls
exposures to certain higher-risk sectors and
closely monitors exposure to others, including:
real estate, the automotive sector, certain non-
bank financial institutions, structured products
and leveraged finance transactions. When
necessary, restrictions are imposed on new
business or exposures, which may be capped at
Group and/or entity level.
• Undertaking independent review and objective
assessment of risk. Group Risk assesses all
commercial non-bank credit facilities and
exposures – including those embedded in
derivatives – that are originated or renewed by
HSBC’s operating companies over designated
limits, prior to the facilities being committed to
customers or transactions being undertaken.
Operating companies may not confirm credit
approval without this concurrence.
• Monitoring the performance and management of
retail portfolios across the Group. Group Risk
tracks emerging trends, overseeing the effective
management of any adverse characteristics.
• Controlling centrally exposures to sovereign
entities, banks and other financial institutions.
HSBC’s credit and settlement risk limits to
counterparties in these sectors are approved and
managed by Group Risk to optimise the use of
credit availability and avoid excessive risk
concentration.
• Establishing and managing exposures to debt
securities by establishing controls in respect of
securities held for trading purposes and setting
issuer limits for securities not held for trading.
• Establishing and maintaining HSBC’s policy on
large credit exposures, ensuring that