HSBC 2008 Annual Report Download - page 194

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Risk management > Appetite / Control culture // Credit risk > Management
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Risk function, which the Group Finance Director
represents on the Board.
Global Risk has functional responsibility for the
principal financial risk types, namely retail and
wholesale credit, market, operational, security and
fraud risks. For these 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.
Accountability and consistent control across the
Global Risk function is provided through the Global
Risk Management Board, chaired by the GCRO, the
membership of which includes the Chief Risk Officers
of HSBC’s regions and the heads of risk disciplines
within GMO. Global Risk also co-ordinates the
continued development of the Group’s 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.
Risk appetite
HSBC’s risk appetite framework describes the
quantum and types of risk that HSBC is prepared to
take in executing its strategy. It is central to an
integrated approach to risk, capital and business
management and supports the Group in achieving its
return on equity objectives, as well as being a key
element in meeting the Group’s obligations under
pillar 2 of Basel II.
The formulation of risk appetite considers
HSBC’s risk capacity, its financial position, the
strength of its core earnings and the resilience of
its reputation and brand. It is expressed both
qualitatively, describing which risks are taken and
why, and quantitatively. HSBC senior management
attaches quantitative metrics to individual risk types
to ensure that:
• underlying business activity may be guided and
controlled, so that it continues to be aligned to
the risk appetite framework;
• key assumptions underpinning risk appetite can
be monitored and, as necessary, adjusted
through subsequent business planning cycles;
and
• business decisions anticipated to be necessary to
mitigate risk are flagged and acted upon
promptly.
The risk appetite framework, governed by the
Board and overseen in its implementation on an
ongoing basis by GMB and RMM, is also
maintained at regional and customer group levels. It
operates through two key mechanisms:
• the framework itself defines the governance
bodies, processes, metrics and other features of
how HSBC addresses risk appetite as part of its
ongoing business;
• periodic risk appetite statements define, at
various levels in the business, the desired level
of risk commensurate with return and growth
targets and in line with the corporate strategy
and stakeholder objectives.
The risk appetite framework covers both the
beneficial and adverse aspects of risk. Within it,
economic capital is the common currency through
which risk is measured and used as the basis for risk
evaluation, capital allocation and performance
measurement across regions and customer groups.
Risk appetite is executed through the operational
limits that control the levels of risk run by the
Group, regions and customer groups and is measured
using risk-adjusted performance metrics.
Risk control culture
HSBC’s risk management policies are encapsulated
in the Group Standards Manual and cascaded in a
hierarchy of policy manuals throughout the Group and
communicate standards, instructions and guidance to
employees. They support the formulation of risk
appetite and establish procedures for monitoring and
controlling risks, with timely and reliable reporting to
management. HSBC regularly reviews and updates its
risk management policies, systems and methodologies
to reflect changes in law, regulation, 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 and experience,
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