HSBC 2009 Annual Report Download - page 202

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Risk management > Risk governance / Risk appetite / Scenario stress testing / Control culture // Credit risk > Management
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balance sheets. In their oversight and stewardship of
risk management at Group level, however, GMB and
RMM are supported by a dedicated Global Risk
function headed by the Group Chief Risk Officer
(‘GCRO’), who is a member of both bodies and
reports to the Chief Financial Officer, Executive
Director, Risk and Regulation within the integrated
Finance and Risk function, which the latter 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
trends on a global and 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 members of which include the Chief Risk
Officers of HSBC’s regions and the heads of risk
disciplines within Group Management Office
(‘GMO’). The regional governance bodies for key risk
matters reflect those in place at the centre. Functional
units at the entity and regional levels report to Group
Risk. GMO helps build the Group’s risk management
capacity through staff selection, training,
development, performance assessment and
remuneration – the GCRO is jointly responsible with
business heads for setting the performance goals of
senior Global Risk officers. Global Risk also
co-ordinates the continued development of the
Group’s risk appetite, economic capital and stress
testing frameworks, and engages in discussions with
regulators and in industry forums on risk and
regulatory policy developments, assesses their
implications and makes recommendations
accordingly. In addition, the GCRO is a member of
the Group Portfolio Oversight Committee, chaired by
the Group Treasurer, which governs the portfolio
management activities of Global Banking.
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; and
• 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.
Scenario stress testing
Scenario analysis and stress testing are important
mechanisms in understanding the sensitivities of the
Group capital and business plans to the adverse
effects of extreme, but plausible, events. As well as
considering the potential financial effect on plans, a
key output of this tool is the consideration and
establishment of management action plans for
mitigating such events should they, or similar events,
arise.
Group Risk regularly assesses regulatory capital
supply against demand under a range of stress