HSBC 2009 Annual Report Download - page 203

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scenarios, including projected global economic
downturns more severe than that which is currently
being experienced. Qualitative and quantitative
techniques are used to estimate the potential impact
on HSBC’s capital position of such scenarios. HSBC
also participates, where appropriate, in standard
scenario analyses requested by regulatory bodies.
In particular, this framework has aided
management in mitigating some of the effects of the
global financial crisis. While the prediction of future
events cannot cover all eventualities, nor precisely
identify future events, a number of the scenarios
analysed in the past provided additional management
insight into the actions necessary to mitigate the
risks when similar events occurred.
In addition to the suite of risk scenarios
considered for the HSBC Group, each major
subsidiary conducts regular macro-economic and
event-driven scenario analyses specific to that region
under the Group governance framework. Executive
managers from across HSBC meet regularly to
consider and debate the outcome of these scenarios
and formulate recommended management actions.
Macro-economic analyses are considered regularly
by GMB.
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 to
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 a payment obligation
under a contract. It arises principally from direct
lending, trade finance and leasing business, but also
from off-balance sheet products such as counterparty
risk guarantees and credit derivatives, and from the
Group’s holdings of debt securities. Among the risks
in which the Group engages, credit risk generates the
largest regulatory capital requirement.
The objectives of credit risk management,
underpinning sustainably profitable business, are
principally to maintain a strong culture of
responsible lending and a robust risk policy and
control framework; to both partner and challenge the
business line in defining and implementing risk
appetite, with its continuous re-evaluation under
actual and scenario conditions; and to ensure
independent, expert scrutiny of credit risks, their
costs and their mitigation.
The credit risk governance structures and
control frameworks implemented by the Group are
designed for all stages of economic and financial
cycles. During 2009, a number of processes, for
example, crisis management and new product
review, were enhanced in response to recent ‘best
practice’ recommendations of industry and
regulatory bodies. Central credit risk oversight and
independent review activities have been reinforced
within a common operating model for the
responsibilities and interaction of GMO Risk,
regionally integrated risk functions and country-
based management.
Credit Risk is part of the Global Risk function,
and the heads of its retail, wholesale and market risk
disciplines within GMO, as well as regional Chief
Risk Officers and certain country Chief Credit
Officers and the Head of Risk Strategy, report to
the GCRO.
Across the Group, Credit Risk fulfils the role of
an independent credit control unit, while engaging
in dialogue with business teams to set priorities,
refine risk appetite, and monitor and report higher-
risk exposures. Credit risk and risk capital
management policies and methodologies, including
analytical model developments and management
information, are enhanced in the light of experience
gained, for instance through the roll-out of the
Group’s advanced internal ratings-based (‘IRB’)
approach to Basel II. See also ‘Capital Management’
on page 285.
The Credit Risk function within GMO provides
high-level 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 develop and record in local instruction