HSBC 2009 Annual Report Download - page 254

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Market risk > Impact of market turmoil / Trading portfolios
252
Stress testing
In recognition of the limitations of VAR, HSBC
augments it with stress testing to evaluate the
potential impact on portfolio values of more
extreme, although plausible, events or movements
in a set of financial variables.
The process is governed by the Stress Testing
Review Group forum. This coordinates the Group’s
stress testing scenarios in conjunction with regional
risk managers, considering actual market risk
exposures and market events in determining the
scenarios to be applied at portfolio and consolidated
levels, as follows:
• sensitivity scenarios, which consider the impact
of any single risk factor or set of factors that are
unlikely to be captured within the VAR models,
such as the break of a currency peg;
• technical scenarios, which consider the largest
move in each risk factor, without consideration
of any underlying market correlation;
• hypothetical scenarios, which consider potential
macro economic events, for example, a global
flu pandemic; and
• historical scenarios, which incorporate historical
observations of market movements during
previous periods of stress which would not be
captured within VAR.
Stress testing results provide senior management
with an assessment of the financial impact such
events would have on HSBC’s profit. The daily
losses experienced during 2009 were within the
stress loss scenarios reported to senior management.
The following table provides an overview of the
reporting of risks within this section:
Portfolio
Trading Non-trading
Risk type
Foreign exchange and
commodity ........................ VAR VAR44
Interest rate ........................... VAR VAR45
Equity .................................... VAR Sensitivity
Credit spread ......................... VAR VAR46
For footnotes, see page 291.
The impact of market turmoil on market risk
(Audited)
The market turmoil that began in 2007 and
accelerated through 2008 was characterised by
extreme market volatility and, as a consequence,
increased levels of VAR notwithstanding reduced
underlying risk positions. High levels of market
volatility across all asset classes continued into early
2009. However, the overall impact was limited as a
result of further managing down the market risk
exposures in all asset classes during this period.
Continued high levels of volatility in interest
rates in 2009 caused a small increase in VAR.
Central banks’ monetary easing has led to the
progressive stabilisation of financial markets during
the second half of 2009. Credit spreads and volatility
levels have generally continued to decrease as
liquidity improved throughout the period.
Additionally, this period was characterised by high
levels of government borrowing, uncertainty around
the robustness of economic recovery in major
economies and concerns over the effect of any
developing inflationary pressures. As a result, this
led to the continuation of high levels of volatility in
interest rates which, together with the extension of
the asset profile in the non-trading books, caused a
small increase in the total VAR.
Value at risk of the trading and non-trading
portfolios
The VAR, both trading and non-trading, for the
Group was as follows:
Value at risk
(Audited)
2009 2008
US$m US$m
At 31 December ................. 204.5 191.2
Average .............................. 156.1 158.9
Minimum ............................ 105.7 59.8
Maximum ........................... 204.5 287.1
The daily VAR, both trading and non-trading,
for the Group was as follows:
Daily VAR (trading and non-trading) (US$m)
(Unaudited)
0
50
100
150
200
250
300
350
D ec-07 May-08 Aug-08 De c-08 Apr-09 Aug-0 9 D ec-09
The major contributor to the trading and non-
trading VAR for the Group was Global Markets.
The histogram on page 253 illustrates the
frequency of daily revenue arising from Global
Markets’ trading, balance sheet management and
other trading activities.