HSBC 2010 Annual Report Download - page 201

199
Overview Operating & Financial Review Governance Financial Statements Shareholder Information
Risk appetite: core characteristics
• Strong balance sheet
• Strong brand
• Healthy capital position
• Conservative liquidity management
• Risk must be commensurate with returns
• Robust Group structure of separate legal entities
• The customer group and global product mix should produce sustainable long term earnings growth
• Risk diversification
The GRC monitors the Group’s risk appetite and
satisfies itself that executive management has taken
account of the future macroeconomic and financial
environment in identifying top and emerging risks.
From the core characteristics of the Group’s risk
appetite (see table above), our strategic and
operational objectives are determined which are
consistent with the Group’s risk appetite. These
objectives are summarised in the table below:
Strategic and operational objectives
Earnings 1. Generate sustainable economic profit commensurate with the risks taken
2. Maintain capital in excess of regulatory requirements and a long term debt rating of AA
3. Maintain a strong tier 1 ratio comprising a high proportion of core tier 1
4. Maintain a well diversified funding structure with a particular focus on advances to core funding ratios
Capital and liquidity
5. Off balance sheet vehicles should not be material in size relative to the total balance sheet
Impairments and
expected losses
6. Manage impairments and expected losses within the Group’s tolerance
7. Manage all risk categories within the risk appetite
8. Harness benefits from business diversification to generate non-volatile and sustainable earnings
Risk category and
diversification
9. Compete for business with international customers where market connectivity is critical; businesses with
local customers where we have local scale, and products where global scale is critical to effectiveness
Scenario and stress
testing
10. Use robust and appropriate scenario stress testing to assess the potential impact on the Group’s capital
adequacy and strategic plans
Top and emerging risks
Identifying and monitoring top and emerging risks is
integral to HSBC’s approach to risk management.
We define a ‘top risk’ as being a current, visible risk
which has the potential to have a material impact on
our financial results, reputation or the sustainability
of our long-term business model. An ‘emerging risk’
is one which has large unknown components which,
if they were to crystallise, could have material
impact on our long-term strategy.
Current top and emerging risks are viewed as
falling under four broad categories: challenges to
business operations; challenges to governance and
internal control; macro-economic and geopolitical;
and macro-prudential and regulatory. These are
summarised below:
Cate
g
ories / definitions To
p
and emer
g
in
g
risks
Challenges to our business operations • Challenges to our operating model in an economic downturn (in developed
economies) and rapid growth (in emerging markets)
• Internet crime and fraud
Challenges to our governance and internal control
systems
• Operational complexity associated with high levels of change
• Information security risk
Macro-economic and geopolitical risk
• Potential emerging markets asset bubble
• Increased geopolitical risk in the Middle East, with possible contagion
Macro-prudential and regulatory risks to our business
model
• Regulatory change impacting business model and Group profitability
• Regulatory requirements affecting conduct of business