HSBC 2010 Annual Report Download - page 88

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Risk profile / Managing risk / Risk governance
86
Risk
Page
Risk profile1 .................................................................. 86
Managing risk1 .............................................................. 87
Capital and liquidity ...................................................... 87
Risk governance1 .......................................................... 87
Scenario stress testing ................................................... 88
Challenges and uncertainties1 ....................................... 88
Business operations, governance and control ............. 88
Macro-economic and geopolitical ............................... 89
Macro-prudential and regulatory ............................ 90
Credit risk ..................................................................... 93
Credit risk management2 .......................................... 93
Credit exposure3 ....................................................... 95
Areas of special interest1 .......................................... 103
Credit quality of financial instruments2 ................... 114
Impairment charge1................................................... 124
HSBC Holdings2 ....................................................... 127
Securitisation exposures and other structured
products3 .............................................................. 128
Liquidity and funding2................................................... 140
Policies and procedures ........................................... 140
Primary sources of funding ...................................... 141
The management of liquidity risk ............................. 142
Contingent liquidity risk ........................................... 143
HSBC Holdings ........................................................ 144
Market risk .................................................................... 145
Monitoring and limiting market risk exposure2 ....... 145
Sensitivity analysis3 .................................................. 145
Trading and non-trading portfolios3 ........................ 146
Structural foreign exchange exposures1 ...................... 149
Sensitivity of net interest income1 ............................ 149
Defined benefit pension schemes2............................. 151
HSBC Holdings3 ....................................................... 152
Operational risk1 ........................................................... 154
Legal risk .................................................................. 154
Compliance risk ........................................................ 155
Group security and fraud risk .................................. 155
Risk management of insurance operations2 ................. 155
Overview of insurance products .............................. 156
Nature and extent of risks ........................................ 156
Insurance risk ........................................................... 157
Financial risks .......................................................... 161
Present value of in-force long-term insurance
business ................................................................ 170
Economic assumptions ............................................. 170
Non-economic assumptions ...................................... 171
Other material risks1 ..................................................... 172
Reputational risk ...................................................... 172
Pension risk .............................................................. 172
Sustainability risk ..................................................... 173
Residual value risk ................................................... 174
1 Unaudited 2 Audited 3 Audited where indicated
Risk Profile
(Unaudited)
Managing our risk profile
• A strong balance sheet remains core to our
philosophy.
• We have reduced our exposure to higher risk
asset classes while achieving controlled balance
sheet growth.
• We have ensured that our portfolio remains
diversified across regions, client sectors and risk
types.
Maintaining capital strength and
strong liquidity position
• Our tier 1 capital ratio remains strong at 12.1%.
• We have sustained our strong liquidity position
throughout 2010.
• The ratio of customer advances to deposits
remains below 80%.
Strong governance
• Our Global Risk function is independent of our
commercial and operational functions.
• Robust risk governance and accountability is
embedded across the Group.
• The Board, advised by the Group Risk
Committee, approves our risk appetite.
• A global risk operating model provides consistent
and effective oversight across all six regions and
our customer groups and global businesses.
Our top and emerging risks
• Challenges to our business operations.
• Challenges to our governance and internal control
systems.
• Macro-economic and geopolitical risk.
• Macro-prudential and regulatory risks to our
business model.