HSBC 2012 Annual Report Download - page 130

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Managing risk / Areas of special interest
128
We also conduct reverse stress testing.
Reverse stress testing is a process of working
backwards from the event of non-viability of the
business model to identification of a range of events
that could bring that event about. Non-viability
might occur before the bank’s capital is depleted,
and could result from a variety of events. These
include idiosyncratic, systemic or combinations of
events, and/or could imply failure of the Group’s
holding company or one of its major subsidiaries and
does not necessarily mean the simultaneous failure
of all the major subsidiaries.
We use reverse stress testing as part of our risk
management process to strengthen resilience by
helping to inform early-warning triggers,
management actions and contingency plans to
mitigate against potential stresses and vulnerabilities
which the Group might face.
Areas of special interest
(Unaudited)
Compliance
In 2012, we experienced increasing levels of
compliance risk as regulators and other agencies
pursued investigations into historical activities,
and we continued to work with them in relation
to existing issues. Manifestation of these risks
included an appearance before the US Senate
Permanent Subcommittee on Investigations and the
Deferred Prosecution Agreement reached with US
authorities in relation to investigations regarding
inadequate compliance with anti-money laundering
and sanctions law, plus a related undertaking with
the FSA. We have also been involved in
investigations into the mis-selling of interest
rate derivative products to SMEs in the UK and
investigations and reviews related to certain past
submissions made by panel banks and the process
for making submissions in connection with the
setting of Libor, Euribor and other benchmark
interest and foreign exchange rates.
With a new senior leadership team and a new
strategy in place since 2011, we have already taken
significant steps to address these issues including
making changes to strengthen compliance, risk
management and culture. These steps, which should
also enhance our compliance risk management
capabilities, include the following:
• the creation of a new global structure which will
make HSBC easier to manage and control;
• simplifying our business through the ongoing
implementation of our organisational
effectiveness programme and our five economic
filters strategy;
• developing a sixth global risk filter which
should help to standardise our approach to
doing business in higher risk countries;
• substantially increasing resources, doubling
global expenditure and significantly
strengthening Compliance as a control
(rather than as an advisory) function;
• continuing to roll out the HSBC Values
programme that defines the way everyone
in the Group should act;
• appointing a new Chief Legal Officer and Head
of Group Financial Crime Compliance with
particular expertise and experience in US law
and regulation;
• appointing a new Global Head of Regulatory
Compliance and starting to restructure the
Global Compliance function accordingly;
• designing and implementing new global
standards by which we conduct our businesses;
and
• enforcing a consistent global sanctions policy.
It is clear from both our own and wider industry
experience that the level of activity among regulators
and law enforcement agencies in investigating
possible breaches of regulations has increased, and
that the direct and indirect costs of such breaches can
be significant. Coupled with a substantial increase in
the volume of new regulation, much of which has
some element of extra-territorial reach, and the
geographical spread of our businesses, we believe
that the level of inherent compliance risk that we
face as a Group will continue to remain high for the
foreseeable future.
Commercial real estate
Our exposure to commercial real estate lending
continued to be concentrated in Hong Kong, the UK,
Rest of Asia-Pacific and North America. The market
in Hong Kong and most other Asian markets in
which we conduct commercial real estate lending,
after relative buoyancy in 2011, began to stabilise
in 2012, partly due to initiatives taken by various
supervisory authorities. In the UK, many regions
were negatively affected by weak growth in the
economy, though London and the South East, where
more than 50% of our UK CRE lending is based,
continued to exhibit relative strength. In North
America, the market remained stable, in part
supported by the continued low levels of interest
rates.