HSBC 2015 Annual Report Download - page 105

HSBC HOLDINGS PLC
103
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to achieve our medium to long-term business objectives.
It is a key component of our management of risk and is
reviewed on an ongoing basis, with formal approval from
the Board every six months on the recommendation of the
Group Risk Committee.
The Group’s actual risk appetite profile is reported to the
RMM on a monthly basis to enable senior management to
monitor the risk profile and guide business activity in order
to balance risk and return, allowing risks to be promptly
identified and mitigated, and inform risk-adjusted
remuneration to drive a strong risk culture across the
Group.
The RAS is established and monitored as part of the Global
Risk Appetite Framework, which provides a globally
consistent and structured approach to the management,
measurement and control of risk by detailing the
processes, governance and other features of how risk
appetite is cascaded to drive day-to-day decision-making
through policies, limits and the control framework.
Risk appetite informs the strategic and financial planning
process, defining the desired forward-looking risk profile
of the Group. It is also embedded in other enterprise risk
tools such as top and emerging risks and stress testing, to
ensure consistency in risk management.
Global businesses, geographical regions and strategic
countries are required to have their own RASs, which are
subject to assurance to ensure they remain directionally
aligned to the Group’s. All RASs and business activities are
guided and underpinned by a set of qualitative principles,
outlined in the Appendix to Risk on page 194. Additionally,
quantitative metrics are defined along with appetite and
tolerance thresholds for 10 risk areas.
Enterprise-wide risk management tools
The following processes to identify, manage and mitigate
risks are integral to risk management at HSBC, helping to
ensure that we remain within our risk appetite.
Risk map
The risk map process provides a point-in-time view of the
risk profile of the Group across a suite of risk categories
including our material banking risks and insurance risks
(see page 105). It assesses the potential for these risks
to materially affect our financial results, reputation or
business sustainability on current and projected bases.
The risk categories presented on the risk map are regularly
assessed through our risk appetite profile, are stress tested
and, where thematic issues arise, are considered for
classification as top or emerging risks.
Top and emerging risks
Identifying, managing and monitoring risks are integral to
our approach to risk management. Our top and emerging
risks process provides a forward-looking view of those risks
which have the potential to threaten the execution of our
strategy and our global operations. Top and emerging risks
are generally described thematically, and may have an
impact across multiple risk map categories, global
businesses or regions.
We define a ‘top risk’ as a thematic issue arising across
any combination of risk map categories, regions or global
businesses which has the potential to have a material
effect on the Group’s financial results, reputation or long-
term business model, and which may form and crystallise
between six months and one year. The risk impact may
be well understood by senior management, with some
mitigating actions already in place. Stress tests of varying
granularity may also have been carried out to assess the
effect.
An ‘emerging risk’ is defined as a thematic issue that
has large unknown components which may form and
crystallise beyond a one-year time horizon. If it were to
materialise, it could have a significant material effect on a
combination of the Group’s long-term strategy, profitability
and reputation. Existing management action plans are
likely to be minimal, reflecting the uncertain nature of
these risks at this stage. Some high-level analysis and/or
stress testing may have been carried out to assess the
impact.
Our top and emerging risk framework enables us to identify
and manage current and forward-looking risks to ensure
our risk appetite remains appropriate. The ongoing
assessment of our top and emerging risks is informed by a
comprehensive suite of risk factors (see page 108) and the
results of our stress testing programme. When our top and
emerging risks result in our risk appetite being exceeded,
or have the potential to exceed, we take steps to mitigate
them, including reducing our exposure to areas of stress.
Our current top and emerging risks are discussed on page 110.
Stress testing
Our stress testing and scenario analysis programme
examines the sensitivities of our capital plans and
unplanned demand for regulatory capital under a number
of scenarios and ensures that top and emerging risks are
appropriately considered. These scenarios include, but
are not limited to, adverse macroeconomic events, failures
at country, sector and counterparty levels, geopolitical
occurrences and a variety of projected major operational
risk events.
At Board level, the Group Chief Risk Officer and the Group
Finance Director are the two executive Directors jointly
accountable for oversight of stress testing in HSBC. The
Stress Testing Management Board, which is chaired by the
Group Finance Director, is responsible for stress testing
strategy and stewardship. Updates on stress testing are
provided regularly to the RMM. The Group Risk Committee
is informed and consulted on the bank’s stress testing
activities, as appropriate, and approves the key elements
of the Bank of England concurrent stress test, including
final results.
The development of macroeconomic scenarios is a critical
part of the process. Potential scenarios are defined and
generated by a panel of economic experts from various
global teams, including Risk and Finance. Scenarios are
translated into financial impacts, such as on our forecast
profitability and RWAs, using a suite of stress testing
models and methodologies. Models are subject to
independent model review and go through a process of