HSBC 2015 Annual Report Download - page 106

Report of the Directors: Risk (continued)
Managing risk
HSBC HOLDINGS PLC
104
validation and approval. Model overlays may be considered
where necessary.
Stress testing results are subject to a review and challenge
process at regional, global business and Group levels and
action plans are developed to mitigate identified risks. The
extent to which these action plans would be implemented
in the event of particular scenarios occurring depends on
senior management’s evaluation of the risks and their
potential consequences, taking into account HSBC’s risk
appetite.
In addition to the Group-wide risk scenarios, each major
HSBC subsidiary conducts regular macroeconomic and
event-driven scenario analyses specific to their region.
They also participate in local regulatory stress testing
programmes, where required.
Stress testing is applied to risks such as operational risk,
including market risk, liquidity and funding risk, credit risk
and conduct to evaluate the potential effects of stress
scenarios on portfolio values, structural long-term funding
positions, income or capital.
Reverse stress testing is run annually on both Group and,
where required, subsidiary entity bases. This stress test is
conducted by assuming the business model is non-viable
and works backwards to identify a range of occurrences
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, including idiosyncratic or systemic
events or combinations thereof. It could imply failure
of the Group’s holding company or one of its major
subsidiaries. Reverse stress testing is used to strengthen
our resilience by identifying potential stresses and
vulnerabilities which the Group might face and helping to
inform early-warning triggers, management actions and
contingency plans designed to mitigate their effect, were
they to occur.
HSBC participated in regulatory stress testing programmes
in a number of jurisdictions during 2015, as outlined on
page 116. In addition, we have conducted an internal stress
test, incorporating the latest portfolio developments and
business plan. For this exercise management considers
that the Bank of England 2015 scenario reflects key risks
which merit examination at this time. The results of this
exercise are used for internal risk and capital management
processes, including the Internal Capital Adequacy
Assessment Process (‘ICAAP’).
Responsibilities
Three lines of defence
We use the three lines of defence model to underpin
our approach to strong risk management. It defines
responsibilities for: identifying, assessing, measuring,
managing, monitoring and mitigating risks; encouraging
collaboration; and enabling efficient coordination of risk
and control activities.
For details of the three lines of defence model, see page 177.
People
All employees are required to identify, assess and manage
risk within the scope of their assigned responsibilities and,
as such, they are critical to the effectiveness of the three
lines of defence.
Clear and consistent employee communication on risk
conveys strategic messages and sets the tone from senior
leadership. We deploy a suite of mandatory training on
critical risk and compliance topics to embed skills and
understanding and strengthen the risk culture within HSBC.
It reinforces the attitude to risk in the behaviour expected
of employees, as described in our risk policies. The training
is updated regularly, describing technical aspects of the
various risks assumed by the Group and how they should
be managed effectively. A confidential disclosure line
enables staff to raise concerns (see page 179).
Our risk culture is reinforced by our approach to
remuneration. Individual awards, including those for
executives, are based on compliance with HSBC Values and
the achievement of financial and non-financial objectives
which are aligned to our risk appetite and global strategy.
For further information on risk and remuneration, see the Report
of the Group Remuneration Committee on page 270.
Independent Risk function
Global Risk, headed by the Group Chief Risk Officer,
is responsible for the enterprise risk management
framework. This includes establishing global policy,
monitoring risk profiles and forward-looking risk
identification and management. Global Risk also has
functional responsibility for risk management in support of
HSBC’s global businesses and regions through its Risk sub-
functions, which are independent from the sales and trading
functions of the Group’s businesses. This independence
ensures the necessary balance in risk/return decisions.