HSBC 2005 Annual Report Download - page 117

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Risk management
(Audited IFRS 7 information)
All HSBC’s activities involve analysis, evaluation,
acceptance and management of some degree of risk
or combination of risks. The most important types of
risk are credit risk (which includes country and
cross-border risk), liquidity risk, market risk,
residual value risk, reputational risk, operational risk
and insurance risk. Market risk includes foreign
exchange, interest rate and equity price risk.
HSBC’s risk management policies are designed
to identify and analyse these risks, to set appropriate
risk limits and controls, and to monitor the risks and
adherence to limits by means of reliable and up-to-
date administrative and information systems. HSBC
regularly reviews its risk management policies and
systems to reflect changes in markets, products and
emerging best practice. Individual responsibility and
accountability, instilled through training, are designed
to deliver a disciplined, conservative and constructive
culture of risk management and control.
The Group Management Board, under authority
delegated by the Board of Directors, formulates high
level Group risk management policy. A separately
constituted Risk Management Meeting monitors risk
and receives reports which allow it to review the
effectiveness of HSBC’s risk management policies.
The management of all risks that are significant
to HSBC is discussed below. The insurance
businesses manage their own credit, liquidity and
market risk along with insurance risk, so these risks
are discussed separately from those relating to the
rest of HSBC in the ‘Risk management of insurance
operations’ section.
Credit risk management
(Audited IFRS 7 information)
Credit risk is the risk of financial loss if a customer
or counterparty fails to meet an obligation under a
contract. It arises principally from lending, trade
finance, treasury and leasing business. HSBC has
standards, policies and procedures dedicated to
controlling and monitoring risk from all such
activities.
Within Group Head Office, a separate function,
Group Credit and Risk, is mandated to provide high-
level centralised management of credit risk for
HSBC worldwide. Group Credit and Risk is headed
by a Group General Manager who reports to the
Group Chief Executive. Its responsibilities include
the following:
• Formulating credit policies. These are embodied
in the HSBC standards with which all HSBC’s
operating companies are required to comply in
formulating and recording in dedicated manuals
their own more detailed credit policies and
procedures. All such credit policies and
procedures are monitored by Group Credit
and Risk.
• Establishing and maintaining HSBC’s large
credit exposure policy. This policy delineates
HSBC’s maximum exposures to individual
customers, customer groups and other risk
concentrations in an approach which is designed
to be more conservative than internationally
accepted regulatory standards. All HSBC’s
operating companies are required to comply
with the policy.
• Issuing lending guidelines to HSBC’s operating
companies on the Group’s attitude towards, and
appetite for, lending to, inter alia, specified
market sectors and industries. Each HSBC
operating company and major business unit is
required to base its own lending guidelines on
HSBC’s standards, regularly update them and
disseminate them to all credit and lending
executives.
• Undertaking an independent review and
objective assessment of risk. Group Credit and
Risk assesses all commercial non-bank credit
facilities originated by HSBC’s operating
companies in excess of designated limits, prior
to the facilities being committed to customers.
Operating companies may not confirm credit
approval without this concurrence. Renewals
and reviews of commercial non-bank facilities
over designated levels are subject to the same
process.
• Controlling exposures to banks and other
financial institutions. HSBC’s credit and
settlement risk limits to counterparties in the
finance and government sectors are approved
centrally to optimise the use of credit
availability and avoid excessive risk
concentration. A dedicated unit within Group
Credit and Risk controls and manages these
exposures globally using centralised systems
and automated processes.
• Managing exposures to debt securities by
establishing controls in respect of the liquidity
of securities held for trading and setting issuer
limits for securities held-to-maturity. Separate
portfolio limits are established for asset-backed
securities and similar instruments.
• Controlling cross-border exposures. A dedicated
unit within Group Credit and Risk uses