HSBC 2005 Annual Report Download - page 163

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effect, however, does not incorporate actions that
could be taken to mitigate the effect of this interest
rate risk.
HSBC Holdings’ interest rate risk has not
changed materially in the year.
Residual value risk management
(Audited information)
A significant part of a lessor’s leasing activities is its
management of residual value risk. This arises from
operating lease transactions to the extent that the
values recovered from disposing of leased assets or
re-letting them at the end of the lease terms (the
‘residual values’) differ from those projected at the
inception of the leases. The business regularly
monitors residual value exposure by reviewing the
recoverability of the residual value projected at lease
inception. This entails considering the re-lettability
and projected disposal proceeds of operating lease
assets at the end of their lease terms. Provision is
made to the extent that the carrying values of leased
assets are impaired through residual values not being
fully recoverable.
The net book value of equipment on operating
leases includes projected residual values at the end
of current lease terms, to be recovered through
re-letting or disposal in the following periods:
2005 2004
US$m US$m
Within 1 year ............................. 355 172
Between 1-2 years ..................... –484
Between 2-5 years ..................... 465 1,042
More than 5 years ...................... 1,684 2,073
Total exposure ........................... 2,504 3,771
Operational risk management
(Unaudited information)
Operational risk is the risk of loss arising from fraud,
unauthorised activities, error, omission, inefficiency,
systems failure or external events. It is inherent in
every business organisation and covers a wide
spectrum of issues.
HSBC manages this risk through a controls-
based environment in which processes are
documented, authorisation is independent and
transactions are reconciled and monitored. This is
supported by an independent programme of periodic
reviews undertaken by Internal Audit, and by
monitoring external operational risk events, which
ensure that HSBC stays in line with best practice and
takes account of lessons learned from publicised
operational failures within the financial services
industry.
HSBC has codified its operational risk
management process by issuing a high level
standard, supplemented by more detailed formal
guidance issued in January 2005. This explains how
HSBC manages operational risk by identifying,
assessing, monitoring, controlling and mitigating the
risk, rectifying operational risk events, and
implementing any additional procedures required for
compliance with local regulatory requirements. The
processes undertaken to manage operational risk are
determined by reference to the scale and nature of
each HSBC operation. The HSBC standard covers
the following:
• operational risk management responsibility is
assigned to senior management within each
business operation;
• information systems are used to record the
identification and assessment of operational
risks and to generate appropriate, regular
management reporting;
• assessments are undertaken of the operational
risks facing each business and the risks inherent
in its processes, activities and products. Risk
assessment incorporates a regular review of
identified risks to monitor significant changes;
• operational risk loss data is collected and
reported to senior management at the business
unit level. Aggregate operational risk losses are
recorded and details of incidents above a
materiality threshold are reported to Group
Head Office. A regular report on operational
losses is made to Group Audit Committee and
the Risk Management Meeting; and
• risk mitigation, including insurance, is
considered where this is cost-effective.
In each of HSBC’s subsidiaries, local
management is responsible for implementing HSBC
standards on operational risk throughout their
operations and, where deficiencies are evident,
rectifying them within a reasonable timeframe.
Subsidiaries acquired by HSBC are required to
assess, plan and implement the standard’s
requirements within an agreed timescale.
HSBC maintains and tests contingency facilities
to support operations in the event of disasters.
Additional reviews and tests are conducted in the
event that any HSBC office is affected by a business
disruption event, to incorporate lessons learned in
the operational recovery from those circumstances.
HSBC has requested all country managers to prepare
plans for the operation of their businesses, with
reduced staffing levels, should a flu pandemic occur.