HSBC 2010 Annual Report Download - page 95

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Overview Operating & Financial Review Governance Financial Statements Shareholder Information
• In the EU, new authorities for segments of the
financial services sector took up their powers
with effect from 1 January 2011: the European
Banking Authority, the European Securities
Markets Authority and the European Insurance
and Occupational Pension Authority. In
addition, a European Systemic Risk Board will
consider emerging macro-prudential risks.
• In the UK, the Financial Services Authority’ s
(‘FSA’ ) prudential supervisory responsibilities
will be transferred in 2012 to a Bank of England
agency, the Prudential Regulatory Authority,
while the Financial Conduct Authority will act
as a single regulator of conduct of business for
both retail and wholesale firms.
• In the US, the Dodd-Frank Act re-assigns
responsibilities of existing agencies, demising
the Office of Thrift Supervision and creating
others, including a Financial Stability Oversight
Council to address systemic matters and a
Bureau of Consumer Protection.
Implementation risks
The extensive programme of regulatory change
carries significant implementation risks for
authorities and industry participants alike, including:
• Disparities in implementation: many official
measures are proposals in development and
negotiation, and have yet to be enacted into
regional and national legislation. These
processes could result in differing, fragmented
and overlapping implementation around the
world, leading to risks of regulatory arbitrage, a
far from level competitive playing-field and
increased compliance costs, especially for large,
global financial institutions such as HSBC.
• Timetable and market expectations: while the
Basel Committee has announced the timetable
for its core proposals in Basel III, it remains
uncertain how these and other measures will
play out in practice, for instance with regard to
differences in approach between Basel III and
the Dodd-Frank Act in the US. Meanwhile,
market expectations will exert pressure on
institutions to assess and effect compliance well
in advance of official timetables.
• Wider economic impact and unforeseen
consequences: while the conclusions of official
and industry studies have diverged, the
measures proposed will clearly impact on
financial and economic activity in ways that
cannot yet be clearly foreseen. For example,
higher capital requirements may seriously
constrain the availability of funds for lending to
support economic recovery.
Credit risk
Credit risk management
(Audited)
Credit risk is the risk of financial loss if a customer
or counterparty fails to meet a payment obligation
under a contract. It arises principally from direct
lending, trade finance and leasing business, but also
from off-balance sheet products such as counterparty
risk guarantees and credit derivatives, and from our
holdings of debt securities. Of the risks in which we
engage, credit risk generates the largest regulatory
capital requirement.
Principal objectives of our credit risk management
• to maintain across HSBC a strong culture of responsible
lending and a robust risk policy and control framework;
• to both partner and challenge our businesses in defining,
implementing and continually re-evaluating our risk appetite
under actual and scenario conditions; and
• to ensure there is independent, expert scrutiny of credit
risks, their costs and their mitigation.
The Credit Risk department fulfils the role of an
independent credit control unit as part of the Global
Risk function in our Group Management Office
(‘GMO’ ). Credit approval authorities are delegated
by the Board to the most senior Chief Executive
Officers, who receive commensurate authorities
from their own boards. In each major subsidiary, a
Chief Risk Officer reports to the local Chief
Executive Officer on credit-related issues, while
maintaining a direct functional reporting line to the
Group Chief Risk Officer in GMO.
Credit quality
(Audited)
Our credit risk rating systems and processes
differentiate exposures in order to highlight those
with greater risk factors and higher potential severity
of loss. In the case of individually significant
accounts, risk ratings are reviewed regularly and any
amendments are implemented promptly. Within our
retail businesses, risk is assessed and managed using
a wide range of risk and pricing models to generate
portfolio data.
Our risk rating system facilitates the internal
ratings-based (‘IRB’ ) approach under Basel II
adopted by the Group to support calculation of our
minimum credit regulatory capital requirement.
For further details, see ‘Credit quality of financial
instruments’ on page 114.