HSBC 2012 Annual Report Download - page 128

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Managing risk
126
Risks Arising from Measurement, monitoring and management of risk
Fiduciary risk
The risk of breaching our
f
iduciary duties.
Fiduciary risk arises from our
business activities where we
act in a fiduciary capacity as
Trustee, Investment Manager
or as mandated by law or
regulation.
Fiduciary risk:
• is measured by monitoring against risk appetite;
• is monitored through the use of key indicators; and
• is managed within the designated businesses via a comprehensive
policy framework.
Reputational risk
The risk that illegal, unethical
or inappropriate behaviour by
the Group itself, members of
staff or clients or
representatives of the Group
will damage HSBC’s
reputation, leading,
p
otentially, to a loss of
business, fines or penalties.
Reputational risk encompasses
negative reaction not only to
activities which may be illegal
or against regulations, but also
to activities that may be
counter to societal standards,
values and expectations. It
arises from a wide variety of
causes, including how we
conduct our business and the
way in which clients to whom
we provide financial services,
and bodies who represent
HSBC, conduct themselves.
Reputational risk:
• is measured by reference to our reputation as indicated by our dealings
with all relevant stakeholders, including media, regulators, customers
and employees;
• is monitored through a reputational risk management framework,
taking into account the results of the compliance risk monitoring
activity outlined above; and
• is managed by every member of staff and is covered by a number of
policies and guidelines. There is a clear structure of committees and
individuals charged with mitigating reputational risk, including the
Group Reputational Risk Policy Committee and regional/business
equivalents.
Pension risk
The risk that contributions
f
rom Group companies and
members fail to generate
sufficient funds to meet the
cost of accruing benefits for
the future service of active
members, and the risk that the
p
erformance of assets held in
p
ension funds is insufficient to
cover existing pension
liabilities.
Pension risk arises from
investments delivering an
inadequate return, economic
conditions leading to
corporate failures, adverse
changes in interest rates or
inflation, or members living
longer than expected
(longevity risk).
Pension risk includes
operational risks listed above.
Pension risk:
• is measured in terms of the schemes’ ability to generate sufficient
funds to meet the cost of their accrued benefits;
• is monitored through the specific risk appetite that has been developed
at both Group and regional levels; and
• is managed locally through the appropriate pension risk governance
structure and globally through the Risk Management Meeting.
Sustainability risk
The risk that the
environmental and social
effects of providing financial
services outweigh the
economic benefits.
Sustainability risk arises from
the provision of financial
services to companies or
projects which run counter to
the needs of sustainable
development.
Sustainability risk:
• is measured by assessing the potential sustainability effect of a
customer’s activities and assigning a Sustainability Risk Rating to
all high risk transactions;
• is monitored quarterly by the Risk Management Meeting and monthly
by Group Sustainability Risk management; and
• is managed using sustainability risk policies covering project finance
lending and sector-based sustainability polices for sectors with high
environmental or social impacts.
Risk profile
Risks are assumed by our global businesses in
accordance with their risk appetite and are managed
at Group, global business and regional levels. All
risks are identified through our risk map process,
which sets out the Group’s risk profile in relation to
key risk categories in different regions and global
businesses. In addition to those listed above, risks
including model, financial management, capital,
Islamic finance and strategic risk are identified and
monitored through the risk map process.
These risks are then regularly assessed through
our risk appetite framework, subjected to stress
testing and considered for classification as top and
emerging risks. These processes are discussed in
further detail below.
Credit, market and operational risks are measured
using the Pillar 1 framework for regulatory capital
through the allocation of risk-weighted assets. We
measure other risks using our economic capital model
under Pillar 2 (as described in our Pillar 3 Disclosures
2012 report.)
Risk appetite
Risk appetite is set out in the Group’s Risk Appetite
Statement, which describes the types and levels of
risk that the Group is prepared to accept in executing
our strategy. It is approved by the Board on the
advice of the Group Risk Committee, and is a key