HSBC 2012 Annual Report Download - page 133

131
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Macroeconomic and geopolitical risk
• Emerging market slowdown.
• Macroeconomic risks within developed
economies.
• Increased geopolitical risk in certain
regions.
Emerging market slowdown
World growth is slowing as demand in mature
economies is subdued and credit availability and
investment activity remain constrained. A number
of mature economies are implementing austerity
measures in order to reduce their deficits and public
debt. This is expected to help resolve the sovereign
and banking crisis in the medium term but, in the
short term, it is limiting growth, leaving labour
markets weak and thereby making fiscal
consolidation a bigger challenge. This is affecting
the rest of the world through lower trade, reduced
international financing as banks are deleveraging,
and the potential disruption to capital flows. In
addition, it makes emerging countries more
vulnerable to a slowdown in mature economies.
Potential impact on HSBC
• Trade and capital flows may contract as a result
of lower world production, banks deleveraging,
the introduction of protectionist measures in
certain markets or the emergence of geopolitical
risks, which in turn might curtail profitability.
• A prolonged period of low interest rates due
to policy actions taken to address the economic
crisis in mature economies will constrain
through spread compression and low returns
on assets the interest income we earn from
investing our excess deposits.
• During 2012, we continued to reduce our
sovereign and financial institution counterparty
credit positions in peripheral eurozone
countries. In addition, we actively sought to
identify and reduce exposures to those
counterparties domiciled in core European
countries that had exposures to sovereigns
and/or banks in peripheral eurozone countries of
sufficient size to threaten their ongoing viability
in the event of an unfavourable conclusion to
the current situation.
Macroeconomic risks within developed
economies
There is still some risk of one or more countries
leaving the euro, although the situation improved
in 2012. Even without a eurozone break-up,
the currency will remain vulnerable to market
perception. Banks in some countries remain very
fragile and the rest of the European banking industry
could be affected through its exposure to the weakest
countries. Banks are therefore expected to continue
to deleverage. In the current context of very low
growth due to austerity measures, this could further
aggravate the economic crisis and could push
European countries into a vicious circle of economic
crisis and sovereign difficulties. Although our
exposure to the peripheral eurozone countries is
relatively limited, we are exposed to counterparties
in the core European countries which could be
affected by any sovereign or currency crisis. Our
eurozone exposures are described in more detail on
page 192.
Potential impact on HSBC
• We could incur significant losses stemming
from the exit of one or more countries from
the eurozone and the redenomination of their
currencies.
• Our exposures to European banks may come
under stress, heightening the potential for credit
and market risk losses, if the sovereign debt and
banking system crisis in the region increases the
need to recapitalise parts of the sector.
• In the event of contagion from stress in the
peripheral eurozone sovereign and financial
sectors, our ability to borrow from other
financial institutions or to engage in funding
transactions may be adversely affected by
market dislocation and tightening liquidity.
• A sovereign default without co-ordinated
intervention to protect the rest of the eurozone
could trigger banking defaults in companies
with which we do business and have a knock-on
effect on the global banking system. We have
actively managed the risk of sovereign defaults
during 2012 by reducing exposures and other
measures.
• In seeking to manage and mitigate these risks,
we have prepared and tested detailed operational
contingency plans to deal with such a scenario.
However, such plans may not be adequate or
may not prove effective.
Increased geopolitical risk in certain regions
Weak global economic growth is exacerbating the
risk of protectionism and some countries may
impose restrictions on trade or on capital flows to
protect their domestic economies.