HSBC 2012 Annual Report Download - page 134

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Top and emerging risks
132
In Egypt, the political process remains in
transition with a continuing risk of instability. In
addition, the fighting in Syria may disrupt global
international relations, with tensions between Israel
and Iran adding to the risks in the region.
Potential impact on HSBC
• Our results are subject to the risk of loss from
unfavourable political developments, currency
fluctuations, social instability and changes in
government policies on matters such as
expropriation, authorisations, international
ownership, interest-rate caps, foreign exchange
transferability and tax in the jurisdictions in
which we operate. Actual conflict could bring
about loss of life among our staff and physical
damage to our assets.
• We have increased our monitoring of the
geopolitical and economic outlook, in particular
in countries where we have material exposures
and a physical presence. Our internal credit risk
rating of sovereign counterparties takes these
factors into account and drives our appetite for
conducting business in those countries. Where
necessary, we adjust our country limits and
exposures to reflect our appetite and mitigate
these risks as appropriate.
Macro-prudential, regulatory and legal risks
to our business model
• Regulatory developments affecting our
business model and Group profitability.
• Regulatory investigations, fines,
sanctions and requirements relating to
conduct of business and financial crime
negatively affecting our results and
brand.
• Dispute risk.
Financial service providers face increasingly
stringent and costly regulatory and supervisory
requirements, particularly in the areas of capital
and liquidity management, conduct of business,
operational structures and the integrity of financial
services delivery. Increased government intervention
and control over financial institutions, together with
measures to reduce systemic risk, may significantly
alter the competitive landscape. These measures may
be introduced as formal requirements in a supra-
equivalent manner and to differing timetables across
regulatory regimes.
Regulatory developments affecting our
business model and Group profitability
Several regulatory changes are likely to affect our
activities, both of the Group as a whole and of some
or all of our principal subsidiaries. These changes
include (i) the introduction of Basel III measures in
the EU through CRD IV and uncertainty on both the
timing and final form of implementation given that
certain areas, such as, the operation of capital buffers
have yet to be finalised and the technical guidance
from the European Banking Authority (‘EBA’)
across numerous areas has yet to be published, (ii) a
new regulatory structure within the UK comprising
the Financial Policy Committee (‘FPC’), Prudential
Regulatory Authority (‘PRA’) and Financial
Conduct Authority (‘FCA’) and, in particular, the
effects of the ability of the FPC to seek additional
capital for lending to sectors perceived as higher
risk, (iii) the designation of the Group by the
Financial Stability Board as a global systemically
important bank; (iv) proposed legislation in the UK
to give effect to the recommendations of the ICB in
relation to ‘ring-fencing’ of the UK retail banking
from wholesale banking activities, the structural
separation of other activities envisaged in legislative
proposals in the US (including the Volcker Rule
proposed under the Dodd-Frank Act) and in France
and, in the EU, considerations following the
Liikanen Group recommendations; (v) changes in
the regime for the operation of capital markets with
increasing standardisation, central clearing, reporting
and margin requirements; (vi) requirements flowing
from arrangements for the recovery and resolution of
the Group and its main operating entities; and (v)
changing standards for the conduct of business.
There is also continued risk of further changes to
regulation relating to remuneration and other taxes.
Potential impact on HSBC
• Proposed changes relating to capital and
liquidity requirements, remuneration and/or
taxes could increase the Group’s cost of doing
business, reducing future profitability.
• Proposed changes in and the implementation of
regulations for derivatives and central
counterparties, the ICB ring-fencing proposals,
recovery and resolution plans, the Volcker Rule
and the Foreign Account Tax Compliance Act
(‘FATCA’) may affect the manner in which we
conduct our activities and structure ourselves,
with the potential both to increase the costs of
doing business and curtail the types of business
we can carry out, with the risk of decreased
profitability as a result. Due to the fact that the
development and implementation of many of