HSBC 2012 Annual Report Download - page 327

325
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
presentations from the Group Head of Compliance,
Group Head of Internal Audit, the Chief Legal
Officer and other business, function and risk heads.
Risk appetite
Risk appetite is a key component of our management
of risk. The Board, advised by the GRC, approves
the Group’s risk appetite, which describes the types
and levels of risk that the Group is prepared to
accept in executing our strategy and which is set out
in the Group’s Risk Appetite Statement. Embedding
risk appetite statements and the related monitoring
and reporting framework across the Group has
continued to be an area of significant focus in 2012
with initiatives undertaken to:
• further integrate consideration of risk appetite
into the process for developing the Annual
Operating Plan and to enhance alignment
between Group strategy and risk appetite; and
• continue to embed and develop risk appetite
statements throughout the global businesses and
functions.
Our risk appetite framework is underpinned by
the following core characteristics:
Risk appetite: core characteristics
• Risk must be commensurate with sustainable returns
• Strong balance sheet
• Healthy capital position
• Conservative liquidity management
• Strong brand
• Robust Group structure of separate legal entities
• The global businesses should produce sustainable long-term
earnings growth
• Risk diversification
These core characteristics are applied to define
the risk appetite statements on a Group-wide, global
business and regional level. The relevant strategic
and operational objectives, within which we expect
businesses and regions to operate, are expressed
quantitatively across the following dimensions:
Strategic and operational objectives
Earnings 1. Generate sustainable economic profit commensurate with the risks taken
2. Maintain capital in excess of regulatory and internal economic capital requirements
3. Maintain a strong tier 1 ratio comprising a high proportion of core tier 1
4. Maintain a well diversified funding structure with a particular focus on advances to core funding ratios
Capital and liquidity
5. Off-balance sheet vehicles should not be material in size relative to the total balance sheet
Impairments and
expected losses
6. Manage impairments and expected losses within the Group’s tolerance
7. Manage all risk categories within the risk appetite
8. Harness benefits from business diversification to generate non-volatile and sustainable earnings
Risk category and
diversification
9. Compete for business with international customers where market connectivity is critical, businesses with
local customers where we have local scale and products where global scale is critical to effectiveness
Scenario and
stress testing
10. Use robust and appropriate scenario stress testing to assess the potential impact on the Group’s capital
adequacy and strategic plans
Top and emerging risks
Identifying and monitoring top and emerging risks
is integral to our approach to risk management. We
define a ‘top risk’ as being a current, emerged risk
which has arisen across any of our risk categories,
regions or global businesses and has the potential to
have a material impact on our financial results or
our reputation and the sustainability of our long-term
business model, and which may form and crystallise
within a one year horizon. We consider an ‘emerging
risk’ to be one which has large uncertain outcomes
which may form and crystallise beyond a one-year
horizon and, if it were to crystallise, could have a
material effect on our long-term strategy.
The GRC discusses top and emerging risks with
management at each of its meetings. Current top and
emerging risks, which are summarised below, are
viewed as falling into three broad categories:
macroeconomic and geopolitical; macro-prudential,
regulatory and legal risks to our business model; and
risks related to our business operations, governance
and internal control systems.
The following table shows the current top and
emerging risks identified through our risk
management processes: