HSBC 2012 Annual Report Download - page 328

HSBC HOLDINGS PLC
Report of the Directors: Corporate Governance (continued)
Board committees > Group Risk Committee
326
Current top and emerging risks
Categories
Top and emerging risks
Macroeconomic and geopolitical risk
• Emerging market slow down
• Macroeconomic risks within developed economies
• Increased geopolitical risk in certain regions
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
Risks related to our business operations, governance
and internal control systems
• Regulatory commitments and consent orders including under the Deferred
Prosecution Agreement
• Challenges to achieving our strategy in a downturn
• Internet crime and fraud
• Level of change creating operational complexity and heightened operational
risk
• Information security risk
• Model risk
Stress testing
Our stress testing and scenario analysis programme
is central to the monitoring of top and emerging
risks. It highlights the vulnerabilities of our business
and capital plans to the adverse effects of extreme
but plausible events.
The outcome of the testing and analysis is also
used to assess the potential impact of the relevant
scenarios on the demand for regulatory capital
compared with its supply.
Management develops action plans to mitigate
risks identified. The extent to which those action
plans are implemented depends on management’s
evaluation of the risks and their potential
consequences, taking into account HSBC’s risk
appetite.
Further information on scenario stress testing is
set out on pages 127 and 128.
Stress tests and scenario tests fall into three
main classifications: regulatory scenarios; Group-
wide business scenarios; and specific business or
exposure scenarios.
During the year, the GRC reviewed the outcome
of a number of stress tests undertaken by the Group
and the implementation of action plans to mitigate
risks where appropriate; including stress tests on the
Annual Operating Plan under mild and severe
macroeconomic scenarios, a Group reverse liquidity
stress test, a Group reverse solvency stress test and a
eurozone break-up stress test.
Internal Audit has conducted a review of
stress testing within the Group including model
development, validation and use, and the
methodology, governance and management of
enterprise-wide stress testing. The development of
HSBC’s stress testing and scenario testing analysis
programme will continue to be an area of focus for
the Committee.
Committee activities
The GRC undertook the following key activities in
the discharge of its responsibilities:
• Oversight of executive risk management.
Regular reports and presentations were received
from the Group Chief Risk Officer including at
each meeting a presentation of a ‘risk map’,
which provided analysis, on a Group-wide,
global business and regional basis, of risk
profiles for categories of risk identified in the
Group Risk Appetite Statement, and a top
and emerging risks report which summarised
proposed mitigating actions for identified risks.
• Legal and regulatory environment. Reports
were received from the Chief Legal Officer on
forward-looking legal risks, the Group Head of
Compliance on forward-looking compliance
risks and the Head of Group Performance and
Reward. Regular updates were received on the
investigations by US regulatory and law
enforcement authorities and US dispute risk and
compliance matters in the US and the steps
taken to remediate these compliance issues. The
Group Finance Director, Group Chief Risk
Officer, Group Chief Accounting Officer, Group
Company Secretary and the external auditor and
other senior executives attended Committee
meetings.
• Stress testing. The Committee reviewed the
outcome of certain stress tests referred to in the