HSBC 2015 Annual Report Download - page 107

HSBC HOLDINGS PLC
105
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Processes
Banking and insurance risks
The material risk types associated with our banking and
insurance manufacturing operations are described in
the tables below.
Description of risks – banking operations
Risks Arising from Measurement, monitoring and management of risk
Credit risk (page 118)
The risk of financial loss if a
customer or counterparty fails to
meet an obligation under a
contract.
Credit risk arises principally
from direct lending, trade
finance and leasing
business, but also from
certain other products such
as guarantees and
derivatives.
Credit risk is:
• measured as the amount which could be lost if a customer or
counterparty fails to make repayments. In the case of derivatives,
the measurement of exposure takes into account the current
mark-to-market value to HSBC of the contract and the expected
potential change in that value over time caused by movements in
market rates;
• monitored within limits approved by individuals within a
framework of delegated authorities. These limits represent the
peak exposure or loss to which HSBC could be subjected should the
customer or counterparty fail to perform its contractual
obligations; and
• managed through a robust risk control framework which outlines
clear and consistent policies, principles and guidance for risk
managers.
Liquidity and funding risk (page 154)
The risk that we do not have
sufficient financial resources to
meet our obligations as they fall
due or that we can only do so at
excessive cost.
Liquidity risk arises from
mismatches in the timing of
cash flows.
Funding risk arises when the
liquidity needed to fund
illiquid asset positions
cannot be obtained at the
expected terms and when
required.
Liquidity and funding risk is:
• measured using internal metrics including stressed operational
cash flow projections, coverage ratios and advances to core
funding ratios;
• monitored against the Group’s liquidity and funding risk
framework and overseen by regional Asset and Liability
Management Committees (‘ALCO’s), Group ALCO and the RMM;
and
• managed on a stand-alone basis with no reliance on any Group
entity (unless pre-committed) or central bank unless this
represents routine established business-as-usual market practice.
Market risk (page 166)
The risk that movements in
market factors, including foreign
exchange rates and commodity
prices, interest rates, credit
spreads and equity prices, will
reduce our income or the value of
our portfolios.
Exposure to market risk is
separated into two
portfolios:
• trading portfolios
comprise positions
arising from market-
making and warehousing
of customer-derived
positions.
• non-trading portfolios
comprise positions
that primarily arise
from the interest rate
management of our
retail and commercial
banking assets and
liabilities, financial
investments designated
as available for sale and
held to maturity, and
exposures arising from
our insurance operations
(page 180).
Market risk is:
• measured in terms of value at risk, which is used to estimate
potential losses on risk positions as a result of movements in
market rates and prices over a specified time horizon and to a
given level of confidence, augmented with stress testing to
evaluate the potential impact on portfolio values of more extreme,
though plausible, events or movements in a set of financial
variables;
• monitored using measures including the sensitivity of net interest
income and the sensitivity of structural foreign exchange which are
applied to the market risk positions within each risk type; and
• managed using risk limits approved by the GMB for HSBC Holdings
and our various global businesses. These units are allocated across
business lines and to the Group’s legal entities.