HSBC 2015 Annual Report Download - page 118

Report of the Directors: Risk (continued)
Areas of special interest
HSBC HOLDINGS PLC
116
Areas of special interest
During 2015, we considered a number of particular
areas because of the effect they may have on the
Group. Whilst these areas may already have been
identified in top and emerging risks, further details of
the actions taken during the year are provided below.
Financial crime compliance and regulatory
compliance
We continued to experience increased levels of compliance
risk as regulators and other agencies pursued investigations
into historical activities. Examples include continued
engagement with respect to compliance with AML and
sanctions law (historical investigations gave rise to the US
DPA and related FCA Direction), on-going interaction with
regulators relating to mis-selling of the PPI policies and
allegations of pressure selling in the UK, investigations in
relation to conduct in the foreign exchange market, and
benchmark interest rate and commodity price setting.
Details of these investigations and legal proceedings may
be found in Note 40 on the Financial Statements. The
work of the Monitor, who was appointed to assess
the effectiveness of our AML and sanctions compliance
programme, is discussed below.
The level of inherent compliance risk remained high in 2015
as the industry continued to experience greater regulatory
scrutiny and heightened levels of regulatory oversight and
supervision.
For further information about the Group’s compliance risk
management, see page 178.
The Monitor
Under the agreements entered into with the DoJ and the
FCA in 2012, including the five-year US DPA, the Monitor
was appointed to produce annual assessments of the
effectiveness of the Group’s AML and sanctions compliance
programme.
In January 2016, the Monitor delivered his second annual
follow-up review report based on various thematic and
country reviews he had conducted over the course of 2015.
In his report, the Monitor concluded that, in 2015, HSBC
made progress in developing an effective and sustainable
financial crime compliance programme. However, he
expressed significant concerns about the pace of that
progress, instances of potential financial crime and systems
and controls deficiencies, whether HSBC is on track to meet
its goal to the Monitor’s satisfaction within the five-year
period of the US DPA and, pending further review and
discussion with HSBC, did not certify as to HSBC’s
implementation of and adherence to remedial measures
specified in the US DPA. The ‘US deferred prosecution
agreement and related agreements and consent orders’
are discussed in top and emerging risks on page 113.
Regulatory stress tests
Stress testing is an important tool for regulators to assess
vulnerabilities in the banking sector and in individual banks,
the results of which could have a significant effect on
minimum capital requirements, risk and capital management
practices and planned capital actions, including the payment
of dividends, going forward.
We are subject to regulatory stress testing in many
jurisdictions. These have increased both in frequency and in
the granularity of information required by supervisors. They
include the programmes of the Bank of England (‘BoE’), the
FRB, the OCC, the EBA and the Hong Kong Monetary
Authority and other regulators. Assessment by regulators
is on both quantitative and qualitative bases, the latter
focusing on portfolio quality, data provision, stress testing
capability, forward-looking capital management processes
and internal management processes.
In 2015, the Group took part in the BoE’s concurrent stress
test exercise involving major UK banks. The 2015 stress
scenario incorporates a global recession in which
disinflationary pressures and weakening expectations of
growth lead to diminished risk appetite, falling commodity
prices and lower market liquidity. Several emerging
economies are adversely affected, as is the eurozone,
where the rate of deflation increases. The UK experiences
a downturn as the global recession affects exports and as
financial linkages and weaker confidence affects other parts
of the economy.
Selected key economic variables for the BoE 2015 concurrent
stress test, as specified by the BoE
GDP
growth1
Unemploy-
ment2
House
Price Index
Equity
prices3
%% % %
Hong Kong (5.6) 5.8 40 65
China 1.7
–
35
–
UK (3.1) 9.2 20 36
1 Worst quarter (percentage quarter on quarter – year earlier).
2 Peak percentage.
3 Price fall percentage (start to trough).
The results were published by the BoE alongside the
Financial Stability Report on 1 December 2015. The stressed
CET1 capital ratio of HSBC was deemed by the BoE to fall
to a minimum of 7.7%, taking into account management
mitigating actions accepted by the BoE for this exercise. This
was above the hurdle ratio of 4.5% set for this exercise. The
leverage ratio fell to a minimum of 3.7% after management
actions, also above the minimum hurdle ratio of 3%.
HSBC North America Holdings Inc. (‘HNAH’) participated
in the 2015 Comprehensive Capital Analysis and Review
(‘CCAR’) and the annual Dodd-Frank Act Stress Test (‘DFAST’)
programmes as required by the FRB. In addition, HSBC Bank
USA N.A. (‘HSBC Bank USA’) participated in the OCC’s 2015
DFAST programme. The CCAR and DFAST submissions were
made on 5 January 2015 and their results publically disclosed
on 5 March 2015. On 11 March 2015, HNAH received notice
that the FRB did not object to its 2015 Capital Plan – a key
component of the CCAR submission. Under DFAST, HNAH is
also required to conduct a company-run mid-cycle stress
test, the results of which were disclosed on 16 July 2015.
Under this test HNAH maintained capital levels in excess of
regulatory minimums; specifically, the stressed common
equity tier 1 ratio fell to a minimum of 7.5% compared with
a required level of 4.5%.