Last checked at 26 Aug 2015 16:28
Risk profile | 57 |
Managing risk | 57 |
Top and emerging risks | 57 |
Areas of special interest | 59 |
Credit risk | 60 |
Liquidity and funding | 76 |
Market risk | 78 |
Operational risk | 82 |
Reputational risk | 83 |
Risk management of insurance operations | 84 |
There have been no material changes to the policies and practices regarding risk management and governance described in the Annual Report and Accounts 2014 with the exception of the implementation of the new AML and sanctions policy procedures outlined on page 83.
A description of our principal risks and uncertainties for the remaining six months of 2015 is discussed in top and emerging risks below.
A summary of our current policies and practices regarding risk is provided in the Appendix to Risk on page 204 of the Annual Report and Accounts 2014.
Risk profile
Managing our risk profile
· A strong balance sheet remains core to our philosophy.
· Our portfolios continue to be aligned to our risk appetite and strategy.
· Our risk management framework is supported by strong forward-looking risk identification.
· We manage and reduce financial crime compliance risk with defined global standards programme.
Maintaining capital strength and a strong liquidity position
· Our common equity tier 1 capital ratio remained strong at 11.6%.
· We sustained our strong liquidity position throughout the first half of 2015.
· The ratio of customer advances to deposits remained significantly below 90%.
Strong governance
· Robust risk governance and accountability is embedded across the Group.
· The Board, advised by the Group Risk Committee, approves our risk appetite.
· Our global risk operating model supports adherence to globally consistent standards and risk management policies across the Group.
Managing risk
Our established framework ensures appropriate oversight of and accountability for the effective management of risk.
We employ a risk management framework at all levels of the organisation and across all risk types, fostering a continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions. It is underpinned by a strong risk culture and reinforced by HSBC Values and our Global Standards and ensures that our risk profile remains conservative and aligned to our risk appetite. Our risk management framework is set out on page 24 of the Annual Report and Accounts 2014.
Risk factors
Our businesses are exposed to a broad range of risks that could potentially affect the results of our operations or financial condition. These risk factors are summarised on page 113 of the Annual Report and Accounts 2014. They inform the ongoing assessment of our top and emerging risks, which may result in our risk appetite being revised.
Top and emerging risks
Our top and emerging risk framework enables us to identify, continuously monitor and manage current and forward-looking risks to ensure our risk appetite remains appropriate.
The ongoing assessment of our top and emerging risks, which is informed by analysis of our risk factors and the results of our stress testing programme, may result in our risk appetite being revised. Our approach to identifying and monitoring top and emerging risks is described on page 22 of the Annual Report and Accounts 2014.
During 1H15, senior management paid particular attention to those risks which were identified as top or emerging, and made one change to them during the period to reflect our assessment of their effect on HSBC. 'Internet crime and fraud' was removed as a top risk as mitigating actions taken have reduced losses through digital channels. HSBC remains a target for cyber-attacks, which is noted as a top risk under 'Information security risk'.
'Economic outlook' heightened in 1H15. Expectations of divergent monetary policies increased market volatility and resulted in changes in capital flows. The impact of the turmoil in Greece is discussed further on page 74.
Our current top and emerging risks are summarised overleaf.
Top and emerging risks | / | |||||||||||
Risk | Description | Mitigants | ||||||||||
Macroeconomic and geopolitical risk | ||||||||||||
| Economic outlook |
| Weak economic growth in both developed and emerging market countries could adversely affect global trade and capital flows and our profits from operations in those countries. |
| We closely monitor economic developments in key markets and take appropriate action as circumstances evolve. We use stress testing, both internal and regulatory programmes, to assess the effect of changes in economic conditions on our operations. | |||||||
| Increased geopolitical risk |
| Our operations are exposed to risks arising from political instability and civil unrest in a number of countries. This may have a wider effect on regional stability and regional and global economies. |
| We continuously monitor the geopolitical and economic outlook, particularly in countries where we have material exposures and/or a physical presence. | |||||||
Macro-prudential, regulatory and legal risks to our business model | ||||||||||||
| Regulatory developments affecting our business model and Group profitability |
| Governments and regulators continue to develop and implement policies which impose new or additional requirements, particularly in the areas of capital and liquidity management and our business, governance and corporate structure. |
| We actively assess and consider the impact of relevant developments and engage closely with governments and regulators in the countries in which we operate. We seek to ensure that requirements are considered properly and implemented in an effective manner. | |||||||
| Regulatory and other investigations, fines, sanctions, commitments and other requirements relating to conduct of business and financial crime negatively affecting our results and brand |
| Financial service providers are at risk of regulatory and other sanctions or fines related to conduct of business and financial crime. These can take significant time both to crystallise and to resolve. Breach of the US DPA may allow the US authorities to prosecute HSBC with respect to matters covered thereunder. |
| We actively seek to manage and defend HSBC's interests in those investigations. Significant programmes to enhance the management of conduct and financial crime risks are progressing in all global businesses and functions and we have significantly enhanced our financial crime and regulatory compliance controls and resources. We continue to take steps to address the requirements of the US DPA and other consent orders in consultation with the relevant regulatory agencies. | |||||||
| Dispute risk |
| HSBC is party to legal proceedings arising out of its normal business operations which could give rise to potential financial loss and significant reputational damage. |
| We continue to focus on identifying emerging regulatory and judicial trends in order to limit exposure to litigation or regulatory enforcement action in the future. | |||||||
Risks related to our business operations, governance and internal control systems | ||||||||||||
| Heightened execution risk |
| The execution of the Group's strategy requires the management of complex projects that are resource demanding and time sensitive. The size and scope of actions to meet regulatory demands and risks from business and portfolio disposals may affect our ability to execute our strategy. |
| We have strengthened our prioritisation and governance processes for significant projects and have invested in our project implementation and IT capabilities. | |||||||
| People risk |
| Regulatory reform and remediation are placing significant demands on the human capital of the Group. |
| We continuously review our remuneration policy to ensure we remain competitive and attract and retain key talent. We have increased the level of specialist resources in key areas. We are embedding a learning-based culture to improve employee capability, collaboration and engagement. | |||||||
| Third-party risk management |
| Risks arising from the use of third-party service providers may be less transparent and more challenging to manage or influence. |
| We continue to strengthen our risk management processes and procedures in relation to the use and monitoring of third-party service providers. | |||||||
| Information security risk |
| HSBC and other multinational organisations continue to be the targets of cyber-attacks. |
| We continue to improve our governance and controls framework to protect HSBC information and technical infrastructure against ever-increasing and sophisticated cyber-threats. | |||||||
| Data management |
| Regulatory requirements necessitate more frequent and granular data submissions, which must be produced on a consistent, accurate and timely basis. |
| A number of key initiatives and projects are in progress to implement our data strategy to enable consistent data aggregation, reporting and management. | |||||||
| Model risk |
| Adverse consequences could result from decisions based on incorrect model outputs or from models that are poorly developed, implemented or used. The regulatory environment and supervisory concerns over banks' use of internal models to determine regulatory capital further contribute to model risk. |
| The development, usage and validation of models used for a range of purposes including regulatory and economic capital calculations, stress testing, granting credit and pricing are subject to increased governance and independent review. | |||||||
Areas of special interest
During 1H15, we considered a number of particular areas because of the effect they may have on the Group. While some of these areas may have already been identified in top and emerging risks, further details of the actions taken in 1H15 are provided below.
Financial crime compliance and regulatory compliance
We have experienced increasing levels of compliance risk in recent years as regulators and other agencies pursued investigations into historical activities, for example, investigations regarding inadequate compliance with AML and sanctions law (giving rise to the US DPA), mis-selling in the UK of payment protection insurance ('PPI') policies, investigations in connection with the setting of Libor and other benchmark interest rates, and activities related to foreign exchange, precious metals and credit default swaps. Details of these investigations and legal proceedings can be found in Note 19 on the Financial Statements and the work of the Monitor, who has been appointed to assess our progress against our various obligations in the US DPA is discussed on page 13.
The level of inherent compliance risk remained high in 1H15 as the industry continued to experience greater regulatory scrutiny and heightened levels of regulatory oversight and supervision. Further information about the Group's compliance risk management may be found on page 83.
Swiss Private Bank
Various tax administration, regulatory and law enforcement authorities around the world are conducting investigations and reviews of HSBC Swiss Private Bank in connection with past practices at the bank and the financial affairs of some of its clients. Details of these investigations and reviews may be found in Note 19 on the Financial Statements. We are cooperating with the relevant authorities.
Regulatory stress tests
Stress testing is an important tool for regulators to assess the resilience of the banking sector and of individual banks to adverse economic or financial developments. The results inform the regulators' view of the capital adequacy of individual institutions and could have a significant effect on capital requirements, risk and capital management practices and planned capital actions, including the payment of dividends, going forward.
The Group is participating in the 2015 PRA concurrent stress test programme, which involves all major UK banks. The scenarios for the 2015 stress test incorporate a synchronised global downturn affecting Asia, Brazil and the eurozone in particular, a reduction in global risk appetite and market liquidity, and a slowdown in the UKdriven by a downturn in its trading partners. The results will be published by the Bank of England alongside the Financial Stability Report in the fourth quarter of 2015.
HSBC North America Holdings Inc. ('HNAH') participated in the Comprehensive Capital Analysis and Review ('CCAR') and Dodd-Frank Act Stress Testing ('DFAST') 2015 programmes of the Federal Reserve Board ('FRB'); HSBC Bank USA N.A. ('HSBC Bank USA') participated in the DFAST 2015 programme of the Office of the Comptroller of the Currency. Submissions were made on 5 January 2015 and summaries of the results of the stress test were disclosed on 5 March 2015. On 11 March 2015, HNAH received the FRB's non-objection to its 2015 CCAR submission and its capital plan, and on 16 July 2015, it disclosed a summary of the results of its DFAST 2015 company-run mid-cycle stress test.
Other entities in the Group, including the Hongkong and Shanghai Banking Corporation Limited, continue to participate in regional regulatory stress tests activities.
A summary of our approach to stress testing and scenario analysis programme is provided on page 117 of the Annual Report and Accounts 2014.
Oil and gas prices
Oil and commodity prices declined significantly during 2014 as a result of increasing global supply and demand imbalances and changes in market sentiment. During 1H15 oil prices increased compared with 2014. At the prices prevailing during 1H15 the pressure on large integrated producers and Middle Eastern economies was somewhat reduced. Higher cost non-integrated producers remained relatively weaker while we expect that infrastructure and services providers will continue to come under pressure due to reduced capital expenditure across the industry.
Our diversified lending portfolio was resilient during 1H15; impairments as a result of the lower oil and gas prices were insignificant. The sector remains under enhanced monitoring with risk appetite and new lending carefully monitored.
Greece
In light of recent developments in Greece we invoked our long-established major incident crisis management procedures and continue to monitor the situation carefully.
The rest of the eurozone, including Italy, Ireland, Portugal and Spain, has remained resilient. Various indicators such as credit default swap prices and interest rate spreads suggest that the risk of contagion to other peripheral eurozone countries has been successfully contained.
As a result of the unfolding crisis we have raised additional loan impairment charges and other credit risk provisions amounting to $0.1bn. Exposures to Greece are described in further detail on page 74.