Hong Kong & Shanghai Banking Corporation (HSBC) is one of the largest banking & financial services organizations in the world. HSBC is available in 86 countries. It provides a comprehensive range of financial services to its more than 100 million customers by personal financial services, commercial banking, Global banking & services &private banking.
Risk Assessment in HSBC Bank:
The resilience of banks in emerging markets depends on their exposure to new forms of risks and their ability to manage them. As a part of risk assessment, in emerging markets, banks are taking innovative, effective & efficient steps by adopting advanced techniques such as VaR, stress testing and credit scoring. Risk assessment is now onwards used as the basis for routine transactions and to improve risk management practices in HSBC bank.
The most important categories of risks that HSBC is exposed to are credit risk, market risk, operational risk, liquidity risk, foreign exchange risk, interest rate risk, etc… As risk is not static, the risk profile of HSBC and its individual entities change as the scope and impact of a range of factors, transactional to geographical change.
Risk Mitigation in HSBC Bank:
Market Risk:
Market risk is the risk that movements in market risk factors, including foreign exchange, commodity prices, interest rates, credit spread and equity prices will reduce HSBC's income or the value of its portfolios. Market risk is measured, with FSA permission, using Value at Risk models, or the standard rules prescribed by the FSA. HSBC uses both VaR and standard rules approaches for market risk. Its longer-term aim is to migrate more positions from standard rules to VaR. The objectives of HSBC's market risk management are to manage and control market risk exposures in order to optimise return within the Group's risk appetite, as defined by Group Management Board.
Credit Risk:
It is the risk of financial loss if a customer or counterparty does not able to meet a payment obligation under a contract. It takes place principally from direct lending, trade finance and leasing business, but also from off-balance sheet products such as guarantees and credit derivatives, and from the Group's holdings of debt securities. Among the risks the Group engages in, credit risk generates the largest regulatory capital requirement. This includes a capital requirement for counterparty credit risk in the banking and trading books.
The objectives of credit risk management in HSBC, underpinning sustainably profitable business, are principally:
to maintain a strong culture of responsible lending, supported by a robust risk policy and control framework
to both partner and challenge business originators effectively in defining and implementing risk appetite, and its re-evaluation under actual and scenario conditions
To ensure independent, expert scrutiny and approval of credit risks, their costs and their mitigation.
The most basic, the standardised approach, requires banks to use external
Credit ratings to determine the risk weightings applied to rated counterparties group other counterparties into broad categories and apply standardised risk weightings to these categories. The next level, the internal ratings-based foundation approach, allows banks to calculate their credit risk capital requirements on the basis of their internal assessment of the probability that a
Counterparty will default, but subjects their quantified estimates of exposure at default and loss given default to standard supervisory parameters. Finally, the IRB advanced approach allows banks to use their own internal assessment in both determining PD and quantifying EAD and LGD.
Operational Risk:
Operational risk is the risk of loss arising through fraud, unauthorised activities, error, omission, inefficiency, systems failure or from external events. It is inherent to every business organisation and covers a wide spectrum of issues. The terms 'error', 'omission' and 'inefficiency' include process failures, systems/machine failures and human error. The Group has historically experienced operational risk losses in the following major categories:
Fraudulent and other external criminal activities
Breakdowns in processes/procedures due to human error, misjudgement or malice
Terrorist attacks
System failure or non-availability
In certain parts of the world, vulnerability to natural disasters.
The Group remains alert to the possibility of incurring losses for a wide variety of reasons, including rare but extreme events.
Liquidity Risk:
Cash-flow stress testing is being used by HSBC as part of its control processes to assess liquidity risk. HSBC does not manage liquidity through the explicit allocation of capital as, in common with standard industry practice, this is not considered to be an appropriate or adequate mechanism for managing these risks. However, HSBC recognises that a strong capital base can help to mitigate liquidity risk both by providing a capital buffer to allow an entity to raise funds and deploy them in liquid positions and by serving to reduce the credit risk taken by providers of funds to the Group.
Foreign Exchange Risk:
Foreign exchange risk arises as a result of movements in the relative value of currencies. The foreign exchange risk arising within the non-trading portfolios is transferred to the trading portfolios for management. As well as VAR and stress testing, HSBC controls the foreign exchange risk within the trading portfolio by limiting the open exposure to individual currencies, and on an aggregate basis. HSBC is also subject to structural foreign exchange exposures that arise from net investments in subsidiaries, branches or associated undertakings, the functional currencies of which are currencies other than the US dollar.
Interest Rate Risk:
Interest rate risk arises within the trading portfolios and non-trading portfolios, principally from mismatches between the future yield on assets and their funding cost as a result of interest rate changes. HSBC aims, through its management of interest rate risk, to mitigate the effect of prospective interest rate movements which could reduce its future net interest income, while balancing the cost of such hedging activities on the current net revenue stream.
HSBC uses a range of tools to monitor and limit interest rate risk exposures. These include the present value of a basis point movement in interest rates, VAR, stress testing and sensitivity analysis.
Conclusion:
Mitigation of credit risk is an important aspect of its effective management and, in a diversified financial services organisation such as HSBC, takes many forms. In terms of IRB parameters, risk mitigants are considered in two broad categories: first, those which reduce the intrinsic probability of default of an obligor and therefore operate as adjustments to PD estimation, and second, those which affect estimated recoverability of obligations and require adjustment of LGD/EAD. The first includes, for example, full parental or third party guarantees; the second, collateral security of various kinds such as cash or mortgages over residential property.
For individually assessed exposures, LGD values are determined by reference to approved parameters based on the nature of the exposure. For retail portfolios, credit mitigation data is incorporated into the internal risk parameters for risk exposures and feeds continuously into the calculation of the expected loss band value summarising both customer delinquency and product or facility risk. Credit and risk mitigation data forms part of the inputs submitted to a centralised database by all Group offices, upon which a risk engine then performs calculations applying the relevant Basel II rules and approach.
