In this paper, the risk management approach adopted by HSBC Bank plc has been reflected upon. However, the discussion cannot be commenced without a prior understanding of the concept of risk management. Hence, the paper intends to shed some light upon the basic concepts linked with risk management and subsequently proceed towards the discussion relating specifically to the approach adopted by HSBC.
Pickett identifies the need of risk management as, “The internal audit activity should assist the organization by identifying and evaluating significant exposures to risk.” (Pickett 2005 1) Regester, in this context for example, notes, “Risk assessment is essential when: a new risk emerges – such as the threat of contracting CJD or the safety of the Channel Tunnel following the fire.” (Regester 2005 18)
Thus, Risk Management is the identification, evaluation, as well as prioritization of risks and subsequently synchronized and economical utilization of resources to curtail, examine and control the likelihood and/or adverse effects of undesirable events. Risks may stem out from instability in economic markets, unsuccessful project operations, legal liabilities, credit risks, industrial accidents, natural calamities and disasters over and above premeditated attacks caused by a rival or competitor. (Robins & Krosinsky 2008)
Risk management strategies vary from one business sector to other sectors and even across organizations in one particular sector. These strategies are tailored to meet the objectives of a certain organization. However, essentially, these approaches comprise of the following aspects, carried out, approximately, as per the following arrangement:
Identification, exemplification and appraisal of threats,
Evaluation of the vulnerability of significant assets in relation to particular threats,
Calculation of the risk (i.e. the estimated outcomes of particular types of hits on definite assets),
Identification of techniques to counter or mitigate those risks, and
Prioritization of risk diminutive procedures founded on an explicitly defined strategy;
The approaches towards managing risk consist of shifting the risk to a different entity, circumventing the risk, curtailing the adverse effects of the risk, and accepting the end results of a certain risk up to some extent or entirely. (Chaudhry & Crick 2007)
In an idyllic risk management process, a prioritization model is adopted in which the risks which have capability of inflicting the organization or a particular asset with the maximum damage or loss and has the highest probability of coming into existence are countered or mitigated at the earliest. The risks with poorer probability of cropping up and having lesser potency to inflict adverse impacts are dealt with in descending order. Hutter and Power, however, mentioned, “a risk management model can become a source of risk when everyone uses the same model.” (Hutter and Power 2005 17)
However, in reality the course of action can be intricate and equilibrating the risks with a greater probability of occurrence but capable of inflicting lower loss versus a risk with increased loss potency but lower likelihood of occurrence can frequently be mismanaged. After understanding these key concepts in risk management, it is now time to analyze HSBC’s risk management approach. (Marar, Iyer & Brahme 2009)
All of HSBC’s operations involve analysis, assessment and management of some level of risk or permutation of various threats and vulnerabilities. The most significant forms of risk pertaining to HSBC’s activities are credit risk (which incorporates overseas risks), liquidity risk, market risk and operational risk. Market risks comprise of foreign exchange issues, interest rate instabilities and equity price risks.
HSBC’s risk management strategy is tailored to identify and evaluate credit risk, liquidity and market risk and various other possibilities with combination of these aforementioned risks. In addition the risk management policy is crafted out deliberately in a manner which allows the administration to lay down apposite risk limits, and to recurrently keep an eye on these risks and its confines by way of consistent and state-of-the-art managerial and information systems.
HSBC constantly transforms and augments its risk management guidelines and enhances the systems linked with risk management in order to reflect alterations in the markets and business environment. The Group Executive Committee, a team of executive Directors and Group General Managers designated by the Board of Directors, puts together the risk management policy of the organization, monitors risk and appraises the efficacy of HSBC’s risk management policies and systems on a regular basis. (Marar, Iyer & Brahme 2009)
In this document the credit risk management strategy of HSBC Bank plc is scrutinized. Credit risk is the threat that a client or counterparty will be incapable of or reluctant to fulfill an obligation that it has engaged in along with HSBC. It crops up primarily from lending, trade deals, financial dealings, capital and leasing operations. HSBC has committed principles, strategies and processes formidably in place in order to manage and scrutinize all such risks.
Operating from the Group Head Office, the Group Credit and Risk division is authorized to offer high level centralized supervision of all credit risks for HSBC on an all-inclusive basis. The Group Credit and Risk division is lead by a Group General Manager who comes directly under the Group Chief Executive in the hierarchy of the organization. (Marar, Iyer & Brahme 2009)
It is the responsibility of this division to devise high level credit policies. These are in line with HSBC’s organizational standards. All HSBC subsidiaries are obligated to comply with these standards and policies. The organization has established and maintains its Large Credit Exposure Policy which lays down limitations on the HSBC extent of exposures to consumers and customer factions and on other risk applications. HSBC’s strategy is planned in a more conservative fashion as compared to the global conventional regulatory standards. This policy too is enforced and should necessarily be implemented by all the banking subsidiaries working with HSBC. (Robins & Krosinsky 2008)
The issue of Lending Guidelines is paid significant attention to by the organization. This supplies HSBC auxiliaries with unambiguous directions on HSBC’s approach towards and eagerness in lending to various market segments, businesses and products, etc. It is necessary for all HSBC subsidiaries and key business components to craft their own lending guidelines which are aligned with the standard HSBC Guidelines and need to be frequently restructured to be market compatible. (Marar, Iyer & Brahme 2009)
The risk management policy explicitly defines the control of cross-border exposures. Management of national and overseas risk is also looked after by an especially devoted unit which is a part of the Group Credit and Risk division using centralized systems, by means of the laid down country limits with sub-limits by maturity and form of trade. Country limits are set taking into consideration economic and political aspects along with local business expertise. Dealings with countries considered to be of a higher risk value are carefully evaluated on a case-by-case basis. (Chaudhry & Crick 2007)
Periodic audits of the subsidiaries’ credit procedures are carried out by the HSBC Internal Audit process. Such reviews take account of the comprehensiveness and competence of credit documents and lending strategies, in addition to an in-depth scrutiny of a representative illustration of accounts in the portfolio to appraise the worth of the loan book and various other exposures.
Individual accounts are appraised to make certain that the facility status is proper, that credit guidelines have been properly adhered to and that when an account is not performing up to expected standards, provisions raised are sufficient. Internal audit also considers any facility ranking they deem should be reworked at the conclusion of the appraisal process and their consequent suggestions for reworked grades must then be allocated to the facility. (Marar, Iyer & Brahme 2009)
The risk management process of HSBC is a comprehensive one which is implemented at all levels including its subsidiaries. Even though it might be deemed to be on the conservative side it has definitely worked for the organization successfully. All risk management procedures are followed meticulously and regularly reviewed with the intention of keeping all risk management processes and systems in line with the market conditions.
Chaudhry, S & Crick, D 2007, ‘Attempts to more effectively target ethnic minority customers: the case of HSBC and its South Asian business unit in the UK’, Strategic Change, vol. 13, no. 7, pp. 361-368.
Hutter, B, & Power, M 2005, Organizational encounters with risk, Cambridge University Press, London.
Marar, P, Iyer, BS & Brahme, U 2009, ‘HSBC brings a business model of banking to the doorsteps of the poor,’ Global Business and Organizational Excellence, vol. 28, no. 2, pp. 15-26.
Pickett, KH 2005, Auditing: the risk management process, Wiley, New York.
Regester, M 2005, Risk issues and crisis management a casebook of best practice, Kogan, LA.
Robins, N & Krosinsky, C 2008, ‘After the credit crunch: the future of sustainable investing’, Public Policy Research, vol. 15, no. 4, pp. 192-197.