Annual Report and Accounts 2011 - Bermuda Stock Exchange

Capital and liquidity
Preserving our strong capital position has long been,
and will remain, a key priority for HSBC. We are
well equipped to respond to the capital requirements
imposed by Basel III, which are discussed further
on page 212, and to sustain future growth. We utilise
an enterprise-wide approach to testing the
sensitivities of our capital plans against a number
of scenarios; our approach to scenario stress testing
analysis is discussed on page 188.
We continue to maintain a very strong liquidity
position and are well positioned for the emerging
new regulatory landscape.
Top and emerging risks
(Unaudited)
Details of the top and emerging risks identified
through our risk management processes are set out
below:
Macro-economic and geopolitical risk
• Eurozone – risk of sovereign default
• Eurozone member departing from the
currency union
• Increased geopolitical risk in certain
regions
Eurozone – risk of sovereign and
counterparty defaults
Exposures to the eurozone have received increasing
focus given the continued instability in the area and
the potential for contagion from the peripheral to
core eurozone countries.
There is an increasing risk of sovereign defaults
by the peripheral eurozone countries which would
place further pressure on banks within the core
European countries that are exposed to these
sovereigns. Although our exposure to the peripheral
eurozone countries is relatively limited, we are
exposed to counterparties in the core European
countries which could be affected by any sovereign
crisis. Our eurozone exposures are described in more
detail on pages 113 to 118.
Potential impact on HSBC
• Our exposures to European banks may come
under stress, heightening the potential for credit
and market risk losses, if the sovereign debt
crisis in the region increases the need to
recapitalise parts of the sector.
• Trade and capital flows may contract as a result
of banks deleveraging, protectionist measures
being introduced in certain markets or the
emergence of geopolitical risks, which in turn
might curtail profitability.
• A prolonged period of low interest rates due to
policy actions taken to address the eurozone
crisis will constrain, through spread
compression and low returns on assets, the
interest income we earn from investing our
excess deposits.
• In the event of contagion from stress in the
peripheral eurozone sovereign and financial
sectors, our ability to borrow from other
financial institutions or to engage in funding
transactions may be adversely affected by
market dislocation and tightening liquidity.
• We have actively managed the risk of sovereign
defaults during 2011 by reducing exposures and
other measures.
Eurozone member departing from the
currency union
The risk of a eurozone member departing from the
currency union is a plausible scenario. Should it
materialise it would have a significant impact on the
entire financial sector and the wider economy. It
would crystallise sovereign risks and those to the
bank and corporate sectors, and the disruption
caused would affect consumer activity.
Potential impact on HSBC
• We could incur significant losses stemming
from the exit of one or more countries from the
eurozone and the return to their local
currencies.
• In addition, should such an event happen in a
disorderly manner, it could trigger banking
defaults in companies with which we do
business and have a knock-on effect on the
global banking system.
• In seeking to manage and mitigate this risk, we
have prepared and tested detailed operational
contingency plans to deal with such a scenario.
We are keeping these plans under close review
as events develop.
Shareholder Information Financial Statements
Corporate Governance Operating & Financial Review
Overview
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