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HSBC’s challenges in implementing an
AMA fr m w rk w rl wi
13th May 2010, Sao Paolo
Presented by:
Mike Constantinou – Global Head of Grou O erational Risk Polic andDevelopment, HSBC Holdings PLC
Walter Fernandes Jr. – Head of Operational Risk, HSBC Bank Brasil
GroupRisk
. .
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-organisations
Sovereign debt crisis Banking regulation
Guðnasteinn
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“ ' ”- …
Our reputation Our global presenceOur customers Our success
Best Global 8 000 off ices inBank 2009
88 countries> 100 mil lion
$13.3 BN
pre-tax
300,000 staff >45m internet
banking customers$199 BN mkt cap1
profit2
31. Reported on December 31 20092. Year ending 2009
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HSBC’s global strategy is about joining up our customers and
operations
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Share progress and challenges in rolling out ouradvanced O erational Risk Framework
Explain how HSBC Brasil is managing OperationalRisk and implementing the advanced framework
` Answer an uestions on the racticalities of our implementation
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Managing Operational Risk is important for HSBC in order
to achieve a variety of benefits for the Group
9 Proactive lossRisk aware culture
9 Proactive cost
reduction
9 ServiceRisk based actions
improvement
9 Safeguardingreputation
Value and use
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HSBC is in the process of developing an advanced Operational
Risk and Control Framework
Operational Riskand Internal Control
Operational Risk and Control Framework
•Operations•Accounting•Compliance•
Top Risk Anal sis
Risk and Control Assessments
•Fraud•Physical•Business continuity•Information•Le al
Key Indicators
External Incidents
•Tax•Technology•People
CapitalModelling
Identify AssessSet Risk
Appet iteControl ReportGovernance
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The framework’s success rests on increasin risk awareness
supporting risk based decisions and demonstrating value and use
‘Tone from the top’
Individual awareness
Risk based actionsFocussing on material risks & controls Training
Top-of-the-house reporting
Value and use Action-focused
Adequate monitoring
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Management support for the advanced framework is essential
to ensuring its success
` `Tone from the top´
“The objective is to achieve a reduction over time in the level of avoidableopera ona osses, an o eve op processes w c suppor sus a na e grow ,
are value-added and a contributor to the bottom line and to capital efficiency.”
, ,
– Investment in enhanced Operational Risk processes
– Increased resourcing for Operational Risk
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us ness owners p n v ua awareness
Mandatory e-learning course Awareness pack
Balanced scorecards & individual objectivesORIGINAL TARGET
S ET TI NG F IR ST UP DA TE DA TA
2009
ACTUAL
2010
TARGET
2010 TARGET(bringfwd full-year,
restateforcontant fx
orphased ytdtargetasappropriateto
metric) ACTUAL
Status
R/A/G
GMB 3.1 Operational Losses 2 $1,764.0m $1,670.8m
A1 -SGULLIVER 3.2 Operational Losses 2 $1,052.2m $960.9m
A 2 - GB M 3 .1 O pe ra ti on al L os se s $ 28 7.3m $ 28 0.1m
SCORECARD Metric
1.0 FINANCE (20%) 2.0 CUSTOMER (30%)
2008
Actual
2009 Latest
Estimate
2010
Target
2008
Actual
2009Latest
Estimate
2010
Target
1.1 Function specific metric 2.1 Function specificmetric
1.2 Function specific metric 2.2 Function specificmetric
1.3 Function specific metric 2.3 Function specificmetric
1.4 Function specific metric 2.4 Function specificmetric
1.5 Function specific metric 2.5 Function specificmetric
2010 BALANCED SCORECARD - FUNCTION
A3 - UK 3.1 Operational Losses £196.3m £197.8m
A4 - CONT EUROPE3.1 Operational Losses $142.3m $120.1m
A5 -MENA 3.1 Operational Losses (excl. SABB) 0 $42.9m $42.9m
A6 - PRIVATE B ANK3.2 Operational Losses 5 $ 92 .9 m $ 43 .4 m
B1-SFL OCKHART 3.1OperationalLosses•P FS (IncHSBC Finance),CMB&Insurance(am $1,127.0m $1,100.0m
B 2 - CM B 3 .1 O pe ra ti on al L os se s $ 16 0.2m $ 15 6.2m
B3 - PFS 3.1 Operational Losses -Total $946.5m $924.0m
B 3- P FS 3. 1O pe ra ti ona lL os se s -P FS - e xc l. HS BC F ina nc e $7 20 .4m $ 70 3. 5m
B5 - HTS 3.1 Operational Losses $210.5m $205.3m
B7 - LATAM 3 .1 O perati ona l Losses $ 50 7.9m $ 50 9.7m
B9 - INSURANCE 3.1 Operational Losses $20.3m $19.8m
C1A - DFLINT 3.1 Operational Losses 2 $1,764.0m $1,670.8m
C2 - RISK 3.1 Operational Losses 2 $1,764.0m $1,670.8m
D3 -B MCDONAGH 3.2 Operational Losses $317.5m $286.4m
D 4 - AS P 3 .2 O pe ra ti on al L os se s $ 18 9.1m $ 15 0.0m
3.0 PROCESS (30%) 4.0 PEOPLE (20%)
2008
Actual
2009 Latest
Estimate
2010
Target
2008
Actual
2009Latest
Estimate
2010
Target
3.1 Function specific metric 4.1Empl oyee engagement
3.2 Open High Risk Audit Points > 6 Months 4.2%of Offshore F TE
3.3 Function specific metric 4.3Employee Mobility
3.4 Function specific metric 4.4Cult ural Inclusion/Divers ity
3.5 Function specific metric 4.5Par t icipat ion in GMB
Key: PerformanceagainsttargetYTD:
greaterthan5%adverseto target
within5%adverseto target
atorfavourableto target
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- out to ensure greater risk awareness in the business l ines
Provide business areas with forward looking view of operational risks andhelp them proactively manage material risks within acceptable levels
How does it work?
Monitoring Metrics
Identify & Assess Controls
Assess &Prioritise Risks
Test Plans
Typical Risk
Improvements
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,actions can be identified at the top of the house
Top risks Risk indicators Control issues Internal Losses External Losses
` Risk type ` Description` Risk type ` Internal lossstatistics
` Pertinent risks
` Typical
` 1 in 100 year
` Progress
` Owner
` Threshold
` Value & trend
against target
` Large internalincidents
inform seniormanagementdecision
` Actions
` Owner
` Progress
Illustrative
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implementation of the framework
1st line of defence 2nd line of defence 3rd line of defenceRISK MANAGEMENT RISK OVERSIGHT INDEPENDENT ASSURANCE
Primary responsibility for
management of operational
Provides operational risk
policy, minimum standards and
Provides independent
assurance over the robustness
AuditBusiness Unit Head
(DCEO/CRO)ALCO
OpRisk and Internal Control
Business UnitLine Managers
Risk Management
Committee (RMC)
Committee (ORICC)Operational Risk
BusinessCo-coordinators
Operational Risk
Coordinator (WF)
Business Unit Staff
Direct Report (sets objectives, monitors performance, etc)
Group Operational Risk
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Indirect Report (Receives information, provides guidance and advice)
Interface (Co-ordination of activity to ensure efficiency and effectiveness)
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in Brasil
Senior Management Commitment
Importance of Operational Risk Management strongly encouraged with a top-down a roach
Notion that Operational Risk must be used extensively in the decision-makingprocess
Risk awareness E-learning training
4 main “ pillars” for Use Test: Governance
Information Use
Data ualit
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Ongoing Enhancements
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` TRA
Building on our Top Risk Reporting Focus on more robust quantification
Training provided to our Operational Risk team
Initial exercise is on lendin Fraud Ro ue Tradin and Information
Risk
Activity based across all business areas
Training provided in the new process
Control certification
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O erational loss ca ture in Brasil is focused on root cause
analysis
Centralised analysis by Operational Risk team
System used: CRO (Operational Risk Control)
- – ’ ,departments have access
Data also used for root cause analysisÆ future loss prevention
BEGINNINGMIDDLE
O erational Risk / Losses Control:
CRO Macro Flow:
Branches and Departments:Register and detail the incident
The incident is analyzed with lossacceptance or not.
ENDAuthority limit:Final approval
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Main considerations for im lementin the framework in
Brasil
Resolving different home / host regulatory requirements and
- . .
global loss models and scenario analysis
External Loss Database: Local or Global?
How we can work together to share knowledge
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