Our current top and emerging risks are as follows.
Externally driven
Geopolitical and macroeconomic risk
The group faces elevated geopolitical risks, with the Russia-Ukraine
war continuing to have global economic and political implications. The
Israel-Hamas war is also increasing tensions in the Middle East,
leading to recent attacks on shipping in the Red Sea and resulting
counter-measures, which have begun to disrupt supply chains. The
group is monitoring and assessing the impacts of these wars.
The Russia-Ukraine war has continued to elevate geopolitical
instability which could have continued ramifications for the group and
its customers. We continue to monitor and respond to financial
sanctions and trade restrictions that have been adopted in response.
These sanctions and trade restrictions are complex, novel and
evolving. In particular, the US, the UK and the EU, as well as other
countries, have imposed significant sanctions and trade restrictions
against Russia. Such sanctions and restrictions target certain Russian
government officials, politically exposed persons, business people,
Russian oil imports, energy products, financial institutions and other
major Russian companies and sanctions evasion networks. These
countries have also enacted more generally applicable investment,
export, and import bans and restrictions. In December 2023, the US
established a new secondary sanctions regime, providing itself broad
discretion to impose severe sanctions on non-US banks that are
knowingly or even unknowingly engaged in certain transactions or
services involving Russia’s military-industrial base. This creates
challenges associated with the detection or prevention of third-party
activities beyond HSBC’s control. The imposition of such sanctions
against any non-US HSBC entity could result in significant adverse
commercial, operational, and reputational consequences for HSBC,
including the restriction or termination of the non-US HSBC entity’s
ability to access the US financial system and the freezing of the
entity’s assets that are subject to US jurisdiction. In response to such
sanctions and trade restrictions, as well as asset flight, Russia has
implemented certain countermeasures, including the expropriation of
foreign assets.
Our business in Russia principally serves multinational corporate
clients headquartered in other countries. Following a strategic review,
HSBC Europe BV (a wholly-owned subsidiary of HSBC Bank plc) has
entered into an agreement to sell its wholly-owned subsidiary HSBC
Bank (RR) (Limited Liability Company). While we remain committed to
the sale of our business in Russia, the outcome of the sale became
less certain and remains subject to regulatory approval.
Economic and financial risks also remain significant, and we continue
to monitor our risk profile closely in the context of uncertainty over
global macroeconomic policies.
A fall in global energy and food prices from the highs of 2022
facilitated a process of disinflation across key economies during 2023.
Following the reduction in global inflation rates, central banks in most
developed markets are expected to have concluded monetary policy
tightening in the second half of 2023. A further fall in inflation is
expected to enable interest rate reductions through 2024, although
forecasts still assume that they remain materially higher than in
recent years. Higher financing costs will raise interest payment
burdens for many counterparties.
Fiscal deficits are also expected to remain large in both developed and
emerging markets, as public spending on items including social
welfare, defence and climate transition initiatives is expected to
remain high. In many countries, the fiscal response to the Covid-19
pandemic has also left a very high public debt burden. Against a
backdrop of slower economic growth and high interest rates, a rise in
borrowing costs could increase the financial strains on highly indebted
sovereigns.
Macroeconomic, financial and geopolitical risks have all impacted our
macroeconomic scenarios. Our Central scenario, which has the
highest probability weighting in our IFRS 9 ‘Financial Instruments’
calculations of ECL, assumes that GDP growth across our key
markets will remain low in 2024, followed by moderate recovery in
2025. It is anticipated that inflation will converge towards central
banks’ target rates by early 2025. Similarly, interest rates are
expected to decline but remain materially higher than in recent years.
We also consider scenarios where commodity prices are materially
higher, inflation and interest rates rise and a global recession follows,
although we assign these scenarios a lower probability of occurring.
Forecasts remain uncertain, and changing economic conditions and
the materialisation of key risks could reduce the accuracy of the
Central scenario forecast. In particular, forecasts in recent years have
been sensitive to commodity price changes, changing supply chain
conditions, monetary policy adjustments and inflation expectations.
Uncertainty remains with respect to the relationship between the
economic factors and historical loss experience, which has required
adjustments to modelled ECL in cases where we determined that the
model was unable to capture the material underlying risks.
For further details of our Central and other scenarios, see
‘Measurement uncertainty and sensitivity analysis of ECL estimates’
on page 41.
A Memorandum of Understanding (‘MoU‘) was signed on 27 June
2023, setting out a framework for voluntary regulatory cooperation in
financial services between the UK and the EU, including through the
establishment of a Joint UK-EU Financial Regulatory Forum. This is
expected to provide a platform on which both parties will be able to
discuss financial services-related issues, including future equivalence
determinations.
Negotiations between the UK and the EU over the operation of the
Northern Ireland Protocol concluded in February 2023. In January
2024, an additional agreement titled, "Safeguarding the Union" was
signed. Together, these agreements provide a greater degree of
certainty over the regulatory arrangements governing the movement
of goods between Great Britain, Northern Ireland and the EU. In
February 2024, the Northern Ireland Executive was reinstated after a
power-sharing agreement was reached by key political parties.
Challenges remain in the UK-EU relationship following the UK's
withdrawal from the EU. Over the medium to long term, the UK’s
withdrawal from the EU may continue to adversely impact the terms
of EU market access for our UK based clients. We are monitoring the
situation closely, including the potential impacts on our customers.
Our business could also be adversely affected by economic or political
developments in regions of the world outside Europe. This reflects
our extensive business links, through members of the HSBC Group
and other entities, in Asia and elsewhere. Tensions between China
and the US, extending to the UK, the EU, India and other countries,
and political developments in Hong Kong and Taiwan, may adversely
affect the group.
The US, the UK, the EU and other countries have imposed various
sanctions and trade restrictions on China. In response to foreign
sanctions and trade restrictions, China has also announced sanctions,
trade restrictions and laws that could impact the group and its
customers.
Further sanctions, counter-sanctions and trade restrictions may
adversely affect the group, its customers and the markets in which
the group operates, by creating regulatory, reputational and market
risks.
Mitigating actions
– We closely monitor geopolitical and economic developments in
our key markets and sectors, and undertake scenario analysis
where appropriate. This helps us to take actions to manage our
portfolios where necessary, including through enhanced
monitoring, amending our risk appetite and/or reducing limits and
exposures.
– We continue to monitor the EU’s relationship with the UK, and
assess the potential impact on our people, operations and
portfolios.
– We continue to monitor our risk profile closely in the context of
the current geopolitical and macroeconomic situation, and given
the significant uncertainties, additional mitigating actions may be
required.
– We have taken steps, where necessary, to enhance physical
security in geographical areas deemed to be at high risk from
terrorism and military conflicts.
