Mike Constantinou

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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

. .



-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



HSBC’s global strategy is about joining up our customers and

operations

4



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

5



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





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)



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



` 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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Mike Constantinou

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