HSBC Risk Management - Essay Example

The problem is that profit, the measure of reward, requires, as a minimum, a pencil, the back of an envelope, and some degree of skill in arithmetic calculations. HSBC is the world's largest banking group operating on the global scale. HSBC is considered the 4th largest financial institution of the world with $2,348.98 billion of assets. Also, HSBC is the largest bank with market value of $180.81 billion and the most profitable bank with $19.13 billion2. For this financial group, risk management is crucial to forecast and predict possible market changes and economic fluctuations.

Similar to HSBC, MNCs face financial problems and need risk management techniques to avoid profit loss and sustain market growth. For both types of corporations, the first principle of sound financial systems is to lend money only to those who do not need the money. This may sound contradictory to the intent of banking, but it is not. Banking is a business where the banker takes the savings of a number of individuals and lends the money to others. Those whose savings are being redirected to others as loans do not know, or care, that this is happening3.

All they care about is the timely payment of interest and the right to withdraw money at one hundred cents on every dollar. Bankers are lenders not of personal or bank funds, but the funds of depositors. Bankers are, in effect, borrowers. HSBC Bankers borrow money from depositors and pay them interest. They take the money and lend it out to others at a higher rate of interest. What bankers expect from borrowers is what depositors expect from bankers. Depositors, borrowers, and bankers function in a system where repayment is in terms of one hundred cents for every dollar deposited or borrowed.

Depositors expect one hundred cents on every dollar that bankers have borrowed from them4. For bankers to honor their obligations to depositors, bankers must expect one hundred cents returned on every dollar that they have lent to borrowers. From the bankers' perspective, a deposit is a liability on the books because they "owe" this to depositors at the time when depositors desire to withdraw money. A loan to a borrower is an asset from the perspective of a banker because its interest represents income and its repayment represents cash flow into the bank.

To maintain a balance between assets and liabilities, a dollar's worth of assets and a dollar's worth of liabilities must be in terms of one hundred cents on the dollar5. "What If" analysis is part of risk management for HSBC and MNCs. "What If" analysis consists of looking not only at the most likely, from which one derives a measure of reward, but also certain unlikely cases where the events of business life do not follow the most likely script. The measure of reward diminishes with respect to the measure of reward for the most likely case.

At some point, the measure of reward becomes the measure of risk. A measure of risk is a low degree of reward that is insufficient either to meet expenses or to provide a minimum return on investment. Risk, in a business environment, can be looked upon as an unsatisfactory level of reward where the wisdom of proceeding with the project must be questioned6. In viewing loan applications or proposals, bankers focus on the prospects of repayment. This is because loans are made when it is perceived that the borrower does not need the money.

In other words, loans are made wh