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1Our risk appetite2Our risk appetite defines our desired forward-3looking risk profile and informs the strategic 4and financial planning process. It provides an 5objective baseline to guide strategic decision 6making, helping to ensure that planned 7business activities provide an appropriate 8balance of return for the risk assumed, while 9remaining within acceptable risk levels. 10Risk appetite supports senior management 11in allocating capital, funding and liquidity 12optimally to finance growth, while monitoring 13exposure to non-financial risks. 14At 31 December 2023, our CET1 ratio and 15ECL charges were within their defined risk 16appetite thresholds. Our CET1 capital ratio 17at 31 December 2023 was 14.8%, up 0.6 18percentage points from 2022, mainly driven 19by capital generation net of dividends, share 20buy-backs and regulatory adjustments, partly 21offset by an increase in RWAs during the 22year. For further details of the key drivers 23of the overall CET1 ratio, see ‘Own funds 24disclosure’ on page 207. Wholesale ECL 25charges during the year reflected the default of 26several mainland China commercial real estate 27developer clients. Wholesale ECL charges fell 28outside of appetite in the first half of 2023, 29although returned within appetite during the 30second half of 2023, due to relatively lower 31defaults in the UK and most other markets. 32During 2023, we enhanced the coverage of 33interest rate risk metrics in the banking book 34within the Group’s appetite statement.35Stress tests36We regularly conduct stress tests to assess 37the resilience of our balance sheet and 38our capital adequacy, as well as to provide 39actionable insights into how key elements 40of our portfolios may behave during a crisis. 41We use the outcomes to calibrate our risk 42appetite to review and calibrate as required 43our strategic and financial plans, helping to 44improve the quality of management’s decision 45making. The results from the stress tests also 46drive recovery and resolution planning to 47help enhance the Group’s financial stability 48under various macroeconomic scenarios. The 49selection of stress scenarios is based upon the 50identification and assessment of our top risks, 51emerging risks and our risk appetite. 52In January 2023, HSBC Holdings and HSBC 53UK, its UK ring-fenced bank, submitted the 54internally modelled results of the Bank of 55England’s (‘BoE’) 2022–2023 annual cyclical 56scenario to the regulator. The BoE uses 57the annual cyclical scenario stress test to 58determine the banking sector’s ability to 59withstand an adverse scenario and continue to 60serve UK households and businesses. 61The results were published on 12 July 2023  62by the BoE in its Financial Stability Report  63and indicated that both HSBC Holdings and 64HSBC UK are sufficiently capitalised with  65a CET1 capital ratio remaining well above  66the regulatory reference rate on both an  67IFRS 9 transitional basis and on a  68non-transitional basis.69During the second half of 2023, the Group-70wide internal stress test was completed 71alongside testing of the Group’s strategy. The 72concluding results of the Group-wide internal 73stress test provided updates to the Group 74Risk Committee in support of its assessment 75of adequacy of HSBC Holdings capital levels. 76The underlying conclusions drawn from this 77exercise will also be included in the Group 78internal capital adequacy assessment process 79(‘ICAAP‘) in the first quarter of 2024.80Climate risk81Climate risk relates to the financial and 82non-financial impacts that may arise as a 83consequence of climate change and the move 84to a net zero economy. Climate risk can impact 85us either directly or through our relationships 86with our clients. These include the potential 87risks arising as a result of our net zero 88ambition, which could lead to reputational 89concerns, and potential legal and/or regulatory 90action if we are perceived to mislead 91stakeholders on our business activities or if we 92fail to achieve our stated net zero targets.93We seek to manage climate risk across 94all our businesses in line with our Group-95wide risk management framework and are 96incorporating climate considerations within 97our traditional risk types. 98 For further details of our approach to climate risk 99management, see ‘Climate risk‘ on page 221.100 For further details of our TCFD disclosures, see 101the ‘ESG review‘ on page 42.102Climate stress tests103To support the requirements for assessing the 104impacts of climate change, we continue to 105develop a set of capabilities to execute climate 106stress testing and scenario analysis. These are 107used to help improve our understanding of 108risk exposures for managing risk and business 109decision making. 110In the second half of 2023, we ran further 111internal climate scenario analyses. The 112outcomes were used to identify challenges 113and opportunities to our net zero strategy, 114inform capital planning and risk appetite, as 115well as to respond to climate stress tests for 116regulators, including the Hong Kong Monetary 117Authority and the Central Bank of the United 118Arab Emirates.119 For further details of our approach to climate risk 120stress testing, see ‘Insights from scenario 121analysis’ on page 225.122Our operations123We remain committed to investing in the 124reliability and resilience of our IT systems and 125critical services, including those provided 126by third parties, which support all parts of 127our business. We do so to help protect our 128customers, affiliates and counterparties, and 129to help ensure that we minimise any disruption 130to services. In our approach to defending 131against these threats, we invest in business 132and technical controls to help us detect, 133manage and recover from issues in a  134timely manner. 135We are working to ensure that we balance the 136opportunity AI presents to accelerate delivery 137of our strategy with the need to ensure 138appropriate controls are in place to mitigate 139the associated risks. HSBC is committed 140to using AI ethically and responsibly. We 141continue to refine and embed robust and 142effective governance and controls into our 143risk management processes to help meet 144the Group’s needs and increasing regulatory 145expectations for when AI is both developed 146internally and enabled through third parties.147We continue to focus on improving the quality 148and timeliness of the data used to inform 149management decisions, and are progressing 150with the implementation of our strategic and 151regulatory change initiatives to help deliver 152the right outcomes for our customers, people, 153investors and communities. 154 For further details of our risk management 155framework and risks associated with our banking 156and insurance manufacturing operations, see 157pages 137 and 145, respectively.158Managing risk continued159Top and emerging risks 160Our top and emerging risks report identifies 161forward-looking risks so that they can be 162considered in determining whether any 163incremental action is needed to either prevent 164them from materialising or to limit their effect. 165Top risks are those that have the potential 166to have a material adverse impact on the 167financial results, reputation or business model 168of the Group. We actively manage and take 169actions to mitigate our top risks. Emerging 170risks are those that, while they could have a 171material impact on our risk profile were they to 172occur, are not considered immediate and are 173not under active management.174Our suite of top and emerging risks is subject 175to regular review by senior governance forums. 176During 2023, we removed Ibor transition as a 177top risk given the cessation of the publication 178of US dollar Libor in June 2023. We continue to 179monitor closely the identified risks and ensure 180management actions are in place, as required.18138 HSBC Holdings plc Annual Report and Accounts 2023182Strategic report | Risk overview