Financial markets continue to evolve amid deregulation and the introduction of innovative financial techniques and information technologies. Against this backdrop, profit-making opportunities are growing, while risks faced directly by institutions are also increasing, both in scope and diversity.
The Bank works constantly to establish risk management rules and set up reliable systems for controlling risk, while improving its ability to quantify risk and adopt effective upgrade risk management techniques. To this end, we have set up special entities to enable appropriate control of risk. These include the Management Administration Office, which monitors and controls the various risks confronting the Bank, such as credit risk, market risk, liquidity risk, administrative risk, and system risk. Another is the Risk Management Committee, which discusses the risk status of the entire bank.
Going forward, the Bank will continue enhancing its risk management capabilities in order to ensure more sound operations and stable earnings.
Credit Risk Management
Credit risk refers to the possibility of incurring losses due to inability to recover loan principal or interest from a borrower, stemming from deterioration of the borrower’s business situation.
As a framework for managing credit risk, we have compiled a document called Basic Policy for Lending Operations, which provides criteria for lending activities, basic items for screening, the framework for explaining loans to customers, and fundamental credit risk management policies.
We have also established “self-imposed limits on lending concentration risk,” with the aim of avoiding excessive losses due to over-extension of credit in certain sectors.
To protect the soundness of our assets, we continue to upgrade our credit risk management capabilities. We have separated the credit screening function from the Business Promotion Division and we institute meticulous self-assessments and undertake internal audits to verify the accuracy of such assessments. In addition, we have set up the Management Support Office within the Credit Administration Division, in order to help borrowers improve their business performance and thus preserve our own loan assets.
Market Risk Management
Market risk refers to the risk of incurring losses due to fluctuations in market-related factors, such as interest rates, foreign exchange rates, and share prices. The Bank employs Value-at-Risk (VaR) and Basis Point Value (BPV) techniques to accurately measure market risk.
The Bank has a “mutual checks-and-balances” risk management framework, in which the front office executes market-related transactions, the middle office controls risk, and the back office handles administrative processing and account settlements.
To assure stable earnings, the middle office and Management Administration Office monitor and manage market risk, while the ALM Committee and Risk Management Committee ensure an appropriate balance between risk and return.
Definitions of terms
VaR: Method of measuring the maximum possible loss of an investment portfolio over a certain time of period, based on certain assumptions.
BPV: Method of measuring how the market value of an entire investment portfolio would change if the market interest rate moved 0.01 percentage point.
Liquidity Risk Management
Liquidity risk refers to the potential for incurring losses due to inability to secure required funds, leading to restrictions on the flow of funds and inability to avoid interest rates greatly exceeding market rates.
The Bank rigorously manages its funding position by closely monitoring information that could affect fund flows and keeping abreast of the maximum funds it can procure on a daily basis.
Our Liquidity Risk Management Rules classify the status of fund flows into four categories: “normal,”“requiring attention,”“causing concern,” and “critical.” We are building a framework enabling appropriate responses to each category.
Administrative Risk Management
Administrative risk refers to the likelihood of posting losses due to inaccurate administrative processing or failure of administrative systems.
We have formulated a set of procedures to address this risk and strive to earn the trust of customers by ensuring accurate and meticulous administrative processing. We also provide staff training and guidance to our offices periodically in order to constantly improve their administrative capabilities.
To improve our internal inspection system, the Management Administration Office carries out rigorous inspections of the headquarters and branches, and provides guidance on how to ensure strict and accurate processing and avoid accidents.
System Risk Management
System risk refers to the possibility of incurring losses due to system-related problems. These include unprecedented stoppage, erroneous operation, or improper use of computer systems, as well as fraudulent use of computers or leakage of information.
To avoid such risks, the Bank duplicates on-line circuit connections and facilities within its computer center, and has installed firewalls to prevent fraudulent third-party access to its systems. To ensure full preparedness for the unexpected, we have also compiled a manual outlining contingency plans.
To address fraudulent computer use or information leakage, we have formulated our Basic Policy for Information Management (security policies), which describes measures to take to protect our information assets, that is information itself and information systems. We have also established information security standards that determine specific safety guidelines, such as Information Management Rules and System Risk Management Rules. In these ways, we constantly work to ensure meticulous operation and control of our systems.
Reputational Risk Management
The spread of rumors and other false information can conceivably affect a company’s reputation in markets and among customers. The Bank refers to this as reputational risk.
To prevent such risk from occurring, we proactively disclose information in a timely and appropriate manner while constantly raising the transparency of our operations.
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