Group Risk Management Systems

To consolidate its role as a corporate group that truly serves its community, The Kiyo Financial Group (Kiyo Holdings, Inc. and companies under its umbrella, hereinafter “the Group”) ensures operational soundness and higher profitability through risk and profit management frameworks that enable it to provide high value-added services.
    Specifically, to coordinate risk management across the Group, we have established a Risk Management Committee consisting mainly of directors of the holding company, as well as the Group Administrative Services Department. We have also compiled a Basic Policy for Risk Management and Risk Management Regulation that lays down the basic items for risk management, as well as General Risk Management Rules to enable overall and quantitative assessment of diverse kinds of risk. In this way, we are building a comprehensive risk management system for the entire Group.
    At Kiyo Bank (The Kiyo Bank, Ltd., hereinafter “the Bank”), we have also established a risk management committee and dedicated offices to oversee the various categories of risk, to ensure we have in place mechanisms for all categories and scales of risk inherent in our business.

Credit Risk Management
The Group defines credit risk as the possibility of incurring losses from a diminution in credit assets or their uncollectibility, due to deterioration in the credit conditions of counterparties.
    Within the Group, we have compiled a set of credit risk management rules as a framework for credit risk management, and have established principles and basic policies for credit risk management as well as a risk management system. To control credit risk within reasonable parameters, we have created various mechanisms such as a borrower credit-rating system, and discretionary ceilings on loan amounts, to forestall credit concentration risk.
    In line with these basic policies and regulations, the Bank has created a credit-screening management function, in which credit screening is detached from the business promotion sections, thereby ensuring asset soundness. We also conduct rigorous asset self-assessments and verify their accuracy through the auditing group in charge, which works independently of our loan promotion departments. In this way, we seek to improve our credit-risk management.

Market Risk Management
The Group defines market risk as the possibility of incurring losses due to fluctuations in the value of Group assets from various market-related factors such as changes in securities prices, interest rates and foreign exchange rates.
    We have compiled a set of Market Risk Management Rules and employ Value-at-Risk (VaR) and Basis Point Value (BPV) techniques to accurately measure market risk. The Group is also putting in place appropriate risk control systems with safeguards such as maximum allowable risk limits and loss-cutting functions to prevent excessive risk-taking.
    We have also drawn up a set of ALM risk management rules and are establishing basic parameters for risk management relating to comprehensive asset and liability management in the Group.
    Against this backdrop, the Bank is working to ensure stable earnings by exploring ways, through the Risk Management Committee and the ALM Strategy Committee, to achieve the best balance between risk and return.
    The Group has a risk management framework incorporating a system of mutual checks and balances in which the front office executes market-related transactions, the middle office controls risk, and the back office handles administrative processing and account settlements.

Liquidity Risk Management
The Group defines liquidity risk as the possibility of incurring losses due to the inability to secure required funds that can lead to restrictions on the flow of funds and the inability to avoid interest rates that greatly exceed market rates.
    Because the greatest liquidity risk faced by the Group is a funding crisis caused by a run on deposits, the Bank works to allay customer concerns in transactions by ensuring stable earnings and a robust financial position. At the same time, the Group maintains maximum vigilance in regard to the early detection of signs of abnormality in funding and strictly manages its funding position.
    Finally, we have compiled our “Liquidity Risk Management Rules” and classified 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.

Operational Risk Management
The Group defines operational risk as the possibility of incurring losses due to inappropriate internal processes resulting from human or computer error, the malfunctioning of computer systems, or damage as a result of accident or disaster.
    There is a wide range of risk categories apart from credit, market and liquidity risk. Additional categories include operational risks such as administrative, system, and reputational risk.

Administrative Risk Management
Administrative risk refers to the possibility of incurring losses due to the failure to perform administrative duties appropriately or due to administrative errors as a result of accident, malfeasance or similar cause.
    The Bank has established rules for administrative processing and administrative procedures, and we are working to build customer trust by eliminating errors and rigorously following procedures in administrative processing.
    Regular training and guidance given at branches are used to enhance administrative performance at the branch level. To avert administrative risk and preempt problems, the Auditing Office carries out audits at branches and offers guidance on the accurate, error-free performance of duties and the prevention of mishaps.

System Risk Management
System risk is the possibility of incurring losses from computer system failure due to technical problems, operator mistakes, deliberate misuse of computers, or the leakage or falsification of computer data.
    To preempt such risk, the Group undertakes rigorous measures during the development of system projects to optimize process and quality management. Additionally, online circuits are duplicated and firewalls have been installed to prevent unauthorized third-party access to systems. We have taken security and other measures to prevent information leakage.
    We have also compiled a manual for crisis response and have taken a variety of measures enabling us to minimize the impact should a failure of any kind occur.

Reputational Risk Management
Reputational risk is the possibility of incurring losses due to the spreading of rumors and other false information that could affect the Company’s reputation in markets and among customers.
    The Group makes every effort to ensure that disclosure of information is timely and appropriate. We preempt reputational risk by improving the transparency of management, enhancing the protection of customer information, and increasing customer satisfaction.

Comprehensive Risk Management
To increase the transparency of management and help ensure stable earnings, the Group in March 2007 embarked on comprehensive risk management using a single yardstick for the categories of risk detailed above to generate a quantitative measurement of risk. With regard to credit risk, we are still developing the sophisticated tools needed for the higher level of precision such quantification demands. Looking ahead, we are taking every measure to comprehensively quantify the various types of risk and to control risk within appropriate parameters in relation to the Group’s resources (risk capital), without prejudice to maximizing returns.