Special Feature : INTERVIEW BETWEEN AN OUTSIDE DIRECTOR AND THE PRESIDENT REGARDING GOVERNANCE

A group interview in regard to Shinsei Bank's corporate governance was conducted among Mr. Ernest M. Higa, Outside Director, Mr. Hideyuki Kudo, President and Chief Executive Officer, and Mr. Shigeki Toma, Advisor to Shinsei Bank (the previous President and Chief Executive Officer), with Mr. Ken Takamiya, a bank sector analyst at Nomura Securities Co., Ltd., serving as the moderator. (Interview was conducted in April 2015)

Special Feature : President's Conversation with Investor

From left

Shigeki Toma
Advisor, Shinsei Bank
Hideyuki Kudo
President & CEO, Shinsei Bank
Ken Takamiya(Moderator)
Bank Sector Analyst Nomura Securities Co., Ltd.
Ernest M. Higa
Outside Director, Shinsei Bank

Takamiya:The idea of a risk appetite framework has been brought up recently in discussions regarding regulations including Basel, and a cornerstone of governance is its requirement that the Board of Directors assume the functions of avoiding inadvisable risk-taking whilst on the other hand proactively encouraging the Bank to undertake advisable risk and businesses the Bank is engaged in. Mr.Toma and Mr.Kudo, have you had the experience of being encouraged by the Outside Directors?

Toma:Rather than discussing the risks one can or cannot take in specific deals, it is important to consider the criteria for determining whether certain risks can or cannot be taken from the aspect of the nature of the risks and what kind of Bank we aim to be. Additionally, there are risks that should be taken even if in the past we felt it should not be taken, as well as risks that should not be taken even if we have taken them in the past. Japanese commercial banks need to foster a sound risk-taking culture by carefully considering such issues. Furthermore, it is important they instill a sound risktaking culture amongst their employees. An example of sound risk-taking criteria is our traffic light project. We believe that this project functions as effective risk-taking criteria since through it, for cyclical market businesses including real estate, we first determine whether the market situation is a "green," "red," or "yellow" state, and based upon the assessment we decide whether to accelerate or decelerate the initiatives of the business before connecting assessment to individual initiative.

Kudo:Taking risk and promoting business are two sides of the same coin. The Board naturally engaged in discussions about proactively taking risk in particular areas, and such discussions are absolutely necessary.

Takamiya:As an Outside Director, what do you think is best to represent Shinsei Bank's strategic strengths to shareholders and investors? Conversely, what are the issues for Shinsei Bank?

Higa:A differentiated strategy is crucial in the intensely competitive banking industry. An example of Shinsei Bank's strength is that it started internet banking earlier than any other banks and is perceived as a pioneer, and I believe that it should be working to strengthen this perception. I believe that "big data" and "analytics" can be used in the Front Office to contribute to the differentiation of and growth of the Bank's business. On the other hand, I also believe that our overseas banking and product development still have many issues.

Toma:Strengths and weaknesses are tied together. For example, we are a small-sized bank, which is a very big advantage in a rapidly changing world in that we can engage in new areas, products, and services very quickly. On the other hand, we also have issues, one being public funds and the other being risk taking. The risk taking issue is related to how to discern whether the business to which we are considering extending credit to will grow to be an industry, product or service pioneer. In order to do this, we need to be capable in evaluating the trends, regulations and technologies of the industry itself. In such cases the game is not the lending of a million yen because the collateral is worth a million yen. Industry, product, and service pioneers, although small, will grow and enlarge the market itself as they globalize, magnifying the returns of their successes. We are instilling such a vision in the Bank in order develop an edge over our competitors through our day to day businesses and through training.

Kudo:Our intention is not to equally provide universal services to everyone in the world, but to narrow down the issues and needs of the world in our own way, construct the pillars of several businesses, and astutely leverage our strengths in doing so. Take as an example the structured finance business, which I use to be in charge of, where we have provided financing by utilizing cash flow financing and asset financing, evaluating the value of specific deals from a different perspective from plain vanilla corporate financing. This method can be used in many business areas, and even project financing, which had difficulty gaining traction in Japan, is now rapidly spreading in the area of renewable energy, and I believe that we were in a way the trailblazers for this in Japan. Another example may be the Bank's retail and consumer finance businesses, which, while started from different paths, I believe can develop into something more interesting if we better harness their potential synergies. We do not need a revolutionary idea to do this, as there are almost certainly parts of our Retail and Consumer related businesses, which many people consider important, where we should be able further refine our undertakings and utilize of our strengths. While the incorporation of specific strategies into the Third Medium-Term Management Plan ("MTMP") will come at a later stage, through repeated discussions, I would like us to be able to create several main pillars that can transform our weaknesses into strengths.

Takamiya:Mr.Higa, is there any advice you can give regarding what needs to be done by both Shinsei Bank as a corporate organization as well as its individual employees, so that Shinsei Bank can continue to be a trailblazer?

Higa:I believe that Shinsei Bank needs a structure that enables global banking operations. The Board always discusses what it is that Shinsei Bank can do which mega banks cannot. The greatest chance would be to ride the wave of globalization. Additionally, the foundation to do so is already in place at Shinsei Bank, as simultaneous interpretation of Japanese and English is provided for all Board of Directors meetings, and all documents are also available in both languages, which enables non-Japanese Outside Directors to participate in the discussions without difficulty allowing for diversity as the Board level.

Takamiya:An extremely important issue in corporate governance is changing Management. Please tell us about the role the Board played in the transition in presidency from Mr.Toma to Mr.Kudo.

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