Risk Management

Management Strategy and Risk Capital Allocation

The Bank defines "risk capital" as an integrated control approach to risk that groups risk into categories, namely (1) credit risk, (2) market risk, (3) interest rate risk and (4) operational risk, and measures exposures relating to each risk category.

Risk Capital

An approach to defining the type and total amount of risk (risk appetite) the Bank thinks it should be willing to adopt so it can attain its management plan goals within the limits of the Group's management strength. The Bank measured the risk capital based on a stress test in response to environmental changes, and operated its management plan and risk appetite in an integrated manner, by incorporating the results of the risk capital to the budget compilation process in fiscal 2017.

Monitoring of Allocated Risk Capital

By tracking business performance adjusted for allocated risk capital on a monthly basis, risk capital is effectively put to work as a tool to comprehensively manage progress toward management plan goals from a risk-taking perspective. Moreover, risk capital budgeting is useful for judging business performance when monitoring of this performance adjusted for allocated risk capital is combined with risk-return monitoring as an indicator of whether allocated risk capital has been effectively deployed.

Shinsei Bank Group's Portfolio

The Group's nonperforming loan ratio (nonconsolidated) decreased to 0.17% as of March 31, 2018, because deteriorated credit standing had little negative impact on the Group's corporate loans and real estate-related loans centered on non-recourse loans. Meanwhile, as a result of higher growth of the unsecured personal loan balance at subsidiaries with a higher risk-monitored loan ratio, the Group's risk-monitored loan ratio (consolidated) increased to 1.53% as of March 31, 2018.

Risk Factors and Future Policy

In the Bank's three-year Medium-Term Management Plan that commenced in fiscal 2016, we grouped our businesses into "Growth Areas," "Stable Revenue Areas," "Strategic Initiative Areas" and "Curtailment Areas," and put forward consumer finance and structured finance in particular as growth areas.

While the external environment has continued to improve, we must continue to monitor the downside risks to the global economy from such factors as the future adjustments to U.S. monetary policy, the impact of the U.K.'s exit from the EU, geopolitical risks and the impact of such factors on financial markets. Risk management operations will continue efforts to accurately understand both domestic and overseas environments and develop a recognition that is shared by senior management on risk preferences and comprehension of the risk profile of the Group's portfolio from multiple angles using more-advanced stress tests and other means.

Also, an appropriate system with checks and balances is applied to initiatives in growth areas led by business promotion sections and implementation of business strategies. Through advanced measurement of risk-return and a stronger monitoring function, we are working to bolster and improve our risk management posture through flexibility in reviewing and revising risk strategies as the need arises.

Overview of the Group's Risk Management Systems

To ensure its risk management is effective, the Bank has established various specific committees such as the "Group Risk Policy Committee," "Transaction Committee," "Group Asset and Liability Management (ALM) Committee" and "Market Business Management Committee." All these committees are able to function effectively as bodies responsible for making important risk judgments by constantly improving their composition and functions in response to changes in the operating environment. The Group Risk Policy Committee, whose members include senior management such as the CEO, Chief Officer of the Group head of corporate planning and finance and the Group head of risk management, performs the crucial role of setting and coordinating the appropriate and optimal level of risk taking by concurrently reviewing the Bank's risk management policies and business strategy. Shinsei Bank has established the "Risk

Management Policy" as its fundamental policy on risk management and basic recognition of risk categories based upon its understanding of the totality of risks faced by the entire Shinsei Bank Group and the need to actively manage them.

Basic Concept regarding Risk Management

Financial institutions are exposed to various risks, including credit risk, market risk, interest rate risk, liquidity risk and operational risk. To maintain highly profitable and stable operations, a financial institution must make the control of these risks a management priority. For that purpose, the Bank must be able to ascertain that risks are taken in line with Bank-wide policies as well as individual operational policies, and remain within appropriate limits. To strengthen the required monitoring functions and further develop its risk management framework, the Bank established two risk management groups: 1) credit analysis divisions responsible for credit analysis, loan application approvals and monitoring and 2) divisions responsible for overall risk management, measuring and analyzing credit, market and other risks, and integrating functions for examining and verifying fair value.

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