The key components of risk governance are risk culture, appropriate business execution based on risk appetite, and risk management. While the Shinsei Bank Group continually strives to improve all of these elements, we have put particular emphasis on building systems for appropriate business execution based on risk appetite and have put in place an integrated management framework based on consistency between risk appetite and financial planning. The concept of risk appetite is commonly referred to as the risk appetite framework. At the Shinsei Bank Group, however, we focus on the consistency between risk appetite and financial planning as a key premise, and work to achieve appropriate business execution based on risk appetite through the integrated operation of existing functions related to both. The Shinsei Bank Group uses the common equity Tier 1 ratio and return on equity (ROE) as key strategic financial indicators. By aligning risk appetite with financial planning, appropriate risk-taking aims to produce expected returns, which in turn leads to improved financial indicators.
Risk appetite and financial plans are detailed and materialized in the process of formulating these plans based on strategies and tactics for each business line based on the Medium-Term Management Strategy that indicates the direction of management. The Shinsei Bank Group has formulated a Risk Appetite Policy that documents risk appetite in an appropriate and detailed manner to clarify the Group′s risk appetite behind financial planning and foster a shared understanding of risk. In addition, to quantify risk appetite on a uniform scale, we have formulated a capital allocation plan that allocates capital to each business line.
Of the risks that could materialize in the next one-year period, we recognize risks that are considered to have a significant impact on management based on management discussions. This process emphasizes the consideration of nonfinancial risks that are difficult to quantify, but trigger events, transmission channels, and financial impacts are specified as much as possible when determining the impact on management. In addition to the current economic downturn, we have identified important risks such as the entry of nonfinancial companies into the financial industry due to innovations in financial technologies, materialization of human resource risks, risk of fraud in business processes, and the instability of the foreign currency procurement environment. The integrated business management framework is designed to continuously strengthen the ability to predict and respond to these risks.
Overview of the Group's Risk Management Systems
To ensure its risk management is more 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 Bankfs risk management policies and business strategy. Shinsei Bank has established the ″Group 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 Bankwide policies as well as individual operational policies, 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.