Comprehensive Risk Management System

Comprehensive Risk Management
The Group defines risk management as one of its critical management issues
and aims at well-balanced management in pursuit of enhanced profitability
while maintaining operational soundness through further development ofcomprehensive risk management. To this end, risks are managed in accordancewith the Basic Risk Management Rules which set out policies and a framework
for risk management for the entire Group along with other basic matters on thesubject.
Risks faced by the Group include credit risks, market risks, liquidity risks andoperational risks. The Group has established a risk management system basedon the “three lines of defense” concept. As the first line of defense, businessdivisions facing the risks engage in the responsible management of the risks.
The second line of defense is to designate sections in charge of each type ofrisk management, and understand, analyze and evaluate the status, andmanage and check each type of risk. In addition, we have established a systemfor comprehensively managing the various types of risks through theestablishment of committees and a department in charge of risk management(Corporate Administration Department). As the third line of defense, we haveestablished a system in which the internal audit department (Audit & InspectionDepartment) verifies the appropriateness and effectiveness of risk management.
The Group strives to ensure operational soundness while enhancing
profitability at the same time, and has a policy to conduct appropriate risk-taking
within the limits of capital. The Group sets risk limits for each risk category(credit, market, and operational risks) and calculates, monitors, and manages
the amount of each risk using statistical and other methods.
In addition to comparing the total amount of risk aggregated each risk
amount with capital, we also evaluate and verify the degree of capital adequacyby estimating the impact of risk events that may not be captured in each risk
amount using stress tests, etc. The results of these evaluations and verifications
are used to strengthen and revise business plans and risk management.
ALM
ALM is an abbreviation for Asset and Liability Management, which is asystem to comprehensively manage assets and liabilities, including varioustypes of risk analysis, to ensure stable earnings growth.
Three lines of defense
Line 1: Autonomous management by business divisions; Line 2: Checks andsupport by risk management divisions; Line 3: Verification of appropriatenessand effectiveness and recommendations for improvements by the internal audit
divisions.

Credit Risk Management
Credit risk refers to the risk of losses incurred when the value of assets(including off-balance-sheet assets) declines or becomes worthless due tochanges in the financial status of those to whom credit is provided.
Credit risk management aims to maintain and improve the financial
soundness of the Group through appropriate management of credit operations
in order to contribute to the sound development of the social economy and byextension, to develop the Group. The Group’s basic credit risk management
policy is to manage credit risk inherent in diverse transactions across all
divisions and business sections in a comprehensive and integrated manner, andto establish and appropriately manage risk assessment and management
methods that suit the characteristics of each risk.
A credit risk management system has been established so that each Group
company manages credit risks based on our basic credit risk management
policy, and the Corporate Administration Department, which is responsible foroverseeing and managing credit risk, oversees and manages credit risks for theentire Group.

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CHUGIN FINANCIAL GROUP, INC.

Credit risk management methods include a credit management system thatestablishes standards and procedures for making credit decisions and, as partof such procedures, a credit risk assessment system that stipulates standards
and procedures for conducting credit risk assessments that form the basis for
credit decisions has been established. These systems are properly operated tocontrol risk by preventing the credit risk losses or suppressing losses within acertain range. Credit concentration risk is also appropriately controlled by
avoiding excessive concentration of credit to specific customers or groups orspecific industries. Through these efforts, we aim to control credit risk andsecure stable earnings.
Regulatory capital requirements for credit risks are strictly measured in thecredit risk management system given the importance of capital ratio
requirements in risk management and information disclosure. We haveestablished a framework to assess credit risk and financial conditions understress such as economic recessions and defaults by large borrowers, to evaluate
capital sufficiency and appropriateness of risk management plans, and to reflect
such assessments and evaluations in our credit management, etc.

Market Risk Management
Market risk refers to the risks of incurring losses from fluctuations in profits
arising from assets and liabilities and the risks of incurring losses fromfluctuations in the value of assets and liabilities (including those off balancesheet) due to fluctuations in market risk factors such as interest rates, exchange
rates and share prices.
The Group’s basic risk management policy for market risks is to determine
and analyze risks from the point of view of fluctuations in both current value andnet interest income and to assess the risks from various angles, using stresstests and other methods.
A market risk management system has been established so that each Group
company manages market risks based on our basic market risk management
policy, and the Corporate Administration Department, which is responsible foroverseeing and managing market risk, oversees and manages market risks forthe entire Group.
In terms of the method of managing market risks, trading limits and loss
limits have been set for trading operations, the goal of which is to earn trading
profit from buying and selling securities in market operations. These limits aremanaged to ensure that losses in excess of a certain amount do not occur.
Banking operations (investment securities) are managed for risks by taking therisk-return balance into consideration through ALM analysis, Value at Risk (VaR)
analysis and other means to ensure stable profits over the medium and longterm. We have also established a system for the flexible management of market
risks as well as credit risks and liquidity risks related to market operations.
Market risk management, including lending and deposit services, is carriedout by analyzing risks from multiple aspects, such as the calculation of interest
rate risks. The Group Risk Management Committee and the Group ALM
Committee discuss the overall management of assets and liabilities andconsider management and lending policies.
VaR (Value at Risk)
Value at Risk (VaR) is the maximum loss, incurred in a portfolio during a
specific holding period and confidence interval, estimated using statisticalmethods based on historical data.

Liquidity Risk Management
Liquidity risk refers to the risks of incurring losses (hereafter, “fund procurementrisks”) when it becomes difficult to secure the requisite funds or when procuring
funds at a much higher than normal interest rate becomes necessary due to amismatch between the timing of use and procurement or to an unexpectedoutflow of funds, or to risks incurred when transactions cannot be conducted or
must be conducted at prices that are much more disadvantageous than normal
due to market disruptions or other factors (hereafter, “market liquidity risks”).
The Group recognizes the importance of fund procurement management andits basic fund procurement risks policy is to ensure a stable supply of funds. Ourbasic policy for managing market liquidity risks is to take into consideration thespecial features of markets for individual products, such as market size, liquidity,
and other factors, and to pay careful attention to their market liquidity.
A liquidity risk management system has been established so that each Group
company manages liquidity risks based on our basic liquidity risk management
policy, and the Corporate Administration Department, which is responsible foroverseeing and managing liquidity risk, oversees and manages liquidity risks forthe entire Group.
In terms of the method of managing liquidity risks, we pay attention to thedaily status of fund procurement by monitoring early warning indicators andwork to limit the fund procurement risks. In addition, we manage liquidity risks
by establishing management policies for fund procurement risks, such aspolicies for holding highly liquid assets and setting limits on the gap between
funds under management and funds procured over a certain period of time.
Deposits comprise the vast majority of procurements at particularly important
subsidiary bank. While its fund procurement is stable, we are working todiversify our means of procurement to prepare for unforeseen circumstances,by procuring from the market utilizing marketable securities held by the Group.
For foreign currencies, we verify that funding is feasible using stress tests thatassumes that it is difficult to procure funds from markets due to deterioration in
conditions of foreign currency procurement, and we work to maintain themedium to-long-term stability of our foreign currency balance sheet bymeasuring and managing the stable foreign currency ratio which indicates thedegree of stability of foreign currency investments and procurement.

Group Risk Management System
A department in square
brackets is in chargeof the relevant risk.

Management/Check/
Instruction

Report/Consultation

Collaboration

Audit/Accounting Audit/■ First line dept. ■ Second line dept. ■ Third line dept.
Supervision

Board of DirectorsAudit & Supervisory
Committee

Group Management MeetingGroup Risk Management Committee

Group Compliance Committee

Audit & Inspection Dept.

Comprehensive Risk Management[Corporate Administration Dept.]

Operational Risk
[Corporate Administration Dept.]
Credit Risk

Market Risk

Liquidity Risk

[CorporateAdministration
Dept.][CorporateAdministrationDept.][CorporateAdministration
Dept.]

Administrative Risk, System Risk, Tangible Assets Risk,
Information Resource Risk, Compliance and Legal Risk
[Corporate Administration Dept.]

Human-related Risk

Outside Certified Public Accountant

Group ALM Committee

Other Risk
(reputation, strategy,crisis management and others)[Corporate Planning Dept.][Human Resources Strategy Dept.]

Depts. in the holding company The Chugoku Bank and other Group companies

CHUGIN FINANCIAL GROUP, INC.

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