March 12, 2024
Bank of Japan

On-Site Examination Policy for Fiscal 2024
1. Introduction
The Bank of Japan (hereafter, the Bank) formulates the on-site examination policy every
fiscal year based on the decision of the Policy Board.1
In conducting on-site examinations and off-site monitoring, it is becoming increasingly
important to assess financial institutions' soundness and risk management in a swifter andmore continuous manner and to monitor changes in the financial system as a whole in atimely fashion, in light of changes in the environment surrounding the financial system andvarious challenges faced by financial institutions.
In fiscal 2023, the Bank worked to strengthen the integration of on-site examinations andoff-site monitoring by deepening information sharing between the on-site examination
section and the off-site monitoring sections at the head office and branches. In addition, theBank deepened coordination with the Financial Services Agency (FSA) through a wide
range of initiatives, including joint surveys with the FSA targeting major financial
institutions, and worked on monitoring the financial system in more detail.2
In the "On-Site Examination Policy for Fiscal 2024," the Bank outlines the situation offinancial institutions' business management and risk management as assessed from on-siteexaminations and off-site monitoring in fiscal 2023. It also compiles issues key toconducting on-site examinations in fiscal 2024 and operations of on-site examinations
while also taking into account recent changes in the environment. Moreover, with regard
to off-site monitoring, while taking key issues in the on-site examination policy into
The Bank of Japan Act stipulates that "the content of a contract concerning on-site examinations"and "important matters concerning the implementation of on-site examinations for each businessyear" shall be determined by the Policy Board (Article 15, paragraph 2, item v).
2 Topics of the joint surveys in fiscal 2023 include the following: the supervisory simultaneous stresstesting based on common scenarios as well as joint surveys on foreign currency liquidity risk
management and on cybersecurity management. Topics will be reviewed as appropriate in
consultation with the FSA in line with their importance to the financial system.
1

1

account in order to ensure that off-site monitoring is well integrated with on-siteexaminations, the Bank will respond flexibly to changes in the environment.

2. On-Site Examinations in Fiscal 2023 and General Observations(1) On-Site Examinations in Fiscal 2023
The Bank carried out on-site examinations of 67 financial institutions: 20 domesticallylicensed banks, 42 shinkin banks, and 5 other institutions, including securities companies
as well as Japanese branches and subsidiaries of foreign banks. 3 In fiscal 2022, the Bank
partially resumed on-site examinations; that is, it visited financial institutions' premises
while using remote methods. In fiscal 2023, the Bank resumed such examinations to a large
degree and focused on hybrid-type examinations that combine remote methods.
Number of Financial Institutions Examined(number of entities)
Fiscal 2021

Fiscal 2022

Fiscal 2023

Domestically licensed banks

18

20

20

Shinkin banks

34

37

42

Other institutions

7

4

5

Total

59

61

67

(2) Issues Identified through On-Site Examinations and Off-Site Monitoring
Financial institutions' profitability and financial soundness, business management, as wellas their risk management examined in on-site examinations and off-site monitoring in fiscal
2023, are as follows.
Profitability, Financial Soundness, and Business Management
Looking at financial institutions' financial soundness, their capital levels are adequate
relative to the amounts of various types of risk taken on, and they have sufficient capacity
3"Securities companies" in this document refers to firms that conduct securities-related businessactivities among those classified as Type I Financial Instruments Business in Article 28 of the
Financial Instruments and Exchange Act.
2

to absorb losses. The smooth functioning of financial intermediation has been maintainedeven amid the global tightening of financial conditions and the resultant various types ofstress.
As for profitability, major financial institutions have increased the efficiency of theirdomestic deposit-taking and lending activities on the one hand, while on the other hand
they have pushed ahead with inorganic growth strategies involving acquisitions andinvestments at home and abroad as well as continued to strengthen group-wide profitability
across commercial banks, securities companies, trust banks, nonbanks, etc. belonging to
the same holding company and to broaden their revenue sources.
A growing number of regional financial institutions have been working to increase businessefficiency through, for example, consolidation of their branch networks (including socalled "branch-in-branch" consolidation) and reviews of their ATM networks and staff
allocation, and enhance profitability by improving financial services such as non-interest
services, in a situation where their core profitability has been pushed down due to structural
factors such as a declining population and the prolonged low interest rate environment inJapan. Moreover, these institutions have been active in providing loans in areas of focus,
such as leveraged buyout (LBO) financing.
Against this background, in terms of business management, there were some examples offinancial institutions that had actively pursued risk taking and returns to shareholders thatneeded to strengthen their management of risk-weighted assets to ensure capital adequacy
ratio levels, and that needed to refine their profit projections as well as sophisticate themanagement of them, which are prerequisites for increases in returns to shareholders. On
the other hand, there were also some cases where business management, risk management,
and business promotion were hampered by increasing personnel constraints.
Meanwhile, on the back of digitalization/digital transformation (DX), including the use ofopen application programming interfaces (APIs) and cloud computing, an increasing
number of financial institutions have been improving the efficiency of their operations andenhancing non-face-to-face services for customers. Against this background, the Bank,
together with the FSA, implemented a self-assessment survey for regional financial
institutions and securities companies, etc. in fiscal 2023 to encourage them to make theirown efforts to strengthen cybersecurity measures, returned the aggregated results to3

financial institutions, and exchanged views with the relevant industry associations.
Moreover, it was confirmed that a growing number of financial institutions have beenaddressing climate-related financial risks.
Credit Risk
Looking at financial institutions' credit provision, some major financial institutions havebeen focusing on financing for institutional investors, including investment funds, M&A
financing, real estate-related lending, and sustainable finance, whereas some regional
financial institutions are focusing on real estate-related lending, LBO financing, and "crossborder" lending. Moreover, both major and regional financial institutions have been
actively providing financing support to firms and support for firms to improve theirbusiness conditions.
Against this background, although credit costs increased in fiscal 2020, due mainly to thepandemic, they have leveled out since then. Many financial institutions expected that credit
costs would remain low on the whole, albeit increasing moderately. However, someregional financial institutions experienced risks building up as the loan-loss provision ratio
for large borrowers with unfavorable business conditions was low relative to the amountof uncovered loans.
With regard to risk management, there were some cases where financial institutions had
problems in understanding borrower firms' financial and funding conditions, analyzing
their repayment capacity, and providing effective support for low-performing firms to
improve their business conditions. In addition, issues have been found in terms of credit
screening and monitoring of loans in areas on which financial institutions have focused.
For example, regarding real estate-related lending, there were cases where cash flow
projections and portfolio analyses were not sufficient. In terms of LBO financing, there
were cases in which credit screening and monitoring were not keeping pace with the
expansion in the business scope.
Market Risk
Looking at developments in securities investment, financial institutions have continued tomaintain a restrained investment stance, due mainly to rising domestic and foreign interest
rates and increased volatility. Moreover, some financial institutions, particularly regional4

ones, have sustained valuation losses on securities holdings, reducing their risk-taking
capacity.
In terms of risk management, some financial institutions, especially regional ones, havesuffered a substantial increase in valuation losses due to inadequate loss limit frameworks
and responses to the breach of loss limits amid a decline in bond prices, mainly triggeredby rising domestic and foreign interest rates. Moreover, some did not adequately examine
their risk tolerance, with some not taking valuation losses into account in their framework
for allocating capital and others not capturing the impact of stress on their distributableprofits and their net asset values. In addition, there were many cases where theestablishment of management frameworks has not kept pace with the broadening of risktaking, such as investments in foreign securities, corporate bonds, and investment funds.
Liquidity Risk
Major financial institutions have been making efforts to maintain funding stability byextending the maturity of foreign currency deposits, the stickiness of which is relatively
high, and of FX and currency swap funding. Moreover, reflecting the failure of some banks
in the United States, they have been examining the stickiness of deposits. In this context,
the Bank has encouraged major financial institutions to consider issues such as therefinement of assumptions regarding the deposit runoff rate in their stress testing.
While many regional financial institutions have sufficient yen liquidity and have noproblems in managing it, among those for which deposits have been declining as a trend,some have failed to sufficiently analyze the reasons and examine countermeasures, andothers have not reviewed their emergency responses due to the downsizing of branch
networks and the reduction of staff. As for foreign currency funding, some institutions,especially those that are highly dependent on short-term market funding, etc., were facing
challenges in securing stable funding means in response to changes in their risk profiles
and in strengthening their ability to respond in the event of stress.
In addition, some financial institutions that work on raising funds through internet deposits
had issues with respect to the assumptions regarding deposit outflows in the event of stress.

5Operational Risk4
With regard to computer system risks, while both major and regional financial institutions
are increasingly using new digital technologies, cyber threats such as ransomware attacks
are becoming more prevalent.
Against this background, there were some institutions that had inadequate risk management
frameworks for the use of cloud computing, such as risk management standards andsecurity settings. Moreover, regarding cybersecurity management, there were some cases
where the investigation of potential vulnerabilities was inadequate, while in other cases,
the security of data encryption was not sufficiently ensured. In addition, amid businesscollaborations with third parties and group companies increasing, there were cases in which
the management of information security, including at these entities, and the managementof outsourcees, such as cloud computing providers, were insufficient. At some major
financial institutions, there was room for improvement in, for example, the effectiveness ofcybersecurity management on a group and global basis.
As in fiscal 2022, the Bank looked into whether financial institutions were steadily
improving their frameworks for anti-money laundering and counter-terrorism financing
while sharing its awareness and perspectives with the FSA through the framework of
coordination between the FSA's inspections and the Bank's on-site examinations. The
examinations showed that, while institutions overall were taking steps to improve theirframeworks, progress varied by financial institution, and there were some items, such as
ongoing customer due diligence, where the achievement rate was relatively low.
3. On-Site Examination Policy for Fiscal 2024
On-site examination policy for fiscal 2024 is as follows (see attachment for more details
on the key issues). Moreover, with regard to off-site monitoring, while taking key issues in
the on-site examination policy into account in order to ensure that off-site monitoring iswell integrated with on-site examinations, the Bank will respond flexibly to changes in theenvironment.

4 Operational risk refers to risks related to overall business operations, including, for example, risks

related to business procedures, compliance, computer systems, and business continuity.
6(1) Outlook for Profitability and Financial Soundness as well as Efficacy of Business
Management
The Bank will examine (1) boards of directors and senior management's view of theexternal environment, including financial and economic conditions at home and abroad,(2) the feasibility of their medium- to long-term business strategies, (3) the outlook forprofitability and financial soundness on that basis, and (4) the effectiveness of financial
institutions' business management. In doing so, the Bank will pay particular attention to thefollowing issues:
The status of efforts to build a sustainable business model. This includes the status andfeasibility of (1) efforts to strengthen top-line earnings, (2) measures to improve businessefficiency, such as a review of branch networks and staff allocations and thereengineering of business processes, and (3) the use of digital technologies.
-- Through examinations of these issues, the Bank will continue dialogue with regional
financial institutions on the status of implementing measures to support regional
economies and strengthen their business foundations in coordination with off-sitemonitoring.



For major financial institutions, the status and efficacy of efforts in a wide range offinancial services through their global activities and group strategies.



For regional financial institutions that have been pushing ahead with strengthening
business foundations through business integration, enhancement of group-wide businessactivities, and especially business collaborations with other firms, the status and efficacy
of such efforts.
-- With regard to regional financial institutions that are facing more severe staff
constraints, the Bank will also examine the sufficiency of their business management andrisk management, as well as the status of the framework for business promotion underthese circumstances, and have dialogue with them on countermeasures.

Profit outlook in light of expectations for yield curves and business strategies, such as
regarding loans and deposits as well as securities investment under such circumstances.
-- The Bank will check these through profitability simulations, etc., based on the market
outlook for domestic and foreign interest rates, the pass-through of these rates to loan anddeposit interest rates and its feasibility, and the composition of financial institutions'7

assets and liabilities, as well as have dialogue with financial institutions on
countermeasures.
Management of financial soundness mainly based on the increase in valuation losses on
securities holdings and the amount of risk, including interest rate risk in the banking book
(IRRBB).

In the case of financial institutions for which there is concern about their future
profitability and financial soundness, the effectiveness of risk-weighted asset
management and capital policies including dividend distributions.



Whether financial institutions identify and manage climate-related financial risks, theirinformation disclosure, and their engagement with corporate customers.

(2) Status and Efficacy of Governance Framework
The Bank will examine the status and efficacy of financial institutions' governanceframework necessary to ensure the effectiveness of business management and risk
management. In doing so, it will pay particular attention to the following issues:In the case of financial institutions that have overseas branches and subsidiaries andfinancial holding companies, their business management commensurate with their group
strategies, global activities, as well as financial regulatory and supervisory frameworks
in different jurisdictions.



The framework for the collection of the information necessary for effective business andrisk management.

(3) Status of Various Risks and Risk Management Frameworks
The Bank will review current developments and future directions of various risks faced byfinancial institutions and then examine the effectiveness of their risk management. (In theon-site examinations, the Bank will avoid overlapping with joint surveys conducted with
the FSA on subjects such as foreign currency liquidity risk management and cybersecurity
management at some major financial institutions.) In doing so, the Bank will pay particularattention to the following issues:

8Credit Risk


Whether financial institutions ascertain borrowers' financial and funding conditions andportfolio characteristics, as well as changes therein. Moreover, whether their initial
screening and interim management based on such information are appropriate, and thestatus of deliberations on methods for write-offs and loan-loss provisions (including thesufficiency of loan-loss provisions for large borrowers with unfavorable businessconditions).



Whether financial institutions are identifying borrowers that require support for
improving their business conditions based on borrowers' financial conditions and loan
coverage ratios, as well as the status of financial institutions' effective support for andmanagement of their borrowers. (In particular, the status of drastic support measures toaddress management challenges for large borrowers with unfavorable businessconditions.)

Implementation of initial screening, interim management, and portfolio analysis of realestate-related loans and housing loans. Frameworks for credit screening and monitoringwith regard to other areas of focus (financing for institutional investors and M&A
financing at major financial institutions, LBO financing and "cross-border" lending at
regional financial institutions, etc.).



Estimation of future credit costs in light of default cases and financial and economic
conditions, as well as the calculation of downside risks.
Market Risk



Financial institutions' strategies for securities portfolios, mainly in light of the market
outlook and gains/losses on securities holdings. Risk tolerance of their investment plans
relative to their financial soundness and profits.

Whether various risk and loss limits are consistent with financial soundness and profits.
The efficacy of action plans at times of market turmoil.



Whether financial institutions ascertain risks and have established risk management
frameworks in line with the size and broadening of securities portfolios.

9Liquidity Risk


Whether financial institutions have developed risk management frameworks, such as
strengthening funding bases and setting their risk appetite in line with their foreign
currency balance sheet strategy, managing the funding gap based on their funding
capacity in terms of different currencies, and developing and implementing liquidity
stress testing and contingency funding plans.



Whether the analysis of the underlying reasons for developments in deposits andcountermeasures are effective, especially at financial institutions for which deposits havebeen declining as a trend, and whether, given the downsizing of branch networks and the
reduction of staff, emergency responses are effective.

Financial institutions' analysis of the stickiness of their deposits in response to interest
rate fluctuations, etc., and policies for dealing with deposit outflows through online
banking.
Operational Risk

The effectiveness of measures to prevent computer system failures, as well as of recovery
frameworks in the event of a failure. The appropriateness of management frameworks forlarge-scale projects such as the move toward open core banking systems.

Whether financial institutions have ensured cybersecurity, including that of cloudcomputing, amid advances in digitalization and rising threat of cyberattacks. 5 The
effectiveness of measures to prevent cyber incidents and limit damage, as well as ofrecovery frameworks in the event of an incident.



Whether financial institutions have developed operational frameworks, mainly in light of
the review of branch networks and staff allocations.



Whether financial institutions have developed frameworks for anti-money laundering andcounter-terrorism financing.6

As for regional financial institutions, etc., the Bank, in its on-site examinations, will make use of theresults of the self-assessment survey on cybersecurity management frameworks that it conducted incooperation with the FSA.
6 The Bank will conduct examinations while sharing its awareness and perspectives with the FSA
through the framework of coordination between the FSA's inspections and the Bank's on-siteexaminations.
510

4. Operations of On-Site Examinations(1) Continuation of Hybrid-Type Examinations That Combine On-Site Examinations
and Remote Methods
In fiscal 2023, the Bank resumed on-site examinations to a large degree; that is, it visitedfinancial institutions' premises and focused on hybrid-type examinations that combine
remote methods such as web conferencing. In fiscal 2024, it will continue with such hybridtype examinations.
Specifically, during the "regular examinations," which take about three weeks and consistof a comprehensive examination and assessment of regional financial institutions' businessconditions and risk management frameworks, the first two weeks or so will basically be
spent conducting on-site examinations, while the last week or so will be spent conducting
examinations using remote methods. However, depending on factors such as examinee
institutions' circumstances, the Bank may adjust the relative length, etc. of on-site andremote examinations and/or may conduct examinations entirely on-site.
(2) Giving Consideration to Financial Institutions' Operational Burden and Improving
Efficiency
While making use of the information obtained through off-site monitoring, the Bank
efficiently conducts examinations (hereafter referred to both as on-site examinations andexaminations using remote methods) based on a risk-based approach by deciding, in a
flexible and efficient manner, the frequency, length, and scope of its examinations, as wellas the documents to be submitted and the number of examiners involved on the basis of acomprehensive assessment of individual financial institutions, such as from the following
perspectives: (1) the impact on the financial system of the materialization of risks inherent
in financial institutions and (2) financial institutions' capital adequacy and profitability, as
well as the degree of risk taking.
From fiscal 2022, in order to reduce the operational burden on examinee institutions andfurther improve the operational efficiency of examinations, the Bank has conducted "shortterm examinations" of some regional financial institutions, and will continue with suchexaminations in fiscal 2024; "short-term examinations" are more concise examinations that11

will take about two weeks and are based on a risk-based approach, in which operationalrisk management, etc. are excluded from the scope of the examination.
In addition, the Bank will continue to strengthen its coordination with the FSA bycoordinating the planning of the FSA's inspections and the Bank's on-site examinations
through the Joint Group for Coordinating FSA's Inspections and BOJ's On-Site
Examinations and by sharing the findings of inspections and examinations. In conducting
on-site examinations, the Bank will avoid overlapping with various joint surveys that it
conducted with the FSA to take into account the operational burden on examinee financial
institutions and enhance the efficiency of such examinations.
Moreover, the Bank will continue to share its awareness and strengthen cooperation withoverseas regulators, mainly on issues regarding internationally active financial institutions.
(3) Gaining of Financial Institutions' Understanding
The Bank will work to enhance its communication with financial institutions being
examined through a post-examination survey and interviews conducted after theexaminations as necessary to gain their full understanding of and trust in the examination
process and results. The Bank has constantly worked on improving on-site examination
procedures by responding to opinions and requests gathered from examinee institutions,and it will continue with such efforts.
Moreover, through the regular exchange of views with members of the financial industry
that started in fiscal 2021, the Bank intends to continue exchanging views on the operationof its examination and monitoring, while focusing on efforts to further strengthen
coordination between the FSA and the Bank.

12

Attachment

Issues Key to On-Site Examinations in Fiscal 2024
I. Outlook for Profitability and Financial Soundness as well as Business Management
The Bank will examine whether financial institutions are making necessary efforts fromthe perspective of both Subsections A and B below, in order to build a sustainable businessmodel into the future.
In relation to this, in the on-site examinations, the Bank will examine whether financial
institutions can ensure sustainable profits and maintain their financial soundness byconducting simulations of their profitability. 1 It will also conduct a profitability andfinancial soundness simulation under certain standard stress scenarios and discuss with therespective boards of directors and senior management their awareness of issues regarding
profitability and financial soundness, as well as policies to improve these. As for somemajor financial institutions, the Bank, together with the FSA, will conduct supervisory
simultaneous stress testing based on common scenarios as part of off-site monitoring togain a deep understanding of risk profiles inherent in their business models, thereby
developing a comprehensive perspective for evaluating their financial soundness. The Bank
will also deepen dialogue with these financial institutions on their business challenges, suchas the sophistication of risk management frameworks.
A. Efforts to Achieve Profits and the PDCA Cycle for Business Operations
The Bank will examine whether financial institutions, in order to achieve the profits thatthey should aim for, have appropriately established and operate a system (a so-called
PDCA cycle for business operations) under which they formulate and implement businessstrategies and plans while accurately understanding the domestic and overseas businessenvironment, examine the results, and review such strategies and plans in a timely mannerin response to changes in the business environment.

1 Profits here are defined as pre-provision net revenue (PPNR, excluding profits and losses frominvestment trusts due to cancellations) minus credit costs.
1

The Bank will collect information on changes in the environment surrounding financial
institutions' business in a forward-looking manner, including through off-site monitoring.
For example, it will continue to examine a wide range of issues such as (1) uncertainties
over financial and economic conditions at home and abroad, (2) geopolitical risks, (3)structural challenges faced by regional economies, (4) progress in information technology(IT), (5) developments in financial regulation and supervision at home and abroad, and (6)responses to climate change, including through the conduct of hearings on financial
institutions' recognition of these issues and their innovative initiatives.
Based on such recognition of the environment, in the case of major financial institutions,
the Bank will examine the following, in coordination with off-site monitoring: their global
activities and group strategies (including those with regard to overseas branches andsubsidiaries and inorganic growth) in light of changes in foreign currency funding
conditions, international financial regulations, and financial regulatory and supervisory
frameworks in different jurisdictions; efforts in a wide range of financial services, such as
those for adapting to digitalization/DX; and business process reengineering aimed at raisingbusiness efficiency. It will then analyze the details of their efforts and effectiveness fromthe standpoint of group-wide profitability.
With regional economies facing structural factors such as the declining and aging
population, it is important for regional financial institutions to continue to push ahead withefforts to support regional economies and strengthen their business foundations in order tofirmly provide such support into the future. From this perspective, the Bank will examine
the status and future feasibility of efforts to strengthen top-line earnings, such as loan anddeposit income and income from fees and commissions, and of measures to improvebusiness efficiency, such as a review of branch networks and staff allocations and thereengineering of business processes. In doing so, the Bank will focus on, for example,
digitalization/DX and the effects of business alliances with firms from other industries.
Moreover, as for regional financial institutions that are facing more severe staff constraints,
mainly due to moves to contain costs and to recruitment difficulties, the Bank will also
examine the sufficiency of their business management and risk management, as well as thestatus of the framework for business promotion under these circumstances, and havedialogue with them on countermeasures. With regard to regional financial institutions that2

have been pushing ahead with strengthening business foundations through businessintegration and enhancement of group-wide business activities, such as in the form ofholding companies, the Bank will examine the status of implementing such measures, aswell as their effectiveness. Through these examinations, the Bank will continue dialogue
with regional financial institutions on the status of implementing measures to support
regional economies and strengthen their business foundations, as well as their future
policies and challenges in coordination with off-site monitoring.
The Bank will examine the outlook for financial institutions' future profitability andfinancial soundness through profitability simulations, etc. In doing so, it will ascertain theoutlook for future net interest income, etc., based on the market outlook for yield curves,
taking into account financial institutions' repricing schedules of interest payment for assets
and liabilities and the pass-through to loan and deposit interest rates and its feasibility.
Moreover, regarding business strategies with regard to deposits and loans, securities
investment, etc. on that basis, the Bank will hold in-depth discussions with financial
institutions in coordination with off-site monitoring.
In addition, the Bank will confirm whether financial institutions' profit management isappropriate in employing the PDCA cycle for business operations. In the case of major
financial institutions, the Bank will examine whether their company-wide financial goals
are consistent with profitability management for each business division and client firm, as
well as whether profit management is effective. In the case of regional financial institutions,
the Bank will examine whether they have worked on basic matters such as ascertaining the
profit outlook with a certain degree of accuracy. In addition, it will examine how regional
financial institutions make use of efficiency indicators and how these institutions ascertain
and analyze profitability based on the characteristics of their credit portfolios by sector,
such as by region and borrower classification, while taking into account their profitability,
financial soundness, and business scope.
B. Understanding of and Response to Risks Related to Business Strategies and Plans
The Bank will examine whether financial institutions accurately identify risks
accompanying the implementation of their business strategies and plans, and whether such
identification is leading to a review of these items. The Bank will pay particular attention3

to whether financial institutions ascertain risks that take into account changes in theirbusiness environment and strategies, such as developments in financial markets, including
domestic and foreign interest rates, geopolitical risks, and responses to climate change.
Moreover, the Bank will examine whether financial institutions have an integrated risk
management framework in place, including the treatment of valuation losses on securities
holdings, that verifies if their risk taking is appropriate in relation to profits and equity
capital.
In doing so, the Bank will examine whether financial institutions have analyzed thepossible impact on equity capital and profits in the event of significant changes in financial
and economic conditions, including through the use of stress testing, and have consideredappropriate responses. With regard to stress testing, the Bank will examine the following:(1) the involvement of the respective boards of directors and senior management and thecontrol functions of the relevant divisions in charge of such activity; (2) thecomprehensiveness of scenarios and coverage of the subjects of the stress testing; (3)schemes to develop and verify models and data; and (4) frameworks to utilize test results
for the PDCA cycle for business operations. In particular, the Bank will examine the impact
of changes in domestic and overseas yield curves on valuation losses on securities holdings,
losses on the redemption of mutual funds, and the amount of risk. Moreover, it will check
how financial institutions have placed and managed IRRBB in their risk management
framework, and have dialogue on their thinking behind core deposits. In addition, the Bank
will examine whether financial institutions have analyzed the impact of changes ininstitutional frameworks, such as the Basel III finalization, on the capital adequacy ratiosand have made use of such analysis in formulating business plans.
In the case of financial institutions for which there is concern about their future profitability
and financial soundness, the Bank will focus its dialogue with the respective boards of
directors and senior management on the balance between capital and risk-weighted assets
to perform their financial intermediation function in a stable manner into the future, theframework to manage them, and their capital policies including dividend distributions. In
off-site monitoring after the completion of on-site examinations, the Bank will maintaindialogue with the top management of such institutions.

4Regarding Global Systemically Important Financial Institutions (G-SIFIs) and theirequivalents, the Bank will examine the effectiveness of recovery plans and contingency
plans.
With regard to climate change responses, the Bank will ascertain the progress andchallenges regarding the following issues according to their size and characteristics: (1) the
identification and management of climate-related financial risks (including quantitative
assessments of transition and physical risks); (2) measures to enhance the quality andquantity of disclosure based on the recommendations of the Task Force on Climate-related
Financial Disclosures (TCFD); and (3) engagement with corporate customers in pursuit ofdecarbonization (including raising awareness among small and medium-sized firms,
supporting efforts to measure greenhouse gas emissions, and enhancing products andservices such as sustainability-linked loans and green loans). The Bank will also engage inin-depth dialogue with financial institutions on these issues in coordination with off-sitemonitoring.
II. Governance
A. Ensuring the Efficacy of Governance
The Bank, in the case of major financial institutions, will examine whether they haveestablished group-based governance frameworks, including risk management and internal
audits, that are appropriate for their initiatives to expand activities, such as throughinorganic investment, and strengthen the cross-selling of services on a group-wide basis.
For regional financial institutions, the Bank will examine whether management policies are
disseminated throughout the organization, communication within the organization
regarding the assessment of risks is smooth, and a governance framework is in place thatenables the organization to properly harness its organizational capabilities to achieve its
business strategies and plans. In the case of holding companies to which regional financial
institutions belong, the Bank will conduct a similar examination.
In the on-site examinations, the Bank will conduct interviews with external directors andother officers as necessary.

5B. Governance Framework at Overseas G-SIFIs' Japanese Branches
With regard to overseas G-SIFIs' Japanese branches and subsidiaries, the Bank will
examine whether they have established an appropriate management framework in line with
their business scope and risks while understanding their roles within the group. On thisbasis, it will examine (1) impacts on Japanese branches and subsidiaries under theassumption of stress events for the group as a whole and responses to them, and (2) the roleof Japanese branches and subsidiaries within the recovery and resolution plans, including
their involvement in these matters. Regarding those subsidiaries with corporate status in
Japan, the Bank also will examine the support system provided by headquarters in the eventof a deterioration in business conditions. If yen funding is managed by bases other thanJapanese branches and subsidiaries, (3) the Bank will confirm the state of the managementof the bases and their framework of communicating with the Bank in preparation for
unexpected contingencies. Moreover, (4) it will conduct examinations, including thecollection of information from their headquarters, of the impact on the Japanese financial
system in the case of assumed stress events for the group as a whole.
C. Proactive Business Management and Risk Management through Internal Audits
With regard to internal audits, the Bank -- depending on financial institutions' businessscope and risk taking -- will examine (1) whether the institutions appropriately decide thescope of internal audits and allocate audit resources based on recent operations and risktaking, (2) whether they have verified the appropriateness of their business operations andproperly made improvements reflecting the results of the audits, and, in particular, whether
headquarters audits examine in depth the effectiveness of risk management and lead to theconsideration of effective improvement measures while making use of outside experts'
knowledge as necessary, and (3) whether the results and recommendations of such audits
are utilized in their business. To improve the effectiveness of on-site examinations, theBank will conduct hearings with the respective internal audit divisions before on-siteexamination, if necessary.

6D. Information Management Frameworks Necessary for Business Management andRisk Management
Concerning the global and group-wide financial information and risk information required
for the respective boards of directors and senior management to make appropriate businessdecisions, the Bank will examine, particularly for major financial institutions, (1) whether
they have appropriately set up a framework for the collection of the necessary information,such as a management information system (MIS), (2) whether sufficient management
resources are allocated to this end, and (3) whether the completeness, accuracy, andtimeliness of information, etc. are appropriate. In doing so, the Bank also will confirm thestatus of responses with regard to institutional frameworks, such as international financial
regulations.
III. Credit Risk Management
A. Credit Screening and Monitoring
For both major and regional financial institutions, it is important to conduct credit risk
management that takes into account changes in financial and economic conditions as wellas individual borrowers' conditions. Regional financial institutions in particular need to
conduct credit risk management in consideration of structural challenges faced by regional
economies, such as a declining population.
Given this situation, the Bank will examine whether financial institutions (1) appropriately
ascertain borrowers' financial and funding conditions at the individual borrower level aswell as changes therein, and analyze their repayment capacity, (2) analyze portfolio
characteristics and changes, and (3) properly analyze cases of credit cost incurrence.
Moreover, the Bank will also examine whether financial institutions accurately use theseanalyses in their initial screening and interim management of loans. In particular, it will
carefully examine whether financial institutions sufficiently comprehend the businessconditions of large borrowers that are low-performing or carry considerable business risks
and whether their credit screening and monitoring are appropriate, including of the7

accuracy of self-assessments. In doing so, the Bank will employ "line sheet reviews"2 (thesame applies throughout this section).
Among major and regional financial institutions, some have been active in real estaterelated lending, such as real estate investment trusts (REITs), non-recourse loans, andapartment loans, as well as housing loans. With regard to such financial institutions, theBank will check the appropriateness of their initial screening, such as the examination ofborrowers' cash flows and the collectability of loans in the event of stress, their interim
management based on developments in asset values, rents, and interest rates, their risk
analysis of their portfolios overall, and their risk-asset management including the impactof the Basel III finalization. The cash flow examination of loans with long loan terms isimportant not only for real estate-related loans such as apartment loans, but also for loans
in various areas, such as project financing (for solar power generation, etc.).
Moreover, regarding regional financial institutions that are focusing on LBO financing and"cross-border" lending, the Bank will examine whether their credit screening andmonitoring of such lending are appropriate in light of loan structures and borrower
characteristics. As for major financial institutions, the Bank will examine (1) whether they
are appropriately managing credit in areas where they have been increasing their efforts,such as financing for institutional investors, including investment funds, and M&A
financing, as well as operations in other areas they have been focusing on, such as theorigination and distribution of loan-related instruments, and (2) whether their headquarters
have established global management and reporting rules and are appropriately monitoringthem.
B. Outlook for Credit Costs (Write-Offs and Loan-Loss Provisions)
The Bank will examine future credit costs and downside risks -- taking into accountfinancial and economic conditions in Japan and abroad, recent default cases, borrowers'
2

A line sheet review consists of (1) interviews with relevant divisions on the basis of documents("line sheets") containing information on developments in the financial condition, developments inthe borrowing and repayment situation, and future prospects of chosen individual borrowers, as wellas the financial institution's self-assessment results, lending policy, etc., and (2) the understanding
and assessment of the borrowers' business environment, such as developments in regional
economies and industries, as well as its credit management practices, etc.
8

conditions both at the individual borrower level and the portfolio level, and the status ofloan coverage ratios and loan-loss provision ratios -- and have dialogue with financial
institutions on their accuracy. Moreover, the Bank will deepen its dialogue with financial
institutions regarding the appropriate approach to calculating write-offs and loan-loss
provisions, and exchange opinions with the accounting auditors of financial institutions asnecessary. In particular, the Bank will engage in in-depth dialogue regarding large
borrowers with unfavorable business conditions, including on the sufficiency of loan-loss
provisions.
C. Support for Firms to Improve Business Conditions
The Bank will examine (1) whether financial institutions' headquarters and branches arecooperating and accurately identifying, for example, borrowers that require support toimprove their business conditions, mainly taking account of individual borrowers' financial
conditions and the status of loan coverage ratios and loan-loss provision ratios. In addition,
the Bank will examine the status and efficacy of financial institutions' support for andmanagement of these borrowers, including the following: (2) whether financial institutions
adequately analyze the current business conditions and future prospects of borrowers andshare an awareness of the business challenges with them; (3) whether these institutions'
headquarters and branches are cooperating in terms of offering advice, recommendations,and support to help borrowers overcome challenges; (4) whether these institutions areproviding support for business succession as necessary; and (5) with regard to borrowers
with unstable business conditions, whether these institutions are making efforts toward
more drastic solutions for business challenges by cooperating with other financial
institutions and outside specialists. Regarding large borrowers continuing to haveunfavorable business conditions in particular, the Bank will deepen dialogue with financial
institutions to examine whether risks have built up; for example, whether they havecontinued to provide loans without making efforts toward devising more drastic solutions
to address management challenges.

9IV. Market Risk Management
A. Establishment of Management Frameworks Depending on Financial Institutions'
Risk Taking
As described in Subsection 2. (2) in the main text (Issues Identified through On-Site
Examinations and Off-Site Monitoring), issues have been found in terms of theeffectiveness of financial institutions' risk management amid a decline in bond prices,
mainly triggered by rising domestic and foreign interest rates. As a result, some financial
institutions have incurred a large amount of valuation losses while others did not
sufficiently ascertain the impact on their profitability and financial soundness.
Against this background, the Bank will confirm financial institutions' strategies for theirsecurities portfolios, mainly in light of the market outlook and gains/losses on securities
holdings. Moreover, it will examine whether financial institutions, when formulating
investment plans, verify the tolerance of risks relative to their equity capital and profits in
implementing their investment plans. In doing so, the Bank will examine whether theyassess the impact that an increase in valuation losses would have on their distributableprofits and net asset values through the implementation, for example, of stress testing. In
addition, particularly in the case of financial institutions with broadening securities
portfolios, the Bank will check management frameworks to ascertain whether risk factors
are accurately identified and market values, risk amounts, etc., are monitored and measured
at an appropriate frequency.
B. Appropriateness of Various Risk and Loss Limits, and Responses to Events Based on
Loss-Cut Rules
The Bank will examine whether financial institutions set various risk and loss limits at theappropriate levels relative to their financial soundness and profits, whether these areproperly reviewed, and whether action plans in case of a breach are considered. Moreover,the Bank will examine whether loss-cut rules are in place and functioning to allow fortimely decisions on the appropriateness of continuing to hold securities when a mandatory
consultation framework becomes requisite, such as in times of sudden changes in domestic
and/or international markets, taking into account the future impact on their equity capitaland profits.
10V. Liquidity Risk Management
A. Foreign Currency Liquidity Risk Management
Given that internationally active major financial institutions have large amounts of foreign
currency funding outstanding, the Bank will examine the following: (1) whether suchfinancial institutions have set their risk appetite (such as in terms of the results of liquidity
stress testing, the medium- to long-term funding ratio, etc.) in line with their foreign
currency balance sheet strategy (such as with regard to whether they are planning toincrease or decrease their foreign currency balance sheet and in respect to the gap between
loans and deposits, the maturity gap in investment and funding, and profitability); (2)whether such financial institutions have set up a framework for managing their funding gap
based on their funding capacity, in terms of different currencies, and have a liquidity buffer
to cope with sudden outflows of funds; and (3) whether they have developed andimplemented liquidity stress testing and contingency funding plans in a consistent manner
on a group-wide basis, based on reasonable capital flow assumptions.
In off-site monitoring, the Bank will also continue to examine major financial institutions'
efforts to strengthen foreign currency funding bases and increase the sophistication of theirrisk management while cooperating with the FSA and overseas regulators that exercise
jurisdiction over major financial institutions. The Bank will conduct joint surveys with the
FSA on some major financial institutions and avoid overlapping with such surveys in theon-site examinations. In the joint surveys, the Bank will examine the status of individual
financial institutions' management of their overseas branches and subsidiaries andassumptions regarding the deposit runoff rate in liquidity stress testing.
Turning to regional financial institutions, particularly with regard to those that are highly
dependent on short-term market funding, etc., as well as those that are actively investing inforeign currency-denominated assets, the Bank will examine whether they have secured
stable funding means that take into account market liquidity of assets and have establishedrisk management frameworks, such as conducting and utilizing stress testing andimproving the effectiveness of emergency measures.

11

B. Yen Liquidity Risk Management
The Bank will examine the implementation of analyses of the stickiness of deposits in
response to interest rate fluctuations, etc., as well as monitoring frameworks and policies
for dealing with the risk of deposit outflows through online banking.
Moreover, with regard to regional financial institutions, the Bank will examine (1),especially at financial institutions for which deposits have been declining as a trend,
whether they are analyzing the underlying reasons for developments in deposits andexamining countermeasures, and (2) whether, given the downsizing of branch networks
and staff reductions, they have established and/or reviewed frameworks to quickly secureliquidity reserves in an emergency.
VI. Operational Risk Management
A. Computer Risk Management Frameworks
Focusing on financial institutions' critical computer systems, the Bank will examine theeffectiveness of (1) measures to prevent computer system failures, such as their computer
system maintenance and the duplication of critical systems, and (2) recovery frameworks
in the event of a failure, including the planning and training for contingencies. When doing
so, the Bank will also examine financial institutions' computer systems from theperspective of whether their management is in line with the use of new technologies andservices brought about by advances in digitalization/DX. Moreover, in light of the growing
trend toward financial institutions' business collaborations with third parties, such as theuse of cloud computing and API linkages, the Bank will examine whether they
appropriately manage third parties, including existing outsourcee companies, in terms ofthe management of the development and operation of projects, a collaborative frameworkat times of system failures, and information security, such as with regard to customer data.
Furthermore, regarding whether financial institutions, in large-scale projects such as themove toward open core banking systems, are managing the various projects andoutsourcees appropriately, the Bank will examine this while also investigating outsourcees,
and check deliberations for the next system (including joint systems to be used by regional
financial institutions). In addition, the Bank will examine the effectiveness of financial
institutions' IT governance -- their own and that of their group companies, etc. -- from the12perspective of whether management resources are allocated to ensure both the efficacy of
their overall system management, including cybersecurity, and efficiency with regard totheir investment in computer systems.
B. Cybersecurity Management Frameworks
With regard to the status of cybersecurity management frameworks, the Bank -- while
taking into account individual financial institutions' business scope (including the use ofcloud computing) -- will examine (1) the appropriateness of the collection and sharing of
information on developments in ever-changing cybersecurity threats, (2) the effectivenessof countermeasures against vulnerabilities, (3) the appropriateness of the management ofaccess rights for important data such as customer information, and (4) the effectiveness ofmeasures to prevent cyberattacks and limit damage caused by such attacks. Moreover,given that it is difficult to prevent cyberattacks completely, it will examine the effectivenessof frameworks and contingency plans to recover critical operations in preparation for theoccurrence of cyber incidents, the implementation of drills, and the review of management
frameworks reflecting the outcomes of such drills.
In the joint surveys with the FSA on some major financial institutions, the Bank will deepen
its dialogue on (1) the development of group-wide global risk management frameworks,(2) improvement of cyber resilience, (3) the management of third parties including
outsourcee companies, and (4) addressing changes in risk profiles. In conducting on-siteexaminations, the Bank will avoid overlapping with the joint surveys.
In cooperation with the FSA, the Bank will continue to implement a self-assessment survey
on cybersecurity management frameworks, such as of regional financial institutions, andencourage them to ascertain their preparedness and strengthen their countermeasures.
C. Business Risk Management and Compliance Management Framework
Given that an increasing number of financial institutions have actively taken measures suchas concentration of business operations and review of branch networks and staff allocations,
the Bank will examine (1) whether financial institutions adequately recognize changes in
the risk profiles of business procedures associated with recent developments and (2)whether these institutions, including their major group companies and third parties such as
13their outsourcee companies and partners, have appropriately established and reviewed risk
management frameworks in response to changes in risk profiles. Particularly in the case offinancial institutions that focus on fee-based business activities, the Bank will examine (3)the status of their compliance management frameworks for sales of financial instruments
and advisory services. It also will examine whether financial institutions identify risk
management issues through understanding of the actual situation of operational processing
and analysis of fraud and accidents, and take effective measures to address such issues.
D. Anti-Money Laundering and Counter-Terrorism Financing Controls
Given strong international requests to take measures specific to anti-money laundering andcounter-terrorism financing, it is essential for financial institutions to steadily implement
these measures to ensure the proper conduct of their business operations and to maintaintheir credibility. On this basis, in the on-site examinations, the Bank will continue toexamine the status of frameworks in these areas while sharing its awareness andperspectives with the FSA through the framework of coordination between the FSA's
inspections and the Bank's on-site examinations.
E. Business Continuity Management
The development of effective business continuity management is important to ensuring
financial institutions' critical operations, as well as the smooth functioning of the payment
and settlement systems in Japan. The Bank will continue to examine whether business
continuity management is reviewed appropriately in response to not only the pandemic but
also natural disasters -- such as earthquakes, typhoons, and floods -- as well as cyberincidents, the latter two of which have occurred recently. In doing so, it will take accountof individual financial institutions' business scope, as well as these institutions' presence inpayment and settlement systems and in their respective business areas.3

3

In the case of major financial institutions, etc., the Bank, given changes in the environment, such asincreased dependence on IT systems and third parties, will conduct examinations also from theperspective of their operational resilience (the establishment of early recovery and continuity
systems based on the assumptions that business operations may be disrupted even when all
preventive measures have been taken) in the event of system failures, terrorism and cyberattacks,
pandemics, natural disasters, etc.
14