Bank of Japan presents the summary of an article published in the May
edition of its Quarterly Bulletin BANK OF JAPAN, COMMUNICATION, 30/5/97.
Checklist for Risk Management (Revised Edition)
Bank
The English version of the Checklist published in the May 1997 issue of the
of Japan Quarterly Bulletin
includes specific sample questions in addition to check points that
were provisionally published in the November 1996 issue. The original Checklist written in
Japanese has precedence over this English version.
I. Objectives
The Bank Supervision Department of the Bank of Japan initially compiled the
Checklist for Risk Management (hereafter referred to as the former Checklist) in December 1987
to assist examiners in assessing the adequacy of risk management at individual banks during
onsite examinations. The former Checklist was distributed to financial institutions under the
Bank's supervision as a reference for checking and strengthening their risk management
systems.
Amid the progress in financial liberalization and innovation that has taken place
during the past several years, financial institutions have expanded the scope of their business
activities, and this has enabled them to pursue higher returns by taking on risks freely while
giving consideration to market rules. At the same time, this has led to a better understanding by
financial institutions of the importance of maintaining the balance between risk and return by
adequately assessing and controlling risk exposure. As a result, financial institutions are taking
the initiative in strengthening and upgrading their risk management systems in order to secure
financial safety and soundness.
With these changes in the environment surrounding financial institutions, the
Bank of Japan has recognized the increased importance of adequately assessing any future
threats to the safety and soundness of financial institutions. This implies nothing more than
further strengthening and promotion of the same kind of examination focused on risk
management as in the past. With this aim, the Bank Supervision Department has
comprehensively revised the former Checklist (hereafter referred to as the new Checklist).
Like its predecessor, the new Checklist has been distributed to all banks subject to
the Bank of Japan's supervision, as it is intended to assist banks in reviewing and strengthening
their risk management systems based on the principle of self-responsibility, while serving as a
guideline for bank examiners. As this revised document includes some points that will be
equally useful to those financial institutions not subject to the Bank's supervision (such as some
shinkin banks, credit cooperatives, agricultural cooperatives, and labor credit associations) and
business enterprises, the new Checklist is presented in the Quarterly Bulletin.
II. Major Features
The most prominent feature of the new Checklist is the change in categorization.
In view of the transformation of risk management emphasis from heightening recognition of
risks in the former Checklist to the recent actual control of risks, the overall structure of the
Checklist has been altered from the eight categories by type of risk in the former Checklist
(credit risk, interest rate risk, foreign exchange risk, liquidity risk, operations risk, electronic
data processing [EDP] risk, systemic risk, and management risk) to four categories by type of
operation (management and internal controls, lending operations, market operations and asset
and liability management [ALM], and business operations and EDP).
The Checklist has also been revised to reflect the important points in risk
management acquired during the Bank's past on-site examinations, while giving due
consideration to the various reports and guidelines of international organizations and foreign
financial authorities, and to trading practices in Japan.
Concretely, the section on management and internal controls emphasizes basic
management policy and strategy concerning risk management, while including items regarding
legal compliance and countermeasures against disasters. This section is given the highest priority
in the new Checklist.
Second, against the background of the increase in nonperforming assets
accompanying the bursting of the "bubble" economy, the section on lending operations has been
strengthened to reflect points important in the evaluation of creditworthiness and avoidance of
credit concentration. At the same time, this section promotes comprehensive management of
domestic, overseas, on-balance-sheet, and off-balance-sheet transactions, and includes general
remarks foreseeing the introduction of a loan grading and review system, further contributing to
the continued enhancement of risk management as a whole.
Third, the section on market operations and ALM has been expanded in content,
as this section is the most strongly influenced by the progress in financial liberalization and
innovation, namely, the rapid growth in derivatives transactions and the greater impact of ALM
skills on profit/loss of financial institutions. This section incorporates numerous concepts from
the Checklist for Risk Management on Derivatives Transactions, which was compiled and issued
in April 1995, and reflects new risk management techniques and lessons learned from some of
the recent financial incidents.
Fourth, with the development of EDP at financial institutions, more weight has
been put on EDP in the section on business operations and EDP. Furthermore, to reinforce the
importance of the accuracy of individual offices' work, this section has given as comprehensive
a treatment as possible to such issues as new types of transactions accompanying progress in
information technology (i.e., fund transactions using customers' computer terminals).