provisioning and loan write - offs under the prompt corrective action ( pca ) directives. one of the key policies for japanese banks will be to remove nonperforming loans from their balance sheets by such means as selling collateral real estate, in addition to steadily disposing of nonperforming loans and disclosing further information about their business. these efforts could moderate serious impacts of fluctuations in collateral real estate prices on the asset quality of japanese banks, and thus ensure the reliability of the information included in their balance sheets, and finally restore market confidence in their soundness. in addition, the sales of collateral real estate enable banks to plan flexible management strategies ; and reinvestment of the cash inflow from the sales will improve banks ’ profitability. * * * checklist for risk management ( revised 1998 edition ) objectives of the checklist the bank supervision department of the bank of japan initially compiled the checklist for risk management ( hereafter : the checklist ) in december 1987. to provide examiners with guidance in reviewing the adequacy of risk management at individual banks during on - site examinations, the bank completely revised the checklist in may 1996, and it was distributed to financial institutions under the bank ’ s supervision as well as to various other financial institutions in the belief that it could serve as a reference as they undertake initiatives to check and strengthen their risk management systems. over the two years since the last revision, major revisions of institutional systems have been undertaken in japan reflecting drastic changes in the financial and social environment, and in order to deal with the deterioration in business performance of japanese financial institutions. furthermore, consensus has been reached and various reports have been released relating to risk management in the international arena such as that of the basle committee on banking supervision, against the background of steady progress in financial deregulation and refinement of risk management skills. meanwhile, as part of the review of its bank supervision functions accompanying the enactment of the bank of japan law of 1997, the bank supervision department revised and expanded the 1996 edition of the checklist for risk management, and distributed the revised 1998 edition of the checklist to financial institutions under the bank ’ s supervision and various other financial institutions on june 19. with a view to securing transparency of bank supervision, the revised 1998 edition of the checklist has been made generally available as much of it should be useful to nondepository financial institutions not directly subject to the checklist ( securities companies, tanshi

disruption could be passed on to other ones through their interdependence in financial transactions and settlement. if a computer failure due to a lack of year 2000 readiness materializes in a settlement system, not only financial institutions but also end - users or customers will be affected because they may not be able to withdraw or transfer funds through cash dispenser ( cd ) and automated teller machine ( atm ) networks. the year 2000 problem could seriously affect the business of individual financial institutions as well as the stability of payment and settlement systems. the bank of japan, with the cooperation of market participants, is therefore promoting year 2000 readiness of individual financial institutions and payment and settlement systems. this paper discusses how japan ’ s financial sector is addressing key issues of the year 2000 problem and provides information on its progress in achieving year 2000 readiness. 16 after an overview of the results of the year 2000 problem survey of financial institutions conducted by the bank of japan in june 1998, the paper presents ( 1 ) plans for external tests of payment and settlement systems ; ( 2 ) global initiatives taken by international organizations including the bank for international settlements ( bis ) ; and ( 3 ) an upcoming issue. the paper focuses exclusively on the preparations being made by financial institutions and payment and settlement systems for the year 2000 problem. it does not deal with preparations made by social infrastructures, such as telecommunications or utilities that support computer system operations, nor does it cover year 2000 preparations of companies supplying host computers and software, although these deserve careful attention of financial institutions. * * * this paper was originally published in the form of a brochure on august 14, 1998. for inquiries regarding the brochure, please contact the financial and payment system office ( tel : + 81 - 3 - 3279 - 1111 [ x2954 ], fax : + 81 - 3 - 5255 - 6752 ) or the bank supervision department ( tel : + 81 - 3 - 3279 - 1111 [ x6442 ], fax : + 81 - 3 - 5255 - 6755 ), bank of japan, at 2 - 1 - 1, hongoku - cho, nihonbashi, chuo - ku, tokyo 103 - 8660, japan.