Profit breakdowns and their projections Ensuring continuity with the 1997 framework Credit risk management AConcentration of major credit exposures, etc. flexible, globally-applicable standard Market risk management Changes should be limited to the minimum necessary Impact of fluctuations in securities prices, etc. Not intended to introduce new rules or standards Liquidity risk management The Proportionalitylevel of reserves, trends of deposits, etc.
The risk profile, size and complexity of individual banks needs to The FSA conducts in-depth implementing CPs, on this monitoring, and be taken into account in interviews based particularly for risk management policies and processes may order more detailed reporting and/or corrective measures as
necessary
5
Framework of the early warning system
Prompt Corrective Action From the standpoint of solvency Early Warning System Measures to strengthen Profitability Need to take actions Measures to improve Credit Risk Management Measures to improve Market Risk Management Measures to improve Liquidity Risk Management
In-depth interviews/ Request for frequent reporting Request for reports based on the Article 24 of the Banking Act Business improvement orders based on the Article 26 of the Banking Act 6
From the standpoint of liquidity
Enhancing the early warning system: implementing Basel II (Pillar 2) in Japan
(1) Assessment of Comprehensive Risk Management System (2) Enhancement of the Early Warning System
Comprehensive Risk Management System
Risks are assessed and managed as a whole according to the scale of the financial institution and its risk profile.
Early Warning System
(Early Warning Thresholds) (Actions)
-Best Practice-
Profitability Improvement Measures
①The risk amount of each business department is assessed quantitatively. ②Capital is allocated to each business department in accordance with the risk amount within the core capital.. ③Risk and return is appropriately managed in relation to the business plan and profit plan by using quantitative indicators such as risk-adjusted profit of each business department.

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