Nanto Bank : （Ｇ） Preparing for Increasingly Varied and Complex Risks (302kb)

G	Developing with Our Region
Preparing for Increasingly Varied and Complex Risks

Risk Management Division	Kazuya Yokotani
Director and Senior Managing Executive Officer

Reinforcing Risk Management

Basic Policy

The environment in which financial institutions operate is changing dramatically, and the risks they face are growing increasingly diverse and complex. The Nanto Bank Group has responded by positioning appropriate risk management as one of the most important issues for management. We are working to enhance our risk management in order to maintain sound management and appropriate operations, and to ensure customers' ability to do business with us with peace of mind.

In recognition of the inextricable linkage between profitability and risk, we are creating a virtuous cycle to enhance both the soundness and the profitability of our operations. This means adopting a proactive stance and mindset to connect enhanced risk management with improved profitability.

Our Action Plan for Fiscal 2022 places particular emphasis on strengthening credit risk management, combating money laundering and terrorist financing, and controlling market risks.

These efforts will enable the Group to establish sophisticated, highly agile risk management and governance structures aimed at acquiring a capability of appropriately controlling risks.

Responding to the SDGs

Our efforts to strengthen credit risk management and control market risk will involve striving to achieve appropriate returns commensurate with the risk by enhancing our risk/return management.

When it comes to combating money laundering and terrorist financing, meanwhile, we reinforced our capabilities by formulating countermeasure policies reflecting our concern that any serious violation occurring due to a lack of effective internal controls could result in a loss of public confidence and significant damage to our corporate value.

Fiscal 2022 Action Plan

Current situation		Goals for achievement
Fiscal 2022 Action Plan
and issues

•Responding	Working in today's highly uncertain business	Building an
environment to build a sophisticated, highly agile
organization
to an	risk management and governance structure
uncertain	capable of
business		Implementing measures		appropriate risk
environment	Reinforcing credit risk		control
against money laundering	Controlling market risk
	management	and terrorist financing

Reinforcing credit risk management

We are strengthening our credit risk management by deepening our understanding of customers' actual conditions through personal communication activities, and by providing full support for their cash management and core business operations.

40 Nanto Report 2022, the integrated report of Nanto Bank

Governance	Risks and	Performance
	opportunities

Initiatives to combat money laundering and prevent terrorism financing

Recent years have brought increasing demand from the international community for measures to combat money laundering and prevent financing of terrorism. In this context, we have positioned money laundering prevention as one of our most important management issues. We are working to improve the effectiveness and sophistication of our money laundering countermeasures by, for example, establishing the "Policy Against Money Laundering and Terrorist Financing" as a fundamental Group policy.

In response to the increasing complexity and sophistication of financial crimes, meanwhile, we are also striving to maintain safe, highly convenient financial services by enhancing our preventive measures to preclude customer engagement in financial crimes.

Policy Against Money Laundering and Terrorist Financing

1. Organizational structure	4. Reporting of suspicious transactions
(1) The Bank shall position money laundering countermeasures as one of its most important	The Bank shall confirm and determine whether transactions reported by its branch offices
issues for management and shall work proactively to implement these countermeasures.	or detected through transaction monitoring are suspicious and shall notify the authorities
(2) The Bank shall establish a centralized management system by designating a person	immediately if it determines that the transactions are suspicious.
responsible and a supervisory department for money laundering countermeasures and	5. Correspondent bank management
shall implement measures across the organization in cooperation with the relevant de-
The Bank shall collect information on correspondent banks, assess it appropriately, and take
partments.
proper measures in response to the risks associated with it. It shall eliminate any relation-
2. Risk-based approach	ships with spurious banks that have no actual business operations.
The Bank shall employ a risk-based approach to appropriately identify and assess money	6. Management and employee training
laundering and other risks and shall implement mitigation countermeasures commensurate
The Bank shall conduct ongoing training programs to educate its officers and employees
with the risks.
fully with respect to money laundering to raise their levels of expertise and assure proper
3. Customer management policy	responses.
The Bank shall establish a system for conducting confirmation appropriately at the time of	7. Compliance auditing
transactions and other customer management measures in accordance with the applicable
The independent Internal Audit Department shall conduct regular audits of the Bank's mon-
legal and regulatory requirements. It shall also examine and analyze customer transaction
ey-laundering prevention and related systems, and the Bank shall draw on the results of the
records periodically and implement necessary customer management measures.
audits to improve its systems further.

Cyber Security Initiatives

Nanto Bank has compiled a cyber security policy to reinforce its management systems concerned with preventing cyber- attacks and other threats.

[Policy on cyber security]

With threats of cyber-attacks expected to grow in number and urgency in the future, Nanto Bank recognizes ensuring cyber security as an important issue for management in performing its role of protecting the safety of its customers and assets. The CSIRT* is directing Bank-wide efforts to compile a cyber security roadmap as a guide for use in its ongoing activities aimed at enhancing the Bank's readiness to respond promptly to cyber-attacks.

*CSIRT is an internal organization responsible for dealing with computer security incidents.

Market risk control

Market risks have recently proliferated in an environment of increasing geopolitical risks, rapidly rising interest rates in Europe and the United States, and a weakening yen at home.

The significant impacts market fluctuations exert on the Nanto Bank Group's performance make stable, sustainable market management increasingly crucial.

We are conducting portfolio rebalancing to prepare for interest rate risk and to control the impact of heightened market risk to the greatest extent possible by applying hedging techniques that reduce the risk of rising interest rates and falling stock prices, while working at the same time to build and manage a portfolio that earns stable yields.

Portfolio rebalancing to prepare for rising interest rates

Accumulation of capital gains through flexible trading practices

Hedging against risk of rising interest rates and falling stock prices

Market sector earnings	Investment balance (unpaid balance basis)
1.28%	(Billions of yen)		(Planned)	(Billions of yen)
1.21%
		1,632.5
	1.01%	1,457.0

17.5	17.3	16.0	Market sector	40%	38%	Self-managed
			earnings			Outsourced
			Market sector yield
		Planned	60%	62%
2020	2021	2022	(Fiscal year)	2021	2022	(Fiscal year)

Nanto Report 2022, the integrated report of Nanto Bank 41

Administrative risk management (Thorough, accurate office work) System risk management

(Response to system failures/prevention of unauthorized use)

Legal risk management (Observance of legal compliance) Human risk management (Response to personnel and labor problems) Tangible asset risk management (Response to impairment of tangible assets) Rumor risk management

(Response to false assertions circulating in the market and among customers)

Market risk

management

Integrated risk management system

Credit risk

management

Liquidity risk management

Operational risk

management

G	Developing with Our Region
Preparing for Increasingly Varied and Complex Risks

Risk Management Systems and Conscientious Compliance

Risk management systems

Integrated risk management

To reinforce our ability to manage the risks we face in our banking business, Nanto Bank has assigned responsibility for each risk to an appropriate department and established the Risk Management Division to handle them in an integrated manner by determining the various risks' individual positioning and magnitude and responding to each promptly and accurately.

In our commitment to risk management, we have specified basic risk management policies through various directives, including our "Integrated Risk Management Regulations."

To realize integrated risk management in which risks are quantified on a unified scale and the amount of each is controlled to an appropriate level in relation to equity capital in consideration of management strength, moreover, we determine the risk capital allotment (capital allocation amount) for each type of risk semi-

annually within the range of equity capital, and control each risk amount (value at risk = VaR, etc.) to ensure that it falls within the scope of capital. The ALM

Committee evaluates the status of each risk at its monthly meetings as part of efforts to achieve more efficient, effective risk / return management, and systems are in place to exercise appropriate controls for ensuring management stability and improving profitability from the perspective of effective use of capital.

Risk management organization						(As of July 1, 2022)
	Board of					Board of
	Auditors					Directors
		Emergency countermeasures					Various
				meetings					management meetings
		(Alert countermeasures meetings)

Various

ALM Committee

Operational Risk Management Committee

Compliance Committee

committees

System

Risk management system

Compliance structure

Supervisory

Risk Management Division

Compliance

Control

departments

Department

オペOperationalレーショナriskル・リスク（リスク統括部）

Compliance守

Credit risk

市場リスク

流動性リスク

(Risk Management Division)

法令 等遵

Classification

(department

(Risk Management

Market risk

Liquidity risk

(Compliance

(Risk Management

(Risk Management

Administrative

Human

Tangible

Reputation

in charge)

Division)

（リスク統括部）

（リスク統括部）

Legal risk

（コンControlプライDepartment)アンス統括部）

Division)

Division)

risk

System risk

resources risk

asset risk

risk

(Compliance

(Business Support

(IT Strategy

(Personnel and

(Personnel and

(Corporate

Control

Department)

Department)

Department)

General Affairs

General Affairs

Planning

Departments)

Departments)

Department)

Operations

Headquarters departments, sales branches, consolidated subsidiaries

departments

Internal

Internal Audit Division

Audit Division

42 Nanto Report 2022, the integrated report of Nanto Bank

Governance	Risks and	Performance
	opportunities

Internal auditing system

Enhancing and reinforcing our risk management will require implementing the PDCA cycle to ensure its effective functioning for autonomous improvement, with the Risk Management Division and the operations departments, including the individual offices and branches, checking and balancing each other for various risks.

The Internal Audit Division responsible for internal auditing seeks to ensure sound management and appropriate operations by monitoring the occurrence of risks in each business, verifying their PDCA cycle functions, and recommending improvements as necessary to promote better, stronger risk management.

Crisis management system

The Bank's risk management systems discussed here are further augmented by its Crisis Management Plan, accompanied by a response manual for each type of crisis, compiled to facilitate appropriate responses to crises that may impact its business, including natural disasters such as large-scale earthquakes, system failures, and epidemics of infectious diseases such as the new coronavirus. In the event of a crisis, the Emergency Countermeasures Committee or Countermeasures Headquarters gathers information depending on the degree of the crisis, and issues centralized guidance and orders to minimize its impact on operations.

We also implement measures to ensure the Bank's ability to continue providing customer services as a social function maintenance provider. These include such measures as enhancing our facilities to enable continued operation, even in the event of a disaster, and ensuring the effectiveness and continuous improvement of our Crisis Management System through crisis management drills and other measures.

Commitment to strict compliance

Compliance systems reinforcement

Compliance is a matter of unswerving observance, not only of laws, government ordinances, and internal rules, but also of ethical and social norms. It is imperative that banks fulfill their social responsibilities and public missions in good faith. At Nanto Bank, we are implementing the following measures to ensure complete compliance:

Fully aware of its public mission and social responsibility as a financial institution, Nanto Bank seeks to gain the trust of its stakeholders, including its regional community and shareholders, by positioning compliance with laws and regulations as the most important issue for management. To this end, it has formulated "Basic Guidelines" and a "Code of Conduct" as corporate policies with which all the Bank's officers and employees are expected to comply.

In order to define a basic framework for our compliance systems, we have clarified our stance toward compliance with laws and regulations, not only by establishing compliance regulations but also by formulating disciplinary regulations that show the fairness and transparency of our disciplinary actions.

We have established a Compliance Committee chaired by the President to serve as a cross-sectional organization within the Bank that discusses and decides important matters related to compliance, as well as a supervisory department responsible for planning and supervising compliance.

Each fiscal year, we prepare a compliance program as a concrete, practical plan for achieving compliance, after which we investigate the program's implementation status and make appropriate revisions.

The Bank is pursuing efforts to optimize operation of its compliance hotline, a whistle-blower system established for purposes of prevention and early detection and correction of violations of laws and regulations.

We have compiled a "Compliance Handbook" to serve as a detailed guide to maintaining compliance, and we are following up with efforts to foster a compliance mindset by distributing the handbook to all our management and general personnel, and by holding regular group training and study sessions at every workplace.

In accordance with our resolute attitude toward antisocial forces that threaten the order and safety of civil society, moreover, we have formulated a set of "Regulations for Dealing with Antisocial Forces, Etc." and have terminated relationships with all such elements.

Nanto Report 2022, the integrated report of Nanto Bank 43