Credit Risk Management
We define credit risk as the Group's exposure to the risk of losses that may be incurred due to a decline in, or total loss of, the value of assets (including off–balance–sheet instruments), as a result of deterioration in obligors' financial position. We have established the methods and structures necessary for grasping and managing credit risk.
MHFG manages credit risk for the Group as a whole. More specifically, we have adopted two different but mutually complementary approaches in credit risk management. The first approach is "credit management," in which we manage the process for each individual transaction and individual obligor from execution until collection, based on our assessment of the credit quality of the customer. Through this process, we curb losses in the case of a credit event. The second is "credit portfolio management," in which we utilize statistical methods to assess the potential for losses related to credit risk. Through this process, we identify credit risks and respond appropriately.
Credit Risk Management Structure
Credit Risk Management of MHFG
Our Board of Directors determines the Group's basic matters pertaining to credit risk management. In addition, the Risk Management Committee of MHFG discusses and coordinates matters relating to basic policies and operations in connection with credit risk management and matters relating to credit risk monitoring for the Group. Under the control of the Group CRO of MHFG, the Credit Risk Management Department and the Risk Management Department jointly monitor, analyze and submit suggestions concerning credit risk and formulate and execute plans in connection with basic matters pertaining to credit risk management.
Credit Risk Management at Our Core Group Companies
Our core group companies manage their credit risk according to the scale and nature of their exposures in line with basic policies set forth by MHFG. The Board of Directors of each company determines key matters pertaining to credit risk management.
The respective business policy committees of MHBK and MHTB (the two banks) are responsible for discussing and coordinating overall management of their individual credit portfolios and transaction policies toward obligors. The Chief Risk Officer of each bank is responsible for matters relating to planning and implementing credit risk management. The credit risk management department of each bank is responsible for planning and administering credit risk management and conducting credit risk measuring and monitoring, and such department regularly presents reports regarding its risk management situation to MHFG. Each credit department determines policies and approves/disapproves individual transactions in terms of credit review, credit management and collection from customers in accordance with the lines of authority set forth by each bank. In addition, each bank has established internal audit groups that are independent of the business departments in order to ensure appropriate credit risk management.
Individual Credit Management
The basic code of conduct for all of our officers and employees engaged in the credit business is set forth in our credit code. Seeking to fulfill the bank's public and social role, our basic policy for credit business is determined in light of fundamental principles focusing on public welfare, safety, growth and profitability.
Internal Rating System
One of the most important elements of the risk management infrastructure of the two banks is the use of an internal rating system that consists of credit ratings and pool allocations. Credit ratings consist of obligor ratings which represent the level of credit risk of the obligor, and transaction ratings which represent the possibility of ultimately incurring losses related to each individual claim by taking into consideration the nature of any collateral or guarantee and the seniority of the claim. In principle, obligor ratings apply to all obligors and are subject to regular reviews at least once a year to reflect promptly the fiscal period end financial results of the obligors, as well as special reviews as required whenever the obligor's credit standing changes. This enables the two banks to monitor both individual obligors and the status of the overall portfolio in a timely fashion. Because we consider obligor ratings to be an initial phase of the self–assessment process regarding the quality of our loans and off–balance–sheet instruments, such obligor ratings are closely linked to the obligor classifications and are an integral part of the process for determining the reserves for loan losses and write–offs in our self–assessment of loans and off–balance–sheet instruments.
- Connection between Obligor Ratings, Definition of Obligor Classifications of Self–Assessments, Claims Disclosed under the FRA and Non–Accrual, Past Due & Restructured Loans
Pool allocations are applied to small claims that are less than a specified amount by pooling customers and claims with similar risk characteristics and assessing and managing the risk for each such pool. We efficiently manage credit risk and credit screening by dispersing a sufficient number of small claims within each pool.
We generally review the appropriateness and effectiveness of our approach to obligor ratings and pool allocations once a year in accordance with predetermined procedures.
Self–assessment, Reserves for loan losses, Off–balance–sheet Instruments and Write–offs
We conduct self–assessment of assets to ascertain the status of assets both as an integral part of credit risk management and in preparation for appropriate accounting treatment, including reserves for loan losses and off–balance–sheet instruments and write–offs. During the process of self–assessment, obligors are categorized into certain groups taking into consideration their financial condition and their ability to make payments, and credit ratings are assigned to all obligors, in principle, to reflect the extent of their credit risks.
The related assets are then categorized into certain classes based on the risk of impairment. This process allows us to identify and control the actual quality of assets and determine the appropriate accounting treatment, including reserves for loan losses and off–balance–sheet instruments and write–offs. Specifically, the credit risk management department of each bank is responsible for the overall control of the self–assessment of assets of the respective banks, cooperating with the administrative departments specified for each type of asset, including loan portfolios and securities, in executing and managing self–assessments.
|Normal Obligors||Calculate the value of estimated loss based on the probability of failure over the coming year for loans by obligor rating and appropriate it for the General Reserve for Possible Losses on Loans.|
|Watch Obligors||Calculate the estimated loss on loans based on the probability of failure over the next three years and appropriate it for the General Reserve for Possible Losses on Loans. Further, in regard to Special Attention Obligors, for obligors with large claims more than a certain amount, if the cash flow from the return of principal and interest payments can reasonably be estimated, set up a reserve under the DCF method.|
|Intensive Control Obligors||Provide an amount for Specific Reserve for Possible Losses on Loans as calculated by one of the following methods after deducting amounts anticipated to be recoverable from the sale of collateral held against the claims and from guarantors of the claims: a) an amount calculated based on the overall ability of the obligor to pay, or b) the estimated loss calculated on the basis of the balance and the probability of failure over the next three years.
Further, for obligors with large claims more than a certain amount, if the cash flow from the return of principal and interest payments can reasonably be estimated, set up a reserve under the DCF method.
|Substantially Bankrupt Obligors||Provide the entire balance after deducting amounts anticipated to be recoverable from the sale of collateral held against the claims and from guarantors of the claims for Specific Reserve for Possible Losses on Loans, or write–off the entire balance.|
Prevention of new non–performing loans through routine credit management is important in maintaining the quality of our overall loan assets.
Credit review involves analysis and screening of each potential transaction within the relevant business department. In case the screening exceeds the authority of the department, the credit group at headquarters carries out the review. The credit group has specialist departments for different industries, business sizes and regions, carries out timely and specialized examinations based on the characteristics of the customer and its market, and provides appropriate advice to the business department.
In addition, in the case of obligors with low obligor ratings and high downside risks, the business department and credit department jointly clarify their credit policy and in appropriate cases assist obligors at an early stage in working toward credit soundness.
We use statistical methods to manage the possibility of losses by measuring the expected average loss for a one–year risk horizon (Expected Loss) and the maximum loss within a certain confidence interval ("credit Value–at–Risk (VaR)"). The difference between expected loss and credit VaR is measured as the credit risk amount (Unexpected Loss).
In establishing transaction spread guidelines for credit transactions, we aim to ensure an appropriate return from the transaction in light of the level of risk by utilizing credit cost data as a reference. Also, we monitor our credit portfolio from various perspectives and set guidelines noted below so that losses incurred through a hypothetical realization of the full credit VaR would be within the amount of risk capital and loan loss reserves.
- Loss Distribution
Risk Control Methods
We recognize two types of risk arising from allowing unexpected loss to become too large. One type is "credit concentration risk," which stems from granting excessive credit to certain individual counterparties or corporate groups. The other type is "chain–reaction default risk," which arises from granting excessive credit to certain areas, industrial sectors and other groupings. We make appropriate management to control these risks in line with our specific guidelines for each. The individual risk management departments of the two banks are responsible for monitoring adherence to these guidelines and reporting to their respective business policy committees.
- Allocation of Risk Capital and Control of Credit Risk