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General concept of risk management

Basic approach

We classify our risk exposures according to the various kinds of risk, including credit risk, market risk, liquidity risk and operational risk, and manage each type of risk according to its characteristics.

In addition to managing each type of risk individually, we have established a risk management structure to identify and evaluate overall risk and, where necessary, to devise appropriate responses to keep risk within limits that are managerially acceptable in both qualitative and quantitative terms.

In line with the basic policies relating to overall risk management laid down by Mizuho Financial Group, companies within the Group identify risk broadly and take a proactive and sophisticated approach to risk management, including methodologies for operations that involve exposures to multiple categories of risk such as settlement and trust businesses.

Risk capital Allocation

We endeavor to obtain a clear grasp of the group's overall risk exposure and implement measures to make sure this exposure is within limits that are acceptable and are in accordance with the risk capital allocation framework.

More specifically, we allocate risk capital to our core group companies (including their subsidiaries) to control risk within the limits set for each company. We also control risk within acceptable limits by working to ensure that the overall risk on a consolidated basis does not exceed our financial strength. To ensure the ongoing financial soundness of Mizuho Financial Group and our core group companies we regularly monitor the manner in which risk capital is being used in order to obtain an accurate grasp of the risk profile within this framework. Reports are also submitted to the Board of Directors and other committees of each company. Risk capital is allocated to Mizuho Bank, Mizuho Trust & Banking, Mizuho Securities, and Mizuho Americas by risk category, and is further allocated within their respective business units.

Framework for allocating risk capital
Image: Framework for allocating risk capital
  • *Includes the risk exposure of group companies that are managed by core group companies
Risk Category Definition
Credit risk 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.
Market risk The risk of losses incurred due to fluctuations in interest rates, stock prices, and foreign exchange rates. Our definition includes the risk of losses incurred when it becomes impossible to execute transactions in the market because of market confusion or losses arising from transactions at prices that are significantly less favorable than usual.
Liquidity risk The risk of losses arising from funding difficulties due to a deterioration in our financial position that makes it difficult for us to raise necessary funds or that forces us to raise funds at significantly higher interest rates than usual.
Operational risk The risk of losses that may be incurred resulting from inadequate or failed internal processes, or systems, human error, or external events. Operational risk consists of several components such as information technology risk and operations risk.
Refer to page 15 of Risk Management Structure in the Appendix for specific components of operational risk.

Top risks

For risks that are recognized to have a major potential impact on the group, we specify these as "top risks" and have introduced top risk management methods.

Based on assessments of the likelihood, impact, and other characteristics of monitored risks, and after careful deliberation by management, top risks are designated and managed accordingly. Through this approach, we endeavor to deepen communication regarding risks, seek to create common perspectives regarding risks, and work to secure consistency in awareness of various types of risks.

For the top risks that are identified, the status of controls is confirmed, and, when deemed necessary, consideration is given to additional risk controls. In addition, by reflecting these considerations in stress test scenarios, we can verify using quantitative analysis the appropriateness of business operation plans and confirm the adequacy of capital.

Furthermore, when deciding on top risks, we consider the timing and probability of the emergence of such risks in a time frame of about one year, and review these considerations every six months.

Top risks Examples
Rebound in credit related costs
  • Sudden deterioration in the credit standing of obligors where we are heavily exposed and in credit standing of major clients
  • Deterioration in regional economies/turmoil in financial markets due to geopolitical factors
  • Slowdown in the Chinese economy and detrimental impact on emerging countries in neighboring areas
Sudden drop in the value of assets
  • Rise in European/US interest rates, adjustments in stock and real estate prices in reaction to overheated market conditions, and resulting negative wealth effects
  • Decline in stock prices, fluctuations in currency values, drying up of liquidity due to turmoil in financial markets
Destabilization of foreign currency procurement
  • Unexpected outflows of funds, deterioration in liquidity conditions due to turmoil in financial markets, and accompanying rise in funding costs
Major system failure
  • Emergence of costs due to IT system failures, government fines, etc., and damage to reputation
Cyber attacks
  • Emergence of additional costs and damage to reputation due to suspension of services as a result of cyberattacks, data falsification, information leakage, improper funds transfer, etc.
Money laundering/provision of funds for terrorism
  • Government fines/penalties and damage to reputation because of flaws in policies to prevent money laundering and supplying funds for terrorism
Improper market transactions
  • Government fines/penalties and damage to reputation because of market manipulation or other compliance violations

Note:

The risks described here are only some of the possible risks we are aware of. For more comprehensive information on the group's risks, please refer to our Securities Report, Form 20–F, and other related documents.

Stress testing

We assess the suitability of our risk appetite and the validity of our business plans through stress testing of Mizuho Financial Group's entire portfolio by calculating and assessing the financial effect on our capital adequacy ratio and on business of the main and risk scenarios we have determined.

Using stress testing, we can confirm whether our capital adequacy ratio, performance, and other indicators are sufficient in the event that scenarios actually materialize. If the capital adequacy ratio and results fall below the necessary level, we reconsider and revise our risk appetite and business results if necessary. In addition, we calculate the impact to risk capital, including interest rate risk in the banking book and we use post–stress risk capital to assess the adequacy of the capital level when a risk scenario emerges.

Note that scenarios are formulated taking into consideration Mizuho's vulnerabilities and other factors, including the current status of the economy and economic outlook.

Furthermore, to structure robust risk management systems, stress testing is also used to manage risk in various risk categories, such as market risk.

Our stress testing also serves as a foundation for understanding the characteristics of our business portfolio and enables planning in advance regarding the course of action which should be taken if the risk scenario occurs, and is conducted regularly to enhance our risk management capabilities.

Mizuho's stress testing

1. Preparing scenarios
  • Current economic conditions and future outlook
  • Vulnerabilities of the group's business and financial structure

Preparation of scenarios common across the group

2. Calculation of risk impact
  • Calculation of the impact on the group when the risk scenario materializes
  • Main items to calculate: Capital adequacy ratio, losses, VAR, etc.
3. Analysis and use of results
  • Appropriateness of risk–taking and verification of suitability of the business plans
  • Assessment of capital adequacy