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Market and Liquidity Risk Management

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Basic Approach

We define market risk as the risk of losses incurred by the Group 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. We define liquidity risk as 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. MHFG manages market and liquidity risk for the Group as a whole.

Market Risk Management Structure

Market Risk Management of MHFG

Our Board of Directors determines basic matters pertaining to market risk management policies. The Risk Management Committee of MHFG broadly discusses and coordinates matters relating to basic policies in connection with market risk management, market risk operations and market risk monitoring. The Group CRO of MHFG is responsible for matters relating to market risk management planning and operations.

The Risk Management Department of MHFG is responsible for monitoring market risk, reports and analyses, proposals, setting limits and guidelines, and formulating and implementing plans relating to market risk management. The Risk Management Department assesses and manages the overall market risk of the Group. It also receives reports from our core group companies on their market risk management that enable it to obtain a solid grasp of the risk situation, submitting reports to the President & Group CEO on a daily basis and to our Board of Directors and the Executive Management Committee of MHFG on a regular basis.

To manage market risk, we set limits that correspond to risk capital allocations according to the risk profiles of our core group companies and thereby prevent market risk from exceeding our ability to withstand losses based on our financial strength represented by capital, etc. The amount of risk capital allocated to market risk corresponds to VaR and additional costs that may arise in order to close relevant positions. For trading and banking activities, we set limits for VaR and for losses. For banking activities, we set position limits based on interest rate sensitivity as needed.

These limits are discussed and coordinated by the Risk Management Committee, discussed further by the Executive Management Committee, then determined by the President & Group CEO. Various factors are taken into account including business strategies, historical limit usage ratios, risk–bearing capacity (profits, total capital and risk management systems), profit targets and the market liquidity of the products involved.

Market Risk Management at Our Core Group Companies

MHBK, MHTB, MHSC and Mizuho Americas, which account for most of the Group's exposure to market risk, have formulated their basic policies in line with the basic policies determined by MHFG. Their Boards of Directors determine important matters relating to market risk management while their Chief Executive Officers are responsible for controlling market risk. Their respective business policy committees, including their ALM & Market Risk Management Committees, are responsible for overall discussion and coordination of market risk management. Specifically, these committees discuss and coordinate matters relating to basic asset and liability management policies, risk planning and market risk management. The Chief Risk Officer of each subsidiary is responsible for matters pertaining to planning and implementing market risk management. Based on a common group risk capital allocation framework, the above–mentioned companies manage market risk by setting limits according to the risk capital allocated to market risk by MHFG.

These companies have established specialized company–wide market risk management departments to provide integrated monitoring of market risk, submit reports, analyses and proposals, set limits and formulate and implement plans relating to market risk management. The risk management departments of each company submit reports on the status of market risk management to their respective Chief Executive Officers and top management on a daily basis, and to their Board of Directors and Executive Management Committee on a regular basis. They also provide regular reports to MHFG. To provide a system of mutual checks and balances in market operations, they have established middle offices specializing in risk management that are independent of their front offices, which engage in market transactions, and their back offices, which are responsible for book entries and settlements. When VaR is not adequate to control risk, the middle offices manage risk using additional risk indices, carry out stress tests and set stop loss limits as needed. They monitor their market liquidity risk for individual financial products in the market while taking turnover and other factors into consideration.

Status of MHFG's Market Risk

Value–at Risk

We use the VaR method, supplemented with stress testing, as our principal tool to measure market risk. The VaR method measures the maximum possible loss that could be incurred due to market movements within a certain time period (or holding period) and degree of probability (or confidence interval).

Trading Activities

VaR related to our trading activities is based on the following:

  • variance co–variance model for linear risk and Monte–Carlo simulation for non–linear risk, which are simply aggregated to determine total risk;
  • confidence interval: one–tailed 99.0%;
  • holding period of one day; and
  • historical observation period of one year.

The following tables show the VaR related to our trading activities by risk category for the fiscal years ended March 31, 2014, 2015 and 2016 and as of March 31, 2014, 2015 and 2016:

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VaR by Risk Category (Trading Activities)(billions of JPY)
  Fiscal 2013
Daily average Maximum Minimum At March 31
Interest rate 2.0 2.7 1.5 1.6
Foreign exchange 4.1 5.6 1.1 4.8
Equities 1.0 3.1 0.2 0.4
Commodities 0.0 0.0 0.0 0.0
Total 5.7 7.4 3.3 5.4

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  Fiscal 2014
Daily average Maximum Minimum At March 31
Interest rate 1.8 2.6 1.4 1.5
Foreign exchange 3.0 5.8 1.6 5.6
Equities 0.5 1.3 0.2 0.3
Commodities 0.0 0.0 0.0 0.0
Total 4.4 7.1 3.1 6.5

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  Fiscal 2015
Daily average Maximum Minimum At March 31
Interest rate 1.8 3.7 0.6 1.1
Foreign exchange 0.9 2.3 0.2 0.3
Equities 0.6 2.5 0.1 0.3
Commodities 0.0 0.0 0.0 0.0
Total 2.9 4.5 1.8 2.0

The following graph shows VaR figures of our trading activities for the fiscal year ended March 31, 2016:

Fiscal 2015 VaR (Trading Activities)
Graph: Fiscal 2015 VaR (Banking Activities)

The following table shows VaR figures of our trading activities for the fiscal years indicated:

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VaR (Trading Activities) (billions of JPY)
  Fiscal 2013 Fiscal 2014 Fiscal 2015 Change
As of fiscal year end 5.4 6.5 2.0 (4.5)
Maximum 7.4 7.1 4.5 (2.5)
Minimum 3.3 3.1 1.8 (1.3)
Average 5.7 4.4 2.9 (1.5)

Non–Trading Activities

The VaR related to our banking activities is based on the same conditions as those of trading activities, but the holding period is one month.

The following graph shows the VaR related to our banking activities excluding our cross–shareholdings portfolio for the year ended March 31, 2016.

Fiscal 2015 VaR (Banking Activities)
Graph: Fiscal 2015 VaR (Trading Activities)

The following table shows the VaR figures relating to our banking activities for the fiscal years indicated:

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VaR (Banking Activities) (billions of JPY)
  Fiscal 2013 Fiscal 2014 Fiscal 2015 Change
As of fiscal year end 281.7 325.6 321.5 (4.0)
Maximum 300.7 349.0 360.6 11.5
Minimum 186.8 265.0 190.0 (75.0)
Average 253.5 307.9 284.9 (23.0)

Characteristics of VaR Model

VaR is a commonly used market risk management technique. However, VaR models have the following shortcomings:

  • By its nature as a statistical approach, VaR estimates possible losses over a certain period at a particular confidence level using past market movement data. Past market movement, however, is not necessarily a good indicator of future events, particularly potential future events that are extreme in nature.
  • VaR may underestimate the probability of extreme market movements.
  • The use of a 99.0% confidence level does not take account of, nor makes any statement about, any losses that might occur beyond this confidence level.
  • VaR does not capture all complex effects of various risk factors on the value of positions and portfolios and could underestimate potential losses.

Interest Sensitivity Analysis

We also conduct interest sensitivity analyses of interest risk, our main source of market risk. The following table shows sensitivity to yen interest risk in our banking activities as of the dates indicated. Interest rate sensitivity (10 BPV) shows how much net present value varies when interest rates rise by 10 basis points (0.1%), and it explains the impact of interest rate movements on net present value when short– and long–term interest rates behave differently.

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Interest Sensitivity by Maturity At March 31 (billions of JPY)
  2014 2015 2016 Change
Up to one year (2) (1) (2) (1)
From one to five years (47) (35) (21) 14
Over five years (12) (14) (25) (11)
Total (62) (51) (50) 1

Cross–shareholding Portfolio Management Activities

We take the market risk management approach with use of VaR and risk indices for cross–shareholdings portfolio management activities as well as for trading activities and non–trading activities. The risk index for cross–shareholdings portfolio management for the fiscal year ended March 31, 2016, consisting of the sensitivity of the cross–shareholdings portfolio to a 1% change in the equity index of TOPIX, was JPY 29.7 billion.

Back Testing and Stress Testing

In order to evaluate the effectiveness of market risk measurements calculated using the VaR method, we carry out regular back tests to compare VaR with assumptive profits and losses. Assumptive profits and losses accounts for general market risk. The following graph shows daily VaR of trading activities (based on the Basel regulatory framework) for the fiscal year ended March 31, 2016, and the corresponding paired distribution of profits and losses. We had five cases where losses exceeded VaR during the period. In addition, we conduct evaluations of the assumptions related to the VaR models. Based on the number of times losses exceeded VaR through back testing and the results of the evaluation of the model assumptions, we changed our VaR models to the Historical Simulation method, which has been used since the beginning of the fiscal year ended March 31, 2017. Changes to fundamental portions of the VaR models are subject to the approval of our Group CRO.

Fiscal 2015 Back Testing
Graph: Fiscal 2014 Back Testing
  • Note:We conduct our back testing and assess the number of cases where losses exceed VaR based on a 250 business day year. The expected average number of instances where one–day trading losses exceeded VaR at the 99% confidence level is 2.5.

Because the VaR method is based on statistical assumptions, we conduct stress testing to simulate the levels of losses that could be incurred in cases where the market moves suddenly to levels that exceed these assumptions. The stress testing methods we use include the calculation of losses on the basis of the largest fluctuations occurring over a period of more than five years and the calculation of losses based on market fluctuations occurring during historical market events. The following table shows the assumed maximum loss results of stress testing in trading activities using the methods described above:

Fiscal 2015 Stress Testing At March 31, 2016 (billions of JPY)
Assumed maximum loss result calculated by stress testing (holding period: one month) 30.6

Outlier Criteria

As part of the capital adequacy requirements under Basel Regulatory Framework, the losses arising from a banking book in hypothetical interest rate shock scenarios under certain stress conditions are calculated and compared with broadly–defined capital. If the interest rate risk of the banking book leads to an economic value decline of more than 20% of broadly–defined capital, we will be deemed an "outlier" and may be required to reduce the banking book risk or adopt other responses. We measure losses arising from our banking book each month as a part of our stress tests.

The table below shows the results of calculations of losses in the banking book in cases where interest rate fluctuations occur under stress conditions. The results of calculations of losses in the banking book show that they are 5.3% of broadly–defined capital. Because the amount of risk on the banking book is therefore well under the 20% threshold and within controllable limits, we do not fall under the "outlier" category.

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Fiscal 2015 Results of Calculations under the Outlier Framework (billions of JPY)
  Amount of loss Broadly–defined capital Loss ratio to capital
At March 31, 2014 386.6 8,655.9 4.4%
At March 31, 2015 529.2 9,508.4 5.5%
At March 31, 2016 516.6 9,638.6 5.3%
Effect of yen interest rate 73.5
Effect of dollar interest rate 340.4
Effect of euro interest rate 73.2
  • Notes:
    • 1.In the above results of calculations of losses, a part of demand deposits without fixed intervals for amending applicable interest rates is deemed core deposits and is treated accordingly in the calculation.
    • 2.For the interest rate shock scenario used in connection with the above figures, we generate annual rate fluctuation data for five years derived from daily raw historical interest rate data of the past six years and then apply the actual fluctuation data, which show a rise in interest rates, at a 99.0% confidence level to the shock scenario.

Market Risk Equivalent

In order to calculate the amount of capital necessary to meet the capital requirements relating to market risk (the "market risk equivalent"), we apply internal models to calculate general market risk (risks related to factors that apply generally to the market, e.g., interest rates, foreign exchange rates) and the standardized measurement method to calculate specific risks (risks other than general market risk, e.g., credit quality and market liquidity of an individual security or instrument). In addition, our internal models are applied to trading transactions with market liquidity based on the relevant holding period.

Under the internal models, the market risk equivalent is expressed as the sum of;

The higher of (i) VaR on the calculation date and (ii) the average of VaR for the preceding 60 business days (including the calculation date) multiplied by a multiplication factor ranging from 3.00 to 4.00 that is determined based on the number of times VaR is exceeded upon back testing; and

The higher of (i) stressed VaR on the calculation date and (ii) the average of stressed VaR for the preceding 60 business days (including the calculation date) multiplied by the same multiplication factor as used in the bullet point above.

The following table shows total market risk equivalent as of the dates indicated calculated using the standardized measurement method and internal models:

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Fiscal 2015 Market Risk Equivalent At March 31, (billions of JPY)
  2015 2016 Change
Calculated using standardized measurement method 78.8 70.6 (8.1)
Calculated using internal models 199.0 65.0 (134.0)
Total market risk equivalent 277.9 135.6 (142.2)
  • Note:VaR and stressed VaR used to calculate market risk equivalent is based on the following:
  • variance co–variance model for linear risk and Monte–Carlo simulation for non–linear risk, which are simply aggregated to determine total risk;
  • confidence interval: one–tailed 99.0%;
  • holding period of 10 days; and
  • historical observation period of one year.

Liquidity Risk Management Structure

Liquidity Risk Management of MHFG

Our Board of Directors determines basic matters pertaining to liquidity risk management policies. The Risk Management Committee of MHFG broadly discusses and coordinates matters relating to basic policies in connection with liquidity risk management, operations, monitoring and proposes responses to emergencies such as sudden market changes. The Group CRO of MHFG is responsible for matters relating to liquidity risk management planning and operations. The Risk Management Department of MHFG is responsible for monitoring liquidity risk, reports and analyses, proposals, and formulating and implementing plans relating to liquidity risk management.

In addition, the Group CFO of MHFG is additionally responsible for matters relating to planning and running cash flow management operations, and the Financial Planning Department is responsible for monitoring and adjusting the cash flow management situation and for planning and implementing cash flow management to maintain appropriate funding liquidity. Reports on the liquidity risk management are submitted to the Risk Management Committee, the Executive Management Committee and the President & Group CEO on a regular basis.

To manage liquidity risk, we use indices pertaining to cash flow, such as limits on funds raised in the market that are set based on a number of time horizons. Limits on liquidity risk set for Japanese yen and foreign currencies taking into account characteristics and strategies of each core group companies, are discussed and coordinated by the Risk Management Committee, discussed further by the Executive Management Committee and determined by the President & Group CEO. In addition, our core group companies set limits on liquidity risk for several currencies. Moreover, they are working on measures to reduce their liquidity risk such as enhancing management related to local currencies.

We have established a group–wide framework of liquidity risk stage such as "Normal," "Anxious" and "Crisis," which reflects funding conditions. In addition, we set Early Warning Indicators ("EWIs") and monitor on a daily basis to manage liquidity conditions. As EWIs, we select stock prices, credit ratings, amount of liquidity reserve assets such as Japanese government bonds, our funding situations and so on.

We have established a liquidity contingency funding plan for emergency situations which are deemed to fall into the "Anxious" or "Crisis." In emergency situations, we will consider measures such as a reduction in the amount of investments made, an expansion of funding from financial markets and deposits, the sale of investment securities and borrowings from the central bank.

In order to evaluate the sufficiency of liquidity reserve assets and the effectiveness of liquidity contingency funding plan, we conduct stress testing under market–wide, idiosyncratic and combined scenario. Furthermore, we utilize stress testing for evaluating the appropriateness of our annual funding plan.

Liquidity Risk Management at Our Core Group Companies

MHBK, MHTB, MHSC and Mizuho Americas have formulated their basic policies in line with the basic policies determined by MHFG. Their Boards of Directors determine important matters relating to liquidity risk management while their Chief Executive Officers are responsible for controlling liquidity risk. Their respective business policy committees, including their ALM & Market Risk Management Committees, are responsible for overall discussion and coordination of liquidity risk management. Specifically, these committees discuss and coordinate matters relating to risk planning, cash flow management planning and propose responses to emergencies such as sudden market changes. The Chief Risk Officer is responsible for matters relating to liquidity risk management planning and operations and the senior executives of the ALM and trading units are responsible for matters pertaining to planning and conducting cash flow management.

The methodologies used for ensuring precise control of liquidity risk include the formulation of management indices pertaining to cash flow, such as limits on funds raised in the market that are set based on a number of time horizons. As with MHFG, the above–mentioned companies have established liquidity risk stage, such as "Normal" to "Anxious" and "Crisis," which reflects funding conditions and have established liquidity contingency funding plan for emergency situations which are deemed to fall into the "Anxious" or "Crisis" categories.

Each subsidiary has adopted stringent controls that call for the submission of reports on liquidity risk management and cash flow management to the ALM & Market Risk Management Committee and other business policy committees, the Executive Management Committee and the Chief Executive Officer of each subsidiary.

(As of Jul 1, 2016)

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