Risk Management

Risk Management System

DBJ conducts risk management from the perspective of ensuring management soundness. To ensure appropriate management of individual risk categories, DBJ has developed a vital risk management system that specifies and evaluates manageable risks and clarifies which department is responsible for each type of risk. The Risk Management Department oversees comprehensive risk management activities.

The ALM & Risk Management Committee and the General Risk Management Committee deliberate on important matters concerning risks and conduct regular monitoring, in line with the basic policy related to comprehensive risk management approved by the Board of Directors.

Asset–Liability and Risk Management System Overview Asset–Liability and Risk Management System Overview

Comprehensive Risk Management

The Risk Management Department assesses both comprehensive and individual risks. Based on risk guidelines that weigh Executive Committee business plans and the results of stress tests, the Risk Management Department controls the amount of comprehensive risk and that of individual risk categories at their respective levels. Furthermore, the Corporate Planning & Coordination Department has begun efforts to measure risk–return by such means as risk-adjusted return on capital.

Credit Risk

Credit risk refers to the risk of sustaining losses resulting from a decline in or loss of the value of assets due to deterioration in the financial condition of the borrower. DBJ provides corporate loans and non-recourse loans, making credit risk acquisition a source of profits. As such, it represents a significant risk category, with DBJ conducting credit management of individual projects as well as bank-wide portfolio management, accordingly.

Credit Administration of Individual Loans

When making an investment or loan, DBJ examines the entity’s project viability and the project’s profitability from a fair and impartial standpoint. DBJ is not subject to the Banking Act or the Act on Emergency Measures for the Revitalization of the Financial Functions (Act No. 132 of 1998), but carries out independent asset assessments in line with internal policies for self-assessment of credit quality based on the Financial Services Agency’s Financial Inspection Manual. The results of self-assessments are subject to an audit by an auditing corporation and are reported to management. Credit risk and amounts are monitored to confirm that they are within the limits established for individual borrowers.
The sales and credit analysis departments hold separate roles in the screening and administering of credit for individual projects, and each department keeps the operations of the other in check.
The Committee on Investment and Loan Decisions meets as needed to deliberate important issues concerning the management and operation of individual projects.
These mutual checking functions serve to ensure the appropriateness of the finance operation and management system.

Borrower Rating System

DBJ’s borrower rating system measures creditworthiness by combining an evaluation point rating and a borrower category rating, with the results quantifying a potential client’s credit circumstances.
The evaluation point rating selects indicator and evaluation categories that are common across all industries, scoring the creditworthiness of the potential borrower quantitatively and qualitatively. On the other hand, the borrower category rating measures specific items related to the borrower, looking at the borrower’s realistic financial condition, cash flows, and debt repayment history, generating a comprehensive assessment of a borrower’s repayment capacity.

Asset Self-Assessment System

Asset self-assessments are used to define asset classifications that will offset recoverability risk or the degree of risk of value loss based on the borrower rating, the corresponding borrower category, and the collateral or guarantee status. Such assessments help DBJ establish timely and appropriate amortization schedules and reserve levels.

Borrower Rating Classifications

Borrower category Borrower rating Definition Claims classified under the Financial Revitalization Act
Normal borrowers 1–8 Borrowers with favorable business conditions who have been confirmed to have no particular problematic financial circumstances. Normal claims
Borrowers requiring caution 9–11 Borrowers experiencing weak business conditions, are unstable, or have issues with their finances. These borrowers need to be managed with caution.
Substandard borrowers 12 Either some or all of the debt of these borrowers requiring caution is under management. Substandard claims
Borrowers in danger of bankruptcy 13 Borrowers in this category are having financial difficulties but are not bankrupt. Management improvement plans and the like are progressing poorly, and these borrowers are highly likely to fall into bankruptcy. Doubtful claims
Effectively bankrupt borrowers 14 Although not legally or formally in bankruptcy, these borrowers are experiencing severe financial difficulties and are realistically falling into bankruptcy as their lack of potential for restructuring has been confirmed. Claims in bankruptcy, reorganization claims, and similar claims
Bankrupt borrowers 15 These borrowers are in bankruptcy, legally and formally. Specifically, these borrowers are in bankruptcy or liquidation, under corporate reorganization, bankruptcy proceedings or civil rehabilitation, or have had transactions suspended by a bill clearinghouse.

Portfolio Management

DBJ performs a comprehensive analysis of data based on borrower ratings and calculates the loan portfolio’s overall exposure to credit risk. Credit risk exposure can be classified as (1) expected loss (EL), the average loss expected during a specific loan period; and (2) unexpected loss (UL), the maximum loss that could be incurred at a certain rate of probability minus the EL. The EL and UL calculations are reported to the ALM & Risk Management Committee.
Through such monitoring and the consideration of countermeasures, DBJ is committed to controlling risk and devising effective measures to improve risk–return.

Investment Risk

Investment risk refers to the risk of sustaining losses resulting from a decline in or loss of the economic value of assets due to worsening financial conditions for entities receiving funds and to changing market environments. DBJ’s investments include the provision of mezzanine and equity financing, particularly to unlisted entities, such as corporations, funds, infrastructure, and real estate. As a source of profits, investments represent one of DBJ’s most significant risk categories. DBJ makes investment decisions and manages individual investments as well as its bank-wide portfolio accordingly.
In addition to investment analysis and management in line with credit risk management, investment decisions based on target returns in accordance with investment category and regular monitoring are utilized to manage individual investments. In terms of portfolio management, we conduct risk measurement that applies credit and market risk assessment methods, with a focus on differences between investment categories and recovery methods.

Market Risk

The primary focuses in terms of market risk management are interest rate risk and exchange risk. DBJ classifies market risk as passive risk pertaining to investment and loan activities and implements management in the manner detailed below. DBJ does not have any trading-related risk because it does not engage in trading (specified transactions).

Interest Rate Risk

Interest rate fluctuations can create mismatches on rates of interest on assets and liabilities or on interest periods, creating the risk of reduced profits or the risk of losses. Interest rate risk can reduce the economic value of DBJ’s assets or interest income.
Based on monitoring through multifaceted indices, such as value at risk (VaR) and interest rate sensitivity analyses (duration and basis point value), as well as ALM policies established by the Executive Committee, DBJ conducts comprehensive management of current assets and liabilities to optimize net interest expenses and economic value by adequately controlling interest rate risk and financial liquidity risk. In regard to controlling interest risk, a portion of the interest rate risk is covered through interest rate swaps.

Exchange Risk

Exchange risk is the risk of loss due to volatility in exchange rates, and this risk affects entities holding a net excess of assets or liabilities denominated in foreign currencies. DBJ’s exchange risk derives from financing in foreign currencies and issuing foreign currency bonds. However, DBJ uses exchange swaps and other instruments to limit this risk in terms of assets and liabilities denominated in foreign currencies at a net-base position.

DBJ uses swap transactions to manage counterparty risk by continuously monitoring the creditworthiness of all parties and by setting a limit to financing for each counterparty. DBJ also conducts risk management through margin transfers by means of a centralized exchange and mutual credit support annex.

Liquidity Risk

Liquidity risk is the risk of a mismatch occurring in the periods when funds are used and raised or of an unexpected outflow of funds, causing differences in the flow of funds (cash liquidity risk). Such situations make securing funds difficult and create situations in which interest rates on borrowed funds are substantially higher than usual rates. At other times, because of market complexities, entities in these circumstances may become unable to participate in market transactions, compelling them to conduct transactions under substantially less favorable terms than otherwise would be the case. The risk of losses for these reasons is known as market liquidity risk.
As its main methods of acquiring funds, in addition to issuing corporate bonds and taking out long-term loans, DBJ relies on the stable procurement of long-term funds from the Japanese government’s Fiscal Investment and Loan Program and governmentguaranteed bonds rather than on short-term funds such as deposits. Contingency plans are established as appropriate to meet unexpected short-term funding requirements and cash flow shortfalls.
Additionally, DBJ maintains daytime liquidity by using the Bank of Japan’s real-time gross settlement system, whereby settlement is made instantly for each transaction. Every effort is made to ensure that settlement conditions are managed appropriately.
In addition to credit, investment, and market risk, the ALM & Risk Management Committee deliberates DBJ’s liquidity risk.

Operational Risk

DBJ defines operational risk as the risk of loss arising from internal processes, people or systems that are inappropriate or nonfunctioning, or from external events. DBJ works to establish a risk management system to minimize risk and prevent potential risks from materializing. The General Risk Management Committee has been established to deliberate topics concerning operational risk management.
Within operational risk management, DBJ conducts administrative risk management and system risk management as described below.

Administrative Risk Management

Administrative risk refers to the risk of sustaining losses resulting from employees neglecting to perform their duties correctly or from accidents, fraud, and the like. To reduce or prevent administrative risk, DBJ prepares manuals, performs checks on administrative procedures, provides education and training, and uses systems to reduce the burden of administrative duties.

System Risk Management

System risk refers to the risk of loss due to a computer system breakdown or malfunction, system defects, or improper computer use. DBJ has implemented the following internal processes to optimize system risk management and properly manage risk with regard to system risk. The System Risk Management Division is responsible for managing DBJ’s system risk centrally, based on its system risk management regulations. By determining security standards from a variety of viewpoints—from information system planning and development to operation and use—the department extends the risk management system bank-wide and addresses appropriate system risk management operations.

Business Continuity Initiatives

DBJ has prepared a business continuity plan (BCP) to protect the interests of its stakeholders, including its clients, its shareholder, and its executives and employees, as well as to fulfill its social mission. The BCP aims to ensure the continuity and rapid recovery of core operations in the event of emergencies, such as natural disasters (in particular, large-scale earthquakes), influenza and other pandemics, system failures, and power outages.
The BCP describes in an easy-to-understand format the role of the Disaster Response Committee, work priorities, and specific actions and procedures to be taken in the event of a disaster.
When drawing up policies for business continuity and restoration, the Company envisions specific incidents, such as an earthquake underneath the Tokyo metropolis, and methodically decides how to respond to anticipated damage in each disaster scenario.

Measures to Ensure Business Continuity

We have prepared a variety of measures to ensure business continuity.

Enhanced System Robustness

We have ensured advanced security levels at the main center and created a backup center to operate in the event that the main center ceases to operate.

Multilayered Communication Procedures

We have introduced a safety confirmation system to quickly determine the whereabouts and status of executives and employees even at night and on holidays. In addition, we have distributed satellite telephones to key locations and personnel to ensure multilayered communication procedures.

Chain of Command and Delegation of Authority

To assure that decision-making concerning the continuity of core operations is prompt and certain, in the event it becomes necessary to execute the plans of the Disaster Response Committee, we have put in place a chain of command and an alternative hierarchy by which authority can be delegated.

Clarification of Initial Response and Procedures for Continuing or Recovering Core Operations

For individual business units, we have established in advance the procedures for the initial response and the continuation or recovery of core operations so that relevant divisions can respond quickly and with certainty on core operations even when in a state of confusion.

Initiatives to Maintain or Improve BCP Viability

DBJ conducts various types of instruction and training of executives and regular employees to maintain or improve the viability of its BCP. Furthermore, employing a plan-do-check-act cycle, we revise the BCP to reflect training results and recent information, and the Executive Committee reviews it regularly and amends it as necessary.

Climate Change Initiatives

Since the adoption of the Paris Agreement in 2015, addressing Climate Change has been a key priority for Japan and other countries around the world.
To a large extent, DBJ has done this through dialogue with customers made possible by the Environmentally Rated Loan Program (see page 59) and DBJ Green Building Certification (see page 26). In June 2018, we announced our agreement with the underlying principles of the Task Force on Climate-related Financial Disclosures (TCFD) created by the Financial Stability Board (FSB). DBJ identifies the unique risks and opportunities presented by Climate Change and discloses relevant information after proper examination.
DBJ is also a participant in the TCFD Consortium, which was established in May 2019 as a forum for discussion among the companies and financial institutions that agree with the TCFD declaration. Through this consortium, DBJ joins other participating companies in proactively discussing how to use and assess information disclosed under TCFD guidelines.

TCFD

Corporate Governance

DBJ has based its business activities on the Policy on Sustainability, which it drew up in May 2017 with the aim of contributing to a sustainable society.
At meetings of the Sustainability Committee (see page 64), which reports to the Executive Committee, members of the Board of Directors lead discussions on Climate Change and other important social issues, their risks and opportunities, and DBJ’s initiatives in this context. The outcomes of these discussions are reflected in business strategies and decision-making for investments and loans. In fiscal 2018, the Sustainability Committee discussed future goals and the fine-tuning of initiatives taken to date for the disclosure of information based on TCFD guidelines, as well as trends in energy around the world and the policies of DBJ.

Discussions at the Sustainability Committee
Discussions at the Sustainability Committee

Strategy

When formulating Vision 2030 (see page 2), DBJ identified Climate Change, natural resources, and energy as changes in the external environment that can significantly impact the stakeholders of the DBJ Group. DBJ is responding to Climate Change by providing customers with solutions in the three critical fields of infrastructure, industry, and regional development.
DBJ holds seminars featuring outside experts in scenario analysis in order to gather information and build networks in the field. With the aim of serving as a leading example for domestic financial institutions, we plan to move ahead with the scenario analysis of climate risks and opportunities with the support programs of the Ministry of the Environment.

Risk Management

DBJ identifies, evaluates, monitors, and controls various risks associated with Climate Change.
In April 2019, in recognition of the need to consciously evaluate and monitor environmental and social risks related to specific projects targeted for financing, DBJ created the Environmental & Social Assessment Office within the Structured Finance Department.
DBJ’s Environmentally Rated Loan Program and DBJ Green Building Certification provide important ways of engaging customers in discussions on how to build sustainable businesses that contribute to a sustainable society.

Measurement Standards and Targets

DBJ gauges the progress of its environmental initiatives related to Scope 1 (direct) and Scope 2 (indirect), which concern the amount of greenhouse gas (GHG) emissions associated with corporate activities. Specific targets are set for DBJ and for each department in regard to the environmental aspects of investment and loan operations and environmental protection initiatives such as educational programs that encourage dialogue on relevant issues. These are all ways in which DBJ works systematically and consistently to help preserve the environment.