Measures to Enhance Corporate Governance
Hyakugo Bank understands the importance of strengthening corporate governance in order to quickly respond to change and exercise true competitiveness in a drastically changing operating environment. In these conditions, Hyakugo Bank has strengthened the functions of the Board of Directors and Management Committee, appointed an outside auditor, established the Compliance Committee and other committees, and enhanced investor relations activities to improve management efficiency, accelerate decision making and enhance management transparency.

Fundamental Risk Management Policies and Administrative Systems
With the progress of liberalization and internationalization of the financial sector, as well as the diversification of financial services and businesses, the number of risks to which banks are directly exposed has increased steadily, and the importance of risk management is increasing. Hyakugo Bank is working to strengthen and enhance risk management. The Bank’s fundamental risk management policy is to gain an accurate understanding and awareness of each type of risk, and to maintain management soundness and secure stable income through proper risk management.

Comprehensive Risk Management System
Various risks arise in the course of conducting the banking business. Hyakugo Bank has a system for comprehensively understanding and managing risk. Departments in charge of each type of risk conduct management according to the characteristics of the risk in the Bank’s business operations, and Hyakugo Bank has also established the Risk Control Division and the Risk Management Committee. The Risk Management Committee, chaired by the president, meets once a month to comprehensively gauge and analyze the occurrence and management status of each type of risk and consider risk management policies and measures.

In addition, Hyakugo Bank quantifies risks as much as possible using statistical methods. By keeping the total amount of the quantified risk within a fixed range of stockholders’ equity, the Bank ensures the soundness of its operations.

The Audit Division, which is independent from business divisions, conducts audits of business operations and examines the appropriateness and effectiveness of management within each of the Bank’s divisions.

Credit Risk Management
Hyakugo Bank has always clearly separated its sales promotion and credit investigation functions to carry out rigorous assessment and control of credit risk. The Bank has also established a credit policy that controls the concentration of credit in any specific company or corporate group, and strives to disperse loans by understanding their distribution by industry, region and other parameters.

Hyakugo Bank has implemented an internal credit rating system to assess borrower creditworthiness and the credit risk of individual loans with unified criteria, which is useful in forming lending policies and setting interest rates. In addition to diversifying its credit portfolio by understanding loan distribution status by industry and region and other parameters, Hyakugo Bank is working to quantify and regularly monitor credit risk in order to take appropriate risks and secure stable earnings.

For borrowers whose business conditions have deteriorated and require management improvement, the Corporate Management Support Team at the head office and the Sales Division cooperate to provide revitalization support.

Market Risk and Liquidity Risk Management
The influence of changes in interest rates, foreign currency exchange rates, stock prices and other market movements on bank earnings has increased steadily. Consequently, Hyakugo Bank has strengthened its asset and liability management (ALM) capabilities with the objective of securing stable earnings. Specifically, the ALM Committee meets monthly to analyze the composition of assets (such as loans and securities) and liabilities (such as deposits). The Bank also has policies for using swaps and other techniques to hedge risk based on interest rate projections. Hyakugo Bank mainly uses Value at Risk (VaR) to reduce market risk, and controls risk by setting risk limits for each type of transaction, such as deposits, loans bonds or long-term shareholdings.

In market trading operations, Hyakugo Bank clearly separates trade execution (front office) and administrative processing (back office), and also has established a risk management department (middle office), thus creating a system of mutual checks and balances.

Hyakugo Bank appropriately monitors day-to-day conditions and the outlook for the yen and foreign currencies, and manages funds accordingly. In addition, we deal with liquidity risk by periodically monitoring the amount of funds the Bank can raise from the market, and have established a series of measures to respond to unforeseen circumstances.

Operational Risk Management
The environment in the financial industry is undergoing major changes, including diversification of businesses, products and services, and the systemization of business processing. Amid these changes, Hyakugo Bank set Operational Risk Management Rules in April 2006, and at the same time established the Operational Risk Management Committee. In this way, the Bank has established a system for comprehensive assessment and analysis of each type of risk involved in business operations, and cross-divisional discussion of risk reduction policies.

Hyakugo Bank considers operational risk to encompass a wide range of risks consisting of administrative risk, systems risk, information asset risk, reputation risk, ethical and legal risk, personnel risk, fixed asset risk, and other operational risks. The Bank is working to upgrade the level of both qualitative and quantitative risk management.

Compliance Measures
Compliance is one of the highest management priorities at Hyakugo Bank. In addition to issuing a business guidebook that states fundamental guidelines for compliance within the Bank, we have created a Compliance Committee chaired by the president and established a Compliance Division to conduct unified supervision and promotion of compliance. Moreover, compliance officers are assigned to all headquarters departments, regional headquarters and branches, and we formulate a compliance program every year as a concrete action plan to proactively prevent legal infractions and check the status of compliance.