Strengthening Corporate Governance

Hyakugo Bank is responding rapidly to the major changes taking place in its operating environment. Strengthening corporate governance is essential to making Hyakugo Bank truly competitive, and the Bank has determined its Fundamental Policies for Internal Control Systems based on its corporate philosophy. We are working to prepare the infrastructure required for sound, appropriate operations.

Moreover, Hyakugo Bank has moved to raise management efficiency, accelerate decision making and increase management transparency by strengthening the functions of the Board of Directors and the Management Committee. We have also appointed an outside auditor and established several committees, including the Compliance Committee. Other efforts to strengthen corporate governance include efforts to enhance investor relations.

Fundamental Risk Management Policies

With the progress of liberalization and internationalization of the financial sector, as well as the diversification of financial services and businesses, the number and diversity 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

Hyakugo Bank has a comprehensive system to understand and manage the risks to which it is directly exposed during the course of banking operations. It is based on fundamental regulations for managing risk set by the Board of Directors and management policies revised every six months.

Specifically, risks such as credit risk, market risk and operational risk are categorized and a department is assigned responsibility for managing each risk in the course of operations. Moreover, Hyakugo Bank has established the Risk Control Division, which is responsible for overall risk management. Moreover, 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 according to consistent criteria and executes comprehensive risk management that controls the amount of risk within a scope appropriate to the Bank’s operating capabilities. Based on this approach, Hyakugo Bank set limits for the amount of credit risk, market risk, operational risk and overall risk in working to both maintain sound operations and generate stable earnings.

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

One of the most important management tasks for Hyakugo Bank is maintaining the soundness of assets such as loans. Hyakugo Bank has therefore implemented a credit rating system that employs consistent criteria to evaluate the credit risk of each borrower and loan. This system is also useful in forming lending policies and setting interest rates. In addition, the Bank has 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, credit rating, credit amount and other parameters from the standpoint of credit portfolio management.

New capital adequacy ratio regulations went into effect at the end of March 2007. The calculation of the capital adequacy ratio will use the standard method in the first fiscal year. However, with more diverse and complex financial transactions increasing the importance of risk management, Hyakugo Bank is working to increase the sophistication of its risk management by introducing basic internal risk weighting techniques.

Moreover, Hyakugo Bank is quantifying and monitoring credit risk, including credit concentration risk, based on its internal integrated risk management system outside of the calculation of the capital adequacy ratio. The Bank is working to take appropriate risks and generate stable earnings through means such as managing credit limits.

Organizationally, Hyakugo Bank has always clearly separated its sales promotion and credit investigation divisions to carry out rigorous assessment and control of credit risk.

For borrowers facing issues such as deteriorating business conditions, Hyakugo Bank appropriately determines management status and administers guidance for the formulation of revitalization plans as required to resolve problems and recover loans.

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 hedging risk based on interest rate projections.

Hyakugo Bank handles market risk based on a framework for integrated risk management. The Bank quantifies various risks that are not included in the calculation of the capital adequacy ratio, such as interest rate risk embedded in its accounts, primarily using Value at Risk (VaR). We then control risk by setting risk limits for each type of transaction, such as deposits and loans, bonds, and long-term shareholdings.

Organizationally, 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.

New capital adequacy ratio regulations went into effect at the end of March 2007. The calculation of the capital adequacy ratio will use a basic method in the first fiscal year, and Hyakugo Bank will employ this method as part of its integrated risk management. However, with more diverse and complex financial transactions increasing the importance of risk management, Hyakugo Bank is working to increase the sophistication of its risk management by introducing the use of advanced measurement techniques.

Organizationally, a department is assigned responsibility for managing each type of risk, including administrative risk. Moreover, Hyakugo Bank has established the Operational Risk Control Division, thus creating a system of mutual checks and balances.

Compliance Measures

Compliance has traditionally been 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 to discuss overall compliance policies and established a Compliance Division to conduct integrated 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.