Checklist for Risk Management (Revised Edition)

November 1996
Bank of Japan
Bank Supervision Department

I. Objectives

The Bank Supervision Department of the Bank of Japan initially compiled the Checklist for Risk Management (hereafter referred to as the former Checklist) in December 1987 to assist examiners in assessing the adequacy of risk management at individual banks during on-site examinations. The former Checklist was distributed to financial institutions under the Bank's supervision as a reference for checking and strengthening their risk management systems.

Amid the progress in financial liberalization and innovation that has taken place during the past several years, financial institutions have expanded the scope of their business activities, and this has enabled them to pursue higher returns by taking on risks freely with due consideration for market rules. At the same time, this has led to a better understanding by financial institutions of the importance of maintaining the balance between risk and return by adequately assessing and controlling risk exposure. As a result, financial institutions are taking the initiative in strengthening and upgrading their risk management systems in order to secure financial safety and soundness.

With these changes in the environment surrounding financial institutions, the Bank of Japan has recognized the increased importance of adequately assessing any future threats to the safety and soundness of financial institutions. This implies nothing more than further strengthening and promotion of the same kind of examination focused on risk management as in the past. With this aim, the Bank Supervision Department has comprehensively revised the former Checklist (hereafter referred to as the new Checklist).

Like its predecessor, the new Checklist has been distributed to all banks subject to the Bank of Japan's supervision, as it is intended to assist banks in reviewing and strengthening their risk management systems based on the principle of self-responsibility, while serving as a guideline for bank examiners.¹ As this revised document includes some points that will be equally useful to those financial institutions not subject to the Bank's supervision (such as some shinkin banks, credit cooperatives, agricultural cooperatives, and labor credit associations) and business enterprises, the essential elements of the new Checklist are presented here.

[footnotes]

1. It hardly needs saying that financial institutions must take the initiative in establishing their risk management systems using their own judgment, based on their respective management policies and business situations. Hence, the banks must take the following into consideration when applying the new Checklist: (1) it is not a minimum standard by which all banks must abide; and (2) even the more advanced banks require more time to achieve some of the points in the Checklist. In this sense, the new Checklist is not intended to be used indiscriminately during the Bank of Japan's on-site examinations, but rather it will be utilized giving full consideration to the situation of each bank.

   This is a provisional translation of the essential elements of the new Checklist. The original Checklist written in Japanese has precedence over this English version.