A. General

1. Role of management

Check points		Specific sample questions
a. Management's awareness of credit risk control	Does the management have a clear policy on credit risk control and conduct lending operations prudently?	Are excessive loans, (i.e., those placing top priority on business expansion) eliminated by separating the credit administration function and business promotion function? Does the management clearly understand that the bank and its subsidiaries are exposed to credit risk in both on- and off-balance sheet transactions? Is there a clear policy promoting asset quality? Does the management fully recognize the significance of self-assessment, and ensure that the bank implements self-assessment adequately and reflects the results of the assessment in write-offs and provisioning? Is the management aware of the importance of effectively utilizing the results of self-assessment in strengthening credit risk management? Is the management aware of the need to control credit risk commensurate with the bank's financial strength (i.e., capital)?

2. Self-assessment of assets and appropriate calculation of the amount of write-offs and provisioning

Check points		Specific sample questions
a. Criteria to be used in self-assessment	Are the criteria appropriate?	Are the criteria for use in self-assessment officially instituted as internal rules after carrying out necessary procedures such as approval of the board of directors? Are the criteria for use in self-assessment in accordance with the asset assessment policy provided by administrative authorities? Does the bank have in place an operational manual for smooth and appropriate self-assessment at branches? Are off-balance sheet transactions (derivatives products, forward exchange contracts, commitments, contingent liabilities, etc.) also subject to self-assessment?
b.Organization for self-assessment	From the standpoint of adequate self-assessment, does the organization of the bank provide for a double-checking system and appointment of experienced staff?	Are the departments conducting self-assessment and in charge of examinations based on the result of self-assessment clearly designated? Does the bank have a double-checking system whereby a department independent from lending sections conducts self-assessment or examines the results when lending sections conduct self-assessment? Do the departments responsible for self-assessment and examination have experienced managers/staff? Does the head office provide lending sections with appropriate training programs and guidance concerning self-assessment?
c. Adequacy and accuracy of self-assessment	Does the bank appropriately carry out self-assessment in line with the criteria for self-assessment?	Does the bank appropriately extract credit files subject to self-assessment (those listed in "line sheets") based on the criteria for self-assessment? Does the bank appropriately determine the borrower rating and loan classification taking collateral value into account, based on the criteria for self-assessment? Where self-assessment is inaccurate, does the bank identify the cause and apply the experience gained to improve it?
d. Reporting of self-assessment results to the management	Does the bank report the results of self-assessment to the management accurately and promptly?	Are the self-assessment results properly reported to the management? Are all relevant matters, such as problems in the implementation of the self-assessment system, appropriately reported to the management in order to improve it?
e. Appropriate calculation of the amount of write-offs and provisioning	Does the bank accurately calculate the amount of write-offs and provisioning based on the results of self-assessment?	Are the standards for write-offs and provisioning formally adopted in the internal rules after carrying out the necessary procedures such as obtaining the approval of the board of directors? Are the in-house standards for write-offs and provisioning in accordance with the policy of external auditors? Are the required amounts of write-offs and provisioning for individual credit files calculated based on self-assessment results and the write-off and provisioning rules? Does the bank file data for calculating the amount of bad debt reserves (i.e., charge-off ratio)?

3. Integrated management credit risk

Check points		Specific sample questions
a. Integrated risk management system	Does the management have in place a system for controlling credit risk on an integrated basis?	Does the bank regularly review whether there is a concentration of credit to a specific type of borrower (e.g., industry, company, or company group including its subsidiaries)? Is credit risk controlled on an integrated basis (domestic and overseas credit, on- and off-balance sheet transactions, securities held, the bank, and its subsidiaries)? Is credit risk on an integrated basis monitored regularly and reported to the management? Does the bank have in place a support system for measuring credit risk? Are credit risks inherent in new products and services recognized and examined by senior management beforehand? Does the bank study methods and try to establish a system for the quantitative measurement of credit risk?
b.Setting of credit limits and avoidance of credit concentration	Are credit limits set, and are these limits strictly monitored to avoid extension of excessive credit to a specific counterparty?	Is consideration given to the balance of loan portfolio by type of industry? Does the bank avoid credit concentration by setting credit limits against a specific counterparty and company group concerned? Are credit limits set against credit risk exposures, including those arising from derivatives and securities transactions, commensurate with the bank's financial strength? Are methods and models for measuring credit risk reviewed regularly?
c.Sophistication management methods	Has the bank introduced and made use of a system which grades credits objectively and regularly reviews the grading ("loan grading and review system")?	Is there an objective standard for corporate rating based on quantitative and qualitative factors? Are ratings reviewed regularly? Does the bank set credit limits taking account of corporate ratings? Is the number of bad loans on the part of highly rated clients nil or few? Are interest rates on loans set taking account of the loan grading? Are objective loan gradings used in credit approval and follow-up monitoring?
d. Reporting system	Does the bank have in place a system for accurately reporting results to the management based on a well-defined review policy?	Based on a well-defined review policy, is concentration of credit to a specific counterparty (e.g., industry and issuer) regularly (e.g., quarterly) reported to the board of directors? Are credit risk profile and credit limit usage reported to the board of directors when necessary?

4. Loan discipline

Check points		Specific sample questions
a. Authority of local credit officers	Does the head office assign the authority to approve credit to local credit officers appropriately?	Is the authority for credit approval assigned to local credit officers appropriately in line with management policy and business operations? Has the bank adopted a second checking system whereby the head office examines the loans approved by local credit officers?
b.Credit administration by the head office	Does the credit department of headquarters carry out its screening functions fully and adequately check and monitor branches?	Do the credit officers instruct branches to conduct additional research and supplement loan criteria when necessary? Do the board of executive directors and credit review committee function effectively?
c.Follow-up of lending conditions	Are the terms and conditions stipulated at the time of loan approval observed?	Does the bank rigorously manage loan terms and conditions by checking the books? Do internal audits check whether terms and conditions are being observed? Does the bank have in place a system to prevent loans not fulfilling conditions from being extended?
d. Violation of loan discipline	Are there any violations of the internal credit administration systems?	Are there any cases of the ex post facto approval of loans, violation of credit approval authority, and related irregularities? Does the bank strictly manage repayment dates, and what is the incidence of delayed processing?
e. Manuals	Does the bank use manuals with checkpoints for credit evaluation to ensure that uniform credit approval criteria are employed throughout the bank?	Has the bank compiled manuals for credit evaluation and approval? Are the manuals adequately reviewed and revised?

5. Staff training and education

Check points		Specific sample questions
a. Training and education for upgrading the level of credit officers	Does the bank seek to upgrade the level of credit officers throughout the organization, including both domestic and overseas branches?	Does the bank seek to enhance the level of credit officers through experience with daily business operations? Are training programs for lending operations conducted regularly for each staff level (e.g., lending staff and loan officers)? Has the bank introduced trainee programs such as the exchange of trainees between credit administration and business promotion departments? Does the bank have in place a sufficient training program for local staff at overseas branches?

B. Domestic Credit Administration

1. Credit approval

Check points		Specific sample questions
a. Credit analysis of firms and business proprietors	Does the bank sufficiently assess the borrower's credit standing?	Does the bank check the soundness of accounting policy and credibility of the financial statements of borrowers? Does the bank analyze the financial condition of borrowers based on their financial statements and monitor their cash flow by means of cash flow charts? Does the bank have a clear understanding of borrowers' business skills and health? Does the bank gather information on a borrower's credibility? Does the bank utilize the results of industrial and business analysis by the research department?

2. Usage of funds

Check points		Specific sample questions
a. Screening of business prospects and usage of funds, and examination of debt-servicing capacity	Does the bank thoroughly examine business prospects, usage of borrowed funds, and debt-servicing capacity of the borrower?	Does the bank examine the rationality of a borrower's business project? Does the bank check a borrower's usage of funds? Does the bank have a good understanding of a borrower's source of repayment? Factors used to analyze a borrower's sources of repayment for: (1) a revolving loan -- business prospects and debt-servicing capacity (2) a term loan -- the amount of revenue that can be appropriated for repayment purposes compared with funds borrowed Are there clear rules for setting credit limits, and are they strictly observed? With respect to discounted commercial bills, does the bank thoroughly analyze components by such methods as checking the balance between sales and outstanding amount of discounts and examining the business relationship between payer and payee? Does the bank analyze cash flow to examine debt-servicing capacity backed by revenue?

3. Follow-up

Check points		Specific sample questions
a. Regular monitoring of borrower's business performance	Does the bank monitor the borrower's business performance regularly after loan extension through financial analysis?	Does the bank conduct financial analysis for each settlement period? Does the bank monitor changes in clients' financial condition by compiling and collecting balance-sheet estimates and monthly/quarterly profit/loss reports? Does the bank confirm the usage of borrowed funds through financial analysis?
b. Monitoring of large exposures	Does the bank have in place a system for monitoring large exposures?	Does the bank emphasize monitoring large exposures? Does the bank clarify credit policy regarding large exposures after receiving the board of directors' approval? Is the bank capable of evaluating credit risk including off-balance sheet transactions when necessary?
c. Monitoring of company groups	Does the bank have a solid understanding of the actual flow of funds between company groups?	Does the bank control credit risk exposure of company groups on a consolidated basis? Does the bank understand the business performance of the entire company group and flow of funds among group companies? Does the bank understand the group's financial condition on a consolidated basis?

4. System support

Check points		Specific sample questions
a. Financial analysis system	Does the bank have and use an effective system for credit approval and follow-up?	Has the bank introduced and utilized a well-functioning financial analysis system for corporations? Does the bank regularly record the latest complete data required for and follow-up? Has the bank adopted and utilized a loan approval system?
b. Information- gathering for credit management of consumer loans	Does the bank systematically accumulate information on customers' credit standing?	Does the bank obtain information from credit guaranty companies? Does the bank make inquiries about the credit standing of individual customers to consumer credit information centers? Does the bank have an automatic calling system to request customer payments, and does it utilize it effectively? Has the bank established its own information system on individual customers?

5. Management of substandard borrowers

Check points		Specific sample questions
a. Administration system for substandard borrowers	Does the bank have in place a framework that emphasizes the administration of credit to substandard borrowers?	Does the bank distinguish loans to substandard borrowers from those to sound borrowers and manage them separately? Does the bank have a clear policy regarding the collection and disposal of problem loans, and are such loans administered by the head office and branches with sufficient cooperation? Is a list of delinquent borrowers regularly distributed to all branches? When it is not the major relationship bank for a particular loan, does the bank pay close attention to the major relationship bank and other banks involved? Does the bank monitor the monthly business performance and moment-to-moment flow of funds of substandard borrowers?
b. Business guidance to delinquent borrowers	Does the bank possess restructuring plans for delinquent borrowers, and does it provide specific guidance to these borrowers?	Does the bank regularly interview substandard borrowers' management regarding their actual business performance and provide appropriate guidance? Does the bank assign officers in charge and support restructuring of substandard borrowers? Does the bank instruct substandard borrowers to draw up a restructuring plan and check its feasibility?

6. Collateral and guarantee

Check points			Specific sample questions
a. Maintenance and appraisal of collateral	Is due consideration given to securing sufficient collateral?	(1) General	Are the rules on the maintenance of collateral (e.g., reappraisal) appropriate? Does the bank aim to expand and strengthen its system support? Does the bank flexibly strengthen its maintenance of collateral in line with changes in a borrower's business performance?
		(2) Real estate	Does the bank frequently carry out on-site surveys? Does the bank regularly reappraise real estate pledged as collateral? Does the bank constantly monitor collateral value against credit outstanding? Does the bank check whether buildings are insured against fire? Does the bank reappraise real estate pledged as collateral when necessary?
		(3) Securities	Does the bank regularly (e.g., monthly) review the appraisal value of securities held as collateral? Does the bank review securities held as collateral when necessary?
b. Confirmation of guarantor's ability and intention to warrant loans	Are the guarantor's ability and intention to warrant loans confirmed?		Does the bank confirm the guarantor's intention to guarantee loans and the third party's intention to provide collateral with a signed document? Is the bank fully aware of a guarantor's property, annual income, and health condition, and does the bank regularly review such information?

C. Overseas Credit Administration

1. Credit approval

Check points		Specific sample questions
a. Credit analysis	Does the bank sufficiently assess a borrower's credit standing?	Does the bank utilize the credit ratings of rating companies? Does the bank analyze a borrower's financial condition from its balance sheet, profit/loss statement, and cash flow statement? Does the bank adequately assess the financial condition of the client's parent company and subsidiaries? Is there close cooperation among related organs such as between the head office and branches? Does the bank have in place a financial statement database to enable the quantitative assessment of a borrower's credit standing?
b. Screening of business prospects and usage of funds, and examination of debt-servicing capacity	Does the bank thoroughly examine business prospects, usage of borrowed funds, and debt-servicing capacity of the borrower? In the case of Japanese subsidiaries, does the bank examine not only the parent company's financial condition and ability to warrant loans, but also the business performance of the subsidiary itself?	Does the bank examine the rationality of business projects and correct use of funds? Does the bank examine a borrower's repayment sources and cash flow? Does the bank examine the business performance of Japanese subsidiaries itself? Does the bank maintain close contact with relevant departments (e.g., those carrying out research on business conditions or particular industries) when examining overseas projects of Japanese subsidiaries?
c. Appropriate covenants	Does the contract include appropriate clauses defining disclosure requirements, restrictive financial covenants, and components constituting default?	Does the contract contain disclosure requirements concerning loan qualifications and financial position and also various restrictive financial covenants and components constituting defaults? Does the bank obtain legal advice from its attorney regarding the full-text contract?

2. Follow-up

Check points		Specific sample questions
a. Regular monitoring of borrower's business performance	Does the bank monitor the borrower's business performance regularly after loan extension, and take appropriate measures based on this monitoring?	Does the bank effect financial analysis for each settlement period? Does the bank review credit limits for each settlement period and promptly when required? Does the bank increase the frequency of monitoring business performance according to the seriousness of problem loans? Does the bank flexibly review interest rates on loans and ensure collateral is maintained in line with changes in a borrower's business performance?
b. Management of problem loans	Does the bank have in place a system for managing problem loans? Does the bank implement adequate loan management according to local legislation and guidance by the local authorities?	Does the bank distinguish problem loans from other loans, and manage them more strictly? As for problem loans, is the frequency of monitoring a borrower's business performance set according to corporate rating and loan grading? Is there close cooperation between the head office and branches in the management of problem loans? Does the bank conduct adequate credit administration pursuant to the host country's legislation and guidance by the host-country supervisory authorities, and take appropriate countermeasures against problem loans (e.g., sufficient loan-loss provisioning)? Does the bank actively make efforts within the terms and conditions of the contract to resolve problems and not leave them to the major relationship banks or agent and manager banks?
c. Loan participation	Does the original creditor of the loan participation continue to manage loans appropriately and provide sufficient information to participants regarding the loan? Do the participants manage the loan adequately as the substantial creditors?	Do the participants clearly understand risk profiles? Do the participants request the original creditor of the loan participation to provide information within the terms and conditions of the contract? Does the bank, as original creditor, appropriately disclose information regarding the loan to participants according to the agreement? Does the bank, as original creditor, manage loans adequately as creditor in name, and is there any problem with loan participants? Do the participants have in place a wide-ranging information network to enable independent credit administration?
d. Loan commitments	Does the bank ensure that credit lines are observed through regular monitoring of the amount of commitments drawn down while adequately assessing the amount yet to be drawn, taking account of liquidity?	Does the bank regularly monitor the amount of commitments drawn down and the amount yet to be drawn down by type of commitment? Are amounts drawn and the balance yet to be drawn down upon reported to the fund management department on a regular basis (e.g., monthly)? Is the bank able to monitor loan commitments and on-balance sheet credit at all times on a consolidated basis by counterparty? Does the bank set credit limits by counterparty on a consolidated basis for on- and off-balance sheet credit? Does the bank set credit limits taking into consideration its own fund-raising capability and draw-down probability by counterparty?

3. Collateral and guarantee

Check points		Specific sample questions
a. Maintenance and appraisal of collateral	Is due consideration given to securing sufficient collateral?	Are the rules regarding collateral maintenance appropriate? Does the bank conduct on-site surveys of collateral as much as possible? Does the bank reappraise collateral regularly or as occasion calls? Does the bank constantly monitor collateral value against credit outstanding? Does the bank flexibly strengthen its maintenance of collateral in line with changes in a borrower's business performance?
b. Confirmation of guarantor's ability and intention to warrant loans	Are the guarantor's ability and intention to warrant loans confirmed?	Does the bank confirm a guarantor's intention to guarantee loans and the third party's intention to provide collateral with a signed document? Is the guarantor's ability to guarantee a loan confirmed regularly using financial statements?

4. Country risk

Check points		Specific sample questions
a. Information -gathering and analysis	Does the bank gather information concerning the situation in each country and analyze the information to facilitate credit risk management?	Does the bank gather information concerning the political and economic situation in each country from external sources? Does the bank's research department conduct its own research? Do the bank staff carry out on-site surveys to reinforce the information base?
b. Country rating	Does the bank have in place uniform criteria for evaluating country risk, and does it review them periodically?	Does the bank utilize country ratings and information from external sources? Does the bank regularly (e.g., semiannually) review country ratings? Does the bank set its own country ratings while referring to the ratings and information from external sources? Are the criteria for country ratings clear and objective? Is the bank able to flexibly review ratings in the event of an emergency such as a default?
c. Credit limits by country	Has the bank set appropriate credit limits by country based on country ratings? Are the limits observed?	Has the bank set credit limits by country? Are credit limits set not as the confirmation of outstanding loan amounts but as a clear and objectively based rule? Does the bank regularly (e.g., semiannually) review credit limits? Are off-balance sheet transactions, guarantees, and securities subject to credit limits by country? Are measures to deal with sudden amounts in excess of limits, resulting from the lowering of credit limits, clearly stipulated?