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Publication of Sound Practices Papers to Promote Risk Management by Financial Institutions

July 28, 2005
Bank of Japan

With the lifting of blanket deposit insurance in FY 2005, financial institutions are expected to develop further creative business services that meet the needs of customers. At the same time, they must manage appropriately the various risks they face. In order to assist financial institutions in accomplishing these dual goals, the Bank of Japan is releasing three papers that address methods of risk management at financial institutions. The papers below are being released as a series entitled, "Advancing Risk Management by Financial Institutions." (The English translations will be released August - September, 2005.)

  • This paper was released on September 6, 2005.
  • This paper was released on September 16, 2005.
  • This paper was released on September 22, 2005.

These papers seek to advance the ability of financial institutions to understand and manage risk, which is connected to overall functional improvement in the Japanese financial system. For these improvements to occur, it is first necessary for financial institutions to have a correct understanding of the economic value of all the assets they possess and transactions they engage in. In addition, while financial institutions should continue making advancements in their management of individual risk categories (e.g. credit risk, market risk, and operational risk), it is also desirable that financial institutions establish a framework that manages these risks in a unified fashion -- i.e. an integrated risk management system. If an integrated risk management system can be put in place, financial institutions will become better able to make objective judgments about risk and return, which should lead to more rational business development and efficient use of capital.

The first paper in this series addresses methods of managing credit risk, which continues to be the largest risk category faced by most Japanese financial institutions. Paper No.2 focuses on methods of managing operational risk, which is also a focal point under the new Basel II capital allocation requirements. Paper No.3 provides an overview of integrated risk management, based on the information provided in the first two papers.

Clearly, the risk management methodology of financial institutions is constantly evolving, in line with the continued progress in financial theory and techniques. Further, risk profiles vary between financial institutions, indicating that the most effective method of risk management also may differ between institutions. Therefore, it is important to note that the thinking in this paper series regarding risk management is only a snapshot of the current conventional wisdom.

With this caveat in mind, we will be happy if this paper series is of some assistance to financial institutions in improving their risk management.

For further information, please contact:
Risk Assessment Section
Financial Systems and Bank Examination Department

(In general) Mr. Oyama +81-3-3277-3078 tsuyoshi.ooyama@boj.or.jp

(No.1) Mr. Yoneyama +81-3-3277-2039 masao.yoneyama@boj.or.jp

(No.2) Mr. Arai +81-3-3277-2005 takashi.arai@boj.or.jp

(No.3) Mr. Obata +81-3-3277-2514 nobuyasu.obata@boj.or.jp