Risk Management | AOZORA BANK

Basic Policy

Aozora positions risk management as the foundation supporting our value creation process and is aware of its extreme importance. Through efficient management and utilization of managerial resources and sound risk-taking, we will realize Aozora’s management philosophy to “contribute to the development of society through the creation of new value-added services” with a basic policy of sustainable and stable accumulation of earnings, capital adequacy, and corporate growth.

Under the basic policy, we are working to enhance our risk management through the establishment of a system to appropriately ascertain and control risks individually and in the aggregate, and through appropriate and disciplined management based on regulations stipulated for each risk category.

Management Structure

Aozora’s risk management structure is organized into two major groups. The first is the Board of Directors and the Audit and Compliance Committee which is comprised of outside directors. The second major group is the Management Committee, which is comprised of Aozora’s executive officers, and sub-committees to which it delegates authority. In the course of business, the Management Committee and sub-committees analyze and take into consideration a range of risks arising from the origination of loans and investments, the delivery of services to customers, and business operations from a broad perspective. In addition, monitoring and reporting on the status of risks are conducted regularly or as needed by each risk management department to the Management Committee and subcommittees, which leads to our flexible and timely responses. The status of risks is also regularly reported to the Board of Directors and the Audit and Compliance Committee, and the appropriateness and effectiveness of risk management are discussed to ensure the effectiveness of risk governance.

Risk Management Structure

Key Risks

Aozora recognizes the following items as its key risks among the many risk factors posed by the environment in our business operations in FY2024. We discuss our risk appetite and business planning based on key risks, and also strive for a higher level of risk management.

Key Risks / Summary of Risk Details	Countermeasures
Increase in credit costs Deterioration in economic environment due to market fluctuations Change in market environment due to heightened geopolitical risk Decline in corporate value due to climate change response, etc.	Comply with loan management and investment policies, carefully analyze borrowers’ business risks, pay attention to portfolio diversification, and selectively incorporate quality projects. Closely monitor real estate market conditions in target regions for overseas real estate non-recourse loans and move forward on maximizing collection of U.S. office workout loans. Develop guidelines to avoid credit concentration risk and conduct capital control including stress tests. Strive for timely analysis of the status of business partners and transactions, ascertain signs, and conduct proactive credit management. Support customers’ sustainable finance initiatives through Aozora’s ESG Support Framework and promote consulting on decarbonization. Provide transition finance to customers in industries with high CO₂ emissions.
Deterioration in unrealized gains/losses on securities portfolio Financial market volatility caused by financial institutions or other factors Deteriorated economic environment due to market fluctuations Changed market environment due to heightened geopolitical risk	Build an efficient and highly liquid portfolio diversified by interest rate, equity, and credit risk, and implement flexible risk control by taking into consideration market trends and the broader financial environment. Develop a framework that allows for an early and appropriate response by establishing various points to check regarding risk levels and losses. Strengthen management of periodic earnings, including hedging positions when developing plans.
Instability of funding Changes in market environment due to heightened geopolitical risk Deterioration of funding environment due to market fluctuations Risk of worsened cash flow caused by financial market volatility due to financial institutions or other factors Risk of cash flow deterioration caused by deterioration of Aozora’s reputation and spread through social media	Set target amounts and limit amounts for liquidity buffers based on estimated survival periods and current funding conditions, confirm credit lines regularly, monitor and verify through stress tests, and check daily on the market environment and other matters related to funding. Through these measures, we will build a framework that can read the signs of instability in foreign currency funding and respond to them. Diversify countermeasures such as setting up foreign currency funding facilities that can be used in emergencies.
Outbreak of crises such as cyberattacks and system failures Adverse impact on Aozora’s operations due to cyberattacks, etc. Deterioration in the Aozora Group’s corporate value due to suspension of operations or malicious use of information, etc.	Enhance knowledge related to cyberattacks among all officers and employees, evolve technological countermeasures, strengthen detection capabilities, and implement recovery drills, including for business groups. Share information about system changes with business groups, and conduct response training in the event of system failure, including business groups. Enhance the framework to ensure operational resilience.
Outbreak of large-scale disasters and other crises Adverse impact on operations due to disasters, terrorism, etc. Impact on the maintenance of social functions due to the suspension of operations and a decline in the Aozora Group’s corporate value	Develop a crisis management structure and business continuity plans (BCP) in preparation for potential disasters. Strengthen crisis response and ensure effectiveness by conducting regular drills and education for officers and employees. Enhance the framework to ensure operational resilience.
Reduced competitiveness due to changes in the social structure or industrial structure Lost growth opportunities or appearance of new risks due to delayed response to irreversible climate changes Advances in digital technologies and intensified competition from other industries Damage to corporate value due to lower ESG evaluation Damage to corporate value due to multiple factors	Develop human resources (DX human resources) capable of utilizing data and information in business workplaces to promote DX within Aozora and for customers. Support customers’ DX acceleration through initiatives such as GMO Aozora Net Bank’s Bank APIs and BaaS byGMO Aozora. Promote sustainability-related initiatives in business and as a business entity throughout the entire Aozora Group. Promote measures to become carbon neutral as a business entity by 2030. Consider expanding the scope of measurement and disclosure of GHG emissions and setting interim targets based on the PCAF Standard toward carbon neutrality of the investment and loan portfolio in 2050. Build a framework for a human rights due diligence structure based on international norms.
Inadequate response to financial crimes, occurrence of internal fraud and information leaks Inadequate framework to prevent and take measures against financial crimes Damage to corporate value due to factors such as criminal punishments or administrative penalties	As part of the annual compliance program, disseminate laws, regulations, and internal rules, and set plans and check on progress of monitoring, training programs, and other activities. Work to further instill and entrench the Code of Ethics and Conduct by obtaining written pledges from all employees, conducting training and continued delivery of top management messages and other matters. Develop a customer management system to prevent money laundering, etc., and ensure the ongoing effectiveness of our response to the targets of economic sanctions as well as promote the further enhancement of the system based on anti-money laundering guidelines, foreign exchange guidelines, etc. Continue to promote awareness of insider trading prevention and information management among officers and employees through training and other methods.
Sustainability of human resources Securing human resources necessary for the Bank’s business growth and continued operations	Conduct ongoing investment in human capital for the redeployment of human resources to focus areas such as strategically transferring personnel and reviewing compensation packages, continuing to appoint human resources by strengthening external recruitment activities and diversity, and encouraging employees’ to take greater ownership of their career development. Identify the extent of satisfaction through the Employee Satisfaction Survey and Employee Engagement Survey to improve employee job satisfaction, and review the HR system and plan, propose, and implement new measures based on the survey results.