General Concept of Risk Management

Risk Capital Allocation

We endeavor to obtain a clear grasp of the group's overall risk exposure and implement measures to make sure this exposure is within limits that are acceptable and are in accordance with the risk capital allocation framework.

More specifically, we allocate risk capital to our core group companies (including their subsidiaries) to control risk within the limits set for each company. We also control risk within acceptable limits by working to ensure that the overall risk on a consolidated basis does not exceed our financial strength. To ensure the ongoing financial soundness of Mizuho Financial Group and our core group companies we regularly monitor the manner in which risk capital is being used in order to obtain an accurate grasp of the risk profile within this framework. Reports are also submitted to the Board of Directors and other committees of each company. Risk capital is allocated to Mizuho Bank, Mizuho Trust & Banking, Mizuho Securities, and Mizuho Americas by risk category, and is further allocated within their respective business units.

Framework for allocating risk capital

Image: Framework for allocating risk capital

*   Includes the risk exposure of group companies that are managed by core group companies

Top risk management

At Mizuho Financial Group, we specify risks that are recognized to have a major potential impact on the group as "top risks", and have introduced top risk management methods.

We gather wide–ranging information on potential risk events which may harm our corporate value in light of our particular vulnerabilities, the external business environment, and other factors. With this information, we assess risk contagion channels, probabilities, impacts, and similar to identify critical potential risk events. We then designate top risks with consideration to the difficulty of risk control and based on discussions at the executive management level.

Through this approach, we endeavor to deepen communication regarding risks, seek to create common perspectives regarding risks, and work to secure consistency in awareness of various types of risks.

For the top risks that are identified, the status of controls is confirmed, and, when deemed necessary consideration is given to additional risk controls. In addition, the Risk Committee, Board of Directors, and other bodies receive reports on these top risks, allowing for multifaceted confirmation from external experts and outside directors regarding the appropriateness of the designation of top risks, status of controls, and other considerations.

As of March 2021, the items on page 86 have been designated as top risks.

Top risks Primary risk control measures
Risk event Risk scenario
Prolonged impact of COVID–19
  • Increased credit costs due to prolonged impact of COVID–19 on corporate earnings, affected by a delayed end to the pandemic resulting from the spread of variants and other factors, as well as rapid social change.
  • Deterioration of markets–related earnings due to interest rate hikes, increased volatility, and other factors resulting from fiscal uncertainty. Instability in foreign currency funding and expansion of the loan–to-deposit ratio due to increased demand for foreign currency financing.
  • Credit risk management: Specify and revise areas of our portfolio which should be subject to stronger management in light of the impacts on our clients' business environment and other factors, then record additional reserves or take other steps as needed.
  • Market risk management: Monitor the amount of risk and losses based on the market environment, including interest rate hikes and declines in stock prices, and promote hedging strategies for asset holdings.
  • Foreign currency liquidity risk management: Expand monitoring indicators and increase monitoring frequency.
  • Predictive management based on monitoring changes in the external environment and other information.
Intensification of US–China friction
  • Increase in credit costs due to factors including the conflation of friction in areas such as technological competition, national security, and human rights, supply chain disruption, and tensions in regard to conditions in East Asia, particularly Taiwan. Turmoil in financial markets resulting in deterioration of markets–related earnings. 
Inflation concerns and interest rate hikes in the US
  • Deterioration of markets–related earnings due to the manifestation of inflation concerns resulting from improved employment rates and other factors and a sudden rise in long–term US interest rates based on an outlook for an early return to normal for monetary policy measures.
  • Business stagnation resulting from cash flow issues at clients with low credit ratings in the Americas region and the repercussions to emerging economies.
Rapid advancement of social change occurring due to climate change
  • Increased credit costs and loss in value of cross–shareholdings arising from deteriorating performance and difficulty in securing financing at clients with a delayed response to the sudden increase in momentum toward climate change action.
  • Damage to our own corporate value due to a delay in the Mizuho group's response to climate change or similar factors.
  • Strengthen our response to transition risk via stronger engagement, enhanced risk control for carbon–related sectors, and other efforts.
  • Revise our Environmental Policy in order to clarify our transformation to a portfolio aligned with the targets in the Paris Agreement and other efforts.
  • Set a target for reducing the Mizuho group’s greenhouse gas (GHG) emissions.
  • Predictive management based on monitoring changes in the external environment and other information.
IT system failure/Cyber attacks
  • Large–scale data breach due to a major IT system failure or cyber attack causing wide–spread inconvenience or disadvantage to customers and damaging trust, leading to the loss of business opportunities.
  • Formulate and implement measures to prevent further incidents following a recent series of IT system failures (revise system failure management and prepare a system contingency plan (SCP)).
  • Strengthen management in response to expanded use of cloud services and the remote access environment.
Money laundering/Financing of terrorism
  • Economic losses stemming from government fines/penalties as a result of insufficient AML/CFT measures. Loss of business opportunities due to reduced industry standing on a global basis and damage to customer trust.
  • Continue to enhance anti–money laundering measures and other efforts in line with laws/regulations and guidelines from Japan's Financial Services Agency.
  • Ascertain/analyze trends in economic sanctions and formulate measures for potential risks.
Inappropriate behavior or nonfeasance by employees/executive officers
  • Damage to customer trust and loss of business opportunities stemming from public disapproval of inappropriate behavior or nonfeasance deemed to be out of line with social norms.
  • Analyze the cause of the incident and formulate improvement measures.
  • Enhance predictive management in order to reduce instances of misconduct* in line with KRI or other goals.
Rapid development of digital society
  • Stagnation in Mizuho's digitalization strategy due to factors including the rapid expansion of revolutionary financial services, the rise of new economic landscapes, and the resulting intensification of competition as companies from other industries enter the field of finance.
  • Predictive management based on monitoring policy trends relevant to our digitalization strategy and initiatives at other companies.

* A violation of laws, regulations, or rules; or an action or misfeasance in conflict with the social responsibility or public duty expected of the Mizuho group.

Note: The risks described here are only some of the possible risks we are aware of. For more comprehensive information on the group's risks, please refer to our
Form 20–F and other related documents.

Stress testing

We assess the suitability of our risk appetite and the validity of our business plans through stress testing, calculating and assessing the financial effect on our capital adequacy ratio and on our business.

We carry out stress testing based on scenarios formulated taking into account current economic conditions and future outlooks, vulnerabilities in the Mizuho group's business and finance structures, and other factors. We can confirm whether our capital adequacy ratio, performance, and other indicators are sufficient in the case that stress events actually materialize. If such indicators fall below the necessary level, we reconsider and revise our risk appetite and business plans. In addition, we confirm the balance between owned capital and risk capital, including interest rate risk in the banking book, at the post–stress stage to assess the adequacy of the capital level.

Furthermore, to structure robust risk management systems, stress testing is also used to manage risk in various risk categories, such as market risk.

This process also serves as a foundation for understanding the characteristics of our business portfolio and enables planning in advance regarding the course of action which should be taken if a stress event occurs, and is conducted regularly to enhance our risk management capabilities.

 

Mizuho's stress testing

1. Preparing scenarios
 
  • Current economic conditions and future outlook
  • Vulnerabilities of the group's business and financial structure
     

Preparation of scenarios common across the group

2. Calculation of risk impact
 
  • Calculation of the impact on the group when the risk scenario materializes
  • Main items to calculate: Capital adequacy ratio, losses, VAR, etc.
     
3. Analysis and use of results
 
  • Assessment of the suitability of our risk appetite and our business plans
  • Assessment of capital adequacy

 

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