Since the 2008 financial crisis, financial institutions have been compelled to adopt more comprehensive and sophisticated risk management systems. This risk management function has also grown in importance for MUFG as a global bank with subsidiaries spanning the commercial, trust and investment banking sectors.
MUFG aims to strengthen its Group risk management through the diffusion of a risk culture that strengthens the structure of Group business management as well as integrated risk management. Our goal is effective risk governance that is consistent across regions, subsidiaries and the holding company.
Furthermore, the Risk Appetite Framework provides guidelines for effective risk management that backs our business strategy and financial plan while supporting efforts to avoid unexpected losses and enhance risk return management.
Risk Appetite Framework
The Risk Appetite Framework aims to clarify MUFG's risk appetite (types and amount of risk that it is willing to accept) as it works to achieve its business strategy and financial plan. The framework is designed to increase management transparency and generate more profit opportunities in an environment where risk is properly controlled.
Risk Appetite Framework Management Process
In the formulation and execution of its business strategy and financial plan, MUFG will set the appropriate level of risk appetite and proceed to monitor and analyze risk volume.
The process of setting and managing risk appetite is set out below. In order to effectively implement the Risk Appetite Framework, risk evaluation and verification procedures (capital allocation system, stress tests, Top Risk management) will be applied at every stage of the management planning process.
Furthermore, even after the plan is formulated, we are ready to take immediate actions in emergency situations through monitoring of the set risk appetite.
Enterprise Risk Management
MUFG makes every effort to recognize the risk that emerges in the course of business execution, assessing them according to uniform criteria.
Enterprise risk management is then conducted while maintaining business stability and striving to maximize shareholder value. Enterprise risk management is a dynamic approach, promoting stable profits commensurate with risk as well as the appropriate allocation of resources.
Enterprise risk management is composed of three main strands: the capital allocation system, stress tests and Top Risk management.
Capital Allocation System
In this framework, latent losses associated with risk are converted to a required capital amount, and capital is then allocated across group companies and between different risk categories according to business strategy and the profit plan. The framework is intended to allow the appropriate distribution of capital throughout the Group as MUFG monitors to preserve financial soundness, evaluate capital adequacy versus risk and judge impact on overall capital strategy.
Stress tests for capital adequacy assessment
In formulating its business strategy, MUFG regularly assesses its internal capital adequacy through stress tests based on two perspectives: regulatory capital, based on capital adequacy regulations (Basel III), and its own economic capital, based on internal risk assessment.
Stress tests analyze both the internal and external environment, and use three-year-period preventative scenarios.
Liquidity stress test
In liquidity stress tests, the impact of MUFG-specific or overall market stress on the balance sheet is assessed so as to implement MUFG's business strategy and financial plan. Various options are examined to respond to short-term fund outflows or long-term structural changes in the balance sheet with a view to ensuring there is no funding shortage.
Top Risk Management
The potential losses that emerge from scenario analysis are classified as risks and then their relative importance is weighed according to degree of impact and probability. The risks that need to be watched most closely over the next year are classified as Top Risks and a risk map is created, thereby ensuring a forward-looking approach to risk management.
At MUFG and its core subsidiaries, management is regularly engaged in discussions aimed at addressing Top Risks to ensure that the understanding of these risks is shared throughout their organizations. By doing so, management is implementing effective countermeasures against Top Risks. (Major Top Risks identified by MUFG are as listed below.)
Major Top Risks
|Risk incidents*1||Risk scenarios|
|A decline in profitability
(including a decline in profitability of net interest income)
|Foreign currency liquidity risk||
|An increase in credit costs||
|Risk associated with money
laundering and economic sanctions
* Note: The aforementioned risk scenarios are examples of scenarios reported to MUFG’s Board of Directors after being discussed at a Risk Committee meeting held in March 2018. These scenarios include types of incidents that are not necessarily specific to MUFG and can happen to business corporations in general.
Enhancing the Effectiveness of RiskManagement
Effective risk management and a strong Risk Appetite Framework depend on a Risk Culture that enables meaningful discussion and clear communication throughout the Group.
Developing and Diffusing a Risk Culture
MUFG defines a Risk Culture as the basic approach that specifies how to take risks and risk management for MUFG's organizational and individual behaviors. MUFG thus formulated its Risk Culture in the Risk Appetite Statement while maintaining its consistency with MUFG Group Code of Conduct. In order to share this Risk Culture throughout the Group, management issues regular strategic messages and holds regular meetings globally.
Risk Appetite Statement
The Risk Appetite Statement elucidates the Risk Appetite Framework which embodies MUFG's attempts to achieve an integrated group strategy along with effective risk management. The Risk Appetite Statement contains an overview of the Risk Appetite Framework (basic policy and management process) as well as specific business strategies, financial plans and risk appetite details.
A summary of the Risk Appetite Statement is distributed throughout the Group in an effort to spread the basic philosophy behind the Risk Appetite Framework.
Through the penetration of risk culture and risk appetite framework, we will take actions in anticipation of environmental changes both inside and outside of the Group, while the environment continues to be uncertain.