Risk Management

General Principles for Risk Management

SMFL recognizes the importance of risk management and identifies the locations and types of risks to be managed according to our strategic objectives and business activities. In accordance with the following general principles, SMFL conducts appropriate management according to the characteristics of each risk.

Group-level management
Various risks are managed at the SMFL Group level to avoid infringement of laws, regulations and other rules in accordance with the nature and importance of the business.
Management based on quantification
SMFL identifies the range of risks to be managed and quantitatively manages them according to the characteristics of the risks.
Ensuring consistency with business strategy
Risk management shall be consistent with business strategy.
System of checks
The risk management system shall be designed to check operations.
Response in case of emergency or serious situation
If risk materializes, SMFL takes necessary measures based on the assumption of situations and scenarios that have a significant impact on management and financial conditions.
Verification of the risk management system
The internal audit division examines our risk management system.

Three Lines Model

We are working to strengthen our risk management based on the three lines model concept, which is a framework for risk governance.

Main Departments Roles and Responsibilities
First Line
Business departments, etc.

As the risk owner for the business under his/her jurisdiction, he/she will assume the following roles and responsibilities in accordance with the basic policies established by the risk management departments (second line).

  • Identify risk, conduct assessments
  • Implement measures to reduce/manage risks
  • Monitor risk conditions and report to the first and second lines
  • Cultivate/instill a healthy risk culture
Second Line
Risk management departments

To improve the risk management system within SMFL, the following roles and responsibilities will be assumed:

  • Drafting/formulation of risk management-related basic principles, frameworks, policies, etc.
  • Monitoring, checks and balances, and training for the first line are conducted to ensure that the first line identifies and assesses risks and takes appropriate measures to mitigate and manage risks.
Third Line
Internal Audit Department

From a position independent of the first and second lines, this department evaluates and verifies whether first and second line activities are being carried out effectively and appropriately. The results of these investigations will be reported to the Board of Directors and Management Committee, etc., and recommendations for improvements made for any issues or problems uncovered, as well as advice given to relevant departments as necessary.

Risk Management System

Organizational chart of SMFL's risk management structure. Top level: Board of Directors, followed by Management Committee. Below, Internal Audit Department and Committees (Risk Management Committee, Investment & Financing Committee, ALM Committee, etc.). Central block: Risk management departments (Risk Management Department, Compliance and General Affairs Department, ICT Planning Department, etc.). Bottom level: Corporate Staff and Each Business Unit.

Risk Management Methods

Risk capital management

In order to balance risks and returns while controlling risks within the limit of business vitality without placing undue emphasis on specific risks, we ascertain the amount of risk as much as possible, and set an upper limit on the size of acceptable risks as the "Total Risk Capital Limit."

SMFL's risk capital management

Diagram showing allocation of risk capital across SMFL businesses. Top row: Domestic leasing business, Real estate business, Transportation business, Overseas business/Environmental and energy business and other, each labeled 'Allocated capital.' Below: Total Risk Capital Limit (size of acceptable risks across all businesses) with arrows pointing upward. Bottom: Consolidated net assets (business vitality/allocated resources) and a buffer on the right.

Risk Capital

We define "risk capital" as the approximate maximum loss exposure on owned assets, which is covered by capital.

Graph illustrating risk capital and expected loss using a bell curve. Horizontal axis shows amount of loss, vertical axis shows frequency of occurrence. The shaded area under the curve is divided into two sections: left side labeled 'Risk capital: Loss exposure for low-frequency events, covered by capital,' and right side labeled 'Average loss expected (i.e., loss provision), covered by earnings.'

Risk Appetite Framework

SMFL has adopted the Risk Appetite Framework as our management structure in order to clarify the types and amounts of risk associated with earnings growth and to disseminate them throughout SMFL.

The Risk Appetite Framework is broadly divided into two components: Risk Appetite Statement and Risk Appetite Indicators (see the diagram on the right).

Using these documents and indicators, SMFL conducts Company-wide reviews of the risks and reflects them in our management strategy to promote appropriate risk-taking and to aim for business operations that balance soundness, profitability, and growth potential.

Structure of Risk Appetite Framework

Flowchart of SMFL's Risk Appetite Framework. Left box: Environment/risk recognition with sub-items Economic environment, Customer/market, Laws and regulations, Business issues. Center box: Risk Appetite Framework containing Risk Appetite Statement (documents showing approaches to risk-taking and risk management) and Risk Appetite Indicators (quantitative indicators of risk and risk-return levels). Arrows connect to Business plans at the top and Dialogue with external stakeholders (including shareholders) at the bottom. Caption: Two cornerstones of business management.

Stress Tests

SMFL is developing and enhancing stress testing methods to proactively verify the impact of unforeseen events such as a large-scale deterioration in economic conditions or a worsening of the market conditions in a specific industrial sector on our credit portfolio and financial position including shareholders' equity, as well as cash flows. Stress tests enable us to maintain the soundness of our business even under stressed conditions, thereby allowing us to establish a system that ensures appropriate risk control under normal circumstances.

Risk Register

In anticipation of venturing into new business fields and coping with rapid shifts in the business environment, we conduct risk identification by means of a Risk Register designed to enhance risk governance and risk ownership. Business units communicate with risk management departments to identify potential business risks. SMFL has established a system whereby each business department identifies the risks inherent in its operations through communication with the risk management department, fully evaluates them and verifies the appropriateness of control measures before promoting operations that reflect them in its business strategy.