FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Japan

The Japanese financial system is supervised by:

• The Bank of Japan
• The Japan Financial Services Authority (JFSA)

Depending on the kind of activity performed further reports might be required by:

• The Tokyo Stock Exchange
• The Osaka Securities Exchange
• The Financial Futures Association of Japan (FFAJ)
• The JASDAQ securities exchange

FRSGlobal in Japan

The Japanese financial sector - including its derivative instruments - was not heavily exposed to sub-prime mortgages. This meant that the country weathered the initial effect of the global credit crunch. However, a sharp downturn in business investment and global demand for Japan's exports in late 2008 pushed it further into a recession.

The regulatory requirements for capital adequacy reporting (CAR) in Japan are regulated by the Japan Financial Services Authority (JFSA). The JFSA Capital Adequacy rules are more in line with the standard specified in the old Basel I accord.The capital adequacy requirements for Japanese banks are specified under JFSA rules (“Cabinet Office Ordinance concerning Financial Instruments Business” and “Japan Financial Services Agency Notice No. 59”). In addition, all the firms are required to submit capital adequacy monitoring reports to the JFSA on a daily basis.

Daily monitoring and monthly capital adequacy reports take up almost 70% of the total time required to prepare all regulatory reports required to be submitted by Japanese banks.

In addition to the JFSA’s regulatory demands, the Bank of Japan (BOJ) believes it necessary to encourage financial institutions to further improve their liquidity risk management.The BOJ will now be checking (both in terms of on-site examinations and off-site monitoring) financial institutions' liquidity risk management systems by focusing on the following points:

1. Developing a governance structure in risk management
2. Gauging the liquidity risk profile and balance sheet management
3. Ensuring stability in daily cash management
4. Strengthening resilience in a stress phase
5. Action plan in case of emergency
6. Establishing a global liquidity management system.

The BOJ will check on a regular basis whether the checklist for liquidity risk management is appropriate in light of the current prevailing financial and economic environment as well as financial transaction methods. Also, to further improve the effectiveness of its monitoring, advice, and guidance, the BOJ will strive to improve information collection from and the exchange of views with financial institutions as well as analytical methods of the collected information, while paying due attention to the burden of financial institutions.

Regulatory Environment — Japan

Financial

Balance sheet reporting
This type of reporting is concerned with balance sheet information required by regulators to assess the financial position of businesses. It includes monthly reports on statement of financial position which is required by the Bank of Japan (BOJ) and Japan’s Financial Supervisory Agency (FSA). In addition to the annual reports, a number of other reports are required for example, reporting of loans and commercial paper, money supply statistics, etc.

Profit and loss reporting
Profit and loss includes reporting of interests, dividends and commissions received, and off site monitoring of profit and loss for securities which is required by the Bank of Japan Japan’s Financial Supervisory Agency.

Prudential

Capital Adequacy Reporting
Japan’s capital adequacy requirement is based on the Basel II framework and is required by the FSA to assess compliance and prudential supervision. Capital adequacy reporting is generally centred around risk reporting and is mainly concerned with credit risk, market risk and operational risk. It includes reports on calculation of capital requirements using standard and advanced approaches for various risk categories, capital adequacy assessment process, etc. In addition it also includes quarterly reports on securitization and repricing analysis (assessing interest rate risk) denominated in domestic currency and foreign currency.

Transactional

Business summary of foreign bank branch reporting
Every bank with branches outside Japan must submit a summary of the financial health of their branches as well as their positions.

Newspaper publication reporting
Every bank needs to submit a report for the publications issued in newspapers annually.

Investment position reporting
Banks need to submit a report to Japan’s Financial Supervisory Agency every quarter showing their position on investments made in different securities to monitor profit and loss in a financial quarter.

Asset & Liability Management (ALM)

ALM is being embraced as more than just a tool to monitor and manage interest rate risk in banking books. It is a process for managing balance sheets against other risks that affect earnings and portfolio valuations of banks, shifts in customer behaviour, future balance sheet growth and impact of business strategies (pricing, hedging, growth and planning).

In light of the recent financial crisis, firms of all shapes and sizes are re-evaluating their ALM model. In order to earn an adequate return, the need to assess and mitigate the adverse value and income impact of changes in the market has become even more vital.

So how do different types of financial institutions manage their ALM requirements today?

Large, tier 1 firms typically develop their ALM systems in-house; a luxury few smaller firms can’t afford. These systems typically include sophisticated and finely tuned functionality for Value exposure, Value at risk, Dynamic simulation, Earnings at risk and Treasury view.

In the past, smaller firms have found solutions for meeting ALM requirements to be over-complicated, difficult to integrate with incumbent systems, resource-dependent and cost-prohibitive. For these reasons they have resorted to using alternative methods such as spreadsheets or independent consultants, neither of which is ideal.

Until now the sheer cost of developing and supporting an in-house ALM system has been prohibitive to smaller firms but the need to have accurate visibility into the future position of the firm is critical.

Our heritage and in-depth knowledge of market have enabled the configuration of our solution to be so flexible that it meets the needs of ALL firms; from those with highly complex derivatives to those with a vanilla approach.

Our ALM solution provides a comprehensive range of capabilities that cover the following areas:

• Value exposure / market risk (static)
  For a consistent and comprehensive assessment of the adverse value impact of changes in market risk factors based on common pricing models using gap analysis and analytical/numerical stress testing analysis
• Value at risk / market risk (static)
  To calculate the loss potential of a specific portfolio or the total balance sheet over a given time horizon and confidence level
• Dynamic simulation (“what if” NII analysis)
  To assess and manage income, using a dynamically modelled balance sheet and market environment
• Earnings at risk (interest rate models)
  To calculate the potential to lose income, and to value it in a dynamically modelled balance sheet and market environment
• Treasury view
  To assess the exposure and risk position of Treasury, using the risk management techniques applied by the firm

And for the smaller firm

Our rich ALM solution offers a functionally that require immediate return on investment by taking a ‘compact’ approach with risk management features that absorb complexity. Along with evaluating a mismatch between assets and liabilities, our ALM solution also manages risks arising due to liquidity and interest rate in banking books.

With our ALM solution firms can:

• Quantify the value impact of interest rate changes over the total balance sheet based on regulatory requirements
• Conduct stress testing / value impact of any risk factor change over the total balance sheet
• Benefit from robust processes with audit ability and traceability, reverse processing from results to initial input using modelling (strategies & scenarios)
• Meet processing times / frequency of analysis and reduce manual work
• View Balance Sheet value impacts from interest rate moves in terms of sensitivity, liquidity and margin
• Utilise a simple financial analysis framework
• Make use of a flexible reporting tool and standard export to standard formats (Excel, PDF, HTML, XML)

FRSGlobal 6-step process for ALM

Basel II

Embracing advanced Basel II approaches and capital management practices

While some countries in Asia-Pacific and Japan were initially content with implementing basic and standardised approaches to Basel II, the trend towards more complex approaches to credit risk and market risk management has evolved as the Basel Committee on Banking Supervision continued to enhance its guidance for more sophisticated approaches to managing market, credit, and operational risk.

As the global influence of banks has shifted away from North America and Europe, leading banks in Japan and developed markets in Southeast Asia are well into their preparation for adopting the Internal Model Approach (IMA) to market risk, the Advanced Measurement Approach (AMA) to operational risk, and the Internal Ratings Based Approach (IRB) for credit risk.

Japan one of the early adopters implemented Basel II guidance in 2007. It currently adopts the IRB approach for credit risk and Advanced Measurement Approach (AMA) for operational risk. In addition, Japan follows a very rigorous policy towards risk assessment

The FRSGlobal solution provides a sophisticated Basel II module with the ability to calculate the capital charge for market and credit risk as required under Pillar 1. For Pillar 2, interest rate risk in the banking book, liquidity risk and concentration risk are covered. DataFoundation enables the reporting requirements set out in Pillar 3. The Basel II compliance can be used as an independent stand alone solution or in combination with all the other FRSGlobal RiskPro and RegPro modules.

Capital Adequacy Reporting Videos

A series of videos explaining various aspects of Capital Adequacy Reporting.

• What is Capital Adequacy Reporting?



• What is the purpose of Basel?



• RiskPro or RegPro?



• What does the FRSGlobal solution cover?



• What are the analysis methods?



• What are the Japanese demands?



• FRSGlobal solution for JFSA

Adoption of the IFRS7 and IAS 32, 39

Employ dynamic ALM for better balance sheet management

The IASB and the Accounting Standards Board of Japan (ASBJ) have been working together to achieve convergence of IFRSs and Japanese Generally Accepted Accounting Principles (GAAP) since 2005. In December 2009 the Japanese Financial Services Agency (FSA) permitted certain qualifying domestic companies to apply IFRSs for fiscal years starting ending on or after 31 March 2010. And decision about mandatory adoption by 2016 is expected around 2012.

The FRSGlobal IFRS solution is made up of both RiskPro and RegPro elements. FRSGlobal RiskPro enables the classification of financial instruments and the calculation of the valuation using either fair value or amortised cost as appropriate. RiskPro also supports several methods for testing and estimating impairment as required by IAS 39.

FRSGlobal RegPro uses ReportGenerator to produce standard IFRS report definitions with country adaptations as well as ReportBuilder to build additional standardised reports.

Read more about the FRSGlobal IFRS solution here.

Liquidity Risk Management

Banks are interested in going beyond simple static financial ratios and gap reports as the measures of their liquidity risk. Since the Basel Committee on Banking Supervision issued its final paper on ‘Principles for Sound Liquidity Risk Management and Supervision’ banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheet. By modelling their liquidity contingency plans against such scenarios, a measure of the bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of the bank’s plan against such crisis.