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Adaptation to International Financial Regulations

1. Adaptation to the Basel Standards The Group must adapt to the Basel standards that set inter- “domestic version” of the “Global Systematically Important national norms governing the soundness of . Basel Banks” (G-SIBs) designated by the Financial Stability Board I sets out minimum levels for capital adequacy regula- (FSB). This designation applied an additional capital ade- tions, and Basel II stipulates self-management and super- quacy ratio of 0.5%. vised verification of financial institutions, and Basel III lays After the introduction of Basel III, the Basel Committee out marketplace regulations for accepting market-based on Banking Supervision considered continuous revisions assessments founded on proper disclosure. Basel II was to capital adequacy regulations, but to ensure that is applied in Japan beginning in March 2007. Moreover, properly reflected and the simplicity and comparability of Sumitomo Mitsui Trust Holdings, Inc. March 2013 marked the beginning of Basel III’s gradual regulations, a final agreement was reached in December phase-in in Japan, which comprises capital adequacy regu- 2017 to review regulations on measuring risk assets that lations to enhance the quality and quantity of capital and serve as the denominator for the capital adequacy ratio. to bolster risk recognition, leverage ratio regulations, and While partially limiting the extent to which banks can use liquidity regulations. internal models, it is also, by introducing a capital floor via a As part of the Group’s initiatives toward more sophis- standardized approach, central to suppressing excessively ticated , we introduced Advanced small assessments of risk assets by the internal models. In Measurement Approach to operational in March 2014 response to the final revisions to regulations, the Group is and Advanced IRB Approach to credit risks in March 2015 taking appropriate steps to introduce new rules. with regard to the calculation of capital adequacy ratios. To Considering the fact that these revisions are sched- complement capital adequacy ratios, we introduced liquid- uled to come into gradual effect beginning in 2022, the ity coverage ratios as the first pillar of our liquidity rules and Group expects that future capital reserves will be sufficient leverage ratios as the third pillar in March 2015. to comply. Meanwhile, while the risk weight of individual In December 2015, the Group was added to the list of loans is expected to fluctuate, the Group will implement 110 “Domestic Systematically Important Banks” (D-SIBs), a proper profit control and portfolio management. ESG Report 201 8/2019

Conceptual Diagram of Risk-weighted Assets Capital Floor Structure Measurement Approach for Floor not applied Current New Floor Exposures Standards Standards applied SA add-on Standardized Internal Equity RWAs RWAs Approach 72.5% of Model SA RWAs RWAs Internal Model Financial Institution Foundation RWAs Advanced IRB Large corporate or Approach Standardized Floor Internal Model Internal Model Foundation Approach(SA) (SA RWAs ×72.5%) RWAs Floor RWAs > Floor Corporate IRB Approach RWAs Small and medium-sized Advanced corporate or • In the case where 72.5%* of SA RWAs (Floor) is larger than internal Foundation Specialized Lending model RWAs, Add-on RWAs are charged. (e.g.Real estate non-recourse loan) IRB Approach *As for the applicable multiplier of the floor, starting at 50% in 2022, it will be Standardized Approach: Supervisory risk weight according to external credit ratings raised by 5% each year to 72.5% in 2027. Foundation IRB Approach: Risk weight calculated based on banks’ own estimates of prob- ability of default (PD) Advanced IRB Approach: Risk weight calculated based on banks’ own estimates of prob- ability of default (PD) and (LGD) Sustainability Policy 1 Sustainability Policy 2 Sustainability Policy 3 Sustainability Policy 4 Sustainability Policy 5 Sustainability Policy 6

2. Adaptation to Other International Financial Regulations In addition to the regulations on capital adequacy and Volker Rule, ringfencing), “too big to fail” action and more. liquidity mentioned above, the international financial The Group properly adapts to these regulatory reforms. regulatory reforms that commenced after the collapse of The main rules that will be strengthened or fleshed out Lehman Brothers kicked off the global financial crisis have in the future are spotlighted below. As a trust group already brought numerous regulations into effect, such that handles the valuable assets of clients, we are steadily as stronger governance and risk management, over-the- working to initiate an appropriate response based on our counter derivatives market reforms, reduced bank risk (the “client-oriented” values.

(1) Conduct Risk Conduct risk is a concept that has come under increas- sound markets, or client interests. While monitoring devel- ing regulation, particularly in the U.K., as it has recently opments at national authorities, the Group is following the received greater attention by national financial authorities. code of conduct on being “Completely Client-oriented — Sumitomo Mitsui Trust Holdings, Inc. Although there is no common definition between coun- Truthfulness and Loyalty” by implementing the framework tries, it is often thought of as the risk accompanying a finan- for a system that prevents potential conduct risk from man- cial institution acting against social norms, the upholding of ifesting and properly responds to any manifestation.

(2) Stronger Regulations for Fund and Asset Managers In January 2017, the Financial Stability Board (FSB) released securities lending activities of asset managers and funds. the “Policy Recommendations to Address Structural In addition, the International Organization of Securities Vulnerabilities from Asset Management Activities.” The Commissions (IOSCO) is gradually releasing various rules document points out structural vulnerabilities and offers and practice frameworks pertaining to investment funds to various policy recommendations for four areas: (1) liquid- serve as guidelines for national authorities applying inter- ity mismatch between fund investments and redemption national regulations to their domestic legal systems. As a terms and conditions for open-ended fund units, (2) lever- trust bank group responsible for managing client assets, age within investment funds, (3) and chal- SuMi TRUST Holdings is working hard to gather informa- 111 lenges at asset managers in stressed conditions, and (4) tion about these regulations and adapt. ESG Report 201 8/2019

(3) Cybersecurity The digitalization of financial businesses and operations adaptations and frameworks which financial institutions further increase cybersecurity risks by connecting systems should realize. The group has set up a global IT manage- to networks. To adapt, there is an international dialog on ment office and cybersecurity response team within the IT financial sector cybersecurity occurring at venues such as & Business Process Planning Department as we promote the G7 meeting of finance ministers and gov- the construction of frameworks for cybersecurity response ernors, while regulations are taking shape in different coun- in the Group’s global network. tries on cybersecurity risk assessment and technological

Company Adaptation System Global Management: Global Business Management Office, Corporate Planning Department Capital Adequacy Ratio Out-of-Area Applicable Law & Overseas Office Regulatory Overseas Office Recovery Cybersecurity & Liquidity Regulations Regulation Conduct Rules Compatibility Support & Resolution Planning Global Business Planning and Coordination Department* Global Markets Business Risk Management Department Corporate Planning Department Risk Management Department Planning Department* Compliance Department IT & Business Process Planning Risk Management Department Financial Planning Department Fiduciary Business Department Planning Department* Asset Management Business Planning Department

* SuMi TRUST Bank