Management Structure Data Section 35 Ility (CSR) 52 B Corporate Social Responsi D

Review of Operations Management Structure Data Section 35 ility (CSR) 52 b Corporate Social Responsi d

Executives 36 d

Corporate GovernanceRisk ManagementHuman Resources an 39 43 Directors an Organization 38 Management Structure Management SHINSEI BANK, LIMITED Annual Report 2010 Management Structure 36 Data Section Directors and Executives Review of Operations Message from the Management Outline * * JoinedTheBankofJapan 1966 Apr ExecutiveAdvisorandSeniortothe 1992 May Director,AdministrationDepartment, 1996 May ExecutiveManagingDirector,TokyoStock 1999 Advisor,NECCorporation May 2002 Apr. Director,ShinseiBank,Limited(Current) 2004 Jun. Professor,YokohamaCollegeofCommerce 2006 Apr. As ofJuly1,2010 DIRECTORS ANDEXECUTIVES p.17 JoinedTheDai-IchiKangyoBank,Ltd. 1972 Apr. CorporateExecutiveOfficer, 2000 Jun. ManagingExecutiveOfficer, 2001 May ManagingExecutiveOfficer, 2002 Apr. Executive 2002 Nov. Director,IsuzuMotorsLimited 2007 Jun. Advisor,ShinseiBank,Limited 2010 May RepresentativeDirector,President, 2010 Jun. p.18 JoinedTheLong-TermCredit BankofJapan,Ltd. 1983 Apr. GeneralManager,MarketsDivision, Shinsei 2003 Jul. GeneralManager,TreasuryDivisionandCapital 2003 Nov. GeneralManager, IBBusinessDivisionand 2005 Sep. GeneralManager, 2006 Apr. GeneralManager,FinanceGroup, 2009 Jan. StandingStatutoryAuditor, 2010 Jun. STATUTORY AUDITORS( BOARD OFDIRECTORS(6) 2 OutsideStatutoryAuditors 1 OutsideDirectors Financial ExchangeInc.) Futures Exchange(PredecessorofTokyo Chairman, TheTokyoInternationalFinancial The BankofJapan Exchange (Current) Corporate Bank,Ltd.) (Predecessor ofMizuhoBank,Ltd.and The Dai-IchiKangyoBank,Ltd. The Dai-IchiKangyoBank,Ltd. Mizuho CorporateBank,Ltd. Isuzu MotorsLimited Shinsei Bank,Limited(Current) (Predecessor ofShinseiBank,Limited) Bank, Limited Markets Division,ShinseiBank,Limited Capital MarketsDivision,ShinseiBank,Limited Office ofAuditCommittee,ShinseiBank,Limited Shinsei Bank,Limited Shinsei Bank,Limited(Current) V ice PresidentandDirector, Commerce Professor, YokohamaCollegeof Department, TheBankofJapan, Former Director,Administration Director, Shigeru Kani President Representative Director, Shigeki Toma Standing StatutoryAuditor Akira Watanabe 3 ) * 1 p.17 JoinedTheLong-TermCreditBankofJapan,Ltd. 1978 Apr. GeneralManager,RiskManagementPlanning 2000 Oct. GeneralManager,RiskManagementPlanning 2007 Apr. StatutoryExecutiveOfficer, 2008 Jun. ManagingExecutiveOfficer, 2009 Oct. RepresentativeDirector, 2010 Jun. o.16 Joined JapanAirlinesCorporation 1967 Nov. Prosecutor,YokohamaDistrictPublic 1993 RegisteredDaiichiTokyoBarAssociation Apr. 1998 Apr. EstablishedShigaLawOffice 1999 Aug. Partner, SonSogoLawOffice 2002 Jun. Auditor,NipponkoaInsuranceCompany,Limited 2004 Partner,Shiraishi&Partners(Current) Jun. 2005 Oct. Auditor,FXPrimeCorporation(Current) 2007 Mar. Auditor,TokushuTokaiHoldings Co.,Ltd. 2007 Apr. Director,Toyoko InnCo.,Ltd.(Current) 2009 Sep. StatutoryAuditor,ShinseiBank,Limited(Current) 2010 Jun. JoinedSalomonBrothersAsiaLtd.,TokyoBranch 1987 Apr. GeneralPartner,TheGoldmanSachsGroup,L.P. 1994 CEO,Monex,Inc. Nov. 1999 Apr. CEO,MonexBeansHoldings,Inc. 2004 Aug. CEO,MonexBeans,Inc. 2005 May 2008 Jun. Director,ShinseiBank,Limited(Current) 2008 Jun. (Predecessor ofShinseiBank,Limited) Management Division,ShinseiBank,Limited and PolicyDivision,PortfolioRisk Management Division,ShinseiBank,Limited Management Division,OperationalRisk and PolicyDivision,PortfolioRisk Group, ShinseiBank,Limited Executive HeadofInstitutionalBusinessSub- Group, ShinseiBank,Limited Executive HeadofInstitutionalBusinessSub- Chief RiskOfficer,ShinseiBank,Limited(Current) Head ofRiskManagementGroup, Senior ManagingExecutiveOfficer, Prosecutors’ Office (Current) (Current) (Predecessor ofTokushuTokaiPaperCo.,Ltd.) (Predecessor ofMonexGroup,Inc.)(Current) (Predecessor ofMonex,Inc.)(Current) Director, TokyoStockExchangeGroup,Inc.(Current) Officer Senior ManagingExecutive Representative Director, Yukio Nakamura Lawyer Statutory Auditor Kozue Shiga CEO, MonexGroup,Inc. Director, Oki Matsumoto * 2 * 1 a.17 JoinedGoldman,Sachs&Co. 1979 Mar. Partner,Goldman,Sachs&Co. 1988 Director,EnstarGroupLimited(Current) Dec. 1996 Oct. Director,ShinseiBank,Limited(Current) 2000 Mar. Chairman,J.C.Flowers&Co.LLC(Current) 2002 Nov. Director,TheKesslerGroup(Current) 2007 Aug. ChairmanandDirector,FlowersNationalBank 2008 Sep. p.16 JoinedTheBankofJapan 1961 Apr. ExecutiveDirector,TheBankofJapan 1992 Chairman,A.T.Kearney Jan. 1996 Apr. President,GlobalManagementInstitute Inc. 2002 May Chairman,JapanIndependentDirectors 2003 Mar. Director,AutobacsSevenCo.,Ltd.(Current) 2008 Jun. Director,NipponkoaInsuranceCompany,Limited 2009 Jun. StatutoryAuditor,ShinseiBank,Limited(Current) 2010 Jun. JoinedMitsui&Co.,Ltd. 1959 Apr. ExecutiveManagingDirector,GeneralManager, 1996 Jun. CorporateAuditor,Mitsui&Co.,Ltd. 1997 Jun. Counselor,Mitsui&Co.,Ltd. 2000 Director,JapanCorporateAuditorsAssociation Jun. 2005 Oct. Director,ShinseiBank,Limited(Current) 2006 Jun. Auditor,MatsushitaElectricIndustrialCo.,Ltd. 2006 Jun. Auditor,KyowaHakkoKogyoCo.,Ltd. 2007 Jun. SHINSEI BANK, LIMITEDAnnual Report2010 (Current) (Current) Network (Current) (Current) Personnel Division,Mitsui&Co.,Ltd. (Predecessor ofPanasonicCorporation)(Current) (Current) (Predecessor ofKyowaHakkoKirinCo.,Ltd.) Chairman, J.C.Flowers&Co.LLC Director, J. ChristopherFlowers Global ManagementInstitute,Inc. The BankofJapan,andPresident, Former ExecutiveDirector, Statutory Auditor Tatsuya Tamura Auditors Association Former Director,JapanCorporate Director, Hiroyuki Takahashi * 2 * 1 * 1 Management Structure Outline Message from the Management Review of Operations Directors and Executives Data Section 37 Shigeru Oishi Executive Officer, Head of Consumer Finance Sub-Group Sanjeev Gupta Senior Managing Executive Officer, Head of Individual Group Michiyuki Okano Senior Managing Executive Officer, Group Chief Information Officer, Head of Banking Infrastructure Group Kazuya Fujimoto Executive Officer, Head of Institutional Business Sub- Group Takao Matsuzaki Executive Officer, General Manager, Osaka Branch Yukio Nakamura Representative Director, Senior Managing Executive Officer, Head of Risk Management Group, Chief Risk Officer Izumi Ogura Senior Managing Executive Officer, Head of Institutional Group Norio Funayama Managing Executive Officer, Executive Head of Institutional Business Sub-Group ) 3 Executive Officer, Head of Advisory Sub-Group Takashi Tsuchiya Michimasa Honda Executive Officer, Head of Institutional Business Sub- Group Shigeru Tsukamoto Senior Managing Executive Officer, Chief Financial Officer Akira Kagiichi Senior Managing Executive Officer, Chief of Staff Shigeki Toma Representative Director, President, Chief Executive Officer, Head of Institutional Group EXECUTIVE OFFICERS (1 EXECUTIVE SHINSEI BANK, LIMITED Annual Report 2010 Management Structure 38 Data Section Organization Review of Operations Message from the Management Outline As ofJuly1,2010 ORGANIZATION *4 Head Office, GroupInvestorRelations&CorporateCommunicationsDivisionshallreport *3 InternalAuditDivisionshallreportnotonlytoCEObutalsoBoardof *2 1 OfficeofCorporate *1 Annex), Hiroshima,Takamatsu, Fukuoka Hankyu-Umeda Annex),Namba (incl. Takatsuki Annex, Yokohama (incl.KamakuraAnnex),Fujisawa,Nagoya,Kyoto,Umeda Jiyugaoka Annex),Hiroo,Meguro,Futakotamagawa, Hachioji,Machida, Kichijoji, Tsudanuma Annex),Tokyo, Ginza,Ikebukuro(incl.KawaguchiAnnex),Ueno, to HeadofFGforInvestorRelationsmatters. S Directors andExecutiveCommittee. tatutory Auditorsdirectly. Di S Boa Audito tatuto r e c r d of to S hinjuku, RoppongiHills, r r r s s y S apporo, S enri-Chuo Annex,Nishinomiya-Kitaguchi Annexand S ecretary shallactasthesecretariatforBoardof S endai, Kanazawa,Omiya,Kashiwa,LaLaport(incl. Exe S Boa Audito Offi tatuto Chief S c hibuya (incl.OmotesandoHillsAnnexand r utive S c d of akai-Higashi Annex),Kobe (incl.Ashiya e r r r s y Office ofCorporate Internal AuditDivision* Committee Exe S Office of Auditors tatutory c S utive ecretary* 1 2 Infrastructure Management Institutional Individual Banking Finance Group Group Group Group Group Risk Custo * 3 m ers Retail Banking Consumer Finance Principal Transactions Advisory Real EstateFinance Institutional Business Operations Technology Control Treasury andCorporate Financial Controlling Retail * 3 Wealth ManagementDivision Retail Marketing Division Customer S Real EstatePrincipalInvestmentDivision Credit Trading Division Private EquityDivision International PrincipalFinanceDivision S Corporate AdvisoryDivision Capital MarketsDivision Alternative InvestmentDivision Commercial FinanceDivision Institutional GroupManagementDivision General Credit AssessmentDivision Legal Division Compliance Division Group InvestorRelations&CorporateCommunicationsDivision Human ResourcesDivision Office ofCorporateDevelopment Corporate PlanningDivision Operational RiskManagement Division Risk ManagementPlanning andPolicyDivision Individual PillarRiskManagementDivision Credit RiskDivision Market RiskManagementDivision Portfolio andRiskManagementDivision Centralized OperationsDivision Operation Operations Technology Information Technology Division Operations PlanningandAdministrationDivision Office ofCFO Group CorporateAnalyticsDivision Group Treasury Division Capital MarketsandTreasury ProductControlDivision Office ofIFR Group FinancialAccountingDivision Group RegulatoryAccountingandTax Division Group BusinessControllingDivision Retail Technology Division Channel ManagementDivision Retail Retail HumanResourcesDevelopmentDivision Retail BusinessDivision Loan ProductsDivision Retail ProductsDivision Channel PlanningDivision pecialty FinanceDivision olution AdvisoryDivision S ervices S (Customer (Corporate Customer (Head OfficeRelocationPreparationDepartment) (Financial CrimeInformationDepartment) (Retail ComplianceDepartment) (Basel IIProjectManagementDepartment) (J- (Expense ControlDepartment) (Fukuoka CallCenter) (Insurance BusinessManagementDepartment) ub-Group S ub-Group S S S S S ales andDistributionDivision ervices Division OX ProgramDepartment) S ub-Group ub-Group ervices Division S S S S S ervice Division S upport Division ub-Group S ub-Group ervices Division upport Division S S S ub-Group ervice Department) S ub-Group S S ub-Group ub-Group ub-Group S ub-Group S ervice Department) SHINSEI BANK, LIMITEDAnnual Report2010 Public Financial InstitutionsBusinessDivisionII Financial InstitutionsBusinessDivisionI II Osaka CorporateBankingBusinessDivision I Osaka CorporateBankingBusinessDivision Institutional BankingBusinessDivision Corporate BankingBusinessDivisionIX Corporate BankingBusinessDivisionVIII Corporate BankingBusinessDivisionVII Corporate BankingBusinessDivisionVI Corporate BankingBusinessDivisionV Corporate BankingBusinessDivisionIV Corporate BankingBusinessDivisionIII Corporate BankingBusinessDivisionII Corporate BankingBusinessDivisionI Real EstateBusinessDivision Real EstateFinanceDivision Hiroshima,Takamatsu andFukuoka) ( Public Osaka FinancialInstitutionsBusinessand S apporo, Financial Centers S ector FinanceDivision S ector FinanceDivision S endai, Kanazawa,Nagoya, * 4 Management Structure Outline Message from the Management Review of Operations Corporate Governance Data Section 39 2 * 3 * ubsidiaries and Business Groups S Affiliates n 1 g Auditors n

ti n n tatutory Auditors kansayakukai-setchi- S and satio Other n Affiliates Corporate Accou Staff Group al Audit Divisio tatutory Auditors, Subsidiaries n S Supervision and Auditing ter Compe n Board of I Advisory Committee* 2 * Statutory Auditor and 2 Outside Auditors) (3 Statutory Auditors, including 1 Standing Group Showa Banking Leasing Infrastructure Group APLUS Finance FINANCIAL ） However, the Bank is now expected to ensure more However, the Bank is now expected ent Statutory Auditors” board model ( active involvement by the Board of Directors in internal active involvement by the Board of management as control system establishment and risk managerial well as to enhance business execution-based management poli- judgment functions in determining its strengthen its audit cies. It also recognizes the need to audit activities functions, such as daily business execution of business exe- by full-time audit officers, and supervision officers responsible cution and director activities by audit For these rea- for audits and independent from directors. of Incorporation and sons, the Bank amended its Articles a “Company with changed its governance framework from with Board of Committees” board model to a “Company m ” Risk Shinki Group ) to a “Company with Board of Statutory Auditors” ) to a “Company Manage ). In a “Company with Committees” board model, statutory with Committees” board model, ). In a “Company iinkai-setchi- Group Shinsei Financial Individual itors” 3 3 * * d Board of Directors Executive Committee bers, including 2 Executive Directors, iinkai-setchi-gaisha m e m Shinsei Securities Financial 9 (as of July 1, 2010) t r （ Products Group 6 Executive Officers and 1 Standing Statutory Auditor of Statutory Au d 6 Directors, including 2 Executive Directors and 4 Outside Directors) ystem Cha （ S Group Chief Executive Officer e & Banking kansayakukai-setchi-gaisha c Shinsei Trust Institutional nan r

1 ent m

) on June 24, 2002, based on the then applicable ) on June 24, 2002, based on the then ate Gove and r and and

Affiliates Strategy po Business Business Groups* Execution r Subsidiaries Company with Board of Statutory Auditors Company with Board of Statutory Develop gaisha *1 Organizational chart after the completion of the reform scheduled at the end of August 2010 *2 Audit *3 Report SHINSEI BANK, LIMITED Annual Report 2010 ters and business execution monitoring and supervision. “Company with Boar Change to a “

On June 23, 2010, Shinsei Bank changed its corporate governance framework from a “Company with from a “Company framework its corporate governance Bank changed 23, 2010, Shinsei On June model ( Committees” board CORPORATE GOVERNANCE CORPORATE board model ( executive officers are engaged in ordinary business execution while directors are mainly responsible execution while directors are are engaged in ordinary business executive officers Statutory Auditors” to a “Company with Board of business execution. The switch for supervising execution and to decision-making and business to ensure appropriate managerial board model aims functions. These are organizational checking framework with sufficient establish a governance in the Board of authorities and responsibilities consolidation of business execution achieved by 1) the of for auditing duties that include auditing and monitoring Directors and 2) Assigning responsibility of auditors and a Board of Statutory Auditors that are independent the Board of Directors, to statutory of Directors. business execution and the Board Shinsei Bank adopted the governance framework of a Shinsei Bank adopted the governance model ( “Company with Committees” board Co Commercial Code. Under this framework, the Bank estab- Commercial Code. Under this framework, and aimed at lished an effective supervisory framework by achieving efficient and transparent management by statutory execu- speedy and flexible business execution of Directors is tive officers and ensuring that the Board managerial mat- engaged in decision-making on important Management Structure 40 Data Section Corporate Governance Review of Operations Message from the Management Outline flexible dailybusinessexecution. Underthissystemaswell adopted anExecutiveOfficer systeminordertoensure ness execution.Ontheother hand,ShinseiBankhas tinction betweendecisionsonandsupervisionoverbusi- Directors’ decision-makingexpandedwithoutanycleardis- Statutory Auditors”boardmodel,thescopeofBoard As aresultoftheswitchto“CompanywithBoard Boar framework placingmoreemphasisonchecks-and-balances. ible managerialjudgmentandtoestablishagovernance order toensureadequatebusinessexecutionbasedonflex- from businessexecutionandtheBoardofDirectors,in and theBoardofStatutoryAuditors,whoareindependent Directors’ audit/supervisoryfunctionstostatutoryauditors Directors. Moreover,theBankwillentrustBoardof authority andresponsibilityiscentralizedintheBoardof making andexecution.Therefore,businessexecution model, directorsareresponsibleforbothbusinessdecision- eral meetingofshareholders. Executive Committeean standpoint. officer/employee compensationpoliciesfromanobjective “Compensation AdvisoryCommittee”toopineon ment strategydeterminationprocess. above, theBankmaintainstransparencyofitsmanage- supervising businessexecutionbydirectors.Asseen independent andobjectiveopinionstomanagement important roleincorporategovernance,suchasproviding audit knowledge.Thesefouroutsidedirectorsplayan extensive financingexperienceandriskmanagementor four outsidedirectorswithadvancedexpertise,suchas tors whoareresponsiblefordailybusinessexecutionand is composedofthefollowingmembers:twoinsidedirec- work establishedonJune23,2010,theBoardofDirectors ample deliberationbytheBoard.Undernewframe- decisions onmanagementandbusinessexecutionafter ing businessexecutionbyexecutivedirectors,andmaking to maximizeshareholderreturns,evaluatingandsupervis- agement strategy,ensuringthatmanagementisworking promotion frameworkthroughdetermininglong-termman- The BoardofDirectorsmaintainstheappropriatebusiness gaisha In a“CompanywithBoardofStatutoryAuditors”board Furthermore, theBankislookingintoestablishinga d ofDirectors ) atthecompletionofJune23,2010annualgen- d ExecutiveOfficers the interestsofstakeholders based onobjectivejudgment. prepared andimplemented such frameworkstoprotect strengthening post-approvalfollow-upfunctions.TheBank verify transactionfairnessandconflictofinterest as preparingastructureforthebusinessexecutionsideto transactions withdirectorsandmajorshareholders,such enhance theBoardofDirectors’checkingfunctionsover lished adequatecontrolframeworkstomaintainand accordance withasetofguidelines.TheBankalsoestab- Directors tojudgetransactionswithmajorshareholders in the BankestablishedRulerequiringBoardof from majorshareholders,asrequiredbytheBankingLaw, Furthermore, inordertoensuretheBank’sindependence the Bankthatmayinvolveaconflictofinterest. Board ofDirectorsfortransactionswithpartiesrelatedto established aprocessforobtainingapprovalfromthe shareholder. InaccordancewiththeBankRule, Mr. Flowersisinfluential,becameShinseiBank’slargest investors. Asaresult,thisgroupofinvestors,withwhich through athird-partyallotmenttothesamegroupof Bank. InFebruary2008,theBankincreaseditscapital Co. LLCandaffiliatescompletedatenderofferforShinsei In January2008,agroupofinvestorsledbyJ.C.Flowers& Transactions withDirectorsan executive directors,officersandgroupheads. Development Committees,andarechairedbytheCEO, and J-SOXProgramSteering,Management New Business/Product,SMELoan,IT,BaselIISteering Compliance, RiskPolicy,TransactionApproval,Credit, mittees includeALM(AssetandLiquidityManagement), and appropriateresponses.ShinseiBank’sprimarycom- have establishedGroup-widecommitteestoenableswift Board ofDirectors. cers includingexecutivedirectorswereappointedbythe framework establishedonJune23,2010,13executiveoffi- swift andefficientbusinessadministration.Underthenew officers whoaregroupheads,withaviewtoachieving Committee consistingofexecutivedirectorsand Directors’ approval,theBankestablishedExecutive efficient manner.Inaddition,basedontheBoardof the BoardofDirectorswillexecutetheiroperationsinan executive officersandbusinessgroupheadsentrustedby as theleadershipofexecutivedirectorsincludingCEO, With theBank’sexpandingspecializedofferings,we SHINSEI BANK, LIMITEDAnnual Report2010 d MajorSharehol d ers Management Structure Outline Message from the Management Review of Operations Corporate Governance Data Section 41 The statutory auditors shall systematically and efficiently The statutory auditors data and a timely and appropriate response to external response to a timely and appropriate data and the audit function. By providing changes thereby enhancing independent and objective viewpoint opinions from a more Board of Statutory Auditors and the at meetings of the the outside statutory auditors contribute Board of Directors, activities. to enhanced auditing execution at the Shinsei Bank audit the state of business including Shinsei Bank and its sub- Group as a whole, auditors will achieve this by cooper- sidiaries. The statutory such as the Internal ating with the internal control groups, Office of Statutory Audit Division, and by using staff of the Bank’s important Auditors in addition to attending the Board of Directors, meetings, such as meetings of the audits of reviewing important documents and undertaking the execu- their own, such as interviewing the directors, tive officers and the accounting auditor. The Compliance Division and Legal Division work closely The Compliance Division and Legal Division governance. together and play a central role in our corporate Compliance Systems Organization compliance We have, with a strong belief that thorough management mis- must be one of the most important system to help sions, established a robust compliance that earns public enable sound and proper management trust. The Compliance Committee, Compliance Division and individual compliance managers within various business and support units constitute the main elements of our compliance organization. The Compliance Committee, with our CEO as its chairman, examines and discusses important compliance matters. The Compliance Division plans various measures concerning compliance risk and implements these measures through central management. Every division, department or branch in the Bank also has a compliance manager to act as the point of contact for compliance-related matters. These managers’ duties also include periodical reporting to the Compliance Division on compliance-related issues. This enables the Compliance Division to conduct Bank-wide monitoring of how various measures are being implemented as well as to provide centralized compliance guidance. Legal and Compliance Activities itors d of Statutory Au d itors/Boar d As stated above, on June 23, 2010, Shinsei Bank changed its corporate governance framework to a “Company with Board of Statutory Auditors.” The Board of Statutory Auditors of Shinsei Bank, which is composed of a full-time auditor with a background in and business experience at Shinsei Bank and two outside auditors who are highly specialized in legal affairs and governance, shall audit the Directors’ execution of their duties as a body that is com- pletely independent from the Board of Directors. The appointment of a full-time auditor will permit full-time monitoring of the Bank’s operations, access to detailed internal SHINSEI BANK, LIMITED Annual Report 2010 Statutory Au Ensuring Internal Control Ensuring corporate governance, it is neces- To enable appropriate that ensures proper governance sary to prepare a system a legal/compliance functions and of internal audit and business execution and decision- structure for monitoring in the Board of Directors. Putting making centered on control system required by the place the internal ensuring internal control so that finan- Corporation Act, and with the accuracy requirements of cial statements comply and Exchange Law are also the Financial Instruments Even though important elements of corporate governance. management, the internal control is the responsibility of measures to ensure overall internal control system takes groups that carry out specific internal control in each of the internal control sys- actual operations. Basic policies on daily operations tems to ensure appropriate and efficient Rules” established are stipulated in our “Internal Control the Board of by the Board of Directors. Moreover, of internal control Directors periodically reviews the status Directors establish- systems. In this process, the Board of audits by statutory es a framework to ensure effective and Affiliates Policy, auditors, establishes the Subsidiaries Shinsei Bank Risk the Information Security Policy, the of Business Management Policy, the Regulations Conduct and the Execution, the Shinsei Bank Code of and endeavors to Internal Audit Policy as the basic rules, operations in ensure appropriate, transparent and efficient In addition, the the Shinsei Bank Group as a whole. Internal Control Rules prohibit relationships with anti-social organizations and establish a framework to prevent various types of damage by such organizations and to ensure appropriate operations. Management Structure 42 Data Section Corporate Governance Review of Operations Message from the Management Outline an effectivesystemofinternalcontrols.IADprovidesinde- trolling businessexecution,andinparticularforestablishing Auditors. IADsupportstheCEOinhisresponsibilityforcon- directly totheCEOandalsoBoardofStatutory helps maintainandenhanceourcorporategovernance. management measuresandinternalcontrols.This,inturn, nal auditistoindependentlyassesstheeffectivenessofrisk risks relatingtotheBank’soperations.Theroleofinter- ly acutewiththeincreaseddiversificationandcomplexityof The importanceofriskmanagementisbecomingincreasing- Internal Audit also supportsouroverallcompliancesystems. The LegalDivision,workingwiththeCompliance tional laws,legaldocumentationandlitigationsupervision. affairs, includingcompliancewithcorporateandtransac- ness conduct.TheLegalDivisionisinchargeoflegal are nowthemostimportantmandateforabank’sbusi- Prevention andpropermanagementoftheselegalrisks process ofnegotiationleadinguptocontractexecution. tracts areunreasonableorweactinadvisablyduringthe we mayfaceunexpectedclaimsfordamagesifourcon- banking systemitself.Intermsofindividualtransactions, reputation asafinancialinstitution,butthatoftheoverall Violations mayseverelydamagenotonlyourcredibilityand and regulationsintheirday-to-daybusinessoperations. Banks arerequiredtocomplywithawidevarietyoflaws Legal Supervision courses alongsideclassroomtraining. tiveness ofthistrainingbyintroducingactivee-learning important subjects,andareworkingtoincreasetheeffec- for complianceawareness,includingperiodictrainingon internal rules.Weplacespecialfocusontrainingprograms enhancement activitiessuchascreatingandupdating our compliance-relatedplans,includingcompliance We implementanannualcomplianceprogramthatoutlines Compliance Activities The InternalAuditDivision(IAD)oftheBankreports drive forcontinuousimprovement. involves Groupsubsidiaries’internalauditdivisionsinits opportunities forimprovementperiodically.IADalso IAD’s internalauditactivitiesinordertoobjectivelyidentify audit methodologies. enhancing itsinfrastructureinadditiontodevelopingnew Certified InformationSystemsAuditor.IADhasalsobeen sional certificationssuchasCertifiedInternalAuditorand in particular,stronglyencouragesthemtoobtainprofes- initiative indevelopingourinternalauditors’expertise,and and theQualityControlPlanningTeam,IADtakes meetings withseniormanagement. reviewing internalcontroldocumentsandholdingregular toring activitiesbyattendingkeymanagementmeetings, nal auditactivities.IADhasbeenenhancingoff-sitemoni- business toimproveeffectivenessandefficiencyofinter- higher riskprofiles. cation ofauditresourcestobusinessesorprocesseswith each businessorprocessaudited.IADprioritizestheallo- and micro-riskassessmenttoassesstherisksinherentin assessment—to capturehigh-levelrisksacrosstheBank— comprehensive riskassessmentbasedonmacro-risk detective controls. and controlprocessesincludingregularpreventive internal audits,andfromday-to-dayoperationalactivities with internalaudit-relatedinformation. ship withtheBoardofStatutoryAuditorsandprovidesthem tions tomanagement.IADalsomaintainsacloserelation- requirements oftheBank;consequently,IADprovidessolu- requirements aswellinternalpolicyandprocedure tems; andcompliancewithstatutory,legalregulatory reliability ofinformationandtechnologysys- risk management,controlandgovernanceprocesses;the pendent andobjectiveassessmentsoftheeffectiveness An externalconsultingfirmconductsaqualityreviewon Comprising theBusinessAuditTeam,ITTeam It isimportanttogatherrelevantinformationaboutthe IAD adoptsarisk-basedauditapproachandconducts IAD isindependentfromalltheorganizationssubjectto SHINSEI BANK, LIMITEDAnnual Report2010 Management Structure Outline Message from the Management Review of Operations Risk Management Data Section 43 tatutory Auditors S al Risk n ce Committee n year. The opportunistic • Complia • IT Committee last fiscal tatutory Auditors/Board of S markdowns. The Bank was also suc- fiscal year ent Division ent Division ent Division (6 Divisions) t Committee m ubsidiaries m n m ent Division The sensitivity to a further decline in the domestic real The sensitivity to a fiscal year, the management have As seen in the last have been some Despite the heavy credit costs, there S m uantify Risk, Attribute Risk Capital and Monitor & Report d cessful to anticipate a few of the large non-bank financial cessful to anticipate a few of the large hedged these expo- institution defaults, and had already swap market. sures at effective levels in the default pated, that the difficult market conditions and balance conditions and the difficult market pated, that continued abnormal credit costs. sheet mix would cause complexity of the portfolio, the full Due to the size and requirements could not be deter- extent of the reserving final quarter of fiscal year 2009. mined until late in the but is now somewhat diminished estate market remains, is now conservatively marked to as the loan book levels and comfortably reserved. “lenders’ valuation” prudential reserves taken the decision to allocate further significantly reduces on some overseas investments. This going forward. the risk of unexpected credit losses some of the exist- Indeed, it should be possible to reverse run off, or are ing credit reserves, as legacy assets are expected restructured or sold. In particular, recoveries and from from the European asset-backed investments domestic real estate non-recourse lending. notable successes in the CLO sale of the majority of the legacy “available-for-sale” recover a portion of and CDO book, allowed the Bank to the prior Q n t Group ageme n n ework, m ent Planning and Policy Division Board of Directors Credit Risk Division ageme m n Executive Committee Chief Executive Officer ess Groups a • Risk Policy Committee n Market Risk Manage Busi Operational Risk Manage Risk Ma Portfolio and Risk Manage • ALM Committee • Market Risk Ma Individual Pillar Risk Manage Risk Manage (as of July 1, 2010) t r Main Task: To Establish Risk Policies/Risk Control Fra Approval Committee ystem Cha n S Credit Risk Market Risk / ALM Operatio sactio n

• Credit Committee • Tra

As stated in last year’s report, it will take time for the full As stated in last year’s report, it will take Asset quality is expected to gradually improve, due to a Asset quality is expected guidelines stated in a Core Credit Risk Policy and several guidelines stated in a Core Credit Risk consumer specific risk policies for real estate finance, finance, and market risk amongst others. nated and replaced by a comprehensive decision making nated and replaced by a comprehensive framework. aged, to mitigate losses and optimize recoveries on individ- aged, to mitigate losses and optimize recoveries scrutiny of the ual assets or products. Naturally, this close credit reserves. books has given rise to some additional benefits of the new risk practices to show. As expected, benefits of the new risk practices to and bias towards the exposure to overseas investments would cause domestic real estate non-recourse lending, It was as antici- additional credit costs in fiscal year 2009. SHINSEI BANK, LIMITED Annual Report 2010 • Third, the portfolio is now being comprehensively risk man- • • Second, the risk appetite has been redefined and clear Second, the risk appetite has been • three pronged approach: three pronged approach: First, the past weak policies and practices were termi- • Under the leadership of a new management, the founda- Under the leadership risk management framework were tions for a stronger of the past 18 months. Risk poli- defined during the course aligned with the back to basics busi- cies that are now more more considered risk taking will ness philosophy and credit costs will be normalized. ensure the Bank’s recurrent Turning point Turning RISK MANAGEMENT RISK Risk Management Management Structure 44 Data Section Risk Management Review of Operations Message from the Management Outline Auditors” boardmodeland reneweditsseniormanage- Committees” toa“Company withBoardofStatutory In June2010,theBankmoved froma“Companywith Directors meetingandbi-monthly totheAuditCommittee. ing theCROattendandpresent toeveryregularBoardof the nextstep,Bankstrengthenedriskoversight,byhav- and providesreportsdirectlytotheBoardofDirectors.As chief riskofficer(CRO)hasafullvetopowerformatters truly independentriskmanagementfunctionwherethe nance. ShinseiBankisamongsttheleadersbycreating a initiatives tofurtherreinforcethealreadystrongriskgover- early warningsystem,amongstothers. party riskandissuermonitoring;acreditrating advanced approachforriskcapitalmeasurement:counter- investing inthebesttechnologyavailabletosupportits stand, anticipateandmanageitsrisks.TheBankisalso tivities willallowtheBank’smanagementtobetterunder- on theBank’soverallperformance.Measuringsensi- will moreaccuratelypredicttheimpactofexternalchange tices, bydevelopingadvancedstresstestingmodelsthat ment increditquality. ed toleadanoveralllong-termsector-wideimprove- challenge tocreditcosts,theincomerestrictionisexpect- tion intotalmarketsize.Aftertheinitialshort-term ing atonethirdofincome,andwillcausesomecontrac- Control andRegulationLaw(MLBL),thatwillcapborrow- with thefinalphaseofMoney-LendingBusiness and 2011.Inbetween,theindustrywillcometoterms with themainbenefits Positive trendscanalreadybeseeninthecostofrisk, on thesubsidiaries’creditunderwritingandcollections. risk policies,theBankhasbroughtconsiderableinfluence escaped attention. in particulartheconsumerfinancesubsidiaries,havenot Group assets,theriskstakenbyIndividualGroup,and decrease incapitalthe ceeded inmaintainingcapitalratiosspiteofthe ect hasbenefitedthereductionofriskassetsandsuc- up ofriskdata.ThisjointFinance/RiskManagementproj- accurate measurementaswellacomprehensiveclean tions inriskweightedassetsthroughmorerigorousand sheet optimization,whichhasproducedsignificantreduc- In linewithinternationalbestpractice,theBankhastaken Risk Managementwillcontinuetobuildonbestprac- Following aGroup-levelreviewoftheconsumerfinance Although alotoffocushasbeengiventotheInstitutional Risk Managementhasalsoplayedaroleinthebalance expectedthr last fiscal year. ough fiscal year 2010 retail /consumerfinancechannels. franchise basedoncorporatebankingrelationshipsand now focusonitscoredomesticbusinessandrebuild risk appetiteisalsolargelycomplete,sotheBankcan to basicsbusinessstrategy. to putprudentialriskmanagementfirst,alongsideitsback nance standard,whichclearlydemonstratescommitment autonomy, ShinseiBankhascreatedtheidealriskgover- on theBank’sBoardofDirectors. tive directorandseniormanagingexecutiveofficer,sits ment. Currently,thechiefriskofficerisbotharepresenta- Capital,” whichisanintegrated controlapproach,requires marketsandcustomers.Estimating“Risk into abank’s to thegreatestextentpossible basedonanalysisandinsight understanding oftotalbank-widerisks,andquantifyingrisks ing ofeachriskinvolvedinindividualoperations,aswellthe including arebuildingoftheriskculturewithinBank. and redefinedthefundamentalprinciplesofriskmanagement fall of2009,theBankrevisedits“RiskManagementPolicy” analysis ofitsperformanceduringthefinancialcrisis.In increasingly complex.ShinseiBankhasundertakenadetailed market environment,theriskswhichShinseiBankfacesare Amidst severecompetitionandanevolvingregulatory standing ofthetotalrisksfacedbyBankasawhole. risks andimplementproactivecontrolsbasedonanunder- Policy” asabasicmanagementpolicyinordertorecognize Shinsei Banksetsforthits“ShinseiRiskManagement To AchieveComprehensiveRiskManagement risk, legalriskandcompliancerisk. credit risk,marketliquidityoperationalsystems respective sectionsincharge. limits andwhethertheyareadequatelycontrolledbythe operational policies,whetherrisksremainwithinappropriate taken inlinewithBank-widepoliciesaswellindividual ment, namely,howtotakeandfacerisks. tion mustunderstandthebasicchallengesofriskmanage- In ordertorunhighlyprofitableoperations,afinancialinstitu- Basic ConceptofRiskManagementSystems Comprehensive RiskManagement The redefinitionofriskmanagementandrecalibration With theincreasedoversight,independenceand Comprehensive riskmanagementmeansdetailedmonitor- Financial institutionsareexposedtovariousrisks,including For thisreason,itisnecessarytomonitorwhetherrisksare SHINSEI BANK, LIMITEDAnnual Report2010 Management Structure Outline Message from the Management Review of Operations Risk Management Data Section 45 ual Transactions d ivi d it Risk Management for In d Credit approval authorities are only awarded to the most Transactions can be very diverse and complex in nature, Our model for credit risk management focuses on securing Our model for credit Shinsei Bank established a com- To achieve these goals, roughly classified Credit risk management processes are (1) ORGANIZATION/SYSTEMS credit risk for There are two main categories of decision—a of an obligor an appropriate amount and maximum duration an appropriate type or counterparty risk; and a deal risk on the decisions are and structure of a transaction. In general, and the risk delega- taken jointly by the business stakeholder is independent of tion holder. The Risk Management Group and impartiality and the business line, to provide objectivity has the power of veto on any risk decision. senior and experienced business heads, group heads, sub- group heads, and general managers, to be exercised jointly with the chief risk officer, chief credit officer or senior credit officers, according to the amount and type of risk. Naturally the business has the right to appeal an unfavorable credit decision, but the final authority and decision will rest with the CRO. and hence Shinsei Bank has adopted a specific approval process for dealing with them. Recognizing that risk can emerge from not only credit, market or operational aspects, on occasion, Finance, Compliance, Legal or other specialized functions, will be invited to participate in the decision process, in the format of a Transaction Approval Committee. This allows for the thorough evaluation of reputational risk, compliance risk, suitability risk, legal risk or tax/regulatory aspects to ensure that the Bank and its customers avoid Institutional Credit Risk Management Credit Risk Institutional as the risk of loss due to a counterpart Credit risk is defined debt obligations. defaulting on contractual in risk, avoiding excessive concentration adequate return on to particular obligors, and managing the particular sectors or a an awareness of potential losses under credit portfolio with worst-case scenario. which defines spe- prehensively revised “Credit Risk Policy” products, markets, cific policy on customer attributes, risks should be taken industries and transaction types where credit provision oper- or limited, and clarifies basic policies for risk management ations and specific guidelines for credit Policy,” “Credit together with the Bank’s “Credit Risk Procedures” and other related procedures. transactions and into credit risk management for individual as follows. portfolio-based credit risk management, Cre Unexpected Loss calculated by subtracting expected loss from estimated maximum loss of which time horizon is one year. Measured by subtracting expected loss from Credit Value at Risk (Credit VaR). Credit VaR is the estimated maximum loss calculated by a simulation utilizing data including probability of default, exposure at default, loss given default, etc. Measured by the most appropriate combination chosen for each investment from some methods such as default loss distribution, value range distribution, sensitivity to other factors, etc. Measured by calculating estimated maximum loss from market risk based on Value at Risk method (VaR method), of which time horizon is one year. Sum of Japanese yen interest rate risk measured by Value at Risk method (VaR method), and other curren- cies interest rate risk measured by BPV method. Estimated maximum loss calculated by a simulation based on frequency and sensitivity distributions which will be derived from historical internal loss records and scenario loss data. Calculated by subtracting effect of correlation across risk categories from simple sum of Risk Capital for each risk category. apital C Shinsei Bank’s senior management has delegated certain Shinsei Bank’s senior Operational Risk Interest Rate Risk Market Risk Structured Credit and Other Investment Risk Credit Risk ategories of Risk Total Risk Capital Risk Capital C SHINSEI BANK, LIMITED Annual Report 2010 risk management authority to specific committees including risk management authority “Asset and Liability Management the “Credit Committee,” and “Market Risk Management (ALM) Committee” the Bank has reviewed the structure Committee.” Recently, a more appropriate of committees and reorganized them into Committee” and framework. In addition to the existing “ALM a “Risk Policy “Market Risk Management Committee,” Committee” Committee” (RPC) and “Transaction Approval Policy Committee (TAC) were established in 2009. The Risk Bank (including the involves the top management of the strategy along- CEO, CFO and CRO), and reviews business define and calibrate side risk appetite. Its decisions help Group. appropriate and optimal risk taking for the measurements for each risk category, namely (1) credit risk, namely (1) for each risk category, measurements and other investment risk, (3) market risk, (2) structured credit and (5) operational risk. In this way, our (4) interest rate risk, and risk acquisition activities are management capabilities manner by monitoring the Bank- controlled in an integrated Group-specific capital attribution status. wide risk volume and Management Structure 46 Data Section Risk Management Review of Operations Message from the Management Outline Obligor ratingsystems,whichareShinseiBank (2) OBLIGORRATINGSYSTEMS our overallassetquality. Shinsei Bankisstrivingtominimizecreditcostsandimprove alertness todeteriorationinobligors’businessenvironment, amount ofreserves.Throughthispreemptivemonitoringand or ofobligorsforwhichShinseiBankhassetasideacertain whose borrowingsoutstandingareaboveacertainamount, plans forobligorswhoseratingsarebelowacertainleveland ness conditionsanddiscussthefutureoutlookaction been established. agement ofweakassets,aDoubtfulDebtCommitteehas power toveto. er andtheriskdelegationholder,withlatterhaving although thefinaldecisionrestswithbusinessstakehold- Transaction ApprovalCommitteetoexpressanobjection, inappropriate deals.Itispossibleforanymemberofa At themeetingsofthisCommittee,wemonitorbusi- To ensurecomprehensivemonitoringandproactiveman- ing systems,areoutlinedasfollows. of obligorratingsandthecredit statusofindividualtransactions. tus, suchascollateraland/orcovenants, fromtheperspective expected lossesthatallowsfor improvementinthecreditsta- dation forcreditriskmanagement. authority proceduresandportfoliocontrols,arethefoun- ulatory self-assessmentrequirements. ty ofobligorratingswithcategoriesbasedonthereg- objectivity andtransparency.Moreover,weensureconformi- determined withtransactionapprovalinordertoensure discussed atthe“CreditRatingReviewCommittee”and data fromexternalratingagencies.Obligorratingsshallbe calculated byourestimationmodels,whicharecreatedusing ing adjustmentswithqualitativefactorstothemodelratings • Ensuring conformitywith • Properly reflectingobligors’consolidated-basis • Benchmarked againstexternalratings • Increasing modelaccuracyandreflectingappropriatequalitative SYSTEMS CHARACTERISTICS OFSHINSEIBANK’SOBLIGORRATING Furthermore, wealsoapplyafacilityratingsystembasedon Obligor ratingsareusedinthestandardsofcreditapproval More specifically,obligorratingsaredeterminedbyapply- rating systemsamongindustryclassifications accounting systems factors ’ s internalrat- temic shockorotherextraordinaryevents. dures aredesignedtoinsulateourcreditportfolioagainstsys- for mattersoutsidethescopeofguidelines.Theseproce- guidelines, aswelleffectivereviewandcountermeasures try concentrationguidelines,obligorgroup Our concentrationmanagementframeworkconsistsofindus- (3) CONCENTRATIONGUIDELINES folio operationsandassetallocation. profitability againstrisksareanalyzedtoachievesoundport- rate marginonloans.Moreover,changesinriskcapitaland and unexpectedlossesreflectingthemintheinterest involved ineachtransactionbymeasuringexpectedlosses ed losses”and“unexpectedlosses.” that riskcapitalcanbequantifiedbymeasuringboth“expect- erally called“unexpectedlosses.”Itisgenerallyconsidered and cannotbeestimatedbasedonpastexperiencesaregen- tion ratios,aregenerallycalled“expectedlosses.” future outlook,andexpectedlossamountsbasedoncollec- ity ofdefault,anassumptionbasedonpastexperiencesand Portfolio-Base from changesinacustomer and assessingthelikelihoodoflossesthatmaybeincurred Quantitative measurementofcreditriskmeansmeasuring (2) QUANTITATIVEMEASUREMENTOFCREDITRISK the CROonamonthlyaswelladhocbasis. this informationtoprovidereportsseniormanagementand related tocustomerswithintheportfolios.TheDivisionuses ings, specificcustomers/groupsandalsoratingfluctuations diversification statusincludingindustryclassifications,rat- analyses ofportfolios,andmonitorsthesegment-specificrisk the PortfolioandRiskManagementDivisionundertakesrisk ducted basedonappropriateriskanalyses.AtShinseiBank, tions, andoperationsofindividualtransactionsmustbecon- done onaportfoliobasis,whichisanaggregationoftransac- diversified intermsofindustriesaswellratings.Thisis Controls mustbecarriedoutinsuchawaythatrisksare (1) MONITORINGANALYSISSYSTEM Shinsei Bankensuresadequatereturnlevelsagainstrisks Losses thatcouldbeincurredintheworstcasescenario d Cre d it RiskManagement SHINSEI BANK, LIMITEDAnnual Report2010 ’ s creditworthiness.Theprobabil- Management Structure Outline Message from the Management Review of Operations Risk Management Data Section 47 to detect trends in delinquency, * 1 The Individual Pillar Risk Management Division co-ordinates The Individual Pillar Risk Management Division credit The subsidiaries make use of several sophisticated by product The portfolio performance is then measured 1 Ageing buckets refer to exposures grouped by delinquency period. Credit cost optimization also depends on efficient collec- Credit cost optimization also depends Since the cost of risk has a pivotal importance in the overall The Group maintains a medium-term objective to grow * Individual Pillar Risk Management Pillar Risk Individual the Individual Pillar Risk Management The Bank created in consideration of the increasing Division in March 2009, sheet of the consumer finance importance in the balance by the Bank’s subsidiaries including businesses operated and APLUS FINANCIAL. Risk man- Shinsei Financial, Shinki finance has been embedded into the agement in consumer from credit scoring to collections. Each business operations, head of risk, who reports into the subsidiary has a dedicated Division and is ulti- head of Individual Pillar Risk Management mately supervised by the CRO. monitors per- credit management in each of the subsidiaries, strategy. formance and advises on credit policy and behavior scores to scoring models, credit bureau data and data records may determine credit line limits. Other public used in the score. also be used to enrich the decision criteria type and by ageing bucket which then feedback into the calibration of the scorecard and which then feedback into the calibration also followed using credit actions. New customer trends are delinquency vintage curves, which represent the aggregate rate by number of months since loan disbursement. best available tech- tions. The subsidiaries make use of the more recently, nology including predictive dialers and, stage collections. In collection scores to improve the early addition, they also use a flexible staffing system to optimize resource deployment through the monthly collection cycle. profitability of the consumer finance business, a dedicated Risk Policy Committee involving the CEO, CFO and CRO as well as the CEOs of the consumer finance subsidiaries, now convenes at least once a year to ensure business strategy and risk-taking are properly aligned. The action plans defined in the Risk Policy Committee are reported monthly to the CRO and refined as necessary. business volume, but reduce the net cost of risk to a range of 5.0% to 5.5% through the cycle for loan cards and credit cards. However this objective may only be fully realized after the full implementation of the MLBL, has been absorbed by the industry, and grey zone claims have declined. s ’ financial ’ Transactions d in Market-Relate d it Risks Involve d More specifically, the criteria and procedures for self- More specifically, the criteria and procedures Shinsei Bank has established a self-assessment system Shinsei Bank has established a self-assessment assessment adhere to the Financial Services Agency assessment adhere to the Financial wherein the Credit Assessment Division, which is independ- wherein the Credit Assessment Division, analysis sections, ent from the business promotion and credit assessment. is the section ultimately responsible for Self-Assessments the “Prompt Corrective Action” As a result of introducing self-assessment of system, financial institutions conduct write off or their assets, such as loans, in order to adequately set aside reserves. Credit risks involved in market transactions, such as deriva- Credit risks involved controlled based on fair value and esti- tive transactions, are fluctuations. The volume of risks mations of future value transactions changes according to associated with market rates after the transaction is closed fluctuations in market strict controls based on future and Shinsei Bank undertakes value fluctuation forecasts. SHINSEI BANK, LIMITED Annual Report 2010 Cre Obligor categories and categorizations are reviewed in a Obligor categories and categorizations Measures to Meet Basel II Requirements In order to comply with the credit risk regulations under Basel II, which came into effect at the end of March 2007, Shinsei Bank has adopted the F-IRB (The Foundation Internal Ratings-Based) Approach. This framework ensures strict internal controls for our internal rating systems, the basis of credit risk management, by the execution of the design and operations of internal rating systems and parameter estimations such as probability of default. The results of the internal rating systems are reflected not only in credit risk management, but also in calculations of capital levels required under the regulations. fundamentals so as to mitigate the emergence of problem loans and to strengthen and update systems to ensure the timely and accurate management of troubled loans. timely manner according to changes in the obligors timely manner according to changes in “Inspection Manual for Deposit-Taking Institutions.” “Inspection Manual for Deposit-Taking assessments are Accordingly, primary assessments and final and the Credit conducted by the credit analysis section some obligors, the Assessment Division, respectively. For analysis section business promotion sections and the credit secondary assess- carry out the primary assessments and ments, respectively. Management Structure 48 Data Section Risk Management Review of Operations Message from the Management Outline VaR andDailyP Division, whichisresponsiblefortheobjectiveandtimely liquidity riskreportsfromtheMarketRiskManagement Committee meetsweeklytoreviewdetailedmarketriskand Group withseniorrepresentativesfromrelateddivisions.The Committee andischairedbytheheadofRiskManagement Management CommitteeservesasanarmoftheALM ic timehorizonandconfidenceinterval.TheMarketRisk the ALMCommittee.TheVaRisamountatriskforaspecif- trading, suchasthevalue-at-risk(VaR)method,areapprovedby related toasset/liabilitymanagement. decision-making bodyforthemanagementofallmarketrisks Committee, chairedbyourCEO,istheseniorreviewand sheet intoatradingbookandbankingbook.TheALM We managemarketriskbysegregatingtheoverallbalance Market RiskManagementPolicy transactions aswell. inherent inallassetsandliabilities,off-balancesheet spreads andothermarket-determinedpricemechanisms,is prices, exchangerates,intereststockcredit value offinancialinstrumentsfromfluctuationsinbond Market risk,whichistheriskassociatedwithchangesin Market RiskManagement -2,000 -1,000 -1,500 VaR dataforFiscalYearEnd,Maximum,MinimumandAverageduringthefiscalyear20092010 1,000 1,500 2,000 YMaximum FY FYE VaR -500 al / VaR(Oneday,2.33Sig Daily P/L 500 The actualrisklimitsforasset/liabilitymanagementaswell 0 p.0 a 9Jn 9Jl 9Ag 9Mar.10 Aug.09 Jul.09 Jun.09 May09 Apr. 09 Average Minimum r ofit andLoss(Ba c k-Testing) (Fis m a) S ep. 09 c al yea Oct. 09 r endedMa Nov. 09 Dec. 09 rc h 31,2010,Consolidatedbasis) Jan. 10 osldtdNnCnoiae osldtdNon-Consolidated Consolidated Non-Consolidated Consolidated Feb. 10 Tra regular riskanalysesandmakesrecommendations. office units,theMarketRiskManagementDivisioncarriesout information tomanagement,administrativedivisionsandfront trading andbankingoperations.Inadditiontoreportingrisk recognition, monitoringandreportingofmarketriskinbothour Market RiskManagementCommitteemeetings. report dailytotheCROandmanagement,weeklyat vega, gamma,creditexposureandnotionalamount), at theMarketRiskManagementCommitteemeetings. ducted onaweeklybasisandreportedtoseniormanagement stress testsusingmorethan40scenarios.Stressarecon- amount exceededVaRonaconsolidatedbasis.Weconduct fiscal year2009showthattherewasnodayinwhichtheloss VaR foraone-dayholdingperiod.Theback-testingresults which examineshowfrequentlyactualdailylossexceeds vation days.SeethetablebelowforVaRdata. a 99%confidencelevel,10dayholdingperiodand250obser- Market RiskcalculationsforBaselIIpurposes.TheVaRuses on FSAapproval,weuseinternalmodelsforourGeneral activity iscarriedoutmainlyonbehalfofcustomers).Based We usetheVaRmethodinourtradingoperations(our (Millions ofyen) 2,136 3,899 7,654 4,081 In addition,wemonitorsensitivitiesandpositions(delta, The validityoftheVaRmodelisverifiedthroughbacktesting, d ing Book 2009 1,883 3,263 6,454 3,359 oeae Tradingbusiness 250days 1day Coverage: Ahistoricalsimulationmethod Observation days: 99% Holding period: Confidence level: 2.33standarddeviations Confidence interval: Method: BA THE TRADIN ASSUMPTIONS OFSHINSEI’SVaRMODEL bility oftheVaRmethod. losses toestimatedVaRconfirmtherelia- Back-testing involvescomparingtheactual SHINSEI BANK, LIMITEDAnnual Report2010 Millions ofyen C K-TESTIN G BUSINESS G ONTHEVaRMODELAPPLIEDTO 1,528 3,094 4,744 1,627 margin) (except forretailcustomer 2010 1,475 2,831 4,535 1,585 Management Structure Outline Message from the Management Review of Operations Risk Management Data Section 49 2.4 0 14.2 -11.8 (Millions of yen) 3 2.4 -7.4 -5.1 2 : -8.2 11.0 -19.1 to ten years Ten years over Parallel Shift Five years over ber of Days) (For the fiscal year ended March 31, 2010) ber of Days) (For the fiscal 44 m (Nu Billions of yen onsolidated) C 0.7 Business-as-usual model: This model forecasts the liquidity situation on an ongoing basis. The output of this model is an estimate of the funds we need to raise under normal circumstances. Net Gap Measurement: Basically we measure the future net funding gap based on business-as-usual assumptions for assets and retail funding, and contractual maturities for wholesale funding. Stress/event model: This is a liquidity forecast under extraor- dinary severe circumstances. The output of this methodolo- gy is the cash on hand under stressed circumstances. 12.9 13.7 99 • • • to five years Three years over Basis point value (bpv) method value due to fluctuations in The bpv method measures the risk of changes in fair market fair market value when inter- interest rates. For example, 10 bpv indicates the change in forth the impact on the fair est rates move 10 basis points, or 0.1%. The table below sets off-balance sheet items when market value of yen-denominated on-balance sheet and interest rates change by 10 basis points. gin) r 74 Ma 6.6 0.6 7.2 r One year over to three years 22 luding Custome c -6.3 -0.4 -6.8 to one year 4 ading-Related Revenue (Ex ading-Related r 11 -1,000< -1,000~-500 -500~-300 -300~-100 -100~0 0~100 100~300 300~500 500~1,000 >1,000 ity Risk am of Daily T am of Daily r d Negative figures indicate where an increase in interest rates will result in a decrease in fair market value. Positive figures indicate where an increase in interest rate will result in an increase in fair market value. : To quantify liquidity risk, we have developed three liquidity Our Liquidity Management Policy, reviewed and approved 0 20 40 60 80 On-balance sheet Off-balance sheet Total 100 Basis Point Value for JPY Balance Sheet (Fiscal year ended March 31, 2010, Non- 100 Basis Point Value for JPY Balance Sheet (Fiscal 100 SHINSEI BANK, LIMITED Annual Report 2010 forecast estimations: periodically by the ALM Committee, stipulates the guidelines and norms for appropriate liquidity risk management. Liqui Our ALM Committee is the senior review and decision-making body for the management of liquidity risk. The ALM Committee manages liquidity risk by establishing the short- term liquidity gap structure limits and minimum liquidity reserve levels. Note Banking Book point value (bpv) In our banking book, we use the basis risk indicators. method and net interest income as principal in fair market The bpv method measures the risk of changes rates. Net interest value resulting from fluctuations in interest net interest income income measures the risk of changes in year, due to fluctua- during a specified period, usually one tions in interest rates. Histog Management Structure 50 Data Section Risk Management Review of Operations Message from the Management Outline ous scenariosformarketinterestratefluctuations. mation fromourcurrentbalancesheetandoperationalplans. expected rolloveroflendinganddeposits,togetherwithinfor- estimated byconstructingahypotheticalmodelthatincludes based onnetinterestincome.Ourfuturebalancesheetis restricted toapredeterminedproportion. method, wherebyriskarisingfrominterestratefluctuationis market valueandprofitorlossforagivenaccountingperiod. as swaps.Weanalyzeandmanageriskbothintermsoffair as lendingactivities,andoff-balancesheettransactions,such risk, incorporatingbothon-balancesheettransactions,such We takeanintegratedapproachtomanaginginterestrate Interest RateRisk • • • minimum reservelevel,whichisdeterminedasfollows: with arecommendationontheliquiditygapstructureand Committee andmonthlytotheALMtogether and presentedweeklytotheMarketRiskManagement within approvedgaplimits. test) isstillmetandtheliquiditygapatvarioustimes in suchawaythatthefirststresstest(emergencysurvival minimum liquiditylevelreservesmaybereduced,butonly If availablereservesaresufficienttomeetthetest,then or changingourliabilityprofile,mustbetaken. action toremedythesituation,suchasincreasingreserves If availablereservesareinsufficienttomeetthetest,then exceed availablereserves. cumulative outflowoveraspecifiedperiodshouldnot relating toinflowandoutflowinastresssituation,thenet a crisisoremergencysituation;basedontheassumptions The firstrequirementisthatweshouldbeabletosurvivein Net interestincomesimulationsarecarriedoutusingvari- For profitorlosswithinaspecificperiod,risklimitsareset We setlimitsforfairmarketvalueriskaccordingtothebpv The outputofthesemeasurementsarecarefullyanalyzed used aspartoftheoverallRiskCapitalsystem. well ashistoricallosses.Thisquantificationresulthasbeen risk scenarioswhichreflectperceptionofbusinesslinesas Capital forinternalusebasedonourmodel,byutilizing II. Ontheotherhand,wehavealsoquantifiedoperationalRisk ed thestandardizedapproachforregulatorycapitalunderBasel tional risk. areas, therebyensuringtheeffectivemanagementofopera- cuss howtomanagethecommonelementsacrossrisk mation onriskmanagementissuesandmeasurestodis- management divisionsholdmonthlymeetingstoshareinfor- area. TheOperationalRiskManagementDivisionandspecific managing riskaccordingtothecharacteristicsofeach cross-organizational measures,standardsandproceduresfor implementing variouscontrols,includingtheformulationof operational andadministrativerisksystemsrisk.Theyare for respectiveriskareascomprisingoperationalrisk,suchas risks. Specificmanagementdivisionshavebeendesignated evaluates, analyzesandreportsontheoveralloperational responsible forGroup-wideoperationalriskmanagement, monitoring, reportingandcontrolling/mitigatingrisk. risk managementandaframeworkforidentifying,evaluating, clarify thedefinitionsofrisk,ourbasicpolicyandsystemfor Operational RiskManagementPolicyhasbeenestablishedto and coversextensiveriskareas. management, becauseitisinherentinanybusinessactivity external events.Operationalriskrequiresorganization-wide quate orfailedinternalprocesses,peoplesystemsfrom Operational riskreferstotheoflossresultingfrominade- ManagementofOperationalRisk 1. Operational RiskManagement Regarding measurementofoperationalrisk,wehaveadopt- The OperationalRiskManagementDivision,whichis To comprehensivelymanageoperationalrisk,an SHINSEI BANK, LIMITEDAnnual Report2010 Management Structure Outline Message from the Management Review of Operations Risk Management Data Section 51 online systems. ’ We have set up a special team tasked with minimizing sys- We have set up a special of business planning, we have With regard to continuity In March 2005, we extended the scope of ISMS certifica- In March 2005, we extended the scope to migrate to Furthermore, we have received certification and con- We provide regular status reports to management have also established a flexible system that enables us to system that enables established a flexible have also and services to meet customers’ con- provide new products In addition, we have endeavored to stantly changing needs. order to respond to possible future ensure scalability in of our customers and transactions. increases in the number in also improved our risk management tems risk. We have of business planning, disaster recovery terms of continuity against personal information leakage planning and safeguards and unauthorized access. tests in light of undertaken a review by conducting regular the growing social importance of banks tion, which we received in March 2004, from the Information tion, which we received in March 2004, Infrastructure Technology Division to the entire Banking Group and Retail Services Sub-Group. and domestic ISO/IEC27001, which became the international standard in March information security management system approaches to infor- 2007, and have strived to enhance our mation security measures. and minimize tinue to make Bank-wide efforts to manage risk. operational and administrative risk and systems failure to ’ or employees ’

d Systems Risk d ministrative Risk an SHINSEI BANK, LIMITED Annual Report 2010 We believe that the following three factors are crucial for We believe that the following three factors As measures for such risk, the Operational Planning and As measures for such risk, the Operational d our information systems strategy: security and reliability, flex- our information systems strategy: security kept our informa- ibility and scalability. In particular, we have and reliable in tion technology infrastructure robust, secure transactions. We order to ensure the security of customers’ Administration Division, responsible for control over the overall Administration Division, responsible for control various guide- operational errors and losses, have established and have also imple- lines such as an “Operations Guideline” supervision/training mented operational flow improvement and do occur, we try to improve our operational levels. When errors of such cases to prevent recurrences by compiling a database computer- and analyzing the causes. Our extensive automation, in minimizing ization and customer self-service have succeeded the occurrence of such mistakes/errors. perform accurate clerical work or from their errors or miscon- perform accurate clerical expanded our retail banking and conduct. Although we have and developed our institutional sumer finance businesses realize that appropriately addressing banking business, we is of crucial importance in order to offer such operational risk customers. reliable services to our A ring losses resulting from executives ring losses resulting Operational and administrative risk refers to the risk of incur- Operational and administrative 2. Management of Operational an Management 2. Management Structure

52 Data Section Human Resources and Review of Operations Message from the Management Outline Corporate Social Responsibility (CSR) throughout theBank.Asaresultofthesemeasures, Women’s Network,”asupportgroupforworkingmothers ing achild-careleaveandbenefitsprogram,“Shinsei female employeesbyofferingavarietyofsupportinclud- diversity, wehavepromotedtheadvancementoftalented opment bytakingonnewchallengesindifferentfields. posting programtotakechargeoftheirowncareerdevel- time, weencourageourpeopletoutilizeaninternaljob deepen ouremployees’skillsandexpertise.Atthesame ees’ developmentlevels,attimelyintervals,inorderto training alignedtospecificpositionsandindividualemploy- and providevariousdevelopmentprogramson-the-job cialization fromthemomentanewrecruitentersBank their customers.Tothisend,wepromoteindividualspe- who haveadeepunderstandingofboththeirfieldand ual businesses,Shinseiaimstodevelopprofessionals ferences incustomerprofileandcharacteristicsofindivid- a businessgroup-basedorganizationthatreflectsthedif- and worktoenhanceourpeople’smotivation.Employing with thecompany.Werespectdiversewaysofthinking, tions basedonage,gender,nationalityorlengthoftime human resources(HR)frameworkthatmakesnodistinc- At ShinseiBank,wehavebuiltaperformance-based Attracting an that offerscomprehensivesupporttoourcustomers. build trustandgrowasadiversifiedfinancialinstitution with accuracyandagility.Bydoingso,webelievecan changes andfulfillourcustomers’ever-changingneeds ness, wewillcontinuetomeetthechallengeofnew ples. Withtalentedpeopleasthedrivingforceofourbusi- fiercely competitiveenvironmentandliveuptoourprinci- services isessentialinordertodifferentiateourselvesa consistently delivervalue-addedsolutionsandsuperior that attractinganddevelopinghigh-caliberpeoplewhocan domestic andinternationalindustrialeconomy.Webelieve customers andthatcontributestothedevelopmentof ed ourgoalofbecomingabankinggroupthatisvaluedby In ourmanagementprinciples,ShinseiBankhasarticulat- Human Resources-AnEngineforGrowth CORPORATE SOCIALRESPONSIBILITY(CSR) HUMAN RESOURCESAND In oureffortstobuildacorporateculturepoweredby d RetainingTop-ClassTalent value overthelong-term. and shareholderscontinuouslygrowourcorporate this way,wewillstrivetoearnthetrustofourcustomers and followhighlytransparentmanagementpractices.In sation structure,boostemployeemoraleandmotivation, a moreappropriateandeffectiveevaluationcompen- ward, weplantointroducevariousHRinitiatives,including decisions onBank-wideHR-relatedchallenges.Goingfor- The Committeeenablesmanagementtomaketimely tant HR-relatedpoliciesandmonitorHRmanagement. Management DevelopmentCommitteetodecideimpor- consultation skills. corporate creditscreeningandretailassetmanagement lar importanceonfurtherdevelopingemployees’ aries. Aswestrivetofulfillthisrole,willplaceparticu- mission ofbanksinsocietyistoactasfinancialintermedi- aging humanresourcesacrossthesegroups.Theprimary ward, wewillworktoenergizetheorganizationbylever- Maintaining ourbusinessgroup-basedstructure,goingfor- the Bank’sprofitabilityandstabilizeourearningsbase. ciently deployourhumanresourcesinordertoimprove strength throughadditionalinitiativestodevelopandeffi- that weneedtofurtherenhanceourorganizational istration andITdeployment.Atthesametime,webelieve tional efficiencythroughfurtheroutsourcingofHRadmin- We arefocusedoncostreductionbyimprovingopera- constant effortisrequiredtoincreasebusinessefficiency. Given ourdifficultfinancialcondition,werecognizethat Corporate Management A HumanResourcesStrategythatSupports vated togivetheirbesteveryday. demonstrate theircapabilitiesandpotential,aremoti- an environmentwhereourpeopleareempoweredtofully mental healthcare.Inthisway,weareworkingtocreate ing servicesprovidedbyexternalspecialiststopromote of March2010.Inaddition,wealsoprovidefreecounsel- ing approximately23%ofalltitledmanagersasattheend among thehighestinourindustrywithwomenrepresent- proportion offemalemanagersatShinseiBankremains At theendoffiscalyear2008,weestablisheda SHINSEI BANK, LIMITEDAnnual Report2010 Management Structure Outline Message from the Management Review of Operations Human Resources and Data Section Corporate Social Responsibility (CSR) 53 performance by SONT athletes Arakawa riverbank their families clean up Christmas party choral

d Employee volunteers and ank an b ucation Program d With support from Arakawa Clean Aid Forum, a non- profit organization, Shinsei Bank and Shinsei Financial employees organized a clean-up of Arakawa riverbank (Tokyo) and environmental education program in October 2009. Attended by Group employees and their families, the program aimed to raise awareness of environmental issues through providing an opportunity to discover the rich biodiversity of an urban riverbank while learning about environmental prob- lems, such as garbage, firsthand. Environmental E nationwide (as of March 2010). Shinsei Financial and Shinsei Financial (as of March 2010). nationwide volunteers take part in the program Shinsei Bank employee in classroom-based workshops. by acting as facilitators plan to extend similar volunteer opportu- Going forward, we in other Group companies as we strive nities to employees our local communities. to give back more to Olympics Nippon Tokyo (SONT) Supporting Special Nippon Special Olympics branch Tokyo is the Japan of Special Olympics, the international sports organization that provides a range of coaching and competitive events for people with intellectual disabilities. Shinsei Bank since fis- has been an active supporter of the organization invited SONT ath- cal year 2004. In fiscal year 2009, we Tokyo headquarters. letes to a Christmas party held at our at the Athletes staged choral and dance performances organized by party, and took part in various activities In fiscal year Shinsei Bank Group employee volunteers. hands-on support 2010, employee volunteers will provide skills develop- to SONT athletes by taking part in a motor training. ment program and other day-to-day sports Clean-Up of Arakawa River workshop (Japanese drum) Employee volunteers take taiko part in a MoneyConnection® ren in Care d Since fiscal year 2008, Shinsei Bank has undertaken vari- Since fiscal year 2008, Shinsei Bank care. These have ous initiatives to support children in included organizing rice-planting, MoneyConnection® - A Financial Literacy Program As a responsible consumer credit provider, our subsidiary Shinsei Financial has been involved in financial literacy promotion since fiscal year 2006. Together with the non-profit organization Sodateage.net, Shinsei Financial runs MoneyConnection®, a financial literacy program for high school students that aims to prevent young people from becoming NEETs (people Not in Employment, Education or Training) - a growing social problem in Japan. To date, the program has reached approximately 28,000 students playing sessions and other activities in cooperation with playing sessions and other activities as well as other companies and non-profit organizations, living in chil- sending employee-donated gifts to children will be working with dren’s homes. In fiscal year 2010, we to arrange Hands On Tokyo, a non-profit organization, opportunities additional support programs that will include homes. for employees to volunteer at children’s SHINSEI BANK, LIMITED Annual Report 2010 Supporting Chil As part of our commitment to acting as a responsible cor- As part of our commitment contributing to societal development, porate citizen and promotes CSR initiatives. From the Shinsei Bank actively year 2008, we have been working second half of fiscal subsidiaries to organize these activities more closely with basis, focusing on opportunities that on a Group-wide to participate in volunteer activities allow our employees technical expertise. We have given and share the Bank’s on the themes of particular priority to activities centered continuing exist- “children” and “the environment,” while disaster relief funding activities, such as charity runs and supported by our raising, that have been strongly including support employees, and finance-related initiatives for microfinance projects. Contributing to Society Contributing Management Structure

54 Data Section Human Resources and Review of Operations Message from the Management Outline Corporate Social Responsibility (CSR) Re “green” electricityprocurement. of-the-art energy-efficientfacilities,arooftopgardenand advanced environmentaldesignelementssuchasstate- relocate toanewheadquartersbuildingfeaturing tures andfittings.Infiscalyear2010,theBankplansto from constructionmaterialsandmethods,tointeriorfix- consider theenvironmentinourchoicesofeverything opening newRetailBankingbranches,wetakecareto environmental impactofourofficesandworkstyle.When to raiseemployees’awareness. intranet sitefeaturingenvironmentalinformationinorder footprint. Inaddition,theBankhasdevelopedadedicated are committedtoprogressiveactionreduceourcarbon social responsibilitytohelptackleglobalwarming,andwe campaign, ShinseiBankbelievesthatitisacompany’s “Challenge 25”campaign.Embracingthespiritof 1990 levels,“TeamMinus6%”wasrecastasthe house gasemissionsby25%2020comparedwith September 2009ofanewnationaltargettoreducegreen- ing, since2005.FollowingJapan’sannouncementin Japanese government-ledcampaigntohaltglobalwarm- sions asamemberof“TeamMinus6%,”national, information ontheBank’sCO ment, weprovidevariousrelevantdataincludingreal-time As partofoureffortstolightenburdenontheenviron- Shinsei BankhasbeenworkingtoreduceourCO Environmental Sustainability Our Commitmentto intranet toboostemployeeawarenessofthisimportant (SAM), theDJSIAsiaPacific Indextracksthe20%most ty investmentspecialistSustainable AssetManagement Jointly managedbyDowJonesIndexesandsustainabili- tive years,onMarch31,2009andSeptember21,2009. Jones SustainabilityAsiaPacificIndexfortwoconsecu- Shinsei BankhasbeenselectedforinclusionintheDow Shinsei BankSelecte At Shinsei,wecontinuetoworkhardminimizethe d ucing ourImpactontheEnvironment d forInclusionintheDowJonesSustaina 2 emissions viaaBank-wide 2 emis- Committee forVaccinestheWorld’sChildren(JCV). fund 195childvaccinationsthroughdonationtotheJapan year 2009aspartoftheEcocapMovement,whichwill ees, wealsocollected156,000PETbottlecapsinfiscal reuse ofdiscardedumbrellas.Withthehelpouremploy- Aid ForumandShibukasa,aprojectthatpromotesthe House, LivingDreams,HandsOnTokyo,ArakawaClean dren’s goodstonon-profitorganizationsincludingFamily umbrellas, posterframesandstands,workgloveschil- organizations. Forinstance,wedonatedpockettissues, being usedattheBank,anddonatedthemtonon-profit we collectedvarioussurplusitemsornolonger “reducing,” “reusing”and“recycling.”Infiscalyear2009 holders withmoreusefulguidance. cy ofthisdatacollectiongoingforwardtoprovidestake- changes, andweintendtoexpandthescopeaccura- data onourenvironmentalimpactincompliancewithlegal issue. Fromfiscalyear2009,wehavebeencalculating Shinsei Bank. authoritative indexisanimportant achievementfor global attention,webelievethatourinclusioninthis responsible investmentcontinuestoattractgrowing the regionbyfreefloatmarketcapitalization.Associally sustainable companiesoutofthe600largeststocksin Notes Amount ofWaste Notes Environmental ImpactData eyln ae%59.2 260.91 % 440.66 179.75 t t t Recycling Rate Amount ofWasteDisposal t Amount Recycled Waste Generated Water Usage CO a sg m kwh Gas Usage Electricity Usage Shinsei Bankiscommittedtopromotingthe3R’sof : : 2 (2) DataisforShinseiBankheadquartersonly. (1) (1) CO (2) DataisforShinseiBankheadquartersonly. b msin t Emissions ility AsiaPacificIn W The EnergyConservationCenter,JapaninJune2009. aste generationdatahasbeencalculatedaccordingtoChiyodaCity(Tokyo)bylaws. 2 emissions datahasbeencalculatedusingtenantenergyestimationtoolsprovidedby G enerated /RecyclingRate SHINSEI BANK, LIMITEDAnnual Report2010 d ex forTwoConsecutiveYears ntF20 FY2009 FY2008 Unit FY2009 Unit 2 4,046,486 14,962 23,292 1,939 177.75 229.13 406.88 56.3