Daiwa Securities Group Annual Report 2012 2. Overview of Capital Instruments 3. Overview of Capital Adequacy Assessment Methods <Economic Capital> <Regulatory Capital> 4. Credit Risk A). Overview of risk management policies and procedures <Calculation of Credit Risk Asset> B). The Name of the external credit assessment institutions  (hereunder ECAIs) used when determining the risk weight 5. Overview of Policy and Procedure for the Credit Risk Mitigation Techniques <Allowance for Doubtful Account> The Group’s capital is consisted of common stock and subordinated debts with defined maturity. Capital Instruments  Balance Common Stock 1,749 Million Shares Subordinated Bonds 57.1 Billion Yen Subordinated Loans 45.6 Billion Yen Economic capital allocated toward major companies is set with  reflecting historical risk amount, business plans, budget, and others  are considered. Capital adequacy is assessed by confirming and  quantifying if the risk amount held by the Group companies as a result  of their business activities falls with in the range of allocated capital. The Group set forth “The Rules of Economic Capital Management”  and “The Rules of Regulatory Capital Management”, and assesses  capital adequacy from economic capital as well as regulatory capital  point of views. The Group sets economic capital allocation amount after reserving  capital buffer adequately resists financial stress under Tier 1 capital,  and accordingly allocates such capital toward major Group companies. In assessing the capital adequacy, the Group monitors capital  requirements based on the aggregated level of each Group company  against the economic capital allocated to them. The Group monitors regulatory capital against the alert level which is  set well above the minimum regulatory capital ratio. allowance for doubtful accounts is provided for probable losses on  loans and receivables, based on the actual historical default rate  for normal claims, and based on individually assessed amounts for  doubtful and default loans. <Credit Risk Management Policy> Credit risk exposures are being calculated in the Standardized  Approach. In regard to transactions that involve exposure to credit risk, before  the transaction is made, the Group assigns the counterparty a  credit limit based on its credit rating. Subsequently, the Group  carefully monitors the notional amount and the credit equivalent  amount. In particular, in the wholesale business where the expo- sure to credit risk is comparatively high, the Group assigns credit  limit based on the probability of failure of each counterparty and  expected recovery rate of the transaction. The probability of failure  is estimated via internal model and expected recovery rate from the  transaction conditions such as the maturity, collaterals and legal  enforceability of the agreement. In addition, the Group measures  and periodically monitors credit VaR at the portfolio level. In order to prepare for the loss from bad debts on loan and others,  Collateral is used for the Credit Risk Mitigation techniques (hereunder  CRM Techniques) purpose. Types of collaterals are generally cash or high liquid securities.  Received collateral is valued mark to market daily and monitored  against exposures. In addition, balance and type of collaterals taken  are also subject to the monitoring. For derivative and repo transac- tions, bilateral netting agreements are generally set. For transaction  where legally enforceable bilateral netting arrangement exists, the  CRM Techniques are applied. The Group uses the Comprehensive Approach for the CRM  Techniques. Rating & Investment Information, Inc. Japan Credit Rating Agency, Ltd. Moody’s Investors Service, Inc. Standard & Poor’s Rating Services Following ECAIs are used to determine the risk weight. 95