Risk Management Basic Approach (2) Fundamental Principles and Basic Policies for Risk  Management (1) Types of Risk to Be Managed Risk Management System ■ SMFG’s Risk Management System SMFG  2011 32 As risks in the financial services increase in diversity and complexity,  risk management—identifying, measuring, and controlling risk—has  never been more important in the management of a financial holding  company. SMFG has encapsulated the basic principles to be employed  in risk management in the manual entitled  Regulations on Risk  Management . In the manual, we have specified the basic policies  for risk management: 1) Set forth SMFG’s Groupwide basic policies  for risk management after specifying the categories of risk to which  these policies apply; 2) Provide all necessary guidance to Group  companies to enable them to follow the basic risk management  policies set forth by SMFG and set up their own appropriate risk  management systems; and 3) Monitor the implementation of risk  management by all Group companies to ensure that their practices  meet the relevant standards. SMFG’s Groupwide basic policies for risk management stipulate the  fundamental principles for risk management that must be followed,  and spell out risk management procedures from various perspec- tives. These include managing risk on a consolidated accounting  basis, managing risk using quantification methods, ensuring con- sistency with business strategies, setting up a system of checks  and balances, contingency planning for emergencies and serious  situations, and verifying preparedness to handle all conceivable  risk situations. In addition, there are specific operational policies  for implementing appropriate management of risk by all Group  companies. Under SMFG’s Groupwide basic policies for risk management,  all Group companies periodically carry out reviews of the basic  management policies for each risk category, or whenever deemed  necessary, thus ensuring that the policies followed at any time  are the most appropriate. The management of SMFG constantly  monitors the conduct of risk management at Group companies,  providing guidance when necessary. Top management plays an active role in determining SMFG’s  Groupwide basic policies for risk management. The system works  as follows: The basic policies for risk management are determined  by the Management Committee before being authorized by the  Board. The Management Committee, the designated board mem- bers, and the relevant risk management departments perform risk  management according to the basic policies. At SMFG, we classify risk into the following categories:  (1) credit risk, (2) market risk, (3) liquidity risk and (4) operational  risk (including processing risk and system risk). In addition, we  provide individually tailored guidance to help Group companies  identify categories of risk that need to be addressed. Risk catego- ries are constantly reviewed, and new categories may be added in  response to changes in the operating environment. The Corporate  Risk Management Department works with the Corporate Planning  Department to comprehensively and systematically manage all  these categories of risk across the entire Group. SMFG SMBC SMBC Nikko Securities SMBC Friend Securities SMFG Card & Credit Cedyna Financial Sumitomo Mitsui Card Sumitomo Mitsui Finance & Leasing Japan Research Institute Management Committee Corporate Risk Management Dept. Designated Board Members Board of Directors Corporate Auditors External Audit Internal Audit Unit  Board of Directors Guidance for  drafting of basic  policies  Monitoring Report Corporate Planning  Dept./Corporate Risk  Management Dept. Corporate Planning Dept./ Corporate Risk  Management Dept. Other Risks Corporate Auditors External Audit Audit Dept. Corporate-wide Risk Management Bank-wide Risk Management Credit & Investment Planning Dept. Operations Planning Dept. IT Planning Dept. Other Departments Management  Committee Credit Risk  Management Committee Market Risk  Management Committee Designated  Board Members Board Member in Charge of Risk Management Unit General Affairs Dept. IT Planning Dept. Settle- ment  Risk System Risk Operational Risk Processing Risk Liquidity Risk Credit Risk Corporate Risk  Management Dept. Risk  Manage- ment Unit Market Risk Credit Risk Market Risk Liquidity Risk Processing Risk System Risk Operational Risk