Liquidity risk is managed within the context of cash-flow plans  and funding gap. Other risk categories are managed with proce- dures closely attuned to the nature of the risk, as described in the  following paragraphs. Credit risk is the most significant risk to which SMFG is  exposed. Without effective credit risk management, the impact of  the corresponding losses on operations can be overwhelming.  The purpose of credit risk management is to keep credit risk  exposure to a permissible level relative to capital, to maintain the  soundness of Groupwide assets, and to ensure returns commen- surate with risk. This leads to a loan portfolio that achieves high  returns on capital and assets. In the current volatile business environment, stress testing to analyze  and estimate the adverse effects of events such as an economic  recession and market volatility on the business and financial condi- tions of financial institutions is increasingly essential. When estab- lishing a management plan, SMFG also conducts stress tests using  a number of stress events to analyze and estimate their impact on  its financial condition. SMBC’s credit policy comprises clearly stated universal and basic  operating concepts, policies, and standards for credit operations, in  accordance with the business mission and rules of conduct. SMBC is promoting the understanding of and strict adherence  to its credit policy among all its managers and employees. By con- ducting risk-sensitive credit management, SMBC aims to enhance  shareholder value and play a key part in society by providing high- value-added financial services. Basel II is an international agreement on the minimum capital  requirements for internationally active banks, and it has been applied  since March 31, 2007, to the internationally active banks in Japan. Under the Basel II framework, there are multiple approaches  to calculating the capital requirements. We have adopted the  advanced internal ratings-based (IRB) approach for credit risk and  the Advanced Measurement Approach (AMA) for operational risk  since March 31, 2009 and March 31, 2008 respectively. Details of our initiatives are provided below, and detailed infor- mation on the capital ratio is provided in the discussion on Capital  Ratio Information appearing in the Financial Section and Corporate  Data. At SMBC, the Credit & Investment Planning Department within  the Risk Management Unit is responsible for the comprehensive  management of credit risk. This department drafts and adminis- ters credit policies, the internal rating system, credit authority  guidelines, and credit application guidelines, and manages non- performing loans (NPLs) and other aspects of credit portfolio  management. The department also cooperates with the Corporate  Risk Management Department in quantifying credit risk (risk capital  and risk-weighted assets) and controls the bank’s entire credit risk.  Further, the Credit Portfolio Management Department within the  Credit & Investment Planning Department has been strengthening  its active portfolio management function whereby loan securitization  and other market transactions are used to stabilize the portfolio’s  credit risk for a more sophisticated portfolio. The Corporate Research Department within the Corporate  Services Unit performs research on industries as well as investi- gates the business situations of borrower enterprises to detect early  signs of problems or growth potential. The Credit Administration  Department is responsible for handling NPLs of borrowers classi- fied as potentially bankrupt or lower, and draws up plans for their  workouts, including write-offs, and corporate rehabilitation. The  department closely liaises with the Group company SMBC Servicer  Co., Ltd., which engages in related services, and works to efficiently  reduce the amount of NPLs by such means as the sell-off of claims. The Credit Departments within each business unit conduct  credit risk management along with branches, for loans handled  by their units and manage their units’ portfolios. The credit limits  they use are based on the baseline amounts established for each  grading category, with particular attention paid to evaluating and  managing customers or loans perceived to have particularly high  credit risk. All Group companies follow the fundamental principles established  by SMFG to assess and manage credit risk on a Groupwide basis  and further raise the level of accuracy and comprehensiveness of  Groupwide credit risk management. Each Group company must  comprehensively manage credit risk according to the nature of its  business, and assess and manage credit risk of individual loans and  credit portfolios quantitatively and using consistent standards.  Overseas credits also include an element of country risk, which  is closely related to credit risk. This is the risk of loss caused by  changes in foreign exchange, or political or economic situations. Credit risk is the possibility of a loss arising from a credit event, such  as deterioration in the financial condition of a borrower, that causes  an asset (including off-balance sheet transactions) to lose value or  become worthless. SMFG  2011 34 (2) Stress Testing Implementation of Basel II (3) Credit Policy 2. Credit Risk Management System Credit Risk 1. Basic Approach to Credit Risk Management (1) Definition of Credit Risk (2) Fundamental Principles for Credit Risk Management