Integrated Risk Management (1) Risk Capital-Based Management Risk management systems are in place at the individual  Group companies in accordance with SMFG’s Groupwide basic  policies for risk management. For example, at SMBC, specific  departments have been appointed to oversee the handling of  the four risk categories listed above, in addition to risks associ- ated with settlement. Each risk category is managed taking  into account the particular characteristics of that category. In  addition, the Risk Management Unit has been established— independent of the business units—and the risk management  framework has been strengthened by consolidating the functions for  managing major risks—credit, market, liquidity and operational—into  the Risk Management Unit and enhancing our across-the-board risk  monitoring ability. A board member is assigned to oversee the Risk  Management Unit comprising the Corporate Risk Management  Department and Credit & Investment Planning Department.  The Corporate Risk Management Department—the unit’s plan- ning department—comprehensively and systematically manages  all categories of risk in cooperation with the Corporate Planning  Department. Moreover, the Internal Audit Unit—independent of all  business units—conducts periodic audits to ensure that the man- agement system is functioning properly. In order to maintain a balance between risk and return as well as  ensure the soundness of the Group from an overall perspective, we  employ the risk capital-based management method. We measure  “risk capital” based on value at risk (VaR), etc. as a uniform basic  measure of credit, market, and operational risk, taking account of  the special characteristics of each type of risk and the business  activities of each Group company. We then allocate capital appro- priately and effectively to each unit to keep total exposure to various  risks within the scope of our resources, i.e., capital. In the case of credit and market risk, we set maximum risk  capital limits, which indicate the maximum risk that may be taken  during the period, taking account the level of stress stipulated in  business plans. In addition, for operational risk, we also allocate  risk capital, and, for the Group as a whole, we set total risk capital  allocations within SMFG’s capital. Risk capital limits are subdivided  into guidelines or ceilings for each business including VaR and loss  limits. Therefore, by strictly observing the VaR and loss limits, and  other factors, SMFG maintains the soundness of the Group as a  whole. In this framework, risk capital includes credit concentration  risk and interest rate risk in the banking book which are taken into  account under the Second Pillar of Basel II. In addition, we conduct  risk capital-based management activities on a consolidated basis,  including each Group company. Furthermore, under our system top management plays an  active role in the approval of basic policies for risk management.  The decision-making process for addressing credit, market, and  liquidity risk at the operating level is strengthened by the Credit  Risk Management Committee and the Market Risk Management  Committee, which are subcommittees of the Management  Committee. The Management Committee is also attended by the  relevant department heads. ■  Risk Management Framework Liquidity Risk Other Risks Framework Risk Category (Settlement Risk and Others) ALM/ Funding Gap Management by Risk Type Credit Risk Banking Risk/Trading Risk Strategic Equity Investment Risk Other Market-Related Risks Risk  Capital-Based  Management Market Risk Processing Risk System Risk Operational Risk Liquidity risk is the risk that there may be difficulties in raising funds needed for settlements,  as a result of the mismatching of uses of funds and sources of funds or unexpected outflows  of funds, which may make it necessary to raise funds at higher rates than normal levels. — 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. Market risk is the possibility that fluctuations in interest rates, foreign exchange rates, stock prices,  or other market prices will change the market value of financial products, leading to a loss. Processing risk is the possibility of losses arising from negligent processing by  employees, accidents, or unauthorized activities. System risk is the possibility of a loss arising from the failure, malfunction, or  unauthorized use of computer systems. Operational risk is the possibility of losses arising from inadequate or failed internal  processes, people, and systems or from external events. SMFG  2011 33