(c) Disclosure of Problem Assets 2. Market and Liquidity Risk Management System 4. Risk Management of Marketable Credit Transactions Market and Liquidity Risks 1. Basic Approach to Market and Liquidity Risk  Management (1) Definitions of Market and Liquidity Risks (2) Fundamental Principles for Market and Liquidity  Risk Management  ■  SMBC’s Market Risk and Liquidity Risk Management  System SMFG  2011 39 Problem assets are loans and other claims of which recovery of  either principal or interest appears doubtful, and are disclosed in  accordance with the Banking Act (in which they are referred to  as “risk-monitored loans”) and the Financial Reconstruction Law  (where they are referred to as “problem assets”). Problem assets are  classified based on the borrower categories assigned during self- assessment. For detailed information on results of self-assessments,  asset write-offs and provisions, and disclosure of problem assets at  March 31, 2011, please refer to page 170. Financial products, such as investments in funds, securitized  products, and credit derivatives, that bear indirect risk arising from  underlying assets such as bonds and loan obligations, are consid- ered to be exposed to both credit risk from the underlying assets as  well as “market risk” and “liquidity risk” that arise from their trading  as financial products. This is referred to as marketable credit risk. For these types of products, we manage credit risk using the  methods of analysis and assessment in detail of characteristics of  underlying assets, but, for the sake of complete risk management,  we also apply the methods for management of market and liquidity  risks. In addition, we have established guidelines based on the char- acteristics of these types of risk and appropriately manage the risk  of losses. 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.  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. SMFG is working to further enhance the effectiveness of its quan- titative management of market and liquidity risks across the entire  Group by setting allowable risk limits; ensuring the transparency  of the risk management process; clearly separating front-office,  middle-office and back-office operations; and establishing a highly  efficient system of mutual checks and balances. On the basis of SMFG’s Groupwide basic policies for risk  management, SMBC’s Board of Directors authorizes important  matters relating to the management of market and liquidity risks,  such as basic policies and risk limits, which are decided by the  Management Committee. Additionally, at SMBC, the Corporate Risk  Management Department, which is the planning department of the  Risk Management Unit, an independent of the business units that  directly handle market transactions, manages market and liquidity  risks in an integrated manner. The Corporate Risk Management  Department not only monitors the current risk situations, but also  reports regularly to the Management Committee and the Board  of Directors. Furthermore, SMBC’s ALM Committee meets on a  monthly basis to examine reports on the state of observance of  SMBC’s limits on market and liquidity risks, and to review and dis- cuss the SMBC’s ALM operation.  To prevent unforeseen processing errors as well as fraudu- lent transactions, it is important to establish a system of checks  on the business units (front office). At SMBC, both the processing  Management Committee Market Risk Management Committee ALM Committee Boar Member in Charge of Risk Management Unit Policy Reporting Back Office (Back offices of Japan  and overseas branches) Other market- related operations Front Office Market  operations  (Treasury Unit) Market  operations  (International   Banking Unit) (Group companies) Front/Middle/Back Offices Market  operations Managing Depts. Middle Office  (Corporate Risk Management Dept.) Liquidity Risk Manage- ment Market Risk Manage- ment Boar of Directors Inspection and verification of transactions Final approval and Management of Model,  new products and risk limits Corporate Auditors Exter nal Audit (auditing firm) Internal Audit Dept.