Capital allocation and bank management based on the quantification of credit risk

Safe and sound banking is maintained through the allocation and control of capital by the use of integrated risk management techniques that are based on quantification of the risks inherent in the banking business. Business management with the integrated ROE - risk-adjusted ROE - facilitates efficient utilization of capital. Such management contributes to the growth of a bank's profitability. By promoting this type of management at Japanese banks with large portfolios of transactions - both in number and amount - the concept of credit risk delta is an effective method. The credit risk delta is a measurement of the marginal increase in the risk of the entire portfolio when loans to one segment that constitutes the portfolio are increased. The credit risk delta helps to quantify risks while taking into account the types of business management city banks use. This management method provides consistent and simple measurement applicable to all the levels - from individual customers up to branches and the bank as a whole.