Mega Bank Annual Report 2017

22 Mega Bank -22- Item Content to the senior management regularly on the implementation status and compliance status of the laws and regulations, such as the Banking Act of the Republic of China, and internal credit and investment related regulations of the Bank. 3. Conducts regular credit review to better understand customers, increases the frequency of review for loan customers with high and abnormal credit risk, and reports the review status to the senior management after annual analysis and review. 4. Visits the invested enterprises at least once per year, and takes note of their operation, capital flow and execution of business plan, helps solve various problems, analyzes the operations, and reports to the Board of Managing Directors. 5. Irregularity reporting system: if loan or investment customers encounter irregular operation, financial difficulty or other unexpected material incident that would affect the company ’ s operation, the business unit shall immediately report to the senior management through the departments in charge, and to Mega Financial Holding Company through the Risk Management Department, so that related information can be relayed and necessary measures carried out immediately. 6. Asset evaluation: for the various credit assets, investments, other assets and contingent assets, business supervisory units shall base on the Bank ’ s historical loss experience on bad debts write-off, provision, bad debt recovery, etc., current non-performing loans ratio, collection status and the competent authority ’ s regulations, generally accepted accounting principles, etc., to evaluate the possible loss and provide for bad debts or cumulative impairment. D. Credit Risk Hedging or Mitigation Policy, and Strategies and Procedures for Monitoring the Continuing Effectiveness of Hedging and Mitigation Instruments Through prudent credit investigation and review mechanism with fully understanding of customers ’ financial and operation status, the following countermeasures are adopted: 1. When the probability of loss occurrence of loans or transactions is high, and the severity of expected losses is significant, e.g. a newly incorporated company with low credit rating and with credit risk higher than profit, the Bank does not undertake such business. 2. When the probability of loss occurrence of loans or transactions is low, but the severity of expected losses is high, such business can be undertaken by self-liquidating trade finance, account receivable finance, etc., and strengthen foreign exchange transactions, and manage cash flow to further reduce risk. Major credit exposures, housing loans, etc., may be undertaken by requesting for collateral or guarantor, or through a syndicated loan, or selling off part of positions in the secondary market after undertaking, or engaging in debt securitization, so as to reduce or transfer risk. 3. When the probability of loss occurrence of loans or transactions is high, but the severity of expected losses is minor, the Bank shall sign agreements with the clauses such as financial or non-financial covenants and prohibition on sale of assets or mortgage so as to control the credit risk of the borrower or counterparty. 4. When the probability of loss occurrence of loans or transactions is low, and the severity of expected losses is minor, the Bank shall undertake such business if upon assessment, the profit is higher than risk borne. 5. For collaterals such as securities, real estates, etc., the Bank regularly monitor loan-to-value ratios for each case. For guarantors ’ creditworthiness, the Bank monitor through measures such as credit review to ensure the effectiveness of risk mitigation tools. E. Method of Legal Capital Allocation 1. The Bank currently adopts the Standardized Approach for credit risk regulatory capital charge. 2. In order to quantify risk so as to effectively measure risk and enhance management, the Bank has progressively developed various credit rating models, introduced aforementioned models linked to probability of default into credit investigation process, and gradually developing a system complied with the credit risk Internal Ratings-Based Approach under the New Basel Capital Accord.