This chapter provides an overview of FMO's risk governance and risk management approach. The sections describe the key risk domains relevant for FMO and developments throughout 2019. Together with the quantitative Pillar 3 disclosures - available on FMO's website - it constitutes FMO's Pillar 3 disclosure.
FMO defines risk as the effect of uncertainty on objectives. FMO has a comprehensive framework in place to manage and control risk, reflecting its banking license, state guarantee and a mandate to do business in high- risk countries. The purpose of FMO’s risk management framework is to support the institution’s ambitions while safeguarding its long-term sustainability. Risk management practices are integrated across the institution, from day-to-day activities to strategic planning, to ensure both compliance with relevant regulations and adherence with internal risk appetite. A sound risk management framework is required to preserve the institution’s integrity, which is essential for fulfilling its mission and upholding good reputation. To accomplish these goals, employees are expected to fulfill their roles within the bank with integrity and care, and carefully consider the interests of all stakeholders.
The risk management framework is based on the principle of “three lines of defense”, where the first line of defense (Investment Department and supporting functions) is being balanced by the second line of defense (Risk), and the third line (Internal Audit) that perform independent assessments whether risks are adequately managed.
FMO has a two-tier board structure in place, consisting of a Supervisory Board and a Management Board. The Supervisory Board (SB) appoints the members of the Management Board and supervises its activities. The SB advises the Management Board and approves the annual budget, the strategic development and the risk appetite. Each SB member has specific expertise in FMO’s primary areas of operation. The SB members are appointed in the Annual Meeting of Shareholders.
The Management Board (MB) comprises of three statutory directors; the Chief Executive Officer (CEO), the Chief Investment Officer (CIO), and the Chief Risk and Finance Officer (CRFO). The MB is accountable for compliance with relevant legislation and regulations.
The MB installed the Executive Committee (ExCo) in 2019. The Executive Committee (ExCo) is responsible for the daily management of the bank, with a mandate that includes the preparation and execution of strategies and plans, culture transformation, projects and stakeholder management. The ExCo members consists of three MB members and a subset of FMO directors.
The Management Board has established risk committees to assist it in fulfilling its oversight responsibilities regarding the risk appetite of FMO, the risk management framework and the governance structure that supports it. The main risk committees are shown in the figure and described below.
The Asset and Liability Committee (ALCO). The ALCO assists the MB by evaluating, monitoring and steering the financial risk profile of FMO in accordance with the risk appetite approved by the SB. The ALCO approves, monitors and evaluates policies, limits and procedures to manage the financial risk profile of FMO on a portfolio level, except for credit and equity risk related policies. The ALCO is responsible for overseeing FMO’s capital and liquidity positions and defining possible interventions. The CRFO (Chair), Director Risk, Director Treasury, Director Credit, Legal & Special Operations (CLS) and two Directors from Investment departments are voting members of the ALCO.
The Financial Regulation Committee (FRC). The FRC- a sub-committee of the ALCO- ensures that FMO adheres to existing prudential and financial regulation and assesses impact of new developments on FMO’s business strategy. The FRC for financial regulation is chaired by the Director Treasury, while the FRC for prudential regulation is chaired by the Director Risk. Members of the committees are senior representatives of Finance, Treasury and Risk.
The Operational Risk Committee (ORC). The ORC is mandated by the MB to evaluate, monitor and steer the operational risk profile of FMO in accordance with the risk appetite. The ORC approves policies and supporting standards and takes decisions in the context of the Product Approval and Review Process (PARP). The Committee is chaired by the CRFO.
The Investment Committee (IC). The IC is responsible for approving financing proposals and advising MB on transactions in terms of specific counterparty, product as well as country risk. The IC is chaired by the Director CLS and consists of senior representatives of Investment departments and CRFO departments. All financing proposals are accompanied by the advice of the Credit department. This department is responsible for credit risk assessment of both new transactions and the existing portfolio. Credit also has the authority to approve new transactions with small exposures.
The Investment Review Committee (IRC). The IRC is responsible for monitoring the portfolio asset quality and for reviewing financial exposures, which require specific attention, and decide on needed measures. If the IRC concludes that a client has difficulties in complying with the contractual obligations, it is transferred to the Special Operations department, which is responsible for the management of distressed assets. The IRC also decides on specific loan impairments, approves credit risk and concentration risk policies and is responsible for internal credit rating models. It is chaired by the CRFO.
The Compliance Committee (CC). The CC is delegated by the MB to take decisions on compliance related matters and issues based on proposed solutions. The CC is chaired by the CRFO and meets at least four times per year. If it is required, the CC can escalate decisions to the MB. CC is responsible for implementing developments, related projects, laws and regulations, policies and procedures related to compliance matters.
Risk appetite and taxonomy
The Risk Taxonomy defines the main risk types and risk subtypes FMO is exposed to in the pursuit of its objectives. This common set of risk categories, types and subtypes facilitates the structuring of other elements of the risk management framework, such as the Risk Appetite and Risk Policies.
The Risk Appetite defines appetite bandwidths, alert and tolerance levels for main risk types and subtypes. The Risk Appetite Framework (RAF) is reviewed by the Management Board and approved by the Supervisory Board on an annual basis. If necessary, it can be revised on a semi-annual basis, particularly in case of material developments or a change in the strategic goals.
The risk appetite, governance, and monitoring metrics for each risk domain are described in more detail in the sections below.
In 2019, many improvements have been made to FMO’s risk management and internal control framework, and more are planned for 2020. A program was started to strengthen our risk governance by consistently applying the principle of three lines of defense. We revisited our Risk Taxonomy for 2020 to accommodate our focus on the main risk types and we adopted the ORX taxonomy for operational risk. New policies were implemented, addressing model risk, tax risk and data quality. A new Governance, Risk & Compliance tool was implemented to support centralized monitoring and testing of key controls, registration of risk events and tracking of risk-related actions.
Pillar 3 disclosure
FMO publishes the required Pillar 3 disclosures on an annual basis in conjunction with the publication of the Annual Report. Together these documents fulfill the Pillar 3 disclosure requirements of the CRD IV regulation.
Market discipline and transparency in the publication of solvency risks are important elements of the Basel III rules for Pillar 3. Central to these publications is information on the solvency and the risk profile of a bank, providing disclosures on such matters as its capital structure, capital adequacy, risk management, and risk measurement, in line with the objective of IFRS 9. The objective of FMO’s disclosure policies is to ensure maximum transparency in a practical manner. The consolidation scope for prudential reporting is equal to the accounting scope for FMO. FMO was granted the Solo Waiver for prudential reporting based on Article 7 and therefore only reports figures related to CRR on a consolidated basis.