FMO aims to maintain a strong capital position that exceeds regulatory requirements and supports its AAA rating.
Risk appetite and governance
FMO maintains a strong capital position by means of an integrated capital adequacy planning and control framework. Capital adequacy metrics are calculated by Risk and regularly reviewed by the ALCO and senior management.
FMO uses both regulatory capital ratios and an internal economic capital ratio to determine its capital position. The regulatory ratios, the Total Capital Ratio and Common Equity Tier 1 (CET1) Ratio, are calculated based on the standardized approach of the Capital Requirements Regulation (CRR) and take credit, market, operational and credit valuation adjustment risks into account. The internal ratio (Economic Capital Ratio) is based on an economic capital model having credit risk as the most important element. Other risks in FMO’s economic capital framework are operational, market, credit value adjustment, interest rate risk and ESG risk impacting FMO’s reputation.
FMO has implemented a Capital Management Framework that aggregates all elements to manage FMO’s current and future capital position in line with the RAF. The Capital Management Framework provides insights to FMO’s management about the degree to which the strategy and capital position may be vulnerable to (unexpected) changes. These insights may require a management intervention to steer FMO's capital position against these unexpected events. Risk is responsible for flagging potential capital issues and proposing and quantifying possible interventions to ALCO.
FMO’s Total Capital Ratio decreased from 24.9% at year-end 2020 to 23.7% at year-end 2021, which is well above the Supervisory Review and Evaluation Process (SREP) minimum and the other regulatory requirements. The second half-year profit of 2021 is not yet included within the capital base. Upon profit recognition from DNB, the Total Capital Ratio would be 26%. Given that FMO has no additional tier 1 and limited tier 2 capital, the Total Capital ratio is more restrictive than the CET-1 ratio. The recovery following the effects of the COVID-19 crisis was strong and the net profit, reflecting the value increase of the equity portfolio, strengthened further the capital position. The slight reduction of the overall portfolio that followed almost two years of relatively low production levels, also benefited the regulatory capital position of FMO and balanced the effect of the USD appreciation observed over 2021.
The Economic Capital Ratio is calculated based on CET-1 capital increased from 14.9% to 15.2%. The increase is mainly the result of the profit recorded in 2021. In 2021 the Economic Capital Ratio is calculated under a more conservative assumption whereby only the going concern capital is taken into account, thus excluding the Tier 2 capital issued by FMO from the total available capital. The methodology changed from June 2021 onwards and has been applied prospectively. Comparatives for 2022 have not been adjusted according to the new methodology.
Under the CRR/CRD banks are required to hold sufficient capital to cover for the risks they face. FMO reports its capital ratio to the Dutch Central Bank (DNB) on a quarterly basis according to the standardized approach for all risk types. Per December 31, 2021, FMO's total available qualifying capital equals €3,004 million (2020: €2,908 million).
IFRS shareholders' equity
Tier 2 capital
-Interim profit not included in CET 1 capital
-Other adjustments (deducted from CET 1)
-Other adjustments (deducted from Tier 2)
Of which Common Equity Tier 1 capital
Risk weighted assets
- Credit and counterparty risk
- Foreign exchange
- Operational risk
- Credit valuation adjustment
Total capital ratio
Common Equity Tier 1 ratio
Following specific provisions in the CRR, FMO is required to deduct from its regulatory capital significant and insignificant stakes for subordinated loans and (in)direct holdings of financial sector entities above certain thresholds. These thresholds correspond to approximately 10% of regulatory capital. Exposures below the 10% thresholds are risk weighted accordingly.
As part of the SREP, DNB sets the minimum capital requirements for credit institutions. For 2021, The Dutch Central Bank has set a prudential requirement for FMO in terms of total capital at 17.3% and CET1 of 11.3%. The total prudential requirement consists of the total SREP capital ratio (13.8%), the combined buffer requirement (2.5%) and a Pillar 2 Guidance (1.0%).
The combined buffer requirement applicable to FMO consists of the capital conservation buffer and the institution specific countercyclical buffer (currently insignificant). As of 2021, the capital conservation buffer was recognized at 2.5%.
The Pillar 2 guidance (P2G) determines the adequate level of capital to be maintained above the existing capital requirements to have sufficient capital buffer to withstand stressed situations. The P2G is a non-binding requirement and no automatic restrictions on distributions of dividends or bonuses are imposed.
FMO's regulatory target capital ratio incorporates the fully phased-in capital requirement by DNB supplemented with
(i) a management buffer, and
(ii) a dynamic FX buffer. The dynamic FX buffer is in place to cover variations in the regulatory capital ratio following changes in the EUR/USD exchange rate that are not covered by the structural hedge. This structural hedge functions as a partial hedge against an adverse effect of the exchange rate on the regulatory capital ratios. Further information regarding the structural hedge is provided in the currency risk section.
Economic capital is calculated using a conservative confidence interval of 99.99%. This level is chosen to support a AAA rating. The economic capital model differs in two elements from the regulatory capital ratios. First, the EC model captures risks that are not covered under Pillar 1: reputational risk, interest rate risk in the banking book (IRRBB). Second, the EC model applies an internal model approach for credit risk resulting from FMO’s emerging market loan portfolio. FMO invests in emerging markets, which results in a profile with higher credit risk exposure than generally applies to credit institutions in developed economies. The internal model is more risk sensitive, leading to a higher capital requirement than the standardized approach. The most important parameters for calculating credit risk capital requirements are the probability of default and loss given default calculated using FMO’s internal credit risk rating. Please refer to the 'credit risk' section for more information regarding the internal credit risk rating system.
Credit risk emerging market portfolio (99.99% interval)
Credit risk treasury portfolio
Credit valuation adjustment
Total pillar 1
Interest rate risk in the banking book
Economic capital (pillar 1 & 2)
Surplus provisioning (capped at 0.6% RWA)
Total available capital
EC - Risk weighted assets (internal model)
EC - Capital ratio
- 1 Surplus provisioning for the loan portfolio refers to the difference between the total provisioning minus total expected loss.
The leverage ratio represents a non-risk-adjusted capital requirement, defined as tier 1 capital as a percentage of FMO's total unweighted exposures. FMO’s leverage ratio equals 29% (2020: 28%) which is far above the minimum requirement of 3% proposed by European authorities.
- 1 The leverage ratio for 2020 has been retrospectively adjusted due to an overstatement of the off–balance amount.