3 Risk developments

For a detailed overview of FMO’s risk governance and risk management approach please refer to the section "Risk Management" in FMO’s consolidated annual accounts as of 31 December 2021. The risk developments in the first half year of 2022 are disclosed below.

3.1 Capital adequacy 

FMO complies with the CRR/CRD requirements and reports its capital ratios to the Dutch Central Bank on a quarterly basis. FMO calculates the capital requirement for its entire portfolio based on the standardized approach. At the end of June 2022, the Total Capital ratio is 24.6%.

The inclusion of the remaining 2021 profit into the own funds is partly offset by the effects of the increased production during the first half year, resulting in a higher Risk Weighted Assets (RWA) and higher deductions from own funds.

FMO’s capital ratio remains above the combined ratio of the Supervisory Review and Evaluation Process (SREP) minimum and FMO’s internal requirements. 

 

June 30, 2022

December 31, 2021

IFRS shareholders' equity

3,557,172

3,433,616

Tier 2 capital

250,000

250,000

Regulatory adjustments:

  

- Interim profit not included in CET 1 capital

-102,010

-292,265

- Other adjustments (deducted from CET 1)

-310,972

-293,381

- Other adjustments (deducted from Tier 2)

-103,799

-94,059

Total capital

3,290,392

3,003,911

Of which Common Equity Tier 1 capital

3,144,190

2,847,970

   

Risk weighted assets

13,352,862

12,655,587

Of which:

 

-

- Credit and counterparty risk

10,824,242

10,256,838

- Foreign exchange

1,958,874

1,882,322

- Operational risk

551,389

492,475

- Credit valuation adjustment

18,357

23,951

   

Total capital ratio

24.6%

23.7%

Common Equity Tier 1 ratio

23.5%

22.5%

  • 1 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.

3.2 Credit risk

According to a June 2022 World bank report , Russia’s invasion of Ukraine has led not only to a humanitarian catastrophe, but also caused a deep regional slowdown and substantial negative global spillovers, such as continued supply bottlenecks and rising inflation. While the World bank still expected 4.1% growth for 2022 in January 2022, against 5.7% in 2021, in this more challenging context, global growth is now projected to slow down more sharply to 2.9% in 2022 and 3% in 2023-24. Growth in Emerging Markets is projected to roughly halve in 2022, slowing from 6.6% in 2021 to 3.4%.  

FMO’s portfolio has also been affected by these developments, particularly in the Ukraine itself. During the first half of 2022, FMO's NPL ratio increased from 9.5% to 11.1%. The increase is caused entirely by new NPL's in Ukraine, which as of 30 June 2022 amounted to €96.5 million, after a write off of €40 million of an exposure located in Russian occupied territory. The total impairment on loans in the Ukraine at end June 2022 (including write offs) amounted to €99 million.

Excluding NPL’s in Ukraine, the NPL percentage would be 9.3%. So far the impact of the war on our portfolio outside the Ukraine has been limited.  FMO made a detailed assessment of our exposures in the ECA region, but no new non-performing Exposures were identified. New NPLs in 2022 outside Ukraine only amounted to €3 million.

The impact of the COVID-19 pandemic on FMO's NPL levels remains relatively limited. None of the new NPL's were caused primarily by COVID-19 pandemic.

Past due information related to FMO’s portfolio loans and receivables are presented in the table below. This categorization does not apply to financial assets other than loans, including interest-bearing securities and short-term deposits.

Loans past due and impairments as per June 30, 2022

Stage 1

Stage 2

Stage 3

Fair Value

Total

      

Loans not past due

3,250,170

841,188

167,335

626,957

4,885,650

Loans past due:

     

-Past due up to 30 days

14,900

4,921

12,564

17,191

49,576

-Past due 30-60 days

-

-

-

-

-

-Past due 60-90 days

-

1,774

-

5,913

7,687

-Past due more than 90 days

-

-

301,445

23,797

325,242

Gross Exposure

3,265,070

847,883

481,344

673,858

5,268,155

Less: amortizable fees

-33,174

-8,702

-3,183

-

-45,059

Less: ECL allowance

-21,647

-33,311

-226,753

-

-281,711

Less: FV adjustments

-

-

-

-84,422

-84,422

Carrying amount

3,210,249

805,870

251,408

589,436

4,856,963

Loans past due and impairments as per December 31, 2021

Stage 1

Stage 2

Stage 3

Fair Value

Total

      

Loans not past due

3,222,515

811,927

75,658

651,035

4,761,135

Loans past due:

     

-Past due up to 30 days

6,154

-

11,558

-

17,712

-Past due 30-60 days

-

-

38,340

-

38,340

-Past due 60-90 days

21

-

6,612

-

6,633

-Past due more than 90 days

-

-

227,301

39,914

267,215

Gross exposure

3,228,690

811,927

359,469

690,949

5,091,035

Less: amortizable fees

-34,678

-7,992

-2,600

-

-45,270

Less: ECL allowance

-20,486

-29,522

-152,095

-

-202,103

Less: FV adjustments

-

-

-

-68,971

-68,971

Carrying amount

3,173,526

774,413

204,774

621,978

4,774,691

All Interest Bearing Securities (credit quality of AA or higher) and Banks (credit quality of BBB- or higher) are classified as Stage 1. An amount of € 72 thousand is calculated for the ECL of both asset classes as per June 30, 2022.

The following table shows the credit quality and the exposure to credit risk of the loans to the private sector at amortized cost and fair value at June 30, 2022.

Loans to the private sector at June 30, 2022
Indicative counterparty credit rating scale of S&P

Stage 1

Stage 2

Stage 3

Fair value

Total

%

F1-F10 (BBB- and higher)

330,102

-

-

-

330,102

6%

F11-F13 (BB-,BB,BB+)

1,882,068

109,935

-

383,547

2,375,550

45%

F14-F16 (B-,B,B+)

1,007,903

327,239

2,932

154,526

1,492,600

28%

F17 and lower (CCC+ and lower)

44,997

410,709

478,412

135,785

1,069,903

20%

Gross exposure

3,265,070

847,883

481,344

673,858

5,268,155

100%

Less: amortizable fees

-33,174

-8,702

-3,183

-

-45,059

 

Less: ECL allowance

-21,647

-33,311

-226,753

-

-281,711

 

Less: FV adjustments

-

-

-

-84,422

-84,422

 

Carrying amount

3,210,249

805,870

251,408

589,436

4,856,963

 

Loans to the private sector at December 31, 2021 Indicative counterparty credit rating scale of S&P

Stage 1

Stage 2

Stage 3

Fair value

Total

%

F1-F10 (BBB- and higher)

298,631

-

-

15,691

314,322

6%

F11-F13 (BB-,BB,BB+)

1,882,765

143,029

-

347,046

2,372,840

47%

F14-F16 (B-,B,B+)

1,019,114

344,623

-

197,785

1,561,522

31%

F17 and lower (CCC+ and lower)

28,180

324,275

359,469

130,427

842,351

17%

Gross exposure

3,228,690

811,927

359,469

690,949

5,091,035

100%

Less: amortizable fees

-34,678

-7,992

-2,600

-

-45,270

 

Less: ECL allowance

-20,486

-29,522

-152,095

-

-202,103

 

Less: FV adjustments

-

-

-

-68,971

-68,971

 

Carrying amount

3,173,526

774,413

204,774

621,978

4,774,691

 

The following table shows the credit quality and the exposure to credit risk of the financial guarantees on June 30, 2022.

Financial guarantees1)

June 30, 2022

Indicative counterparty credit rating scale of S&P

Stage 1

Stage 2

Stage 3

Total

F1-F10 (BBB- and higher)

8,912

-

-

8,912

F11-F13 (BB-,BB,BB+)

179,335

-

-

179,335

F14-F16 (B-,B,B+)

35,322

-

-

35,322

F17 and lower (CCC+ and lower)

12,965

-

14,329

27,294

Sub-total

236,534

-

14,329

250,863

ECL allowance

-767

-

-11,327

-12,094

Total

235,767

-

3,002

238,769

  • 1 Financial guarantees represent €97,963 classified as contingent liabilities and €152,900 classified as irrevocable facilities as per Note 'Irrevocable and contingent liabilities'

Financial guarantees1)

December 31, 2021

Indicative counterparty credit rating scale of S&P

Stage 1

Stage 2

Stage 3

Total

F1-F10 (BBB- and higher)

8,715

385

-

9,100

F11-F13 (BB-,BB,BB+)

142,825

609

-

143,434

F14-F16 (B-,B,B+)

40,187

1,144

-

41,331

F17 and lower (CCC+ and lower)

11,926

-

-

11,926

Sub-total

203,653

2,138

-

205,791

ECL allowance

-723

-36

-

-759

Total

202,930

2,102

-

205,032

  • 1 Financial guarantees represent €69,341 classified as contingent liabilities and €136,450 classified as irrevocable facilities as per Note 'Irrevocable and contingent liabilities'

The following table shows the credit quality and the exposure to credit risk of the loan commitments to private sector on June 30, 2022. These represent contracts signed but not disbursed yet.

Loans commitments

June 30, 2022

Indicative counterparty credit rating scale of S&P

Stage 1

Stage 2

Stage 3

Other1¹)

Total

F1-F10 (BBB- and higher)

9,552

-

-

-

9,552

F11-F13 (BB-,BB,BB+)

172,103

19,105

-

9,053

200,261

F14-F16 (B-,B,B+)

173,475

39,984

-

-

213,459

F17 and lower (CCC+ and lower)

34,627

19,427

5,559

697

60,310

Total nominal amount

389,757

78,516

5,559

9,750

483,582

ECL allowance

-1,883

-2,272

-

-

-4,155

Total

387,874

76,244

5,559

9,750

479,427

  • 1 Loan commitments for which no ECL is calculated (Fair Value loans or expired availability date).

Loans commitments

December 31, 2021

Indicative counterparty credit rating scale of S&P

Stage 1

Stage 2

Stage 3

Other1¹)

Total

F1-F10 (BBB- and higher)

36,471

-

-

-

36,471

F11-F13 (BB-,BB,BB+)

248,726

46,138

-

19,265

314,129

F14-F16 (B-,B,B+)

212,836

16,496

-

-

229,332

F17 and lower (CCC+ and lower)

34,186

2,338

10,477

697

47,698

Total nominal amount

532,219

64,972

10,477

19,962

627,630

ECL allowance

-2,397

-880

-

-

-3,277

Total

529,822

64,092

10,477

19,962

624,353

  • 1 Loan commitments for which no ECL is calculated (Fair Value loans or expired availability date).

The following tables show the changes in loans, financial guarantees and loan commitments. 

Changes in Loans to the private sector at AC in 2022

Stage 1

Stage 2

Stage 3

Total

 

Gross amount

ECL allowance

Gross amount

ECL allowance

Gross amount

ECL allowance

Gross amount

ECL allowance

At January 1, 2022

3,194,012

-20,486

803,935

-29,522

356,869

-152,095

4,354,816

-202,103

Additions

464,118

-2,915

50,871

-1,914

-

-

514,989

-4,829

Exposure derecognised or matured/lapsed (excluding write offs)

-513,418

1,804

-75,335

375

-12,163

44,762

-600,916

46,941

Transfers to Stage 1

56,547

-426

-56,547

426

-

-

-

-

Transfers to Stage 2

-154,948

1,719

154,948

-1,719

-

-

-

-

Transfers to Stage 3

-55,609

337

-88,026

1,493

143,635

-1,830

-

-

Modifications of financial assets (including derecognition)

213

-

-

-

627

-

840

-

Changes in risk profile (including changes in accounting estimates)

-

-84

-

-515

-

-146,545

-

-147,144

Amounts written off

-

-

-

-

-43,518

43,518

-43,518

43,518

Changes in amortizable fees

1,830

-

757

-

989

-

3,576

-

Premium/Discount

68

-

-

-

-

-

68

-

Changes in accrued income

1,745

-

1,896

-

-3,912

-

-271

-

Foreign exchange adjustments

237,338

-1,596

46,682

-1,935

35,634

-14,563

319,654

-18,094

At June 30, 2022

3,231,896

-21,647

839,181

-33,311

478,161

-226,753

4,549,238

-281,711

Changes in Loans to the private sector at AC in 2021

Stage 1

Stage 2

Stage 3

Total

 

Gross amount

ECL allowance

Gross amount

ECL allowance

Gross amount

ECL allowance

Gross amount

ECL allowance

At January 1, 2021

3,289,746

-40,608

814,362

-45,870

301,861

-146,743

4,405,969

-233,221

Additions

294,795

-2,095

6,983

-563

-

-

301,778

-2,658

Exposure derecognised or matured/lapsed (excluding write offs)

-454,056

16,627

-141,379

9,690

-14,504

5,093

-609,939

31,410

Transfers to Stage 1

214,991

-10,587

-214,991

10,587

-

-

-

-

Transfers to Stage 2

-118,745

1,782

119,701

-1,917

-956

135

-

-

Transfers to Stage 3

-10,767

227

-30,372

2,912

41,139

-3,139

-

-

Modifications of financial assets (including derecognition)

-1,602

-

1,837

-

1,488

-

1,723

-

Changes in risk profile not related to transfers

-

10,391

-

551

-

-16,216

-

-5,274

Amounts written off

-

-

-

-

-8,919

8,919

-8,919

8,919

Changes in amortizable fees

3,113

-

-

-

-

-

3,113

-

Changes in accrued income

-833

-

1,625

-

-619

-

173

-

Foreign exchange adjustments

84,096

-1,506

11,918

-1,131

8,707

-4,540

104,721

-7,177

At June 30, 2021

3,300,738

-25,769

569,684

-25,741

328,197

-156,491

4,198,619

-208,001

The full contractual amount of assets that were written off during the current and prior reporting period are still subject to enforcement activity.

Movement financial guarantees1 in 2022

Stage 1

Stage 2

Stage 3

Total

 

Outstanding exposure/Nominal amount

ECL allowance

Outstanding exposure/Nominal amount

ECL allowance

Outstanding exposure/Nominal amount

ECL allowance

Outstanding exposure/Nominal amount

ECL allowance

At January 1, 2022

203,653

-723

2,138

-36

-

-

205,791

-759

Additions

49,232

-423

-

-

-

-

49,232

-423

Exposures matured (excluding write-offs)

-16,596

314

-2,169

783

-27,737

-

-46,502

1,097

Transfers to Stage 1

-

-

-

-

-

-

-

-

Transfers to Stage 2

-

-

-

-

-

-

-

-

Transfers to Stage 3

-13,182

117

-

-

13,182

-117

-

-

Changes to models and inputs used for ECL calculations

-

-9

-

-744

27,745

-10,572

27,745

-11,325

Foreign exchange adjustments

13,427

-43

31

-3

1,139

-638

14,597

-684

At June 30, 2022

236,534

-767

-

-

14,329

-11,327

250,863

-12,094

  • 1 Total financial guarantees represent €97,963 classified as contingent liabilities and €152,900 classified as irrevocable facilities, as per Section 8 Commitments and Contingent Liabilities.

Movement financial guarantees1 in 2021

Stage 1

Stage 2

Stage 3

Total

 

Outstanding exposure/Nominal amount

ECL allowance

Outstanding exposure/Nominal amount

ECL allowance

Outstanding exposure/Nominal amount

ECL allowance

Outstanding exposure/Nominal amount

ECL allowance

At January 1, 2021

300,939

-1,875

105,612

-2,630

-

-

406,551

-4,505

Additions

89,292

-844

633

-

-

-

89,925

-844

Exposures matured (excluding write-offs)

-194,040

666

-91,323

2,543

-

-

-285,363

3,209

Transfers to Stage 1

-

-

-

-

-

-

-

-

Transfers to Stage 2

-

-

-

-

-

-

-

-

Transfers to Stage 3

-

-

-

-

-

-

-

-

Changes to models and inputs used for ECL calculations

-

630

-

-1

-

-

-

629

Foreign exchange adjustments

10,775

-65

3,291

-84

-

-

14,066

-149

At June 30, 2021

206,966

-1,488

18,213

-172

-

-

225,179

-1,660

  • 1 Total financial guarantees represent €123,216 classified as contingent liabilities and €101,963 classified as irrevocable facilities, as per Section 8 Commitments and Contingent Liabilities.

Movement of loan commitments in 2022

Stage 1

Stage 2

Stage 3

Total

 

Nominal amount

ECL allowance

Nominal amount

ECL allowance

Nominal amount

ECL allowance

Nominal amount

ECL allowance

At January 1, 2022

532,219

-2,397

64,972

-880

10,477

-

607,668

-3,277

Additions

459,868

-1,095

40,384

-1,069

-

-

500,252

-2,164

Exposures derecognised or matured (excluding write-offs)

-586,450

1,707

-79,331

1,716

-5,275

-

-671,056

3,423

Transfers to Stage 1

13,182

-56

-13,182

56

-

-

-

-

Transfers to Stage 2

-61,619

318

61,619

-318

-

-

-

-

Transfers to Stage 3

-

-

-

-

-

-

-

-

Changes to models and inputs used for ECL calculations

-

-204

-

-1,722

-

-

-

-1,926

Amounts written off

-

-

-

-

-

-

-

-

Foreign exchange adjustments

32,557

-156

4,054

-55

357

-

36,968

-211

At June 30, 2022

389,757

-1,883

78,516

-2,272

5,559

-

473,832

-4,155

Movement of loan commitments in 2021

Stage 1

Stage 2

Stage 3

Total

 

Nominal amount

ECL allowance

Nominal amount

ECL allowance

Nominal amount

ECL allowance

Nominal amount

ECL allowance

At January 1, 2021

378,990

-3,160

54,904

-1,748

18,360

-

452,254

-4,908

Additions

194,008

-702

35,487

-2,713

-

-

229,495

-3,415

Exposures derecognised or matured (excluding write-offs)

-96,213

1,773

-9,564

1,007

-11,699

-

-117,476

2,780

Transfers to Stage 1

-

-

-

-

-

-

-

-

Transfers to Stage 2

-3,698

52

3,698

-52

-

-

-

-

Transfers to Stage 3

-3,693

-

-

-

3,693

-

-

-

Changes to models and inputs used for ECL calculations

-

566

-

-190

-

-38

-

338

Amounts written off

-

-

-

-

-

-

-

-

Foreign exchange adjustments

9,652

-90

1,708

-59

262

38

11,622

-111

At June 30, 2021

479,046

-1,561

86,233

-3,755

10,616

-

575,895

-5,316

The modelling methodologies, assumptions and inputs applied in determining ECL in the current period are consistent with those applied in the financial year ending December 31, 2021.

The macroeconomic scenarios’ model was updated following the publication of the new macroeconomic outlook data by the International Monetary Fund (IMF) in April 2022 (2021: October). The updates of the model based on GDP forecast, caused new point-in-time adjustments to probability of defaults in the impairment model, leading to an increase of €2.9 million in combined stage-1 and stage-2 impairment charge.

IMF GDP % Growth Forecasts

2022

2021

Turkey

2.7

11.0

India

8.2

8.9

Georgia

3.2

10.4

Argentina

4.0

10.2

Nigeria

3.4

3.6

Uganda

4.9

5.1

Armenia

1.5

5.7

South Africa

1.9

4.9

Mongolia

2.0

1.4

Kenya

5.7

7.2

Ivory Coast

6.0

6.5

Ukraine

-35.0

3.4

June 30, 2022

Total unweighted amount per ECL scenario

Probability

Loans to the private Sector1)

Guarantees

Bonds and Cash

Total

ECL Scenario:

      

Upside

282,076

2%

5,404

236

2

5,642

Base case

303,032

50%

145,433

6,046

36

151,515

Downside

336,581

48%

155,495

6,029

35

161,559

Total

  

306,332

12,311

73

318,716

  • 1 Loans to private sector in this table include amounts related to ECL allowances for off balance loan commitments (refer to note 6).

December 31, 2021

Total unweighted amount per ECL scenario

Probability

Loans to the private Sector1)

Guarantees

Bonds and Cash

Total

ECL Scenario:

      

Upside

187,575

2%

3,740

10

1

3,752

Base case

206,192

50%

102,690

380

26

103,096

Downside

237,678

48%

113,508

553

25

114,085

Total

  

219,938

942

52

220,933

  • 1 Loans to private sector in this table include amounts related to ECL allowances for off balance loan commitments (refer to note 6).

June 30, 2022

    

ECL allowance Stage 2 - Trigger assessment

Loans to private Sector

Guarantees

Loan Commitments

Total

     

More than 30 days past due

-24

-

-

-24

Deterioration in credit risk - financial difficulties

-33,287

-

-2,272

-35,559

Total

-33,311

-

-2,272

-35,583

December 31, 2021

    

ECL allowance Stage 2 - Trigger assessment

Loans to private Sector

Guarantees

Loan Commitments

Total

     

More than 30 days past due

-

-

-

-

Deterioration in credit risk - financial difficulties

-29,522

-36

-880

-30,438

Total

-29,522

-36

-880

-30,438

FMO continues to support clients by undertaking several forborn measures.

June 30, 2022

Performing

of which: performing but past due > 30 days and <=90 days

of which: performing forborne

Non Performing

of which: non performing forborne

of which: impaired

Gross Exposure

Less: amortizable fees

Less: ECL allowance

Plus: fair value adjustments

Carrying value

            

Loans to the private sector (Amortised Cost)

4,112,953

-

192,099

481,344

292,881

251,720

4,594,297

-45,059

-281,711

-

4,267,527

Loans to the private sector (Fair value)

570,913

-

6,468

102,945

87,370

-

673,858

-

-

-84,422

589,436

Total

4,683,866

-

198,567

584,289

380,251

251,720

5,268,155

-45,059

-281,711

-84,422

4,856,963

December 31, 2021

Performing

of which: performing but past due > 30 days and <=90 days

of which: performing forborne

Non Performing

of which: non performing forborne

of which: impaired

Gross exposure

Less: amortizable fees

Less: ECL allowance

Plus: fair value adjustments

Carrying amount

            

Loans to the private sector (Amortised Cost)

4,030,437

-

235,341

369,649

237,052

171,548

4,400,086

-45,270

-202,103

-

4,152,713

Loans to the private sector (Fair value)

577,776

-

23,544

113,173

70,942

-

690,949

-

-

-68,971

621,978

Total

4,608,213

-

258,885

482,822

307,994

171,548

5,091,035

-45,270

-202,103

-68,971

4,774,691

3.3 Equity investment risk 

The first half of 2022 was characterized by the Russian invasion on Ukraine. Inflation, which was already high before the invasion due to disruptions in the supply chain and high consumer demand after COVID-19 pandemic, went up world-wide as prices for fossil fuels and food substantially increased.  As it is expected that the economy in Europe will be impacted more because of the Russian invasion due to gas shortages the EUR weakened substantially versus the USD.

Re-measurement of fair values of the equity portfolio (excluding results from sales) amounted to €113 million profit (YE December 2021: €98 million). Underlying factors contributing to this profit were a strengthening of the USD versus EUR contributing €123 million and a decrease of the value of the portfolio of €10 million. The loss was caused by €67 million from the Ukraine portfolio and higher valuations of the Venture Capital portfolio, the general PE fund portfolio and some changes in the direct equity portfolio contributing to total €57mln.  Per June 30, 2022, the equity investments portfolio amounts to €2.2 billion (December 31, 2021: €2.0 billion). In addition, dividend income amounts to €32 million.

3.4 Concentration risk 

Concentration risk is the risk that FMO’s exposures are too concentrated within or across different risk categories. Concentration risk may trigger losses large enough to threaten the institution’s health or ability to maintain its core operations or trigger material change in institution’s risk profile. Strong diversification within FMO’s emerging market portfolio is ensured through stringent limits on individual counterparties, sectors, countries, and regions.

Country risk

Country risk arises from country-specific events that adversely impact FMO’s exposure in a specific country. Within FMO, country risk is broadly defined. It includes all relevant factors that have a common impact on FMO’s portfolio in a country such as economic, banking and currency crises, sovereign defaults, and political risk events. To ensure diversification within FMO’s emerging market portfolio across regions, a country limit framework is in place to mitigate concentration risk from the perspective of the portfolio as a whole.

During the first half of 2022, country risk in FMO’s markets has generally increased as a result of the Ukraine - Russia war. The impact of the war is worldwide and has resulted into high inflation, higher interest rates, supply chain disruptions and increasing risk aversion.
Moreover, Sri Lanka is affected by a deep economic crisis followed by high inflation, massive protests, and collapse of the government. Most noteworthy rating downgrades in the first half of 2022 occurred for Ukraine, Belarus, Sri Lanka and El Salvador. The rating downgrade of Ukraine affected the valuations of our equity and loan portfolio across all sectors for Ukrainian customers. These rating downgrades could lead to tighter investment limits for particular countries. Finally, individual client ratings may be influenced as a consequence.

3.5 Market risk - Currency Risk

FMO continued the limited appetite for currency risk in 2022. Exposures are hedged through matching currency
characteristics of assets with liabilities, or through derivative transactions such as cross-currency swaps and FX forwards conducted with either commercial parties or with The Currency Exchange Fund (TCX Fund N.V.). Most currency exposures are hedged to US dollars on a micro-hedge basis, whereby the US dollar position is managed on a portfolio basis accordingly. FMO does not take any active positions in any currency for purpose of making a profit. Each individual currency is managed within a strict position limit and an overall appetite level is set at 1% of shareholder’s equity for the total open position across all currencies. Individual exposures and total open currency positions were within risk appetite in 2022. FMO maintains a deliberately unhedged foreign currency position which stems from the private equity investments, and which serves the purpose of a structural hedge for our capital ratio.

Interest Rate Risk in the banking book 

Interest rate risk is the risk of potential loss due to adverse movements in interest rates. Changing interest rates mainly
influence the fair value of fixed interest balance sheet items and affect the bank’s earnings by altering interest ratesensitive income and expenses, affecting its net interest income (NII). FMO continued to have low appetite for interest rate risk in the first half of 2022. FMO does not take any active interest rate positions for the purpose of making a profit.

The interest rate gap and BPV exposure are monitored on weekly basis against limits set by the ALCO. The delta EVE limit is defined in the Risk Appetite Framework and set at 5% of Tier I. The EaR limit is defined in the Risk Appetite Framework set at 5% of projected net interest income. The interest rate positions were within risk appetite in 2022. In spite of rising rates in the United States, Europe and globally our positions remain within limits.

3.6 Compliance risk 

In 2021, FMO  completed its financial economic crime (FEC) enhancement project. This included an extensive Know Your Customer (KYC) file remediation, tailored to the specific requirements of developing and emerging economies. The external validation, which was overall positive, identified several recommendations that FMO will follow up on in 2022. For certain compliance themes, such as anti-bribery and corruption, as well as sanctions and unusual transactions, awareness sessions (refreshers) were organized with targeted front-office departments.

FMO received the Dutch Central Bank's (DNB) conclusions and observations. Follow-up on DNB’s recommendations and findings has been initiated. We are determined to continue to improve in the regulatory domain and to ensure that the changes we implement are tailored to the day-to-day realities and complexities of the markets we are active in.

Several additional measures have been taken since the start of 2022 in relation to sanctions involving Russia/Belarus to ensure FMO’s funds are not directly or indirectly provided to sanctioned parties. These measures include, among others, setting up of a Sanctions Working Group, increased frequency of adverse news screenings and communication has been done with specific customers in the affected regions and industries.

End of 2021, FMO started a project to further develop and enhance privacy data protection capabilities including engaging a dedicated privacy officer and privacy champions within various departments. Specific trainings will be deployed to stimulate awareness. The project is on track and aims to finish in 2022. The privacy officer monitors FMO's privacy compliance periodically. The privacy officer is involved in i.e. change management activities and new projects to advise on privacy risks and risk mitigation.

3.7 Regulatory risk

On 27 October 2021, The European Commission published proposals for reforms to the Capital Requirements Regulations (CRR-3) and Capital Requirements Directive (CRD6). These draft regulations focus on three main parts: 1) the implementation of the finalized Basel III reforms into European legislation, 2) new rules requiring banks to systematically identify, disclose and manage sustainability risks (ESG risks) as part of their risk management, and 3) stronger enforcement tools for supervisors overseeing EU banks. The first two parts are of relevance to FMO, and closely monitors the regulatory developments while these new regulations are being drafted and discussed at a European level.

With regards to the European translation of the Basel III standard, updates were included on the use of internal models, recalibrations to the standardized approach for credit risk, operational risk, CVA and market risk. Important elements for FMO include the envisaged implementation date (1 January 2025) and the change in treatment for private equity exposures under the standardized approach for credit risk. Under the current draft foreseen risk weight will increase from the current 150% to 250% if the intended holding period is greater than 3 years, rather than 400% when falling under the speculative equity classification.

The CRR-3 and CRD-6 proposals also included several amendments in relation to ESG risk. Most notably, according to the draft FMO is required to start disclosing ESG risks as part of its Pillar 3 disclosures on an annual basis starting in 2025, and the proposal also added ESG risks into the scope of the Supervisory Review and Evaluation Process, the annual assessment of banks conducted by banking supervisors. A more elaborate description of the relevant changes expected from CRR-3 and CRD-6 can be found in FMO’s 2021 annual report.