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 the Risk Management department 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, ESG risk.
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 increased from 23.7 percent at year-end 2021 to 24.9 percent at year-end 2022, which is well above the Supervisory Review and Evaluation Process (SREP) minimum and the other regulatory requirements. Given that FMO has no additional Tier 1 and limited Tier 2 Capital, the Total Capital ratio requirements are more restrictive than the CET-1 Ratio requirements. The first part of the year has been characterized by the developments in Ukraine, with FMO’s portfolio being affected by the recognition of €96,5 million of new NPLs in the first half of 2022. The slowdown and increased inflation that followed the events in Ukraine have created further uncertainty in FMO’s markets. At the same time, the unequal impact of the crisis between Europe and the U.S., coupled with a flight to quality of market participants and the aggressively restrictive monetary policy of the Federal Reserve, have led to a significant appreciation of the US dollar against the euro, that diminished towards year-end. The EUR/USD exchange rate dynamic mitigated the loss recognized in the portfolio. The capital position remained strong and has not been impacted significantly by the events.
Regulatory own funds
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, 2022, FMO's total available qualifying capital equals €3,271 million (2021: €3,004 million). The increase is mostly attributable to the full recognition of the profit recorded in the second half of 2021.
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. Exposures below the thresholds are risk weighted accordingly.
As part of the SREP, DNB sets the minimum capital requirements for credit institutions, encompassing Pillar 1 and Pillar 2 risks. On top of the total SREP capital requirement, additional capital buffers are applicable according to the regulation.
The combined buffer requirement applicable to FMO consists of the capital conservation buffer and the institution specific countercyclical buffer (currently insignificant).
The Pillar 2 guidance (P2G) determines the adequate level of capital to be maintained above the existing capital requirements withstand stressed situations. The P2G is formally a non-binding requirement, but it’s expected to be met under normal circumstances.
FMO's regulatory target capital ratio incorporates the fully phased-in capital requirement (including the P2G) supplemented by:
A management buffer, and
A dynamic FX buffer. The dynamic FX buffer is in place to cover variations in the regulatory capital ratio following short-term changes in the EUR/USD exchange rate that are not covered by the structural hedge. The 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.
FMO’s Total Capital Ratio and CET1 Ratio remained comfortably above the appetite level throughout 2022.
Economic capital is calculated in order to support an 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; namely ESG risk, and interest rate risk in the banking book (IRRBB). Second, the EC approach applies internal methodologies for credit risk of the loan and equity 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 for the loan portfolio 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. From the economic capital approach, an internal capital ratio (Economic Capital Ratio) is derived. FMO’s Economic Capital Ratio remained comfortably above the appetite level throughout 2022.
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 31 percent (2021: 29 percent ), far above the minimum requirement of 3 percent proposed by European authorities.