Risk management
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 2022. Together with the quantitative Pillar 3 disclosures - available on FMO's website - it constitutes FMO's Pillar 3 disclosure.
Risk governance
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 Support Agreement 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 to the risk appetite. A sound risk management framework is required to preserve the institution’s integrity, which is essential for fulfilling its mission and upholding its good reputation.
The Management Board defines and promotes the desired corporate culture and high ethical and professional standards. Employees are encouraged to take the right risks in an informed manner, with integrity and careful consideration of the interests of all stakeholders.
The risk management framework is based on the 'three lines model', where the first line (Investment department and supporting functions) is challenged and advised by the second line (Risk department and Compliance department), and the third line (Internal Audit) that performs independent assessments of the functioning of first and second line. The appointment of a separate CRO reinforces FMO’s risk management framework and the oversight responsibilities for risk management.
FMO has a two-tier board structure in place, consisting of a Supervisory Board (SB) and a Management Board (MB). The Supervisory Board 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 MB currently comprises of five statutory directors: the Chief Executive Officer (CEO), two Co-Chief Investment Officers (CIO), the Chief Finance and Operations Officer (CFOO) and the Chief Risk Officer (CRO). The MB is accountable for compliance with relevant legislation and regulations.
The organizational structure is shown in the figure below.
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 risk committee structure will be reviewed in 2023 with the new MB composition in mind. The current risk committees and their responsibilities are 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 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 CRO.
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 CRO 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. The IRC also deciding on specific loan impairments, approves credit risk and concentration risk policies and is responsible for internal credit rating models. It is chaired by the CRO.
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 CRO and is held in two different sessions that focus either on customer cases or on regular compliance topics. The CC is responsible for implementing developments, related projects, laws and regulations, policies and procedures related to compliance matters.
The Regulatory Monitoring Committee (RMC). The RMC maintains oversight of relevant laws and regulations and ensures that the MB is kept up to date on the progress regarding the implementation of new and updated laws and regulations, and the level of regulatory compliance within FMO. The RMC is chaired by the CRO.
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 MB and approved by the SB on an annual basis. If necessary, it can be revised during the year 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.
Developments
The composition of the MB changed in 2022. The CRFO function has been split into a dedicated CRO and a CFOO. Also, a co-CIO has been appointed.
The Regulatory Monitoring Committee was introduced as the sixth risk committee.
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 Capital Requirements Directive (CRD) IV and V regulation.
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.