Capital adequacy

Definition

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 internal capital adequacy planning and control framework. Capital adequacy metrics are calculated by the Risk department and regularly reviewed by the FRC 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 Economic Capital Ratio is based on an economic capital approach 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 in the banking book (IRRBB), concentration risk and 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, forecasting future capital needs, and proposing and quantifying possible interventions to FRC.

Developments

FMO’s Total Capital Ratio decreased from 24.9 percent at year-end 2022 to 23.0 percent at year-end 2023, well above the Supervisory Review and Evaluation Process (SREP) minimum and 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 reduction of the Total Capital Ratio during 2023 is mostly attributable to a regulatory change. From 1 October 2023 (following the publication of the Official Journal of The European Union on 11 September 2023) the list of closely correlated currencies for the purpose of calculating the capital ratios according to the standardized approach has changed. This amendment led to an increased market risk capital requirement of around €48 million.  Overall, market risk requirement has increased with about €65 million from year-end 2022 to year-end 2023, leading to a Total Capital Ratio reduction of about 1.6 percent. Otherwise, the capital position remained strong throughout the year. 

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, 2023, FMO's total available qualifying capital equals €3,245 million (2022: €3,271 million). 

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.

The Pillar 2 guidance (P2G) determines the adequate level of capital to be maintained above the existing capital requirements for withstanding stressed situations. The P2G is a non-binding requirement, but is expected to be met under normal circumstances and a breach would represent an important early warning signal.

FMO's regulatory target capital ratio incorporates the fully phased-in capital requirement (including the P2G) supplemented by: 

• A management buffer, and

• A dynamic foreign exchange (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 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 CET-1 Ratio remained comfortably above the appetite level throughout 2023.

Economic capital

Economic capital is calculated in order to support an AAA rating. The economic capital framework differs in two elements from the regulatory capital ratios. First, it captures risks that are not covered under Pillar 1; such as ESG risk, interest rate risk in the banking book (IRRBB), and concentration risk. Second, the EC approach applies internal methodologies for credit risk of the loan and equity portfolio as well as for market risk. 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 and more conservative, leading to a higher capital requirement than the standardized approach. From the economic capital framework, an internal capital adequacy indicator (Economic Capital Ratio) is derived. FMO’s Economic Capital Ratio remained comfortably above the appetite level throughout 2023.

Leverage ratio

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 percent (2022: 31 percent), far above the minimum requirement of 3 percent proposed by European authorities.