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, with 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 into FMO’s management regarding the degree to which the strategy and capital position may be vulnerable to (unexpected) changes. These insights may require management intervention to steer FMO's capital position through 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 23.0 percent at year-end 2023 to 21.3 percent at year-end 2024, 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 2024 is mostly attributable to a year-over-year USD appreciation of almost 7 percent against EUR and is aligned with previous forecasts regarding the TCR development in 2024. USD appreciation brings about an immediate increase in FMO risk weighted assets, which pushes down the Total Capital Ratio. The USD appreciation also increases the Marked to Market value of FMO’s private equity assets that are USD denominated; this increase in the value of the private equity portfolio will result in a higher profit for FMO. However, this profit cannot yet be taken into account when calculating the capital ratio as the profits can only be included in the regulatory capital after DNB approval. Consequently, the increase in the fair value of assets during 2024 resulted in profit which was not included in capital ratios. On the other hand, this increase directly results in higher risk weighted assets at the end of 2024. Accordingly, the timing difference in the regulatory approval result in a temporarily lower capital ratio in 2024. The upcoming regulatory approval of the 2024 profit will result in a recovery of the capital ratio, if there are no further fair value movements/losses in 2025.

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 DNB on a quarterly basis according to the standardized approach for all risk types. Per 31 December 2024, FMO's total available qualifying capital equals €3,399 million (2023: €3,245 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.

• 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 2024.

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 2024.

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 27 percent (2023: 29 percent), far above the minimum requirement of 3 percent proposed by European authorities.