Capital adequacy

Definition

FMO aims to maintain a sound capital position that exceeds regulatory requirements and supports its AAA rating, issued by Fitch Ratings and S&P Global Ratings.

Risk appetite and governance

FMO maintains a sound 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 determined by dividing their respective capital base to the risk-weighted assets (RWA). The RWA are calculated based on the standardized approach of the Capital Requirements Regulation (CRR) and reflect credit, market, operational and credit valuation adjustment risks into account. Based on FMO’s investment portfolio the main factors influencing the ratios are the USD/EUR exchange rate, fair value adjustments and deduction of holdings of capital instruments of financial sector entities (FSE). As these ratios are calculated in line with the regulatory framework in force, they are subject to change. With the implementation of CRR 3 framework, commonly referred to as Basel IV, this year a new classification structure with new risk weights were applied. The next section will give more insight into the development of TCR.

On the other hand, the Economic Capital Ratio is based on an economic capital approach, with credit risk as the most important element. Additional risks included in FMO's economic capital approach are operational, market (FX), credit value adjustment, interest rate risk in the banking book (IRRBB), credit spread risk in the banking book (CSRBB), 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 line with the Risk Appetite Framework (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 increased from 21.3 percent at year-end 2024 to 22.3 percent at year-end 2025, well above the Supervisory Review and Evaluation Process (SREP) minimum (13.3 percent) 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 observed increase in the Total Capital Ratio for 2025 is attributable to a combination of factors. On the one hand, from an RWA perspective, the foreign‑exchange impact, driven by the nearly 12 percent depreciation of the USD against the euro, resulted in lower asset fair value, thereby reducing RWA. Moreover, the implementation of the new CRR 3 regulatory framework, commonly referred to as Basel IV standards, further decreased RWA, due to revised treatments of off-balance sheet exposures and for collective investment undertakings (CIUs). These effects were partially offset by the FMO’s portfolio growth throughout the year, which led to an increase in RWA across both loans and the equity investment book.  On the other hand, the total capital decreased significantly due to higher capital deductions, stemming from increased FSE holdings volume leading to higher FSE deduction percentages under the CRR 3 regulatory framework. This decrease was partially offset by an increase in additional Tier 2. Similar to the previous year, the 2025 year-end profit has not yet been recognized in the capital ratios, as realized in the second half of the year, resulting in a temporarily lower capital ratio.

The lower RWA, combined with a partial offset by reduced own funds, led to a slight increase in the total capital ratio of 1.0 percent.

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 December 31, 2025, FMO's total available qualifying capital equals €3,128 million (2024: €3,399 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 and included in the risk-weighted assets.

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 (Basel IV, CRR3/CRD6) capital requirement (including the P2G) supplemented by:

• A management buffer, which is an internally defined capital cushion added on top of regulatory requirements to provide early warning and intervention room before breaching supervisory thresholds. We will discuss internally and include/change accordingly.

• 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 above the SREP and appetite level throughout 2025.

Economic capital

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), credit spread risk in the banking book (CSRBB) 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 (FX). 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 above the appetite level throughout 2025.

Leverage ratio

The leverage ratio represents the Tier 1 Capital as a percentage of FMO's total unweighted exposures. FMO’s leverage ratio equals 26 percent (2024: 27 percent), far above the minimum requirement of 3 percent proposed by European authorities.