This chapter provides an overview of FMO's risk governance and risk management approach. The different sections describe the key risk domains according to applicable disclosure requirements and developments that took place in 2017. Together with the quantitative Pillar 3 disclosures - available on FMO's website - it constitutes FMO's Pillar 3 disclosure.
FMO has in place a structured risk governance, ensuring an effective level of alignment between oversight and management responsibility for risk. The risk based roles and responsibilities are organised in adherence to the ‘three lines of defence’ principle to ensure appropriate levels of segregation. The Management Board has established a number of committees that are responsible for decision-making on certain subjects and for advising the Managing Board on risk related topics.
Asset and Liability Committee (ALCO). The ALCO assists the Management Board by evaluating, monitoring and steering the financial risk profile of FMO in accordance with the risk appetite as approved by the Supervisory Board. The ALCO approves the Treasury and Risk policies, the limit framework, the economic capital model, recovery plan and discusses capital and liquidity adequacy planning. The Supervisory Board approves the Internal Capital Adequacy Process (ICAAP) and the Internal Liquidity Adequacy Process (ILAAP). The ALCO complies with the recommendations of the Banking Code (see the annual report for more information on the Banking Code). The CRFO, Directors of Risk Management & Compliance, Treasury, and Credit, Legal & Special Operations and two Front Office Directors are members of the ALCO.
Financial Regulation Committee (FRC). The continuously evolving regulatory landscape for banks requires a thorough understanding and a structured implementation process. To this end, FMO has in place the Financial Regulation Committee (FRC), which is a successor of the former Prudential Regulation Committee (PRC). The FRC ensures that FMO adheres to existing financial regulation and to assess the impact of these regulations on FMO’s business strategy. The FRC is chaired by the Director Risk Management & Compliance and its members are senior representatives of Finance, Treasury, Compliance and Risk Management. In terms of governance, the FRC is a sub-committee of the Asset and Liability Committee (ALCO).
Operational Risk Committee (ORC). The ORC is mandated by the Management Board to evaluate, monitor and steer the operational risk profile of FMO in accordance with the risk appetite. The ORC approves policies and supported standards and takes decisions in the context of the Product Approval and Review and Review Process (PARP). The Committee is effective as of January 2018 and is chaired by the CRFO and meets at least 4 times annually.
Investment Committee (IC). The IC is responsible to review financing proposals for new transactions in terms of specific counterparty, product as well as country risk. The IC is chaired by the Director Credit and consists of senior representatives of several 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. For small exposures, the Credit department has the authority to review new transactions.
Investment Review Committee (IRC). Financial exposures in emerging markets are subject to a periodic review which is in general executed annually. Exposures which require specific attention are reviewed by the IRC. The large and higher risk exposures are accompanied by the advice of the Credit department. If the IRC concludes that a client has difficulty in meeting its payment obligations, the client is transferred to the Special Operations department – responsible for the management of distressed assets. The IRC also decides on specific loan impairments, the fair value of equity investments and monitors the asset quality of the emerging market portfolio. The IRC is chaired by the CRFO.
Compliance Committee (CC). The Compliance Committee is delegated by the Management Board to take decisions on compliance related matters and compliance issues based on proposed solutions. The Compliance Committee is chaired by the CRFO and meets at least 4 times annually. If required, the Compliance Committee can escalate decisions to the Management Board. Compliance Committee topics include compliance developments, compliance related projects, laws and regulations, compliance policies and procedures. It is the mandated authority within FMO to decide on reporting to authorities.
Risk profile and appetite
FMO’s risk appetite articulates the type and quantum of risk that FMO is able and willing to accept in pursuit of its strategy. FMO was set up to take the risks that are required or necessary to make debt and equity investments in the private sector in emerging markets. We therefore need a risk appetite that supports a stable organisation that can continue realising development impact in the long run. FMO actively pursues credit risk and equity risk resulting from loans to and private equity investments in institutions in emerging markets. Other risks cannot always be avoided, but FMO mitigates these risks as much as possible. The risk appetite is subsequently translated into the different risk metrics which define the tolerance for the individual risk types.
The Supervisory Board determines what risks FMO may assume, the appetite levels for these risks and the principles for calculating and measuring such risks. FMO's risk profile consists of the following main financial risk types: capital adequacy, investment risk, concentration risk, counterparty credit risk, market risk and liquidity risk. The main non-financial risk types are reputational risk, operational risk and compliance risk. Please note the latter is elaborated in the Annual Report under compliance and accountability.
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 fulfil the Pillar 3 disclosure requirements of the CRD IV regulation, including:
EBA Implementing Technical Standards on Disclosure for Own Funds,
Guidelines on disclosure of encumbered and unencumbered assets,
Guidelines on materiality, proprietary and confidentiality and on disclosure frequency,
Regulatory technical standards on disclosure of information related to the countercyclical capital buffer,
Implementing Technical Standards on disclosure for leverage ratio.
Market discipline and transparency in the publication of solvency risks are important elements of the Basel III rules for Pillar 3. Central to these publications is information on the solvency and the risk profile of a bank, providing disclosures on such matters as its capital structure, capital adequacy, risk management and risk measurement in line with the objective of IFRS 9. The objective of FMO’s disclosure policies is to practice maximum transparency in a practical manner.
The consolidation scope for prudential reporting is equal to the accounting scope for FMO. As per 30 June 2016, FMO was granted the Solo Waiver for prudential reporting on the basis of Article 7 and therefore only reports figures related to CRR on a consolidated basis.