Liquidity risk

Risk appetite

FMO’s risk appetite is to maintain sufficient liquidity to fulfil FMO’s obligation. The appetite follows a similar rationale as for capital and in particular it is important to maintain sufficient liquidity in order not to utilize the guarantee from the Dutch State.

FMO’s has articulated risk appetite levels for the following risk metrics:

• Survival period

• Liquidity Coverage Ratio (LCR)

• Net Stable Funding Ratio (NSFR)

• Failed funding period

• Cost of wholesale funding above peers

Additional specific thresholds are in place for managing and monitoring the risk profile. These monitoring metrics are delegated to Director Risk Management & Compliance and Director Treasury and subject to the sign-off procedure.

Risk governance

FMO traditionally has a conservative liquidity policy and funding strategy that is well suited to its business. Stress tests are conducted on FMO’s liquidity position at least once a month to ensure this conservative position is maintained. The Liquidity Contingency Plan sets out FMO’s strategy for addressing liquidity needs in the case of a crisis, ensuring that there are various sources of emergency liquidity available to meet all current and future financial obligations at all times, whilst at the same time avoiding excessive funding costs that could harm its business franchise. The liquidity sources include a long-term bond portfolio and a portfolio of short-term instruments such as Money Market Funds, Commercial Paper and Treasury Bills. The long-term bonds can be used as collateral to obtain cash from the Dutch central bank or commercial parties.

Liquidity position

The liquidity ambition can be impacted by a higher than anticipated need for liquidity or a lower than expected ability to obtain liquidity. Large differences in the need for liquidity can be caused by higher than expected disbursements of available facilities and guarantees (risk is capped to the total amount of available undrawn facilities and guarantees) and by collateral requirements on the derivatives portfolio (uncapped). Risks with a high impact on the access to liquidity primarily stem from access to financial markets, the ability to liquidate the treasury portfolio at a sufficient price, and credit risk in the loan portfolio. Severe scenarios for all these risks are included in the liquidity stress tests to determine the required buffer.

Throughout the course of 2017 FMO's liquidity position is comfortably within the corresponding appetite levels. We perform a weekly stress test where: value adjustments on our loan and equity portfolio are increased to 20%; we assume a large collateral outflow and; we include larger haircuts on our liquid asset portfolio. For the annual Internal Liquidity Adequacy Assessment Process (ILAAP) process, we also perform other stress tests including a severe stress scenario provided by DNB and reverse stress testing. A continuous review is performed on the liquidity position, FMO’s assumptions, internal expectations and external market conditions to ensure that FMO’s liquidity overview remains relevant and accurate.

The following table shows the categorization of the balance sheet per maturity bucket. This table shows the timing of the undiscounted principal cash flows, and not the market values, per instrument. The totals per instrument may therefore differ from the totals on the balance sheet. Expected cash flows resulting from irrevocable facilities being drawn are not included in the liquidity gap. For internal liquidity planning and management, cash flows from irrevocable facilities are included in the cash flow forecasts.

The tables below are based on the final availability date of the contingent liabilities and irrevocable facilities.

• 1 FMO expects that not all of these off-balance items will be drawn before expiration date.

Regulatory requirements

On 12 June 2017, DNB published its new Pillar 2 liquidity requirements methodology for Less Significant Institutions (LSIs) which have been applied from the supervisory review and evaluation process (SREP) in 2017. The liquidity requirements are a survival period of at least 6 months based on internal stress testing methodology, a Net Stable Funding Ratio (NSFR) of 100%. In addition, FMO has a institution specific Liquidity Coverage Ratio (LCR) requirement of 125%. FMO's internal liquidity appetite levels include a safety cushion over and above these minimum requirements. Following the risk appetite, FMO's liquidity positions have been well above regulatory requirements and internal appetite levels throughout 2017. Per reporting date, FMO has a survival period over 12 months (2016: over 12 months), an LCR of 542% (2016: 167%) and a NSFR of 128% (2016: 114%).

Sustainability bonds

In May 2017, FMO successfully priced its third EUR Sustainability Bond, a 6-year EUR 500 million transaction. Over 50 investors were involved, highlighting the strong following from FMO’s international investor base as well as broad support from the green investor community. Allocation was dominated by European investors (90%) with the largest proportion (43%) going to Benelux, followed by Germany / Austria / Switzerland at 14%. The Nordic and French investors were not far behind at 13% of allocations each.