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.

Categorization of principal cash flows per maturity bucket

At December 31, 2017

< 3 months

3-12 months

1-5 years

>5 years

Maturity undefined

Total

       

Assets

      

Banks

71,763

-

-

-

-

71,763

Short-term deposits

1,492,333

-

-

-

52,695

1,545,028

Interest-bearing securities

-

19,000

228,717

110,500

-

358,217

Derivative financial instruments

6,554

11,818

128,993

74,762

-

222,127

Loans to the private sector

155,342

498,426

2,114,055

947,858

-

3,715,681

Loans guaranteed by the State

3,670

6,498

23,766

4,365

-

38,299

Equity investments

-

-

-

-

1,502,833

1,502,833

Investments in associates

-

-

-

-

207,482

207,482

Property, plant and equipment

-

-

-

-

12,866

12,866

Deferred income tax assets

-

-

-

-

10,587

10,587

Current income tax receivables

-

-

-

-

7,458

7,458

Current accounts with State funds and other programs

-

-

-

-

274

274

Other receivables

120,713

-

-

-

-

120,713

Accrued income

83,136

-

-

-

-

83,136

Total assets

1,933,511

535,742

2,495,531

1,137,485

1,794,195

7,896,464

       

Liabilities and shareholders’ equity

      

Banks

-

-

-

-

-

-

Short-term credits

-

-

-

-

125,935

125,935

Derivative financial instruments

-550

67,519

18,684

33,999

-

119,652

Debentures and notes

450,277

558,734

2,900,788

1,197,980

-

5,107,779

Current accounts with State funds and other programs

182

-

-

-

-

182

Current income tax liabilities

-

-

-

-

-

-

Wage tax liabilities

117

-

-

-

-

117

Deferred income tax liabilities

-

-

-

-

9,682

9,682

Other liabilities

5,039

-

-

-

-

5,039

Accrued liabilities

56,721

-

-

-

-

56,721

Provisions

-

-

-

-

46,588

46,588

Shareholders’ equity

-

-

-

-

2,829,954

2,829,954

Total liabilities and shareholders’ equity

511,786

626,253

2,919,472

1,231,979

3,012,159

8,301,649

Liquidity gap 2017

1,421,725

-90,511

-423,941

-94,494

-1,217,964

-405,185

Categorization of principal cash flows per maturity bucket

At December 31, 2016

< 3 months

3-12 months

1-5 years

>5 years

Maturity undefined

Total

       

Assets

      

Banks

58,178

-

-

-

-

58,178

Short-term deposits

775,458

169,653

-

-

297,493

1,242,604

Interest-bearing securities

-

102,346

238,340

234,432

-

575,118

Derivative financial instruments

25,069

28,323

103,124

78,928

5,653

241,097

Loans to the private sector

229,847

596,858

2,279,249

1,168,104

-

4,274,058

Loans guaranteed by the State

4,855

9,436

35,779

6,045

-

56,115

Equity investments

-

-

-

-

1,712,112

1,712,112

Investments in associates

-

-

-

-

116,060

116,060

Property, plant and equipment

-

-

-

-

9,168

9,168

Deferred income tax assets

-

-

-

-

10,618

10,618

Current accounts with State Funds and other programs

-

-

-

-

1,901

1,901

Other receivables

21,753

-

-

-

-

21,753

Accrued income

92,028

-

-

-

-

92,028

Total assets

1,207,188

906,616

2,656,492

1,487,509

2,153,005

8,410,810

       

Liabilities and shareholders’ equity

      

Banks

-

-

-

-

-

-

Short-term credits

-

-

-

-

39,464

39,464

Derivative financial instruments

100,644

22,886

193,726

78,205

-

395,461

Debentures and notes

345,544

667,296

3,100,516

1,055,741

-

5,169,097

Current accounts with State funds and other programs

75

-

-

-

-

75

Current income tax liabilities

16,434

-

-

-

-

16,434

Wage tax liabilities

340

-

-

-

-

340

Deferred income tax liabilities

-

-

-

-

13,688

13,688

Other liabilities

7,441

-

-

-

-

7,441

Accrued liabilities

51,408

-

-

-

-

51,408

Provisions

-

-

-

-

45,422

45,422

Shareholders’ equity

-

-

-

-

2,773,535

2,773,535

Total liabilities and shareholders’ equity

521,886

690,182

3,294,242

1,133,946

2,872,109

8,512,365

Liquidity gap 2016

685,302

216,434

-637,750

353,563

-719,104

-101,555

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

Contractual maturity of contingent liabilities and irrevocable facilities

At December 31, 2017

< 3 months

3-12 months

1-5 years

>5 years

Total

Contingent liabilities

-

4,478

39,721

20,822

65,021

Irrevocable facilities

67,841

442,927

724,143

550,248

1,785,159

Total off-balance1)

67,841

447,405

763,864

571,070

1,850,180

At December 31, 2016

< 3 months

3-12 months

1-5 years

>5 years

Total

Contingent liabilities

5,954

6,284

21,925

20,161

54,324

Irrevocable facilities

167,385

357,829

707,713

587,312

1,820,239

Total off-balance1)

173,339

364,113

729,638

607,473

1,874,563

  • 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.