4 Capital management
FMO complies with the Basel III requirements and reports its Common Equity Tier 1 ratio to the Dutch central bank on a quarterly basis. At the end of June 2018 the Common Equity Tier 1 ratio increased to 25.8% from 24.6% as per December 2017. This increase was mainly due to improvement in capital position driven by inclusion of H2 profit of 2017 in CET 1 capital in 2018.
IAS 39 December 31, 2017
IFRS shareholders' equity
Tier 2 capital
-Interim profit not included in CET 1 capital
-Other adjustments (deducted from CET 1)
-Other adjustments (deducted from Tier 2)
Of which Common Equity Tier 1 capital
Risk weighted assets
Total capital ratio
Common Equity Tier 1 ratio
This section describes the latest insights and regulatory publications that could impact FMO’s future capital position in addition to those described on page 92 of the 2017 Annual Report.
On 23 November 2016, the European Commission announced a further package of reforms to CRR, CRD IV, the BRRD and the SRM Regulation (the "EU Banking Reforms"), including measures to increase the resilience of EU institutions and enhance financial stability. The proposals include the requirement to apply a look through for equity investments in funds. In short, investments in Collective Investment Undertakings (CIUs, or Funds) are no longer automatically labelled as ‘high risk’ with a 150% risk weight. Instead, risk weights will be determined using the look-through approach (LTA) or mandate-based approach (MBA) which requires an institution to look at the funds underlying investments and calculate the risk weights based on funds actual investments and leverage.
There are several criteria which must be fulfilled to be able to use the LTA and MBA. These include (amongst others) the eligibility of a fund to apply the look through, sufficiently granular reporting and independent data verification. Under the current CRR-2 proposals, an important part of FMO’s equity investments in funds would not fulfil one of the eligibility criteria to apply the look-through approach (LTA) or mandate-based approach (MBA) as these funds are neither marketed in the European Union, nor managed by managers subject to the AIFM Directive. Consequently, these funds would become subject to a 1,250% risk weight under the fall-back approach. The EU Banking Reforms are still subject to debate and approval at the EU Level as well as implementation and entry into force in the Member States. Furthermore, until the EU Banking Reforms are in final form, it is uncertain how the proposals will ultimately affect FMO.
In March 2018, the Basel Committee published a new consultation on the capital requirements market risk (bcbs 436). Under the proposal, the capital charge is still based on a sensitivity-based approach in which capital charge is currency dependent and correlations between currency pairs are applied. The capital charge will depend on the final new risk weights and the type of liquid currency exposures FMO has after the look-through implementation.
In April 2018, the European Banking Authority (EBA) published a new draft guideline (EBA/CP/2018/03) specifying which types of exposures are to be associated with particularly high risk and under which circumstances. The draft guideline includes the proposal that institutions that apply the standardized approach for credit risk should label exposures with a particular high risk in case these exposures show structural differences that are not reflected in the existing flat risk weights. For FMO this could imply that also other exposures than equity will receive a higher risk weight.