Developments in 2011

FMO continuously improves its business management by ensuring efficient use of capital.

To this end, a new framework especially for internal capital management purposes was introduced in 2011. The BIS II compliant character of the new model (the Internal Ratings-Based (IRB) approach), makes FMO's approach better aligned with the supervisors' view and considered best practice amongst financial institutions when measuring credit risk. It also better reflects the risk of FMO's wide product range and its risk participations.

Part of the new framework was the introduction of a new rating methodology for assessing the credit risk in FMO's loan portfolio. All existing clients were re-rated during 2011 according to the new refined rating methodology. Compared to the old methodology the main differences are the introduction of more qualitative factors, a more objective measurement of quantitative factors and the introduction of more rating classes. The whole exercise of changing the methodology has been validated and supported by one of the leading rating agencies.

The updated rating methodology offers more transparent and comparable data which can be used as input for the Global Emerging Markets (GEM) datapool. This joint initiative of IFC and EIB aims at providing access to valuable emerging market credit information on an aggregated level. The results give a better representation of the entire market than any of the initiative's individual institutions could on their own.

The new framework has been implemented as per January 1, 2012. An economic capital calculation is provided in the capital management section of this risk paragraph.  In order to illustrate the impact of the change in rating methodology, all relevant credit risk data have been presented for both methodologies as per December 31, 2011.