Organization of risk management
To be able to carry out its mission, it is essential for FMO to have an adequate risk management system in place to identify, measure, monitor and mitigate its financial risks. FMO's key risk management bodies and committees reflect the specific nature of the various risks in order to ensure that these are managed within limits set in a transparent and timely manner.
The emphasis of risk management is to focus on improving the understanding of the financial risks and the risk-return relationship, and developing and supporting new financial services in emerging markets. Risk management is responsible for managing portfolio risks of the emerging market portfolio, treasury, and all related market risks.
The Investment Committee, comprising of representatives of several departments, reviews financing proposals in emerging markets. Each financing proposal is assessed in terms of specific counterparty as well as country risk. All financing proposals are accompanied by the advice of the investment mission review department.
In addition, financial exposures in emerging markets are subject to a periodic review, at least annually. Relevant exposures are reviewed by the investment review committee. Its members consist of representatives of several departments. The large and higher risk exposures are accompanied by the advice of the investment mission review department. If the investment review committee suspects that a client has difficulty in meeting its payment obligations, the client is transferred to the special operations department where it is intensively monitored.
The Asset and Liability Committee (ALCO) is responsible for setting risk management policies, which are to be endorsed by the Management Board. The ALCO approves the Treasury and Risk policies, the limit framework, the Economic Capital model and discusses capital and liquidity adequacy planning. The ALCO is chaired by the CEO and complies with the recommendations of the Banking Code (see the annual report for more information on the Banking Code).
Each year FMO's risk appetite is reviewed. Based on the advice of the Audit and Risk Committee, the Supervisory Board approves the risk appetite. Risk appetite is the amount of risk an entity is willing to accept in pursuit of value. Risk appetite can be defined as: "the types and degree of risk an institution is willing to accept for its shareholders in its strategic, tactical and transactional business actions".
The only risk FMO actively pursues relates to the credit/equity portfolio, consisting of loans/equity to private institutions in developing countries. Other risks are mitigated as much as possible. FMO does not have trading positions. All risk management policies are derived from the risk appetite.