FMO seeks to maintain a strong capital position, by means of an integrated capital adequacy planning and control framework, regularly reviewed by the ALCO.
FMO has an external and internal ratio to express its capital position. The external ratio is calculated based on the standardized approach of Basel II regulations; the internal capital ratio is based on the internal capital model. This year a new model has been introduced for our internal capital requirement. This model is based on Basel's Internal Ratings Based (IRB) methodology for measuring credit risk.
The main difference between the internal and external capital models is the calculation of the level of capital needed for credit risk. Since FMO takes risks in developing countries, risks that commercial parties are not usually prepared to take, the risk is higher according to the internal model compared to the standardized approach. Hence the external ratio is higher than the internal ratio.
For a more detailed elaboration of financial risks, see the Financial Risk Management section in the annual accounts.