Liquidity risk is the risk that insufficient funds are available
to meet financial commitments. FMO's policy is to have matched
funding, that is the tenor of our funding is matched to our assets,
in order to reduce liquidity risk. Our liquidity policy is based on
a three pillar approach. This policy ensures:
1) that the maturity mismatch is limited to €500 million per maturity bucket and that our refinancing risk is limited to €250 million per maturity bucket;
2) that we have sufficient cash, liquidity buffers and access to emergency lines to survive a stress period, where the funding market is totally closed for six months and;
3) that our funding sources are well diversified in terms of geography and instrument type. These three pillars are converted into liquidity limits and are tested against the liquidity position on a monthly basis at least. The liquidity position is presented to the ALCO on a monthly basis.
FMO's high credit rating (currently AAA, linked to the Dutch government) facilitates our access to financial markets for funding. This has enabled us to attract funding at a relatively low cost of funds and has meant that during times of crisis the funding market for FMO stays open for longer than it does for commercial European banks. A change in the rating of the Dutch State would likely lead to a change in the rating of FMO. This would in turn affect our access to the funding markets and the margins we pay.
FMO traditionally has a conservative liquidity policy and funding strategy that is well suited to the business we do. In 2011 we have further diversified our investor base, raising approximately €0.5 billion long-term funding from different markets and currencies. The tenors vary from two years to 10 years. The liquidity position is well within our limits and even under various stress tests we are still within the limits. Nevertheless liquidity remains a key point for the ALCO, Risk Management and Treasury. We continually review the liquidity position, our assumptions, internal expectations and external market conditions to ensure that our liquidity overview remains relevant and accurate.