Capital Markets

Financial and Risk Management Policies

ADB maintains conservative financial and risk management policies, within and even beyond Charter requirements.

1. Lending and Borrowing Limitation

Lending Limitation: OCR outstanding loan commitments, guarantees and equity investments never exceed the sum of callable capital, paid-in-capital and reserves (including surplus but excluding special reserve).

Borrowing Limitation: Outstanding borrowings and guarantees cannot exceed the sum of callable capital of non-borrowing members, paid in capital and reserves, subject to the Charter limit of 100% of the callable capital.  

Lending Headroom
As of 31 December 2007

Borrowing Headroom
As of 31 December 2007

Outstanding borrowings and guarantees as percenteage of ADB's total callable capital

Strong Risk Bearing Capacity

ADB measures its risk bearing capacity through the equity-to-loan ratio (ELR) which is consistent with market practice of other MDBs. ELR measures the capital adequacy to withstand a major credit event affecting the loan and guarantee portfolios. The use of ELR was adopted in 2004 and a minimum target of 35% was set. ADB’s ELR of 44.7% as of 31 December 2007 was well above this target. In June 2008, ADB's Board approved a new capital adequacy framework wherein ADB will no longer assess its capital adequacy based on the fixed ELR target of 35%. Instead, ADB will annually assess its capital adequacy using a stress test methodology that entails, among other things, estimated non-accrual shocks and their impact on ADB's capital and income over the next 10 years. The new framework provides ADB with the ability to assess its capital adequacy based on changing portfolio risk profiles as well as on ADB's characteristics as an MDB, including callable capital structure, preferred creditor status, and developmental mandate. In this regard, the new framework is a more dynamic and comprehensive measure of ADB's risk bearing capacity. In addition, the annual assessment ensures that any deterioration in ADB's risk-bearing capacity will be highlighted early and addressed in a timely fashion.

2. Risk Management Infrastructure

ADB's risk management infrastructure is designed to ensure full and accurate identification, measurement, monitoring and management of all risks arising from its financing activities.

• Credit Risk – Borrowers: ADB continuously monitors creditworthiness of borrowing members and manages the risks through a rigorous capital adequacy framework. For private sector operations, ADB manages and monitors risks through various in-depth credit analyses and quantitative methods and ensures each project proposal is in line with ADB's credit risk policy.
• Credit Risk – Counterparties: ADB manages risk arising from its investment and funding operations by restricting activities to authorized dealers and counterparties that meet conservative credit guidelines. In general, ADB will undertake swap transactions with counterparties who:
• have minimum rating of A3/A- with Moodys' and/or Standard and Poors'
• have signed an International Swaps and Derivatives Association (ISDA) master agreement with ADB
• have signed a Credit Support Annex (CSA) with ADB

• Credit Risk – Issuers: ADB seeks to minimize issuer risk by maintaining a very high quality liquidity portfolio. Investments are mainly debt instruments issued by members and government-related agencies, banks and corporate entities. Investments in corporate paper are restricted to A- or higher-rated instruments.
• Market Risk: ADB monitors and manages market risks arising from income volatility due to interest rate movements through the employment of various quantitative analyses.
• Liquidity Risks:   ADB manages liquidity risks through its liquidity policy that ensures the availability of sufficient cash flows to meet all financial commitments despite uncertain conditions in the capital markets.
• Operational Risk: ADB mitigates operational risks by maintaining a system of internal controls, monitoring procedures, and processes that are designed to keep operating risks within acceptable levels.
  
  ADB recently approved a strategy to strengthen its business continuity plan to reduce the impact of disruption affecting its business processes.