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Financial and Risk Management Policies
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Financial and Risk Management PoliciesADB maintains conservative financial and risk management policies, within and even beyond Charter requirements. 1. Lending and Borrowing LimitationLending 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
Borrowing Headroom Strong Risk Bearing CapacityADB 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 InfrastructureADB's risk management infrastructure is designed to ensure full and accurate identification, measurement, monitoring and management of all risks arising from its financing activities.
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