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Financial and Risk Management Policies
ADB maintains the highest reputation as a borrower in financial markets as a result of strong governance and conservative financial and risk management policies, within and even beyond Charter requirements.
ADB maintains risk policies and procedures to measure, monitor, and control risks for the overall management of ADB’s credit, market, operational and liquidity risks. It assesses the creditworthiness of all nonsovereign transactions. Specifically, it conducts risk assessments of new transactions, provides independent monitoring following origination, and when necessary assumes responsibility for resolving distressed transactions. ADB also monitors market and treasury risks, such as the credit quality of counterparties, interest rate risk, and foreign exchange risk. For the aggregate portfolio, ADB monitors limits and concentrations, sets aside loan loss reserves, establishes loan loss provisions including collective provision requirements, and assesses capital adequacy.
The Office of Risk Management (ORM) is responsible for the overall management of ADB's credit, market, and operational risks. ADB continues to strengthen the ORM to support the planned growth in ADB operations. ADB’s risk management framework also includes the Risk Committee, which provides high-level oversight of ADB’s risks and recommends risk policies and actions to the ADB President and the Audit Committee of ADB's Board of Directors.
Conservative financial management
Two fundamental principles underpin ADB's strength:
- Lending limitation: Under ADB's lending policy, the total amount of OCR disbursed loans, approved equity investments, and the maximum amount that could be demanded from ADB under its guarantee portfolio may not exceed the total amount of ADB's unimpaired subscribed capital, reserves and surplus.
- Borrowing limitation: Under ADB's borrowing policy, ADB's gross outstanding borrowings may not exceed the sum of callable capital of non-borrowing members, paid-in capital, and reserves (including surplus).
ADB’s conservative financial management policies have consistently held its loans and borrowings well within these limits.
Lending headroom: 2008-2012
As of 31 December
Lending Limitation: Under ADB’s lending policy, the total amount of disbursed loans, approved equity investments, and the maximum amount that could be demanded from ADB under its guarantee portfolio may not exceed the total amount of ADB’s unimpaired subscribed capital, reserves, and surplus.
Borrowing headroom: 2008-2012
As of 31 December
Borrowing Limitation: Under ADB’s borrowing policy, ADB’s gross outstanding borrowings may not exceed the sum of callable capital of non-borrowing members, paid-in capital, and reserves (including surplus).
Comprehensive risk management
In carrying out its mission, ADB is exposed to various risks: (i) credit risk, (ii) market risk, (iii) liquidity risk, and (iv) operational risk.
- Credit risk – issuers: To mitigate issuer and counterparty credit risks, ADB only transacts with financially sound institutions with ratings from at least two reputable external rating agencies. Moreover, the treasury portfolio is generally invested in conservative assets, such as money market instruments and government securities. In addition, ADB has established prudent exposure limits for its corporate investments, depository relationships, and other investments.
- Market risk: ADB monitors and manages interest rate risks in the Treasury portfolio by employing various quantitative methods. It marks all positions to market, monitors interest rate risk metrics and employs stress testing and scenario analysis. ADB manages its currency risk by matching its loans and investments to the same currencies in which funds are received. Borrowed funds or funds to be invested may only be converted into other currencies provided that they are fully hedged through cross currency swaps or forward exchange agreements.
- 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 has also strengthened business continuity, and particularly information technology, to reduce the impact of disruptions.
More on ADB’s financial risk management in the 2012 Financial Report.
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