Financial and Risk Management Policies
Conservative financial management
Two fundamental principles underpin ADB's strength:
- Lending limitation: Under ADB's lending policy, the total amount of disbursed loans, disbursed equity investments and related prudential buffer, 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, exclusive of special reserve.
- 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.
Note: Includes other debt securities starting December 2016.
Comprehensive risk management
ADB's risk management framework is built on three core components: governance, policies, and processes. Governance starts with the Board of Directors, which reviews and approves risk policies that define ADB's risk appetite. ADB maintains an independent risk management office and has various management committees with responsibility to oversee ADB-wide risk issues and endorse related decisions for approval by the Board of Directors and the President. ADB's risk management framework includes the Risk Committee, which provides high-level oversight of ADB's risks and recommends risk policies and actions to the President.
ADB monitors the credit profile of existing transactions in the operations portfolio, conducts risk assessments of new nonsovereign transactions, and assumes responsibility for resolving distressed transactions when necessary. It also monitors market and credit risks in treasury operations, such as the credit quality of counterparties, interest rate risk, and foreign exchange risk. In addition, ADB has developed an operational risk management framework for the institution. For the aggregate portfolio, ADB monitors limits and concentrations, sets aside loan loss reserves, provide loan loss provisions including collective provision requirements, and assesses its capital adequacy.
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 Annual Report 2018.