14 Mar 2019
EUR 102.26 million
Financial institutions and SMEs
NIB assumes a conservative approach to risk-taking. Credit risks, market risks, liquidity risks and operational risks are managed carefully with risk management closely integrated into the business processes. All projects which NIB considers for financing are subject to an objective analysis.
As an international financial institution, NIB is not subject to any national or international banking regulations. The Bank's risk management systems and procedures are reviewed and refined on an ongoing basis in order to comply, in substance, with what the Bank identifies as the relevant market standards, recommendations and best practices.
Credit risk is NIB's main financial risk. Credit risk is the risk that the Bank's borrowers and other counterparties fail to fulfil their contractual obligations and that the collateral provided does not cover the Bank's claims. Most of the credit risk arises in the lending operations. NIB's credit policy, forming the basis for the lending operations, aims at maintaining the high quality of the loan portfolio and ensuring proper risk diversification. The credit policy sets the basic criteria for acceptable risks and identifies risk areas that require special attention.
The Bank is also exposed to credit risk in its treasury activities, where credit risk derives from the financial assets and derivative instruments that the Bank uses for investing its liquidity and managing currency and interest rate risks as well as other market risks related to structured funding transactions.
NIB's credit risk management is based on an internal limit system including both credit risk ratings and a model for the calculation of economic capital for the management of portfolio-level credit risk.
A primary element of the credit approval process is a detailed risk assessment, which involves a risk-versus-return analysis. The risk assessment concludes with a classification of the risk of the counterparty and the transaction, expressed in terms of the counterparty risk rating and transaction risk class.
Market risk is, i.a., the risk that losses incur as a result of fluctuations in exchange rates and interest rates. NIB's exposure to exchange rate risk occurs when translating assets and liabilities denominated in foreign currencies into the functional currency, the euro. The Bank funds its operations by borrowing in the international capital markets and provides loans often in currencies other than those borrowed, which unhedged would create currency mismatches in assets and liabilities.
Furthermore, the funds borrowed often have other interest rate structures than those applied in the loans provided to the Bank's customers. Exposure to exchange rate risk and interest rate risk created in the normal course of business is minimised by the use of derivative instruments. The residual risk must be within strictly defined limits. Market risks are measured, managed and reported in accordance with a set of limits and procedures that are reviewed on a regular basis.
Liquidity risk management safeguards the ability of the Bank to meet all payment obligations when they become due. NIB's policy is to maintain a liquidity corresponding to its net liquidity requirements for 12 months. An important element of the liquidity risk management is also the Bank's aim to diversify its funding sources in terms of i.a. investor type and geographical region.
Operational risk is the risk of financial losses or damaged reputation due to failure attributable to technology, employees, procedures or physical arrangements including external events and legal risks.
NIB's operational risk management focuses on proactive measures in order to ensure business continuity and the accuracy of information used internally and reported externally.
Furthermore, the aim is to ensure the expertise and integrity of the Bank's personnel and the staff's adherence to established rules and procedures.
The operational risk management also focuses on security arrangements to protect the physical infrastructure of the Bank. The Bank attempts to mitigate operational risks by following strict rules for the assignment of duties and responsibilities among and within the business and support functions and by following a system of internal control and supervision. The main principle for organising work flows is to segregate business-generating functions from recording and monitoring functions. An important factor in operational risk mitigation is also the continuous development and upgrading of strategic information and communication systems.
All projects which NIB considers for financing are subject to an objective analysis. NIB attaches great importance to ensuring that the projects it finances are both technically and economically sound and that they are implemented efficiently. The borrower should be able to show economic stability, with a satisfactory level of solvency and profit.
The Bank's Credit & Analysis department carries out the following types of analyses:
NIB analyses the country risk regarding potential new programme countries. Reviews of existing programme countries are produced on a regular basis. The country risk analysis focuses on the general and political environment, economic policy, foreign trade and foreign debt, as well as the business environment and financial sector environment.
NIB analyses and assigns risk classifications to all banks acting as intermediaries. The analysis is based on financial data and key figures, together with a qualitative assessment.
NIB analyses all corporate counterparties. The analysis comprises a quantitative and a qualitative assessment relying on recognised methods of financial analysis, own estimates and projections, sensitivity checks as well as peer-group comparisons. It also includes an assessment of non-quantifiable elements, such as industry characteristics, market position, management, institutional conditions, regulatory framework and corporate governance.
For project and structured financing transactions, as well as otherwise when a project finance analysis approach is deemed to be required, an extensive project risk assessment and risk classification is conducted. The analysis comprises both a quantitative and a qualitative assessment of the project.
The quantitative assessment is based on the financial projections for the project, focusing on the project's ability to service the debt. This includes business modelling and identifying risk drivers. The borrower's own estimates and projections and sensitivity analysis are usually required.
The qualitative assessment includes market, technical, and institutional aspects of the proposed project. Furthermore, country risk is considered to the extent that business conditions in the country—such as legal, regulatory, or tax frameworks—may adversely impact the project.