Conservative financial management
A fundamental principle underpins ADB's strength:
- Lending limitation: ADB’s lending limitation policy limits 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, to the total amount of ADB’s unimpaired subscribed capital, reserves, and surplus, exclusive of the special reserve.
ADB’s conservative financial management policies have consistently held its loans well within this limit.
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 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. Such committees include the Assets and Liabilities Management Committee, the Investment Committee and the Risk Committee, which provides high-level oversight of ADB's risks and recommends risk policies and actions to the President. ADB also maintains an independent risk management office which is part of the risk management framework.
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. For the aggregate portfolio, ADB monitors limits and concentrations, sets aside loan loss reserves, provides loan loss provisions and fair valuations, and assesses its capital adequacy. In addition, ADB manages its operational risks against its risk appetite and tolerance and in line with its operational risk management framework.
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 transacts with financially sound institutions with ratings from 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 bond 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 manages its operational risks by identifying and assessing risks, and implementing mitigation actions or controls to ensure exposure remains within acceptable levels. ADB monitors and continues to enhance its organizational resilience, enabling a preparation for and response to disruption-related risks and strengthening its capacity to adapt to complex and changing circ*mstances while maintaining its ability to fulfil its core mission.
More on ADB's financial risk management in the Annual Report 2022.
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