Due to NIB’s legal status as an international financial institution, national banking legislation does not apply to NIB, nor is the Bank subject to direct supervision of any supervisory authority. Similarly to other IFIs, NIB does not require a banking licence for its operations. NIB monitors international regulations and standards and adopts those that it identifies to be relevant and represent best practice.
In its risk management, NIB applies the three-lines-of-defence model.
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Capital and liquidity management
The Statutes of the Nordic Investment Bank require NIB to have adequate capital and liquidity management in accordance with sound banking principles. NIB shall have in place sound and effective strategies for risk, capital and liquidity assessments, which shall be conducted at least annually and reviewed regularly. The Bank’s capital and liquidity management shall be based on assessed risks in its operations, supplemented by stress testing. The Principles for Capital and Liquidity Management set by the Board of Governors further specify the Statutory requirements.
The Statutes contain minimum requirements for the economic capital ratio, leverage ratio and liquidity adequacy that the Bank must fulfil at all times. The statutory metric values are reported annually as part of the Bank’s Annual Report.
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Credit risk is NIB’s main financial risk. Credit risk is the risk of loss resulting from borrowers and other counterparties failing 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 objective is to maintain the high quality of the loan portfolio and ensuring proper risk diversification. The Bank’s Credit Risk Policy sets the high-level criteria for acceptable risk taking and identifies risk drivers 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.
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. In addition, NIB’s credit risk management is supplemented by a hierarchy of risk limits and an internally developed portfolio credit risk model to calculate economic capital charge for the credit risk.
Market risk is the risk of valuation loss or reduction in expected earnings stemming from adverse fluctuations in exchange rates, interest rates, credit spreads or cross-currency basis spreads. 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 is the risk of incurring losses due to an inability to meet payment obligations in a timely manner when they come due.
Liquidity risk management safeguards NIB’s ability to carry out its core activities for a defined period even under stressed market conditions without access to new funding and to secure the highest possible credit rating for the Bank. NIB’s target 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.e., investor type and geographical region.
Operational risk is the risk of direct or indirect losses or damaged reputation due to failure attributable to technology, people, processes, procedures or physical arrangements including external events and legal risks.
NIB’s operational risk management focuses on proactive measures to ensure adequate internal controls, 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 information and physical security to protect the information and physical assets of the Bank.
Compliance risk is composed of integrity risk and operational compliance risk. In managing these risks, NIB places particular emphasis on preventing fraud and corruption, money laundering and the financing of terrorism as well as tax fraud and tax evasion. Comprehensive internal screening procedures have been established to identify integrity and reputational risks related to counterparties.
NIB’s Integrity and Compliance Policy outlines the Bank’s commitments and steps taken to manage compliance risk.
Model risk is defined as the potential for adverse consequences from decisions based on an inappropriate, incorrect, misspecified or misused model. Model risk can lead to financial loss, poor business and strategic decision-making, and/or reputational damage. Model risk management is an important part of the Bank’s overall risk management framework. Under the umbrella of this framework, NIB has issued a separate Model Risk Management Policy and the related Guideline.
Sustainability is at the core of NIB’s mission. The Bank is committed to working alongside its clients in their transformation and expansion of sustainable business models. To achieve this, it is necessary to take environmental, social, and governance (ESG) aspects into account. NIB’s Sustainability Policy sets out the Bank’s approach to sustainability.
NIB is committed to the objectives of the key international climate-related action plans for banks and integrates climate risk in its overall risk management framework. The Bank’s business strategy aims to support and assist its owners, clients, and counterparties on their way towards a climate resilient economy. NIB has defined its stance on climate risk management in the Risk Appetite Statement.