Denmark’s Financial Institution Risk Management Frameworks Under Scrutiny

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The Nordic Investment Bank (NIB) has revealed details of its risk management framework, designed to manage risk-taking within the context of its mission and strategy. As an international financial institution operating outside national banking legislation, NIB monitors international regulations and standards, adopting those deemed relevant and best practice.

The Three-Lines-of-Defence Model

NIB’s risk management approach is built on the three-lines-of-defence model, which ensures that risks are identified and managed across multiple levels:

Capital and Liquidity Management

• NIB’s Statutes require adequate capital and liquidity management in accordance with sound banking principles.
• The bank’s capital and liquidity management are based on assessed risks in its operations, supplemented by stress testing.
• Minimum requirements for economic capital ratio, leverage ratio, and liquidity adequacy must be fulfilled at all times.

Credit Risk

• NIB’s primary financial risk is credit risk, stemming from borrowers and counterparties failing to meet their contractual obligations.
• Most credit risk arises in lending operations, where the bank aims to maintain a high-quality loan portfolio with proper risk diversification.

Market Risk

• The bank is exposed to market risk due to adverse fluctuations in exchange rates, interest rates, and credit spreads.
• NIB minimizes exposure to these risks through the use of derivative instruments and adheres to strict limits.

Liquidity Risk

• NIB’s liquidity risk management aims to ensure the bank can meet payment obligations even under stressed market conditions without access to new funding.
• The bank targets maintaining a liquidity corresponding to its net liquidity requirements for 12 months, diversifying funding sources by investor type and geographical region.

Operational Risk

• The bank focuses on proactive measures to ensure adequate internal controls, business continuity, and the accuracy of information used internally and reported externally.

Compliance Risk

• NIB places emphasis on preventing fraud, corruption, money laundering, and tax evasion.
• The bank has established comprehensive internal screening procedures to identify integrity and reputational risks related to counterparties.

Model Risk

• The potential for adverse consequences from decisions based on inappropriate or incorrect models is a key concern for NIB’s risk management framework.

Sustainability

NIB is committed to working alongside clients in their transformation and expansion of sustainable business models, taking environmental, social, and governance (ESG) aspects into account. The bank has issued a Sustainability Policy outlining its approach to sustainability.