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Risk Management Framework

ETDB'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 ETDB's risk appetite. In carrying out its mission, ETDB is exposed to various risks: (i) credit risk, (ii) market risk, (iii) liquidity risk and (iv) operational risk.

The market risks- namely currency risk, interest rate risks, and the liquidity risks are daily monitored and managed by the Treasury Department under the supervision of the Asset Liability Committee of the Bank (ALCO). Additionally, in the context of “enterprise risk on macro level”; the Risk Management Department oversees the Bank’s compliance with the liquidity and the market risk limits. ALCO sets the market and liquidity risk limits and defines the guidelines for managing these risks. ETDB’s market risk policies are more conservative as compared to the general banking practices.

Credit Risk Management:
The Risk Management Department (RMD) is responsible for the analysis, measurement, and mitigation of all aspects of risk pertaining to ETDB’s banking operations. For this purpose, RMD ensures compliance with the Bank’s limits (country, single obligor, single project, sector, etc.) ETDB monitors the credit profile of new transactions in the operations portfolio and conducts risk assessments of new transactions.

In addition, ETDB monitors limits and concentrations, sets aside loan loss reserves, since January 2018 provides loan loss provisions under IFRS-9 on a semi-annual basis, and assesses its capital adequacy.

Market Risk Management:
The Bank’s market risk policies are more conservative as compared to the general banking practices.

i) Currency Risk:
As a development bank denominated in SDR, the ETDB mitigates the currency risk by using the appropriate on and off balance sheet hedging instruments. The currency open position to equity ratio limit is set at maximum +/- 1% of the equity- which is significantly more conservative than the banking standards. Currency risk VaR calculations and daily open position reporting are used as monitoring tools for the currency risk.

ii) Interest Rate Risk:
Rather than using derivative off balance sheet hedging instruments; the interest rate risk is managed on balance sheet by matching the maturity structure of the assets and liabilities in terms of tenor and currency.

Liquidity Risk Management:
ETDB follows highly conservative liquidity risk policy by keeping its liquidity coverage ratio (liquid assets to net cash requirement ratio) minimum at 75% in one year horizon and 100% in 30 and 90 days horizon at all times. This ratio is monitored daily for the cash flow management. Also, daily stress test scenarios are applied to determine the liquidity coverage ratio in different stress test scenarios. Additionally, ALCO defines and monitors the liquidity level limit as a percentage of the liquid assets to selected balance sheet items.

Operational Risk Management:
ETDB mitigates operational risks by maintaining a system of internal controls, monitoring procedures, and processes that are designed to keep operating risks within acceptable levels. To this end, the ETDB takes appropriate measures such as the “four eyes principle” over processes, proper segregation of duties within the departments, purchase of corporate and property insurance policies to achieve a high level of controls and enhance the operational risk management perspective. ETDB protect itself from potential risks by following rigorous anti-money laundering (AML), combating the financing of terrorism (CFT) and anti-corruption policies and training its staff accordingly.