Our Bank holds a strong liquidity position while conservative financial management gives us favorable financial ratios. Our financial and risk management policy design, implementation and oversight are managed by AIIB’s Risk Committee, the Chief Risk Officer, the Chief Financial Officer and the Treasurer. Our risk management activities are guided by the Bank’s Risk Management Framework
, the Financial and Risk Management Policy and the Asset Liability Management Policy
along with the directives which further define how these policies are implemented.
As the organization matures, so does its approach to risk management. In 2018, AIIB developed a more sophisticated approach to ensure the Bank can calculate its capital requirements more precisely, remain adequately capitalized in the face of adverse economic conditions and accommodate planned growth.
The Board of Directors approved the Capital Adequacy and Stress Testing (CAST) policy which (1) establishes that Economic Capital will determine the Bank’s capital requirements and (2) further supports the risk culture of the Bank in line with the principles of the Risk Management Framework. This policy ensures AIIB’s capital adequacy is assessed not only against the existing macroeconomic outlook, but also within the context of a severe and protracted crisis scenario.
We stress tested our business plans to determine their adherence to risk appetite based on our CAST policy approved mid-2018. The CAST policy requires stress testing of AIIB’s profitability and liquidity to ensure that the Bank has robust and sound net income-generating capacity. The desired outcome of the capital adequacy test is that AIIB should have (1) sufficiently available capital to ensure it can maintain its triple-A rating even after being subjected to a severe and protracted crisis, (2) extra lending capacity to provide countercyclical lending during the same crisis period and (3) robust net income generating capacity to absorb the shock of nonperforming loans and to return to positive net income the year after reporting negative net income. To communicate all these activities and outcomes, we also strengthened our risk-related reporting.
In 2018, the Board of Directors supported our latest Risk Appetite Statement and approved the top-down allocation of risk specified therein. We define our risk capacity as the maximum level of risk the Bank can assume given its current level of resources before breaching constraints determined by available capital and liquidity needs, operational environment and obligations. The Risk Appetite Statement distinguishes between the Bank’s buildup phase and its longer-term mature state, with a greater allocation made to noncore supporting activities in the buildup period. By end-2018, the Bank remained in its buildup phase.