AFD_REGISTRATION_DOCUMENT_2017

RISK MANAGEMENT

4

Risk factors

b4.1 RISK FACTORS Because of the nature of its business activity, AFD Group is exposed to the majority of the risks of a credit institution. Its risk management policy is centred around the following key risks, each of which is likely to affect its business activity, results and financial position: P credit risk, which by the nature of AFD’s activity in terms of concentration and counterparty risk, is the main risk to which the Group is exposed; P risk specific to market transactions: exchange rate, counterparty or basis, particularly related to differences between the application of funds and resources in currency terms. AFD holds no instruments for speculative purposes; P global interest rate and liquidity risk related to (i) differences between the application of funds and resources in terms of rates and maturity and (ii) complying with the constraints associated with subsidised financing eligible for Official Development Assistance (ODA); P operational risk, including: P risks related to the outsourcing of services and other essential operational tasks, P the risk of loss covered by the emergency and business continuation plan which comes into play in the event of a crisis, P non-compliance risk arising from failure to adhere to specific banking and financial regulations, primarily the risk of money laundering and funding terrorism (AML/CFT), P legal risk in connection with all its own activities, its status or its refinancing and arrangement operations, strategic risks; P risks to the reputation and image of the Group and its directors. Given its role as a development agency, and notably the subsidiary and/or incentive-providing nature of the Agency’s operations, the acceptable level of credit risk at AFD may sometimes be higher than for traditional banking institutions. For example, AFD must conduct business: P ethical risk, P P IT-related risks,

international risks are likely to have an indirect impact on AFD’s portfolio of loans and operations. So far, six major risks of this type have been identified: P risks related to the tightening of economic and financial conditions in emerging countries. Since 2013, emerging and developing countries have regularly been subject to financial stresses caused by developments in advanced countries (Fed announcements, results of US elections and so forth). A sharp increase in long-term interest rates in the United States and elsewhere, triggered by a more rapid tightening of US monetary policy than expected, could have negative consequences for economies which are dependent on external financing and which currently benefit from a high appetite for risk worldwide. These factors could be reflected by a slowdown in economic activity, owing to a reduction in confidence and in the valuation of some assets, and to higher risk premiums. The accompanying increase in the value of the US dollar could negatively affect some heavily indebted emerging countries whose currencies are pegged to the dollar. In addition, while growth remains fragile, the early tightening of European monetary policy is a particular risk for heavily indebted member economies; P risks related to the Chinese economy. The rebalancing of Chinese growth in favour of consumption and services is continuing more slowly than expected. In addition, indebtedness is on an upward trend and budgetary margins for manoeuvre are decreasing. Unless the Chinese authorities accelerate their efforts to control rapid credit growth, the risk of a sharp deceleration in Chinese growth is increasing, with negative consequences for the rest of the world; P risks related to persistent low inflation in the advanced economies. An extended period of low inflation and low nominal interest rates would reduce the ability of central banks to lower real interest rates in the event of an economic downturn; P risks related to financial deregulation. The reforms carried out following the 2008bfinancial crisis have allowed the supervision of the international financial system to be strengthened, the capital and liquidity of the principal financial institutions to be increased and coordination between the different regulators to be improved. However, recent announcements made by the White House signal a change in direction in favour of deregulation. The concrete implementation of these announcements would be likely to reinforce the probability of a new financial crisis in the medium-term; P risks related to disturbances in international trade, flows of capital and migratory movements. Recent elections in the advanced economies have shown the frustrations and growing protests of a part of the population which considers itself to be “losing” in the context of the globalisation movement. These protests contributed significantly to the vote in favour of Brexit, to the election of Donald Trump and are also present in the

P in challenging countries; P with risky counterparties; P over long maturities.

In any case, AFD Group looks for the most creditworthy counterparties in the countries in which it operates according to its development targets. In addition, lending opportunities are evaluated based on current banking criteria. Aside from macroeconomic and social-political risks specific to the countries in which AFD operates, a few regional or

64

REGISTRATION DOCUMENT 2017

www.afd.fr