Provisions

Question discussed at the 2008 general meeting

The provision for future exchange losses is intended to cover realised or unrealised foreign exchange losses, including deferred losses not covered by the revaluation accounts. The amount of the provision is assessed annually and adjusted according to the best estimate of the risk to be covered, using the “value at risk” method.

Since the money for this provision comes from proceeds (in principle, realised foreign exchange gains, pursuant to an agreement dated 8 July 1998 between the State and the Bank) which are deducted from the allocation under the 3 p.c. rule, the amount of any write-backs is included in the net financial proceeds to be shared between the Bank and the State under that same rule.

The provision for contingencies is intended to cover two quite separate risk categories:

  • the risks inherent in the Bank’s activities; and
  • the fluctuations to which the Bank’s results are subject.

The first risk category is very important for determining the amount of the provision. This concerns the risks inherent in the Bank’s activities, particularly the credit risk on the Bank’s transactions and investments and the operational risk. In recent years the volume of the Bank’s net profit-earning assets has increased sharply, heightening the risk which it incurs in managing them. The credit risk is assessed at the end of each financial year, using the “Creditmetrics” method.

The provision for contingencies may also cover the risk of volatility in the Bank’s results. Thus, it may be used to clear losses before they have absorbed all the profits, in order to permit payment of the second dividend as well.

Unlike the allocations to the provision for future exchange losses, the allocation to the provision for contingencies takes place after application of the 3 p.c. rule. The amount of any write-backs on the latter provision is therefore not subject to that rule.