Managing risk is a fundamental part of banking. Triodos Bank manages risk as part of a long-term strategy of resilience.
Risk Management is embedded throughout the organisation. While business managers are primarily responsible for delivering a resilient business approach, they are supported by risk managers, with local business knowledge, to identify, assess and manage risk. At Group level, a risk appetite process is implemented to align Triodos Bank’s risk profile with the willingness to take risk in achieving its business objectives.
Periodically each business unit performs a strategic risk assessment to identify and manage potential risks that could impede the realisation of their business objectives. The results of these assessments are consolidated and used as input for the Executive Board’s own risk assessment. They are also part of the business plan cycle.
Over the past years, two important external strategic risks have materialised and are expected to continue in the foreseeable future; the continuing low interest rate environment and regulatory pressure. The first has led to a decreased margin and consequently lower profitability than anticipated. The second has led to the need for additional co-workers, system adaptation and processes in order to implement these new regulatory requirements, as well as sharply increasing contributions to the Deposit Guarantee Scheme and resolution costs.
The strategic risk environment forms one of the starting points for determining the corporate strategy, the assessment of the capital and liquidity requirements in relation to the risk appetite and recovery plan in case of deviation. In addition, the local risk sensitivities were reviewed to determine scenarios that were used to stress test Triodos Bank’s solvency, liquidity and profitability during 2018.
Given the scenarios that were selected, Triodos Bank is most sensitive to a long lasting, low interest environment scenario. It shows that, with projected business volumes and fee income, profitability will be under pressure in the coming years. This risk will be mitigated by a focus on cost efficiency and by diversification of income. Another scenario that leads to decreasing profits and capital ratios is exposure to government defaults. This is seen as a logical consequence of a presence in different countries.
Finally, Triodos Bank is sensitive to scenarios relating to reputation risk. To prevent such an event, it is essential to communicate clearly about the mission and to act in line with the mission.
The impact of the scenarios was calculated and assessed in relation to profitability, capital ratios and liquidity. The results of these tests were satisfactory.
Climate risk contains two important elements:
- the risk that relates to the transition of ’old’ sources of energy to sustainable ones, which can result in stranded assets. Power plants using coal that have to close earlier than expected, are an example
- the risk that relates to the changes of the climate itself causing physical damage, leading to extreme weather conditions and the rise of sea levels, for example.
Given that sustainability considerations are a starting point within Triodos Bank’s lending processes, transition risks are minimal in its loan portfolio. Triodos Bank’s lending is already focused on financing enterprises contributing to a low-carbon future.
Triodos Bank’s portfolio could be impacted by the physical risks of climate change. Regarding physical risk, the changes in climate leading to storms, floods and droughts may have an impact its assets. However, Triodos Bank has not identified assets considered to be especially vulnerable to these physical risks. In the longer term, impact on weather conditions (such as wind and solar resources) may affect renewable energy generation. However, there are no reliable predictions for this happening, and it is unlikely to affect the bank’s portfolio assets within the duration of the current portfolio.
Nevertheless, Triodos Bank carries out annual stress tests which take extreme but plausible situations into account. As part of determining the scenarios, it evaluates whether extreme weather situations could impact the bank’s resilience with a time horizon of three years. Currently, the conclusions of this work are that it is very unlikely to have material impact within this time horizon.
Finally, Triodos Bank believes that since these risks will have a profound impact on society as a whole over the longer-term, society and the banking sector should create structures to drastically decrease and minimise the financing of unsustainable assets.
A fully integrated risk management report gives insights into the Triodos Bank risk profile in relation to the accepted risk appetite. The report is an important monitoring tool for Triodos Bank’s risk profile, gives insights into specific risk themes and provides an integrated picture of risk at business unit level. This report is produced quarterly and discussed with the Supervisory Board’s Audit and Risk Committee.
Several risk committees are in place at Head Office, all representing a specific risk area. The monthly Asset and Liability Committee is responsible for assessing and monitoring the risks associated with market risk, interest rate risk, liquidity risk, and currency risk and capital management. The monthly Non-Financial Risk Committee monitors and challenges the development of the non-financial risk profile of Triodos Bank in order to determine whether the operational and compliance risks are, and will be, in line with the defined non-financial risk appetite. The Enterprise Risk Committee of Triodos Bank is the body delegated by the Executive Board to propose the risk appetite, monitor the actual risk profile against the risk appetite, propose capital and liquidity levels and discuss all corporate risks and mitigating actions.
The Credit Risk Committee plays an important role in assessing the risk of new loans and monitoring the credit risk of the entire loan portfolio. The assessment of credit risk is as close as possible to the client and therefore primarily the responsibility of local branches, who are responsible for daily operations. The central risk function sets norms, approves large loans and monitors the credit risk and concentration risk of Triodos Bank’s entire loan book.
The Risk Management section of Triodos Bank’s annual accounts provides a description of the main risks related to the strategy of the company. It also includes a description of the design and effectiveness of the internal risk management and control systems for the main risks during the financial year.
The company’s continuous growth has led to a periodic review of its internal organisation and governance requirements. Also new legislation demanded several additional analyses, risk assessments and adjustments of systems or procedures.
Capital and liquidity requirements
Regulations are demanding a more resilient banking sector by strengthening the solvency of the banks and introducing strict liquidity requirements, such as those developed by the Basel Committee on Banking Supervision. Based on the latest available information, Triodos Bank complies with the capital and liquidity requirements that legally come fully into effect from 2019, known as Basel III. Furthermore, Triodos Bank expects that the latest proposed changes to this regulation, referred to as the EU risk reduction package and the Basel III finalisation of post-crisis reforms, together will provide limited relief on Triodos Bank’s required capital.
Triodos Bank’s capital strategy is to be strongly capitalised. This has become an even more important strategic objective as the regulation introduces new measures to strengthen the capital base of all the banks as a consequence of the financial crisis. Triodos Bank aims for a Common Equity Tier 1 ratio of at least 16%, well above its own internal economic capital adequacy models to guarantee a healthy and safe risk profile. The quality of capital is important as well as the solvency rate. All of Triodos Bank’s solvency comes from common equity. Economic capital is the amount of risk capital held to enable it to survive any difficulties, such as market or credit risks. Economic capital is calculated periodically and supports Triodos Bank’s own view of capital adequacy for the purpose of the yearly Internal Capital Adequacy Assessment Process, which is reviewed by the Dutch Central Bank.
Despite successfully raising capital of over EUR 83 million in 2018, the Common Equity Tier 1 ratio decreased by 1.5% from 19.2% at the year end 2017 to 17.7% at the year end 2018. This ratio is still well above the regulatory requirement. The decrease in 2018 was mainly caused by an increase in risk weighted assets, due to the growth of the sustainable loan portfolio. This trend was coupled with relatively lower growth in capital in 2018 and the fact that Triodos Bank has increased its capital buffer related to the trading in its depository receipts.
The liquidity portfolio increased slightly during 2018, Triodos Bank’s liquidity position remained strong. Its policy is to hold a sound liquidity buffer and invest liquidities in highly liquid assets and/or inflow generating assets in the countries where it has branches. In The Netherlands Triodos Bank has invested its liquidities mainly in (green) bonds of the Dutch government, agencies, and banks, cash loans to municipalities, deposits with commercial banks and the Dutch Central Bank. In Belgium most of its liquidity has been invested in Belgian regional and government bonds. In Spain the liquidity surplus is invested in Spanish regional and central bonds, Spanish regions and agencies and deposited with commercial banks and the Spanish Central Bank. In the UK excess liquidity is invested in UK government bonds and placed on deposits with commercial banks and the Bank of England. In Germany, surplus liquidities are placed with local governments and with commercial banks including the German Central bank. Due to the expansionary monetary policy by the ECB and specifically the asset purchase program, yields of government bonds and other high rated counterparties have plummeted, often even to levels below -0.40%. Hence, the profile of the liquidity buffer changed during 2018. The bonds portfolio decreased by almost 14%, due to maturing bonds being placed mostly at the European Central Bank.
The Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are both well above the minimum limits of Basel III.
More detailed information about Triodos Bank’s approach to risk is included in the Annual Accounts section starting on page 61.
In control statement
The Executive Board is responsible for designing, implementing and maintaining an adequate system for internal control over financial reporting. Financial reporting is the product of a structured process carried out by various functions and branches under the direction and supervision of the financial management of Triodos Bank.
The Executive Board is responsible for the risk management function and compliance function. The risk management function works together with management to develop and execute risk policies and procedures involving identification, measurement, assessment, mitigation and monitoring of the financial and non-financial risks. The compliance function plays a key role in monitoring Triodos Bank’s adherence to external rules and regulation and internal policies. The adequate functioning of the risk management and compliance function as part of the internal control system is frequently under discussion with the Audit and Risk Committee. It is further supported by the Triodos Bank culture as a key element of our soft controls.
Triodos Bank’s Internal Audit function provides independent and objective assurance of Triodos Bank’s corporate governance, internal controls, compliance and risk management systems. The Executive Board, under the supervision of the Supervisory Board and its Audit and Risk Committee, is responsible for determining the overall internal audit work and for monitoring the integrity of these systems.
The risk governance framework is the basis for an integrated in control statement process. Triodos Bank is working in a rapidly changing environment, which requires regular upgrades of its control framework. The Executive Board has indicated that several internal projects are in place that should lead to internal statements providing positive assurance in the coming years.
The risk management and control systems provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation and fair presentation of its financial statements.
In our view the Executive Board report provides adequate insight in the functioning of the internal controls, compliance and risk management systems.
Compliance and integrity
Triodos Bank has internal policies, rules and procedures to ensure that management complies with relevant laws and regulations regarding customers and business partners. In addition, the compliance department independently monitors the extent to which Triodos Bank complies with its rules and procedures. External aspects of the compliance department primarily concern accepting new customers, monitoring financial transactions and preventing money laundering. Internal aspects primarily concern checking private transactions by co-workers, preventing and, where necessary, transparently managing conflicts of interest and safeguarding confidential information. In addition, it concerns raising and maintaining awareness of, for example, financial regulations, compliance procedures and fraud and anti-corruption measures. Triodos Bank has a European compliance team led from the Head Office in Zeist. Compliance officers are appointed in every branch with a functional line towards the central compliance department. Triodos Bank has a Group Data Protection Officer who monitors compliance with the General Data Protection Regulation. The Director Risk and Compliance reports to the Executive Board and has an escalation line to the Chair of the Audit and Risk Committee, that supports the independence of the Risk Control Function.
Triodos Bank aims to serve the interests of all stakeholders, including society, by actively fulfilling its role as a gatekeeper in the financial system and to counter money laundering and terrorism financing. The bank applies various procedures and measures in this respect.
In 2018, the Dutch Central Bank (DNB) conducted a thematic, sector wide survey among Dutch banks, focussing on the measures that the banks have taken to prevent money laundering and terrorism financing. From this survey, DNB concluded that Triodos Bank is required to implement enhancement of its measures concerning customer due diligence and monitoring of customer transactions. Triodos Bank agrees with the required improvements as articulated in an instruction of DNB and is taking the necessary steps to remedy this situation. DNB may publish details of its instruction in due course. Triodos Bank expects to be able to implement the required improvements.
In 2018 there was a compliance incident in the Spanish branch concerning the information relating to costs for consumer mortgages. The Spanish regulator imposed a fine, after the applicable reductions, of EUR 174,000. Triodos Bank completed voluntary payment of the fine on 10 December 2018.
Triodos Bank was not involved in other material legal proceedings or further sanctions associated with non-compliance with legislation or regulations in terms of financial supervision, corruption, advertisements, competition, data protection or product liability.
Sustainability considerations are shared at all levels of Triodos Bank and are an integral part of its management. Social and environmental aspects are taken into account in all day-to-day business decisions. Therefore, Triodos Bank does not have a separate department that continuously focuses on sustainability or corporate social responsibility.
Triodos Bank employs specific criteria to ensure the sustainability of products and services. It employs both positive criteria to ensure it is actively doing good and negative criteria for exclusion, to ensure it doesn’t do any harm. The negative criteria exclude loans and investments in sectors or activities that are damaging to society. The positive criteria identify leading businesses and encourage their contributions to a sustainable society. Twice a year, these criteria are tested and adjusted if necessary. Triodos Bank has also defined sustainability principles for its internal organisation. These are included in its Business Principles. All sustainability criteria referred to can be found on our website.