The aim of Triodos Bank’s risk management activity is to ensure the long term resilience of the business. The organisation’s risk appetite reflects this goal.
Triodos Bank uses and maintains a framework of systems, procedures, limits, reports and checks to manage the risks it faces. The structure and organisation of its business processes comply with the applicable legislation and regulations for financial institutions and Triodos Bank’s sustainability aims. The three lines of defence model is the basis for managing the risks within Triodos Bank. The branches, business units and departments are responsible for managing their own risks (first line of defence). Risk managers (second line of defence) support and advise the branches, business units and departments in embedding risk management processes in the organisation. Finally, Internal Audit (third line of defence) periodically assesses the design and effectiveness of internal processes and controls.
Risks are monitored by various departments and committees who report directly to the Executive Board. Risk Management consists of various risk disciplines, which are coordinated by the Chief Risk Officer who, at Triodos Bank, is also the Chief Financial Officer (CFO). Measures are taken to assign these tasks to a Chief Risk Officer independent of the CFO function. The tasks within these disciplines are to support the business in identifying, assessing, mitigating and monitoring risks within the accepted risk appetite. Risk Management tasks also include analysing risks, preparing risk policies and guidelines for decision by the Executive board, and supporting and controlling their implementation in the organisation.
The Risk Management department produces the integrated report of all financial and non-financial risks, and monitors the risk profile in accordance with the accepted risk appetite.
Senior Management at each of Triodos Bank’s business units is responsible for embedding the risk framework into their business.
The Executive Board has assigned the advisory responsibility for:
- Balance sheet management and related risks to the Assets and Liabilities Committee (Alco). The Alco meets every month.
- Large loan approvals and counterparty and concentration risk to the Executive Board Credit Committee (EBCC). The EBCC meets every week.
The Audit and Risk Committee of the Supervisory Board supervises the risk management activities of Triodos Bank.
Triodos Bank implemented the capital framework of the Basel Committee on Banking Supervision and reports according to the requirements stipulated by Basel II. Basel II Pillar I has different approaches to capital calculations regarding credit, operational and market risks. Triodos Bank opted for the Standard Approach for assigning capital is used to calculate credit risk and market risk. The Basic Indicator Approach is used to calculate the capital requirements for operational risk. The options chosen by Triodos Bank will not diminish its efforts to continue to improve and fine-tune its internal risk management system and capital calculations.
As part of Pillar II of Basel II, Triodos Bank also implemented the Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP reflects the capital adequacy planning of Triodos Bank and is used for the Supervisory Review Evaluation Process (SREP) by the Dutch Central Bank as part of Pillar II requirements.
Pillar III of Basel II concerns the disclosure of solvency risks. Its purpose is to make data on solvency, and the connected risk profile of the organisation, available to stakeholders. In line with regulations, this data is published where desirable or necessary in this annual report.
The yearly Internal Liquidity Adequacy Assessment Process (ILAAP) has been performed and submitted to the Dutch Central Bank as part of SREP. The ILAAP assesses Triodos Bank’s liquidity adequacy during normal business activities and in times of stress.
During 2013 Triodos Bank developed a recovery plan in line with DNB requirement stipulated in the Financial Supervision Act (Wft). The recovery plan specifies measures Triodos Bank can take in order to survive a severe crisis on capital, liquidity and operational stability. The aim of a recovery plan is to be better prepared for a crisis and thus to lower the probability of default. For this purpose, the recovery plan identifies a number of measures aiming to strengthen Triodos Banks resilience. Also, it aims to identify potential impediments to the implementation of these measures and, where possible, ways to mitigate such impediments.
The Dutch Banking Code explicitly mentions that the Executive Board is responsible for adopting, implementing, monitoring and, where necessary, adjusting Triodos Bank’s overall risk management framework. Triodos Bank implemented the recommendations set out by this Code.
The product approval process, that assesses all new products and markets against Triodos Bank’s risk appetite and its duty of care to clients is in place.
Triodos Bank’s risk management strategy is reflected in its risk appetite. This is the level of risk Triodos Bank is prepared to take in order to realise its strategic business objectives. The risk appetite indicates the maximum risk that Triodos Bank considers acceptable to implement in its business strategy in order to protect itself against events that could have a severe and adverse effect on liquidity, profitability, capital and the depository receipt price.
The risk appetite strategy is the basis for recovery plan limits, ICAAP, ILAAP and stress test calculations. The integrated approach to these documents creates an integrated view on Triodos Bank risk management profile.
Triodos Bank has established an Audit & Risk Committee (Supervisory Board A&RC) in line with the Banking Code, which meets at least four times a year. The Executive Board delivers an integrated risk report to the Supervisory Board A&RC to enable them to execute adequately their supervisory responsibilities on Triodos Bank’s risk profile, including capital and liquidity impact. A long-term learning program for members of the Executive Board and Supervisory Board has been set up and implemented.
A capital strategy is developed to guarantee that sufficient capital is available to meet Triodos Bank’s capital needs to implement its business strategy. Triodos Bank works with rolling three year capital planning. The Asset and Liability Committee monitors and advises the Executive Board about the capital adequacy. The Asset and Liability Committee assesses whether the available capital is sufficient to support current and future activities on a monthly basis. In 2013 the available capital was always sufficient. During 2013 new equity of EUR 68 million was issued to support growth.
The capital strategy forms the basis for the process of:
- Capital measurement (ICAAP): measuring the risks resulting in an estimate of the demand for capital.
- Capital contingency and stress testing: managing the supply of and demand for capital in stress situations.
- Capital allocation: allocating capital to the different branches, business units and departments.
“The capital measured at Triodos Bank concerns both the external requirements in accordance with the results of Pillar I under Basel II and the internal demand for capital in accordance with the results of Pillar II under Basel II.
The results of Pillar I and Pillar II add up to Economic Capital, which expresses the need for capital to cover Triodos Bank’s business activities. Therefore Economic Capital supports business decision-making at all levels within banking organisations. The Economic Capital is determined by the following risks:
- Credit risk (counterparty risk and concentration risk)
- Operational risk
- Market risk (foreign exchange risk and interest rate risk)
Capital contingency and stress testing
Capital Contingency is set up for Triodos Group in case a shortage in capital occurs. Capital Contingency is in line with the recoverability measures as described in the recovery plan. The recovery plan sets out actions and activities to strengthen short term capital positions under stressed circumstances. The actual capital position is stressed reguarly, based on a number of stress scenarios.
The total liability capital (equity and subordinated loan) is allocated to business units, in proportion to the economic capital, based on their risk profile.