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  • Credit Risk
  • Market Risk
  • Liquidity Risk
  • Market Risk

    Market risk is the risk of losses arising from movements in market prices. For Triodos Bank this means changes in interest rates and foreign exchange rates in particular.

    Foreign exchange risk

    Foreign exchange risk is the current or prospective risk to earnings and capital that arises from adverse movements in foreign exchange rates. Triodos Bank’s base currency is the euro. The UK Branch balance sheet and profit and loss account are denominated in sterling (GBP). Exchange rate differences arising from translating the UK Branch balance sheet to euro’s are accounted for as a hedge of a net investment in a foreign business unit and are taken directly to shareholders’ equity in the statutory reserve for conversion differences, insofar as the hedge is effective.

    Triodos Bank aims to avoid net currency positions with the exception of those arising from strategic investments. The term positions in foreign currencies mainly reflect the currency derivatives of Triodos Investment Funds which are nearly fully hedged.

    The foreign exchange risk is monitored daily and discussed in the Asset and Liability Committee on a monthly basis. Limits are agreed by the Asset and Liability Committee.

    Foreign currency position

    The following table shows Triodos Bank’s foreign currency position in thousands of EUR as at 31 December.

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    2015
    in thousands of EUR

    Cash position
    Debit

    Cash position
    Credit

    Term position
    Debit

    Term position
    Credit

    Net position
    Debit

    Net position
    Credit

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    GBP

    1,155,563

    1,153,634

    1,929

    USD

    13,492

    5,700

    381,351

    381,351

    7,792

    NOK

    104

    104

    PEN

    5,947

    5,947

    DKK

    5,112

    5,112

    AUD

    875

    470

    405

    SEK

    52

    52

    INR

    26,571

    26,571

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total

    1,170,086

    1,159,334

    418,981

    419,451

    10,282

     

     

     

     

     

     

     

    Net open foreign currency position (total of net positions debit and credit): 10,282

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    2014
    in thousands of EUR

    Cash position
    Debit

    Cash position
    Credit

    Term position
    Debit

    Term position
    Credit

    Net position
    Debit

    Net position
    Credit

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    GBP

    980,278

    979,373

    905

    USD

    10,018

    3,377

    301,953

    301,942

    6,652

    NOK

    110

    110

    PEN

    8,228

    8,228

    PHP

    818

    818

    DKK

    3,807

    3,807

    AUD

    843

    472

    371

    SEK

    50

    50

    INR

    15,865

    15,865

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total

    991,299

    982,750

    330,671

    331,132

    8,088

     

     

     

     

     

     

     

    Net open foreign currency position (total of net positions debit and credit): 8,088

    Interest rate risk

    Interest rate risk is the current or prospective risk that earnings and/or capital are negatively affected by interest rate changes in the financial markets. This risk is inherent to the traditional banking business and is a source of profitability. However, this does not mean that profits depend solely on successfully taking interest rate risk. Triodos Bank wants to optimise its interest rate risk and focus on its core business – lending to and investing in organisations that benefit people and the environment. The objective is a modest risk appetite which is reflected by the internal limits.

    Risk monitoring

    Triodos Bank uses various indicators to measure interest rate risk. The interest rate risk position is monitored by the Asset and Liability Committee on a monthly basis and reported quarterly to the Executive Board. Interest rate risk is managed with an interest rate risk model using guidelines and limits and by performing various interest rate stress scenario analyses. Limits and assumptions are decided upon by the Asset and Liability Committee taking into account Triodos Bank’s risk appetite. The suitability and appropriateness of the limits are assessed on an annual basis. The Asset and Liability Committee will re-evaluate the suitability and appropriateness of the limits if Triodos Bank introduces new products that materially alter its interest rate risk exposure, or if market conditions change in ways that materially alter its exposure to interest rate risk.

    Key risk indicators:

    • Earnings at Risk: a short term indicator which shows the effect of an interest rate shock of plus or minus 2% (200 basis points) on Triodos Bank’s interest income. This is measured over a one year and a two year period.
    • Economic Value of Equity at Risk: a long term indicator which represents the change of the Economic Value of Equity (which is the net present value of the future cash flows of all assets and liabilities) in the event of an interest rate shock of plus or minus 2% (200 basis points).
    • Outlier Criterion: the Economic Value of Equity at Risk expressed as a percentage of Actual own Funds.
    • Modified Duration of Equity: an indicator that expresses the sensitivity of the Economic Value of Equity in the event of interest rate changes.

    Assumptions

    The interest rate risk depends on (client) behaviour for some products. Behavioural models are used to assess these products. As a result, Triodos Bank uses both expert judgement and statistical modelling to predict repricing in various interest rate scenarios.

    The level of interest rate risk in savings and current accounts (or non-maturing deposits) is difficult to quantify in practice since these accounts typically have variable interest rates and no fixed maturity. Triodos Bank may decide to change rates at any point, if it is prompted to do so by changes in market interest rates. Equally, clients may also withdraw their funds at any point. In practice however, rates are not changed very frequently and clients are unlikely to withdraw all their funds instantly. Triodos Bank uses a cash flow based model to analyse interest rate risk in non-maturing deposits. The objective of this model is to forecast the future outflow of the non-maturing deposits and their sensitivities to market conditions.

    For loans, interest rate risk also depends on client pre-payment behaviour. Until recently the volume of prepayments was not material and client behaviour was not taken into account in assessing interest rate risk. More recently, due to the lower interest rate environment, prepayments are increasing. Therefore, behavioural assumptions have been developed in the risk model and the level of prepayments will be monitored.

    Risk mitigation

    Triodos Bank is able to steer the volume and interest rate terms of client assets and liabilities in order to maintain the Triodos Bank’s interest rate risk exposure within desired limits. However, changes in client rates and terms will not be made to the extent that they would materially impair Triodos Bank’s customer service, market position, profitability, capital adequacy and reasonable customer expectations. Triodos Bank also manages the duration of liquid marketable investments to maintain its interest rate risk exposure. If necessary, Triodos Bank will use interest rate swap contracts in order to maintain its interest rate risk exposure, within defined limits.

    Overview of interest rate risk indicators used by Triodos Bank as at the end of the year, for all currencies

    Base case represents the expected results of Interest Earnings and Economic Value of Equity in an unchanged interest environment.

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    2015

    Base case

    Rising interest rate (+200 bp)

    Decreasing interest rate (–200 bp)

    Amounts in millions

     

     

    in %

     

    in %

     

     

     

     

     

     

     

     

     

     

     

     

    Actual own Funds

    € 720

     

     

     

     

    Earnings at Risk 1 year

    € 151

    + € 12

    + 7.7%

    – € 2

    –1.2%

    Economic Value of Equity at Risk

    € 913

    – € 72

    –7.9%

    – € 42

    –4.5%

    Outlier Criterion

     

     

    8.8%

     

    8.8%

     

     

     

     

     

     

    Modified Duration of Equity

    3.9

    5.5

     

    17.6

     

     

     

     

     

     

     

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    2014

    Base case

    Rising interest rate (+200 bp)

    Decreasing interest rate (–200 bp)

    Amounts in millions

     

     

    in %

     

    in %

     

     

     

     

     

     

     

     

     

     

     

     

    Actual own Funds

    € 661

     

     

     

     

    Earnings at Risk 1 year

    € 147

    + € 15

    + 10.0%

    – € 2

    –1.4%

    Economic Value of Equity at Risk

    € 805

    – € 58

    –7.2%

    – € 38

    –4.7%

    Outlier Criterion

     

     

    8.8%

     

    8.8%

     

     

     

     

     

     

    Modified Duration of Equity

    1.3

    –0.2

     

    1.8

     

     

     

     

     

     

     

    The calculations for these indicators are based on interest rate maturities. However saving and current accounts have a non-defined interest maturity. A quantitative assessment of the interest rate sensitivity of Triodos Bank’s saving accounts and current accounts has been executed. The outcome of this assessment is used in the calculations for interest rate risk.

    The model used for the interest rate risk management of savings and current accounts predicts future volumes and interest rates based on historical data, taking into consideration the statistical significance of that data. The model combines the relationship between client interest rates and market interest rates and outflow predictions.

    Remaining interest-rate terms of financial instruments

    The following table sets out the remaining contractual interest-rate term of the financial instruments held, as at 31 December.

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    2015
    in thousands of EUR

    Floating-
    rate

    <= 3
    months

    <= 1
    year

    <= 5
    years

    > 5
    years

    Total

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Interest-bearing assets

     

     

     

     

     

     

    Cash

    285,819

    285,819

    Government paper

    118,900

    94,333

    213,233

    Banks

    298,743

    245,409

    1,000

    545,152

    Loans

    685,508

    1,188,481

    793,901

    1,320,962

    1,194,456

    5,183,308

    Interest-bearing securities

    327,214

    225,842

    821,523

    353,583

    1,728,162

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total

    1,270,070

    1,880,004

    1,115,076

    2,142,485

    1,548,039

    7,955,674

     

     

     

     

     

     

     

    Interest-bearing liabilities

     

     

     

     

     

     

    Banks

    2,124

    7,020

    14,967

    15,687

    39,798

    Funds entrusted

    36,002

    1,291,685

    2,004,041

    2,565,653

    1,372,019

    7,269,400

    Subordinated liabilities

    5,241

    5,241

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total

    36,002

    1,293,809

    2,016,302

    2,580,620

    1,387,706

    7,314,439

     

     

     

     

     

     

     

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    2014
    in thousands of EUR

    Floating-
    rate

    <= 3
    months

    <= 1
    year

    <= 5
    years

    > 5
    years

    Total

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Interest-bearing assets

     

     

     

     

     

     

    Cash

    175,225

    175,225

    Government paper

    141,439

    67,343

    208,782

    Banks

    184,452

    326,791

    64,500

    575,743

    Loans

    655,379

    708,973

    625,270

    1,224,649

    1,001,885

    4,216,156

    Interest-bearing securities

    311,322

    394,077

    634,795

    407,621

    1,747,815

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total

    1,015,056

    1,488,525

    1,151,190

    1,859,444

    1,409,506

    6,923,721

     

     

     

     

     

     

     

    Interest-bearing liabilities

     

     

     

     

     

     

    Banks

    5

    1,393

    10,436

    16,840

    25,953

    54,627

    Funds entrusted

    16,973

    1,142,720

    1,697,413

    2,191,872

    1,224,955

    6,273,933

    Subordinated liabilities

    5,241

    5,241

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total

    16,978

    1,144,113

    1,707,849

    2,213,953

    1,250,908

    6,333,801

     

     

     

     

     

     

     

    Notes:

    Only interest bearing assets and liabilities are reported in this table, which results in differences with the balance sheet figures.

    Interest bearing securities and subordinated liabilities are valued at redemption value including bond premium and after deduction of discounts.

    For funds entrusted without a fixed interest rate term, the outcome of the quantitative savings and current account model, as mentioned before, is used.

    All other interest-bearing assets and liabilities are reported as floating rates or are broken down in the maturity calendar by their remaining contractual interest rate term.