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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. Triodos Bank doesn't have a trading book, but interest rate risk is present in the banking book.

    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 forward positions in foreign currencies mainly reflect the currency derivatives of Triodos Investment Funds which are nearly fully hedged.

    The foreign exchange position 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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    2016
    in thousands of EUR

    Cash position
    Debit

    Cash position
    Credit

    Term position
    Debit

    Term position
    Credit

    Net position
    Debit

    Net position
    Credit

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    GBP

    1,081,884

    1,078,536

    642

    3,990

    USD

    8,858

    891

    402,027

    402,721

    7,273

    NOK

    110

    110

    PEN

    DKK

    10,278

    10,278

    AUD

    469

    469

    SEK

    126

    75

    5,744

    5,744

    51

    INR

    56,717

    56,717

    IRD

    6,720

    6,720

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total

    1,091,447

    1,079,502

    482,128

    482,180

    11,893

     

     

     

     

     

     

    Net open foreign currency position (total of net positions debit and credit): 11,893

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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

    Interest Rate Risk in the Banking Book

    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. In these models, 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 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.

    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 and the maturity of the portfolio, prepayments are increasing. Therefore, behavioural assumptions have been developed in the risk model and the level of prepayments is 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 manages the duration of liquid marketable investments to maintain its interest rate risk exposure. Triodos Bank also uses interest rate swaps in order to maintain its interest rate risk exposure, within defined limits.

    The key interest rate risk indicators for 2016 are comparable to the situation as at the end of 2015. The duration of equity increased from 3.9 years ultimo 2015 to 4.4 years ultimo 2016. The 1 year Earnings at Risk increased from 1.2% ultimo 2015 to 1.8% ultimo 2016 (in case of a decreasing interest rate scenario by 2%, where the resulting market rates are floored at 0%). The Economic Value of Equity (EVE) at Risk increased from 7.9% ultimo 2015 to 8.5% ultimo 2016 (in case of a +2% interest rate scenario). The Outlier Criterion increased from 8.8% ultimo 2015 to 11.4% ultimo 2016.

    For the EUR portfolio, the duration of equity increased from 4.3 years ultimo 2015 to 4.7 years ultimo 2016. The 1 year Earnings at Risk for EUR increased from 1.2% ultimo 2015 to 1.8% ultimo 2016. The EUR EVE at Risk increased from 8.7% ultimo 2015 to 9.2% ultimo 2016.

    For the GBP portfolio, the duration of equity increased from -13.4 years ultimo 2015 to -0.3 years ultimo 2016. The 1 year Earnings at Risk for GBP decreased from 2.8% ultimo 2015 to 1.7% ultimo 2016. The GBP EVE at Risk decreased from 67.1% ultimo 2015 to 9.8% ultimo 2016. These numbers can be quite volatile due to the fact that Triodos Bank has no GBP capital. The EVE of the GBP book therefore fluctuates significantly (in relative terms).

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

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    2016
    in thousands of EUR

    Floating-
    rate

    <= 3
    months

    <= 1
    year

    <= 5
    years

    > 5
    years

    Total

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Interest-bearing assets

     

     

     

     

     

     

    Cash

    732,219

    732,219

    Government paper

    53,544

    125,518

    179,062

    Banks

    351,894

    114,635

    1,000

    467,529

    Loans

    884,283

    856,089

    885,764

    1,591,001

    1,351,289

    5,568,426

    Interest-bearing securities

    264,166

    342,617

    802,861

    347,615

    1,757,259

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total

    1,968,396

    1,288,434

    1,353,899

    2,394,862

    1,698,904

    8,704,495

     

     

     

     

     

     

     

    Interest-bearing liabilities

     

     

     

     

     

     

    Banks

    212

    719

    4,298

    17,626

    8,727

    31,582

    Funds entrusted

    21,186

    1,446,578

    2,256,884

    2,779,729

    1,510,431

    8,014,808

    Subordinated liabilities

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total

    21,398

    1,447,297

    2,261,182

    2,797,355

    1,519,158

    8,046,390

     

     

     

     

     

     

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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

     

     

     

     

     

     

    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.