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 banking business.

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. The Interest Rate Risk is managed with an interest risk model, using guidelines and limits and by performing various interest rate stress scenarios. Limits are agreed by the Executive Board based on a proposal made by the Asset and Liability Committee.

Overview of interest rate risk indicators:

  • Earnings at Risk: a short term indicator, which shows the effect of an interest shock of plus or minus 2% (200 basic points) on the interest income of Triodos Bank for an one 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 cash flows of all assets and liabilities) in case of an interest rate shock of plus or minus 2% (200 basic points).
  • Outlier Criterion: the Economic Value of Equity at Risk in % of the Actual own Funds.
  • Cushion: shows the difference between the Economic Value of Equity and the Actual own Funds.
  • Modified Duration of Equity: an indicator that expresses the sensitivity of the Economic Value of Equity in case of an interest rate change of 1%.

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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2011

Base case

Rising interest rate (+200 bp)

Decreasing interest rate (–200 bp)

Amounts in millions

 

 

in %

 

in %

 

 

 

 

 

 

Actual own Funds

€438

 

 

 

 

Earnings at Risk 1 year

€106

+€10

+9.0%

–€4

–4.2%

Economic Value of Equity at Risk

€602

–€36

–6.0%

+€25

+4.1%

Outlier Criterion

 

 

8.2%

 

8.2%

Cushion

€165

€129

 

€190

 

 

 

 

 

 

 

Modified Duration of Equity

3.3

3.5

 

3.5

 

 

 

 

 

 

 

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2010

Base case

Rising interest rate (+200 bp)

Decreasing interest rate (–200 bp)

Amounts in millions

 

 

in %

 

in %

 

 

 

 

 

 

Actual own Funds

€360

 

 

 

 

Earnings at Risk 1 year

€84

+€10

+11.8%

–€4

–4.9%

Economic Value of Equity at Risk

€503

–€38

–7.6%

+€39

+7.8%

Outlier Criterion

 

 

10.6%

 

10.6%

Cushion

€143

€105

 

€182

 

 

 

 

 

 

 

Modified Duration of Equity

3.6

3.8

 

4.1

 

 

 

 

 

 

 

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 our 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 interest-rate term of the financial instruments held as at 31 December.

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2011
Amounts in thousands of EUR

Floating-
rate

<= 3
months

<= 1
year

<= 5
years

> 5
years

Total

 

 

 

 

 

 

 

Interest-bearing assets

 

 

 

 

 

 

Cash

51,631

51,631

Government paper

10,000

5,000

15,000

Banks

384,767

131,382

152,500

2,000

670,649

Loans

697,597

332,610

394,902

768,767

638,436

2,832,312

Interest-bearing securities

11,999

65,638

396,310

112,222

586,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

1,133,995

485,991

618,040

1,167,077

750,658

4,155,761

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

Banks

855

1,268

1,307

10,087

21,385

34,902

Funds entrusted

114

677,879

1,005,762

1,274,089

752,055

3,709,899

Subordinated liabilities

15,239

15,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

969

679,147

1,007,069

1,299,415

773,440

3,760,040

 

 

 

 

 

 

 

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2010
Amounts in thousands of EUR

Floating-
rate

<= 3
months

<= 1
year

<= 5
years

> 5
years

Total

 

 

 

 

 

 

 

Interest-bearing assets

 

 

 

 

 

 

Cash

44,814

44,814

Banks

370,875

222,925

2,000

595,800

Loans

550,464

143,654

353,436

594,583

485,506

2,127,643

Interest-bearing securities

25,019

107,523

323,183

149,002

604,727

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

966,153

391,598

460,959

919,766

634,508

3,372,984

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

Banks

840

1,199

396

6,239

15,309

23,983

Funds entrusted

12,103

512,456

820,387

1,052,801

624,425

3,022,172

Subordinated liabilities

22,694

22,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

12,943

513,655

820,783

1,059,040

662,428

3,068,849

 

 

 

 

 

 

 

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.

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