Financial risk

Credit risk is the risk that a counterparty doesn’t fulfil its financial obligations. Triodos Bank manages its Credit Risk at a client and at portfolio level. It operates within a pre-defined set of criteria for accepting credits. Credits are extended within the target markets and lending strategy in accordance with Triodos Bank’s mission and expertise. Before accepting a credit facility, Triodos Bank assesses the customer’s risk profile, cash flows, available collateral and the requested transaction, including an assessment of the integrity and reputation of the borrowers or counterparty. Compliance analysis with Triodos Lending Criteria is an integral part of each credit proposal.

In order to manage credit risk Triodos Bank developed an internal rating-based system, resulting in a probability of default. Furthermore, Triodos Bank has developed a loss given default model, allowing us to model the expected loss and the economic capital.

Each branch has a credit risk team headed by a Head of Credit Risk. The teams comprise credit risk analysts and Special Asset Managers. They have a functional reporting line to the Central Head of Credit Risk at Head Office. At central level a dedicated team is in place with credit analysts, data analysts and special asset management specialists.

At local level, individual files have a second line review and the portfolio is monitored and reviewed on a continuous basis. The larger files based on exposure and rating, are furthermore analysed at central level. The aggregated portfolio is also monitored at central level.

The resulting analysis is provided to the local and/or central credit committee for decision making on approvals for individual files, lending criteria for sectors and limits on sectors, countries or individual obligors.

Loans are provided to businesses and projects that contribute to achieving Triodos Bank’s mission. Given that this involves a small number of sustainable sectors, a certain level of sector concentration is inherent to the loan portfolio. Concentration in the existing sectors is acceptable as Triodos Bank has considerable expertise in these sectors and actively invests in further increasing its knowledge.

Triodos Bank focus primarily on the quality and diversification of its loan portfolio. We put extra effort into identifying loans to front-runners in their fields; the entrepreneurs developing the sustainable industries of the future.

A diversified credit risk portfolio is the result of assets spread over many debtors, sectors and geographies that are not inter- or intra-related. In order to manage concentration risks and face an economic downturn with confidence, Triodos Bank maintains a set of limits. The limits are based on the bank’s capital base and reflect the risk appetite. This policy describes the different kind of credit concentrations identified and the limit setting.

Triodos Bank measures and limits the following concentration risks in its lending activities:

• Obligor exposures

• Group exposures

• Top 20 exposures excluding (sub-)Government exposures

• Government exposures

• Sector exposures

• Non-Bank Financial Intermediation (Shadow banking) exposures

• Mortgage exposures

• Country exposures

Besides lending activities, Triodos Bank has established limits related to the investment portfolio:

• Maximum exposure on government and sub-governments

• Maximum exposure on supranational institutions

• Maximum exposure on banks and financial institutions

The limit setting is derived from the risk appetite framework and aims to keep concentration risk at an acceptable level.

Sector concentrations

Triodos Bank is active in well-defined sectors where it has extensive expertise, and which are in line with its mission. It has set limits on sectors, based on Actual Own Funds, at group and banking entity level. Sector studies have shown relatively low correlations of risk drivers in sectors that Triodos Bank finances in multiple countries. A specification of the lending by sector can be found from page Lending by sector in 2020 after intercompany eliminations onwards.

At group level, Triodos Bank divides the sector concentration limits in different levels. Specific limits for each sector per country are set by the Executive Board within these levels, taking into account the specific risks of each sector and country.

Larger sectors are strategic for Triodos Bank. These are well distributed across banking entities (and countries) and have an overall low risk profile that justifies a higher consolidated concentration. Sector analyses are performed on an annual basis and are presented to the Central Credit Committee to be able to respond swiftly to developments that may affect the risk profile of the portfolio. Central Credit Risk can request sector updates at shorter intervals if there is a change to a sector risk profile.

Sector limits are approved on the basis of thorough annual sector analyses demonstrating an in-depth knowledge of the sector and Triodos Bank’s track record.

Country concentrations

Triodos Bank is a European bank, acting under the European Banking Directive since 1993, with banking entities in four countries (The Netherlands, Belgium, Spain and Germany), with a subsidiary in the United Kingdom and with additional exposures amongst others in France and Ireland.

Triodos Bank does not set any country limits for the countries it operates in as long as these countries have a credit rating of AA- or better. Specific limits are defined for countries with a credit rating of A+ or lower.

Credit risk is the risk that a counterparty doesn’t fulfil its financial obligations. Triodos Bank manages its Credit Risk at a client and at portfolio level. It operates within a pre-defined set of criteria for accepting credits. Credits are extended within the target markets and lending strategy in accordance with Triodos Bank’s mission and expertise. Before accepting a credit facility, Triodos Bank makes an assessment of the customer’s risk profile, cash flows, available collateral and the requested transaction, including an assessment of the integrity and reputation of the borrowers or counterparty. Compliance analysis with Triodos Lending Criteria is an integral part of each credit proposal.

In order to manage credit risk Triodos Bank developed an internal rating-based system, resulting in a probability of default. Furthermore, Triodos Bank has developed a loss given default model, allowing us to model the expected loss and the economic capital.

Obligor risk

An obligor is a single legal entity that commits to the terms and conditions of a loan agreement. The obligor is thoroughly analysed on meeting Triodos Bank’s lending criteria and its capacity to repay a loan. The risk related to the obligor is that it fails to meet its contractual obligations. Obligors are rated through an internal rating methodology.

A thorough assessment of each obligor and the structure of their loan is made before any loan is provided. A review of approved credit is made once a year, as a minimum, to assess the evolution of the client’s capacity to meet its obligations. The high quality of securities (collateral) against outstanding loans reduces credit risk. Examples of principal collateral: mortgage registrations for business or private properties, securities from public authorities, companies or private individuals, and rights of lien on movables, such as office equipment, inventories, receivables and/or contracts for projects.

Triodos Bank aims to finance specific projects and assets that are in line with its mission. When financing a project, the bank has a pledge on the underlying contracts. For the financing of objects, Triodos Bank will take a pledge or mortgage on the specific object. It applies haircuts, in all cases, on the market value. The level of this haircut will depend on the marketability of the asset in a negative scenario. This allows Triodos Bank to make a proper assessment of the overall risk of the loan and the value of the asset in case of a downturn. The value of the collateral is reviewed on a yearly basis. An external valuation by an expert is requested, at a minimum every three years, for large loans with a mortgage.

Triodos Bank has an early warning system that helps identify problem loans early, to allow for more available options and remedial measures. Once a loan is identified as being in default (unlikeliness to pay or overdue payments beyond 90 days), it is managed under a dedicated remedial process, with a focus on full recovery.

Group exposures

The risk related to a Group is that if one obligor fails to meet its contractual obligations, so will the remaining obligors within the Group. A group is defined as two or more obligors that are interrelated in such a way that they are considered as a single risk.

Each obligor of the Group, and the Group as a whole, are analysed on all aspects, from meeting Triodos Bank’s lending criteria to their capacity to repay the loan.

Liquidity not invested in loans to customers is invested in deposits with banks (including Central Banks) or bonds. Triodos Bank’s policy is to invest the liquidity in the countries where it has branches or subsidiaries. The bond portfolio of Triodos Bank comprises of (local) government bonds (from countries where Triodos Bank has a branch or subsidiary) and investment grade bonds issued by European supranational organisations (e.g.European Investment Bank), Financial Institutions and corporates.

There are no regulatory restrictions to exposures on governments. Triodos Bank sets limits based on the country risk.

There are also no regulatory restrictions to exposures on multilateral development banks as far as an institution has a credit risk weight of 0% for regulatory capital requirements. Triodos Bank has set limits to avoid concentration risk in these exposures.

Banks are selected on the basis of their creditworthiness and screened on their sustainability performance. Exceptions can occur, when the capacity of selected banks in a country is considered not sufficient to place Triodos Bank’s liquidities using a certain maximum concentration per individual bank. In such cases, deposit maturity periods will not exceed three months. All counterparty limits for banks are set by either the Executive Board or the Central Credit Committee. Banking entities place excess liquidity with the country’s central banks (minimum reserve requirements and deposit facility). There are no regulatory restrictions on exposures to Central Banks.

The Capital Requirements Regulation Large Exposures Regime limits the maximum exposure to a bank at 25% of its Tier 1 capital plus (if available) Tier 2 with a maximum of one third of Tier 1 capital. To avoid the interbank exposure exceeding the regulatory maximum, Triodos Bank applies a maximum exposure below the limit based on the Large Exposures Regime. The limits are furthermore adapted to the external rating of the counterparty and also deposits on banks are limited to a maximum maturity of one year.

Triodos Bank has exposure to credit risk resulting from outstanding Foreign Exchange (FX) contracts (spot, forward and swap transactions) with Financial Institutions and with funds managed by Triodos Investment Management. Triodos Bank services these funds by providing hedges for the foreign exchange risk of these funds’ investments.

Triodos Bank has limited exposure to credit risk resulting from outstanding Interest Rate Swaps (IRS). The IRS are all centrally cleared with the LCH Clearnet. The daily margining minimises the (potential) credit risks.

A limit is set per counterparty based on the expected amount of outstanding FX transactions and the corresponding expected exposure. This limit is subject to the overall counterparty limit Triodos Bank has per counterparty.

Any collateral needed for FX transactions is calculated and managed daily. In the liquidity stress tests, the amount of collateral needed for FX transactions is stressed in order to calculate the potential impact on Triodos Bank’s liquidity position.

Triodos Bank entered into FX deals with Triodos Investment Funds and these deals are hedged by deals with a few banks. Wrong-way risk is the risk that the exposure to a counterparty is adversely correlated with the credit quality of that counterparty. The FX deals with the Triodos Investment Funds do not cause wrong-way risk as these FX deals hedge the FX risk of the underlying assets of the Investment Funds. At the end of 2017 Triodos Bank stopped entering into new FX deals with Triodos Investment Funds because of new regulation. In addition, the wrong-way risk of transactions with banks is mitigated by only using banks with a sufficient credit rating and by having collateral agreements in place.

Business loans in the portfolio are periodically reviewed on an individual basis. Their frequency depends on the debtor’s creditworthiness, the degree of market exposure and the market in which the debtor operates. Small business and private loans are reviewed at portfolio level, and on individual basis if appropriate.

Each branch has a credit risk team headed by a Head of Credit Risk. The teams comprise credit risk analysts and Special Asset Managers. They have a functional reporting line to the Central Head of Credit Risk at Head Office. At central level a dedicated team is in place with credit analysts, data analysts and special asset management specialists.

The credit committees discuss and, if necessary, take action with respect to overdue payments from debtors. If there is any doubt regarding the continuity of the debtor’s core operations and/or a debtor fails to settle agreed interest and repayment instalments for a prolonged period, this debtor falls under the category of doubtful debtors and will be managed intensively.

Provisions for loan losses are taken for doubtful debtors at an individual level based on the difference between the total amount of the debtor’s outstanding liability to Triodos Bank and the future expected cash flows, discounted at the original effective interest rate of the contract. These individual provisions include provisions for concessions or refinancing given to debtors who face financial difficulties. They are only granted to the debtor in question in order to overcome their difficulties in these exceptional circumstances. These are described as forbearance measures.

The credit risk in the loan portfolio is reported each month to the Central Credit Committee, and quarterly to the Audit and Risk Committee as part of the ERM report.

Qualitative disclosure requirements on institutions’ use of external credit ratings under the standardised approach for credit risk.

In addition to our check on minimum standards, external credit ratings – if available – are used to determine the credit worthiness of the counterparties of our investment portfolio and banks, and for a few corporates. External ratings are also used for calculating the minimum capital requirement for credit risk under the standardised approach. For this purpose, we use the ratings of Fitch and Moody’s.

Credit quality analysis

The following tables set out information about the credit quality of financial assets, loan commitments and guarantee contracts. Unless specifically indicated, for financial assets, the amounts in the table represent gross carrying amounts. For loan commitments and financial guarantee contracts, the amounts in the table represent the amounts committed or guaranteed, respectively.

The following table shows the loans and advances to banks at amortised cost, which are all in stage 1.

Triodos Bank applies ratings to its loans and advances to customers based on its credit risk policy. Within the policy clients with total business loans above EUR 250 thousand are rated. Clients with retail mortgage loans and or total business loans below EUR 250 thousand have no rating appointed. These are represented in the not rated category. The below table shows the loans and advances to customers within the rating categories.

The following table sets out information about the overdue status of loans and advances to customers in Stages 1, 2 and 3.

All debt securities at amortised cost are within stage 1 The below table sets out the debt securities per rating.

Loan commitments are not (yet) rated and the ECL is determined based on the business loans and mortgage loans portfolios. The outcome is presented in the table below.

All financial guarantee contracts are within stage 1 as shown in the table below.

Cash and cash equivalents Triodos Bank held cash and cash equivalents of €2.956 million at 31 December 2020 (2019: €2.270 million). The cash and cash equivalents are held with central banks.

Collateral held and other credit enhancements

Triodos Bank can hold collateral and other credit enhancements against certain of its credit exposures. The following table sets out the principal types of collateral held against different types of financial assets.

The following tables stratify credit exposures from mortgage loans and advances to retail customers by ranges of loan-to-value (LTV) ratio. LTV is calculated as the ratio of the gross amount of the loan – or the amount committed for loan commitments – to the value of the collateral. The valuation of the collateral excludes any adjustments for obtaining and selling the collateral. The value of the collateral for residential mortgage loans is based on the collateral value at origination updated based on changes in house price indices. For credit-impaired loans the value of collateral is based on the most recent appraisals.

Details of financial and non-financial assets obtained during the year by taking possession of collateral held as security against loans and advances and held at the year end are shown below.

Triodos Bank sometimes repossesses assets which come from acquisition in public auctions. These assets are collaterals of an executed loan. A part of the repossessed assets however will not be sold immediately because Triodos Bank has opted to add value by letting these assets and are therefore presented as investment properties.

Allowance for expected credit losses

The following tables show reconciliations from the opening to the closing balance of the allowance for expected credit losses by class of financial instrument.

Triodos Bank uses three stages to classify the expected credit loss (hereafter “ECL”) for financial instruments. Stage 1 includes the financial instruments that have (close to) similar credit risk since origination. For this category the ECL is determined by looking forward for 12 months. Stage 2 includes the financial instruments which have had a significant increase in credit risk since origination. The ECL for stage 2 is determined looking over the entire lifetime of the financial instrument. The ECL for stages 1 and 2 is determined by the PD, LGD and EAD per exposure, which are determined with the use of a model that includes several drivers. These drivers can be client specific or based on macro-economic scenarios. Stage 3 includes the financial instruments which are in default. The ECL for this stage is also determined over the entire lifetime, considering default specific scenarios.

The ECL provision represents an estimate of the expected credit loss. The future development of the underlying parameters can influence this estimate positively (or negatively) leading to a decrease (or increase) of expected credit losses in future periods. If economic growth is expected to develop positively in future periods, this will have a positive effect on the calculation of ECL and result in lower ECL provision for stage 1 and 2.

Net portfolio growth captures all additions and full loans repayments. New loans are initially included in Stage 1. Additions in Stage 2 are caused increases in loans already in Stage 2 or sector overlays for significant increases in credit risk. Changes in ratings of clients may trigger classifications into different categories. When a rating declines significantly, the loan is transferred from Stage 1 to Stage 2, if the decline persists the loan can go into default and is subsequently moved into Stage 3. Furthermore, the defaults may be cured, and credit ratings may go up, such that loans can be transferred back to Stage 2 or Stage 1. The changes in stages is represented in the transfers.

When the drivers of the PD and LGD are changed, ECL amounts per financial instrument are recalculated. This is captured in the net remeasurement of allowance for expected credit losses. The net remeasurement can be broken down into several items: (1) Remeasurement in calculated ECL of individual loans which have transferred between stage 1 and stage 2. (2) Changes in forward looking macro-economic scenarios. (3) Updates and refinements of the used ECL model. And, (4) changes in individual loan or advance behaviour such as changes in rating not triggering stage transfer or loan amount due to repayment.

Loans and advances to banks at amortised cost have no changes in rating, and therefore credit risk, from issuance of current outstanding balance and therefore everything is within stage 1.

^* The allowance for expected credit losses in these tables includes ECL on loan commitments for certain retail products such as credit cards and overdrafts, because the Group cannot separately identify the ECL on the loan commitment component from those on the financial instrument component.

The following table shows the movements within the ECL for business loans and current accounts.

The allowance for expected credit losses in this table includes ECL on off balance loan commitments for certain retail products such as credit cards and overdrafts, because Triodos Bank cannot separately identify the ECL on the loan commitment component from those on the financial instrument component.

The following table shows the movements within the ECL for mortgage loans.

The following table shows the movements within the ECL for debt securities at amortised cost.

The following table shows the movements within the ECL for financial guarantees.

The following table shows the movements within the ECL for loan commitments.

Loan commitments issued for the most significant part result in issued loan when offers are signed or when commitments are used. The table therefore shows the totals of the loan commitment ECL per stage.

Allowance for expected credit losses reconciliation to income statement

The following table provides a reconciliation between:

• amounts shown in the above tables reconciling opening and closing balances of allowance for expected credit losses per class of financial instrument; and

• the ‘impairment losses on financial instruments’ line item in the consolidated statement of profit or loss and other comprehensive income.

Credit-impaired financial assets

The following table sets out a reconciliation of changes in the net carrying amount of credit- impaired loans and advances to customers.

Modified financial assets

The following table provides information on financial assets that were modified during the reporting period. The net modification loss comprises the modification result minus modification fees or penalty interest received.

Offsetting financial assets and financial liabilities

Triodos Bank does not make use of any netting under master agreements for its financial instruments.

The ISDA and similar master netting arrangements do not meet the criteria for offsetting in the statement of financial position. This is because they create for the parties to the agreement a right of set-off of recognised amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Group or the counterparties or following other predetermined events. In addition, Triodos Bank and its counterparties do not intend to settle on a net basis or to realise the assets and settle the liabilities simultaneously.

Triodos Bank receives and gives collateral in the form of cash in respect of the derivatives held for risk management. This collateral is subject to standard industry terms including, when appropriate, an ISDA credit support annex. This means that securities received/given as collateral can be pledged or sold during the term of the transaction but have to be returned on maturity of the transaction. The terms also give each party the right to terminate the related transactions on the counterparty’s failure to post collateral.

The impact of potential collateral requirements is increasing at Triodos Bank. The amount pledged with central and commercial banks, for payment system purposes, increased in 2020 and is expected to increase with the further growth of Triodos Bank.

The collateral needs stemming from FX forwards decreased in 2020 because the FX forward portfolio of Triodos Bank decreased. At the end of 2020 total net amount of EUR 7.1 million cash collateral was posted (2019: EUR 16.4 million).

Interest Rate Swaps which are centrally cleared, increased the potential collateral needs as well during the year. At the end of 2020 total net amount of EUR 6.9 million cash collateral was posted (2019: EUR 9.3 million). This cash collateral is posted as part of the ISDA agreement as mentioned above, eligible for the counterparty in case of default.

Part of the value of debt securities at amortised is used as collateral for a possible debit balance, amounting to EUR 177.5 million at the Dutch Central Bank (2019: EUR 89.4 million). This will serve as collateral when Triodos Bank obtains a line of credit from the Dutch Central Bank and cover this line in case of default. Triodos Bank did not make use of this in 2019 and 2020.

Triodos Bank only lends to and invests in sustainable enterprises in the real economy. Triodos Bank is not dependent on funding from the wholesale market. Funds are attracted from depositors and shareholders.

Triodos Bank does not invest in complex financial instruments. It has been this approach that enabled Triodos Bank to remain solid and stable in a time of market crisis but also to continue to grow steadily. The key factor to achieve this is to maintain healthy levels of liquidity. Triodos Bank has a large, good quality liquidity buffer resulting in solid liquidity and funding ratios. Triodos Bank does not act as correspondent bank which minimises liquidity needs during the day.

As a mid-sized European bank with total Funds Entrusted of EUR 11,747 million per the end of December 2020, liquidity risk is an important risk for Triodos Bank. The Bank has intensively worked on the development of a solid liquidity framework to have always sufficient funds to meet sudden and (un)expected short-term liquidity needs. The high cash liquidity buffer in combination with a high-quality investment portfolio, reflects the low risk appetite for liquidity risk. 

For its funding Triodos Bank mainly depends on funds entrusted from retail and business banking clients, consisting of current accounts, saving accounts and fixed term accounts.

The liquidity portfolio increased in 2020 due to the participation in the Targeted Longer-Term Refinancing Operation (TLTRO) of the Euro system to anticipate potential (temporary) higher credit demand from our clients. Our policy is to hold a sound liquidity buffer. Liquidity is invested within our minimum standards on sustainability, in highly liquid assets and (short-term) cash loans which count as inflow in the LCR 30 days before maturity, if the risk-return is more favourable than having the liquidity at the central banks. Around one third of the liquidity is invested, mainly in bonds and to a small extent in cash loans. The rest of the liquidity is mainly at the current account of the national central banks of our local entities and to some extent at sight with commercial banks to facilitate payments. The amount invested in (regional government) bonds (in Belgium and Germany) slightly increased due to favourable investment circumstances in Q2 2020. Most bonds qualify as high-quality liquid assets and are issued by central governments, regional governments and/or agencies in the Netherlands, Belgium, Spain, Germany and the UK without a solvency weight. There are small positions in some green bonds issued by banks and corporates for diversification.

Triodos Bank transforms client funds entrusted to lending purposes that have a positive impact on society. Triodos Bank wants to meet the obligations to all clients at all time without incurring additional costs and/or resulting in reputational issues. Triodos Bank therefore has a low risk appetite for liquidity risk with limits regarding the size and quality of the liquidity buffer accordingly. Triodos Bank ensures availability of a sufficient liquidity buffer of high credit quality and a stable funding base.

The total amount of funds entrusted is EUR 11,747 million of which 79% are deposits insured by the Deposit Guarantee Scheme.

In 2020 Triodos Bank increased its collateral position at DNB to the participate in the Targeted Long-Term Refinancing Operation of the Euro system. This collateral is mainly provided by the retained RMBS Sinopel and mobilized credit claims. The impact of potential collateral requirements from payment system purposes decreased significantly at Triodos Bank in 2020 due to the cancelation of some payment activities that required a high amount of collateral (collection of pension premiums). Other collateral needs mainly stem from market value changes in Interest Rate Swap positions (to manage the interest rate risks) and in FX forwards (because of hedging the currency risk of the UK subsidiary equity participation of Triodos Bank).

The liquidity risk appetite as determined by the Executive Board (EB) and Enterprise Risk Committee (ERC) is reviewed and approved by the Supervisory Board. With this governance structure in place, the risk appetite regarding liquidity is well anchored within the senior management team of the bank. The adequate organisational structure with three lines of defence ensures that a clear division of tasks, power and responsibility is in place together with an independent control, compliance, audit and risk management function.

The liquidity contingency plan has been tested and reviewed thoroughly to achieve a solid crisis management structure in case a liquidity crisis at Triodos Bank emerges.

A limit structure is in place to manage the inherent funding mismatch other than in exceptional circumstances. Triodos Bank follows the BSBC/EBA principles considering its sustainable profile, the very strong relationship with its customers, the granularity of the Funds Entrusted and its conservative and robust liquidity management framework that is integrated in the business processes.

Triodos Bank has a large, good quality liquidity buffer resulting in high Liquidity Coverage Ratios and Net Stable Funding Ratios. In all liquidity stress test scenarios Triodos Bank has sufficient liquidity to survive the total stress period.

The remaining low interest rate climate influences liquidity risk management at Triodos Bank. Triodos Bank needs to manage its liquidity buffer at an ever-increasing cost-of-carry. The trade-off between having sufficient liquidity versus the relative high costs of holding that liquidity is becoming more important.

Liquidity risk management organisation

The daily liquidity management is currently executed at banking entity level as it is the business strategy of Triodos Bank to have this process close to the end-customer to provide detailed cash forecasts. On aggregated level, Group Treasury monitors the liquidity buffer versus the internal limits daily.

Reporting and measurement systems.

Triodos Bank monitors and reports its liquidity position at different levels and frequencies. Firstly, the total liquidity position is monitored by Group Treasury and the individual banking entities on a daily basis. Secondly, the detailed liquidity position, both in total and at banking entity level, is reported to the Chief Financial Officer and Chief Risk Officer on a weekly basis. Finally, every month the liquidity ratios are reported to the Asset and Liability Committee. The main liquidity ratios are part of the quarterly ERM report.

Liquidity risk management policy

The liquidity buffer is the source of funds in case of liquidity needs. The Cash and Liquidity Management Policy describes the requirements related to the liquidity placements, investments and investment portfolio, whereas the goal is to optimize the trade off between risk and return in a manner consistent with the mission and vision of Triodos Bank.

The Liquidity Risk Management Policy describes the actions to manage the liquidity position of Triodos Bank.

The Internal Liquidity Adequacy Assessment Process (ILAAP) assesses Triodos Bank’s liquidity adequacy and liquidity management during normal business activities and in times of stress. This process is performed at least once a year and the results are submitted to the Dutch Central Bank as part of the Supervisory Review and Evaluation Process (SREP). The ILAAP Report is an internal document. The goal of this report is to properly evaluate the liquidity and funding risks and Triodos Bank’s corresponding liquidity levels and the quality of the liquidity management.

Contingency funding plans

The Liquidity Contingency Plan and the Recovery Plan describe the main items that should be considered in managing the liquidity risk position of Triodos Bank in a ‘stressed situation’. This includes liquidity stress indicators and trigger levels for management actions.

To increase the possibilities of recovery in periods of liquidity stress, Triodos Bank executed a retained securitisation transaction of Dutch mortgage loans (Sinopel 2019) and mobilized credit claims (loans to regional government entities) to the Euro system as collateral to be able to participate in the monetary (liquidity providing) operations.

Stress testing

The management of the liquidity position under ‘normal’ conditions is described in the Liquidity Risk Management Policy. Triodos Bank manages the liquidity position to withstand a liquidity crisis without damaging the on-going viability of its business. The potential but unlikely event of an upcoming liquidity crisis requires a set of early warning indicators and triggers, a set of potential early warning and recovery measures, and a dedicated organisation including a communication strategy to handle such a crisis. A list of potential early warning and recovery measures is included in the Recovery Plan. The other aspects mentioned are described in the Liquidity Contingency Plan.

Triodos Bank conducts liquidity stress tests on a monthly basis.

Declaration

A robust framework is in place at Triodos Bank to identify, measure and manage liquidity risk in line with BCBS/ EBA principles. An integrated overview of the group cash position and liquidity metrics is available on a daily and weekly basis.

Securitisation

In 2019, Triodos executed its first retained residential mortgage backed securitisation (RMBS) transaction called Sinopel 2019 B.V. (“Sinopel”). A securitisation is a transaction where a pool of assets is sold to a special purpose vehicle. The special purpose vehicle issues notes with different tranches to finance the purchase price of the assets. Sinopel 2019 adheres to the Simple Transparent and Standardised (STS) securitisation framework.

With Sinopel Triodos Bank structured a retained RMBS whereby Triodos is the sole buyer of the issued notes and as such has not transferred any credit risk. Through the retained RMBS, Triodos strengthens its financial resilience and gains additional access to (central bank) liquidity by pledging the notes as collateral with the Dutch Central Bank. The Sinopel RMBS is collateralised by Dutch residential mortgages loans. The structure is fully compliant with the new Simple Transparent Standardised EU regulation. For notes issued by Sinopel 2019 B.V., the following ECAIs were involved: DBRS Ratings Limited and S&P Global Ratings Europe.

As there is no risk transfer with the Sinopel transaction, the securitisation exposures (notes) are not risk-weighted separately. The securitised assets (mortgage loans) are taken into account as if they were not securitised. Triodos consolidates Sinopel in its annual accounts.

Apart from the Sinopel transaction Triodos is not active as originator, investor or sponsor of securitisation exposures. As a result, Triodos does not hold any re-securitisation positions and does not provide securitisation related services to any other Special Purpose Vehicle.

Maturity analysis for financial liabilities and financial assets

The following tables set out the earliest possible contractual maturities of Triodos Bank's financial liabilities and financial assets.

¹ Includes assets and liabilities on demand.
² Includes intangible assets, property and equipment, investment property, right-of-use assets, deferred tax assets, other assets and non-current assets held for sale as presented in the consolidated balance sheet.
³ Includes lease liabilities, deferred tax liabilities, current tax liability and other liabilities as presented in the consolidated balance sheet.

¹ Includes assets and liabilities on demand.
² Includes intangible assets, property and equipment, investment property, right-of-use assets, deferred tax assets, other assets and non-current assets held for sale as presented in the consolidated balance sheet.
³ Includes lease liabilities, deferred tax liabilities, current tax liability and other liabilities as presented in the consolidated balance sheet.

The amounts in the table above have been compiled as follows:

Triodos Bank’s expected cash flows on some financial assets and financial liabilities can vary significantly from the contractual cash flows. The principal differences are as follows:

• demand deposits from customers are expected to remain stable or increase;

• unrecognised loan commitments are not all expected to be drawn down immediately; and

• retail mortgage loans have an original contractual maturity of up to 35 years, end of 2019 this resulted in an average contractual maturity of 15.5 years and an average expected maturity of 10.1 years because customers take advantage of early repayment options.

Liquidity reserves

^* The amount is the actual credit line available.

Financial assets available to support future funding

In addition, in some Triodos Bank N.V. has an obligation to maintain a reserve with central banks. As at 31 December 2020, the minimum mandatory reserve deposits with various central banks amount to EUR 102,245 (2019: EUR 91,752).

Market risk is the risk of losses in on and off-balance positions 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 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 base currency of the UK subsidiary of Triodos Bank is GBP.

Triodos Bank aims to avoid net currency positions with the exception of those arising from strategic investments. The forward positions in foreign currencies are used for hedging the currency risk of the UK subsidiary equity participation. The position also contains 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 ALCo.

Market risk structure and organisation

Triodos Bank has exposure to credit risk resulting from outstanding Foreign Exchange (FX) contracts (spot, forward and swap transactions) with Financial Institutions and with funds managed by Triodos Investment Management. Triodos Bank services these funds by providing hedges for the foreign exchange risk of these funds’ investments.

Triodos Bank has limited exposure to credit risk resulting from outstanding Interest Rate Swaps (IRS). The IRS are all centrally cleared with the LCH Clearnet. The daily margining minimises the (potential) credit risks.

A limit is set per counterparty based on the expected amount of outstanding FX transactions and the corresponding expected exposure. This limit is subject to the overall counterparty limit Triodos Bank has per counterparty.

Market risk measurement systems

Any collateral needed for FX transactions is calculated and managed daily. In the liquidity stress tests, the amount of collateral needed for FX transactions is stressed in order to calculate the potential impact on Triodos Bank’s liquidity position.

Triodos Bank entered into FX deals with Triodos Investment Funds and these deals are hedged by deals with a few banks. Wrong-way risk is the risk that the exposure to a counterparty is adversely correlated with the credit quality of that counterparty. The FX deals with the Triodos Investment Funds do not cause wrong-way risk as these FX deals hedge the FX risk of the underlying assets of the Investment Funds. At the end of 2017 Triodos Bank stopped entering into new FX deals with Triodos Investment Funds because of new regulation. In addition, the wrong-way risk of transactions with banks is mitigated by only using banks with a sufficient credit rating and by having collateral agreements in place.

Interest rate risk in the Banking Book

Interest rate risk is generated by normal customer related banking activities. Triodos Bank uses retail funding to finance clients and projects which aim to improve society and the environment. In addition, the bank maintains solid capital and liquidity buffers to support its resilience.

The level of interest rate risk is managed in a four-stage risk control cycle. In this cycle, first the relevant definitions, indicators, measurement methods, and analysis for IRRBB are set. Next, the limits for the main IRRBB indicators are specified in the risk appetite statement. The third stage defines the roles and responsibilities for IRRBB management, model governance, and escalation procedures and exceptions. Lastly, the risks are monitored, reported and mitigated if necessary.

The development at the individual banking entities determines an important part of the risk development. Each banking entity sets up a budget for the next three years and updates it quarterly with a forecast. The budgets are consolidated and compliance with the risk appetite is checked. Adherence to the budget means that asset and liability management is predictable and therefore the fulfilment of the budget is closely monitored.

Triodos Banks manages its interest rate risk position in three ways. - Firstly, Triodos Bank is to a limited extent able to steer the volume and interest rate terms of new assets and the interest rate of its liabilities in order to maintain the interest rate risk exposure within 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. - Secondly, the amount and duration of the marketable investments in the liquidity buffer can be adjusted. - Finally, Triodos Bank uses Interest Rate Swap (IRS) contracts to maintain the bank’s IRRBB exposure within the limits, if the first two methods are not effective enough. The consequent positions are taken into account in all the IRRBB calculations and subject to hedge accounting to avoid volatility in the P&L.

The ALCo is delegated by the Executive Board to monitor and take decisions related to the management of the IRRBB. Additionally, the ALCo approves material changes to IRRBB models and changes to important model assumptions. Finally, the ALCo decides on approval of and monitors adherence to the group-wide pricing framework for retail and business banking products.

One of our main strategic risks is the low interest rate environment. With the economy hit hard by the global pandemic and a long recovery ahead of us, low interest rates are likely to continue for some time, with a negative impact on Triodos Bank’s return. As rates on the assets are decreasing, and the rates on the liabilities have hit the psychological floor of zero percent, the margin is being compressed. Negative rates on savings and current accounts of clients with a balance over EUR 100.000, as well as fees on savings accounts were introduced to be able to deal with the margin compression.

Interest Rate Risk management and mitigation strategies

Triodos Bank defines interest rate risk in the banking book (IRRBB) as the risk that changes in prevailing interest rates will adversely affect the market value of assets versus that of liabilities and/or income versus expenses. Triodos Bank identifies the following three main sources of IRRBB:

• Gap risk, the risk of adverse consequences due to differences in timing of the impact of interest rate changes on the value and interest of assets and liabilities, covering changes to the term structure of interest rates occurring consistently across the yield curve (parallel risk) or differentially by tenor (non-parallel risk).

• Basis risk, the risk of adverse consequences which result from changes in the difference between two or more rates for different instruments with the same interest maturity but different benchmark rates on which the pricing is based.

• Option risk, the risk that changes in market interest rates prompt changes in the value or maturity of instruments, due to explicit or implicit optionality embedded in the bank’s products.

Main measures

Triodos Bank uses various indicators to measure interest rate risk. The interest rate risk position is monitored by the ALCo monthly and reported quarterly to the Executive Board. The main IRRBB indicators used are Earnings at Risk, Economic Value of Equity at Risk, Modified Duration of Equity, and Gap analysis. Below follows a brief description:

• Earnings at Risk: a short-term indicator which shows the effect of an interest rate shock on Triodos Bank’s net interest income over a one year and two-year horizon.

• 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 netted with the net present value of the future cash flows of the liabilities) in the event of an interest rate shock.

• Modified Duration of Equity: an indicator that expresses the sensitivity of the Economic Value of Equity in the event of parallel interest rate changes.

• Gap analysis: allows to get a quick and intuitive sense of how Triodos is positioned by comparing the values of the assets and liabilities that roll over – or reprice – at various time periods in the future. While a Gap analysis is a good measure of repricing risk, it is not able to measure interest rate risk stemming from option risk and basis risk. Therefore, Triodos Bank monitors the sensitivity of economic value of the banking book items to interest rate changes for different parts of the yield curve, by calculation of key rate durations.

Option risk is typically present in the form of caps and/or floors on floating interest rates and as a result of client and bank behaviour, i.e. due to prepayments on loans and mortgages, withdrawal of funds entrusted, and the discretion to change the interest rate on savings and current accounts. Both embedded options and behavioural characteristics are considered in the IRRBB measures.

Due to the growth of the mortgage portfolio, Triodos has also worked (and continues working) on improving the data on off-balance commitments. Especially fixed rate commitments (which are often present in new mortgages to be paid out) add to the interest rate position of the Bank.

Triodos Bank runs a variety of interest rate scenarios to assess its level of interest rate risk. The scenarios are expressed as shocks to the market rate. These shocks can vary from parallel shocks to non-parallel shocks, downward to upward shocks, and instant to gradual shocks. Part of the shocks are prescribed by regulatory guidelines whereas other shocks are developed internally. The interest rate scenarios are regularly reviewed and approved in the ALCo.

Modelling and parametric assumptions

The model used for calculating IRRBB meaasures complies with the EBA guidelines. The balance sheet develops according to the budget/forecasts for earings calculations and uses run off profile for the EVE calculations. In modelling of IRRBB, client behaviour is complex as it depends on many factors and, as a result, IRRBB models in general build on many assumptions. A brief description of relevant assumptions used in Triodos Bank’s IRRBB modelling follows below.

First of all, behavioural models are used to assess the interest rate risk in savings and current accounts. The interest rate risk stemming from these products is difficult to quantify since these accounts typically have variable interest rates and no fixed maturity. The objective of the models used 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.

Secondly, prepayments on loans and mortgages affect interest rate risk on the asset side of the balance sheet and depend on customer behaviour as well. Due to the low interest rate environment and the maturity of the portfolio, prepayments increased during the last years. Therefore, behavioural assumptions are present in the risk model and the level of prepayments is included in the measurement of IRRBB. Currently, a constant prepayment rate is used, consistent with the forecast made by the banking entities. Triodos Bank takes into account the correlation between interest rate levels and prepayment behaviour by using sensitivity analyses.

Thirdly, some of Triodos Bank’s loans and mortgages contain caps and floors to prevent interest rates increasing or decreasing below a certain level. This affects the level of IRRBB in these products and both are taken into account in the economic value and earnings analysis. The economic value of the pipeline, which contains loans with a set interest rate which are committed but not yet remitted, is considered as well.

The EVE measures, Duration of Equity and Outlier Criterion measures are determined using risk free discounting and commercial margin and other spread components are excluded from the cash flow calculations.

Explanation of the risk measures significant variations of those risk measures

The one-year Net Interest Income at Risk increased from 2.5% at the end of 2019 to 2.8% at the end of 2020. This is the impact of a ramped parallel 2% downward scenario, a floor based on expert judgement is applied to the market rates.

Duration of equity increased from 0.3 years to 3.3 years in 2020. This increase was mainly caused by the growing mortgage portfolio and the inclusion of interest rate sensitivity of embedded options in the duration of equity measure. These two effects were partly offset with a higher savings duration caused by the continuing low interest rate environment.

The Economic Value of Equity (EVE) at Risk increased from 4.1% at the end of 2019 to 15.0% at the end of 2020. The sharp increase is partly due to the introduction of risk-free discounting, and partly due to the growing mortgage portfolio. When using the same methodology as last year, the current value would be 9.4%. The worst-case scenario from the perspective of EVE at Risk occurs under a parallel upward shock of the yield curve. The supervisory outlier test (SOT) increased from 12.9% at the end of 2019 to 17.2% at the end of 2020. All EVE measures including the SOT are now calculated using risk-free discounting, only the duration of equity is still calculated using product specific spread components. The new methodologies impact the numbers significantly, together with the introduction of the new methodologies the process was started to gradually reduce the interest rate risk, this process will be finalized in the first quarter of 2021.

Regarding the EUR portfolio, the duration of equity increased from 0.4 years at the end of 2019 to 2.81 years at the end of 2020. The one-year Euro Net interest Income at Risk, at 2020 year-end, increased slighlty from 2.6% to 3.1%, compared to the end of 2019. The EUR EVE at Risk increased from 4.7% at the end of 2019 to 16.3% at the end of 2020.

Duration of equity of the Pound Sterling (GBP) portfolio increased from 0.4 years at the end of 2019 to 5.2 years at the end of 2020. The one-year GBP Net Interest Income at Risk decreased from 3.2% at the end of 2019 to 0.9% at the end of 2020. The GBP EVE at Risk increased from 5.5% at the end of 2019 to 9.7% at the end of 2019.

Interest Rate Risk in the Banking Book

The following table shows the interest rate risk within Triodos Bank:

Only interest-bearing assets and liabilities are reported in this table, which results in differences with the balance sheet figures. No allowance for expected credit losses, net modification of amortised cost or interest amounts are showed in this table above. Interest bearing securities 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.

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 base currency of the UK subsidiary of Triodos is GBP.

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

Net open foreign currency position (total of net positions debit and credit): 28,593

Net open foreign currency position (total of net positions debit and credit): 30,982