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 FX rates in particular. Interest rate risk is present in the banking book.

FX risk is the current or prospective risk to earnings and capital that arises from adverse movements in FX 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 FX position is monitored at least monthly and discussed in the Asset and Liability Committee. Limits are agreed by the Asset and Liability Committee.

Market risk structure and organisation

Triodos Bank has exposure to credit risk resulting from outstanding 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 FX risk of these funds’ investments.

Triodos Bank has limited exposure to credit risk resulting from outstanding 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.

Interest rate risk in the banking book

Interest rate risk in the banking book (IRRBB) is inherent in regular customer-related banking activities, due to the fact that short-term funding is invested in long-term loans. Triodos Bank uses mainly retail funding to finance clients and projects which aim to improve society and the environment. In addition, the bank has issued a green subordinated Tier 2 bond in 2021 to diversify its capital and funding base.

Triodos Bank defines 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 from changes in the difference between two or more rates for different financial instruments with the same interest maturity but with 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 financial instruments, due to explicit or implicit optionality embedded in the bank’s products.

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 local balance sheet development in the individual banking business units is an important driver for how the interest rate risk position develops. Each banking business unit sets up a budget for the next three years and updates it on a quarterly basis with a forecast. The budgets are consolidated and compliance with the risk appetite is checked. Hedging is applied to keep the risk position within the risk appetite and regulatory limits. Adherence to the budget means that asset and liability management is predictable and therefore the fulfilment of the budget is closely monitored.

Interest rate risk management and mitigation strategies

Triodos Bank manages its interest rate risk position in three ways.

  • Firstly, Triodos Bank is able to steer the volume and interest rate terms of new assets and the interest rate of its liabilities to a limited extent 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 swaps (IRS) 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, subject to hedge accounting to avoid P&L volatility.

Monitoring and decision-making related to the management of the IRRBB is delegated to the Asset and Liability Committee (ALCo). Additionally, the Model and Assumptions Review Committee (MARC) 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 Triodos Bank’s main strategic risks is the low interest rate environment. Although there is upward pressure due to increasing inflation, relatively 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. The threshold for negative rates on savings and current accounts has been lowered in several market segments over the last year. At the same time, fees on savings accounts were introduced and/or increased to be able to deal with the margin compression.

Benchmark reform

Triodos Bank has robust written plans in place per business unit and product as referred to in Article 28(2) of the EU Benchmarks Regulation (BMR). It details (1) the operational procedures that apply in case the benchmark would materially change or cease to exist , and (2) the organisational arrangements for continuously monitoring relevant developments in respect of the underlying benchmark. Risks associated with benchmark reform did not result in changes to the underlying risk management strategy. The benchmark reform will also not have a material effect on the underlying products of Triodos Bank.

Main measures

Triodos Bank uses various indicators to measure interest rate risk. The interest rate risk position is monitored by the ALCo on a monthly basis and reported quarterly to the Executive Board. The main IRRBB indicators used are earnings at risk (also referred to as net interest income (NII) at risk), economic value of equity at risk, modified duration of equity, and gap analysis. Below follows a brief description:

  • Net interest income 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 (EVE) in the event of an interest rate shock. EVE is defined as the net present value of the future cash flows of all assets netted with the net present value of the future cash flows of liabilities.

  • Supervisory outlier test: this is the economic value of equity at risk relative to either CET-1 or Actual Own Funds, for several interest rate shocks as specified in the EBA Guidelines on IRRBB.

  • Modified duration of equity: an indicator that expresses the sensitivity of the EVE in the event of parallel interest rate changes.

  • Gap analysis: this provides a quick and intuitive sense of how Triodos Bank 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 arises from 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 continued growth of the mortgage portfolio, Triodos Bank continues to work on improving the data and modelling of off-balance commitments. Fixed-rate commitments in particular (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 curve. 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 measures complies with the EBA guidelines. The balance sheet in Triodos Bank’s model develops according to the budget/forecasts for earnings calculations and uses a 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.

First, 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 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 business units. Triodos Bank is using sensitivity analyses to measure the correlation between interest rate levels and prepayment behaviour.

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 also considered.

The EVE measures, duration of equity and outlier criterion measures are determined using risk-free discounting and commercial margins. Other spread components are excluded from the cash flow calculations.

Interest rate risk is hedged through the purchase of interest rate swaps. On a monthly basis an assessment is made of the need to hedge based on the current interest rate risk position, the forecasted position, and market circumstances.

Triodos Bank applies macro hedge accounting to its interest rate hedges to solve the accounting asymmetry between the portfolio of hedged items (loans and mortgages) measured at amortised cost, and the interest rate derivatives measured at fair value through the profit and loss statement. As a consequence hedge ineffectiveness is automatically reflected in the P&L.

Explanation of the significance of the IRRBB measures and significant variations

Economic value of equity at risk declined in 2021. Triodos Bank hedged its position with interest rate derivatives, and a recalibration of the prepayment parameter led to slightly higher prepayment speeds. On the other hand, continuing growth in the mortgage portfolio, and a decline in duration of savings accounts due to somewhat higher yield curves increased Triodos Bank's vulnerability to rate rises at the long end of the curve. All in all, EVE at Risk, as measured under a steepener scenario, decreased from 15.0% to 7.7%.

Net interest income at risk decreased in 2021 as well, from 2.8% to 1.2%. The scenarios were updated in 2021, reflecting the latest interest rate outlook. This means the scenario became less severe at the short end of the curve and more severe at the long end. A negative shock at the short end of the curve immediately impacts Triodos Bank’s interest income due to the interest paid on cash positions.

Changes in net interest income, as disclosed in template EUR IRRBB1 are measured with the following assumptions:

  • The upward scenario reflects a parallel up shock of 200 basis points, and the downward scenario the expected interest rate movement in a depression scenario.

  • Both shocks are applied gradually over a period of 12 months.

  • The magnitude of the downward scenario is updated frequently and based on the latest interest rate outlook.

  • In both scenarios no floors are applied to the market interest rates.

  • The net interest income sensitivity is measured over a period of 12 months.

  • Projected future volumes of the different balance sheet items are used in the calculations.

The average repricing maturity assigned to non-maturity deposits is 2.7 years, and the longest assigned repricing maturity assigned is equal to 7 years.

Below follows a short summary of the main developments in the main interest rate risk indicators.

Net interest income at Risk

Net interest income at Risk is measured with a one- and two-year horizon. One-year net interest income at risk decreased from 2.8% to 1.2% in 2021, and two-year net interest income at risk from 5.6% to 4.4%. Both indicators show their worst-case outcome in a scenario where the economy moves into recession and interest rates decrease. The scenarios were updated in 2021, reflecting the latest interest rate outlook. This means the scenario became less severe at the short end of the curve and more severe at the long end. A negative shock at the short end of the curve immediately impacts Triodos Bank’s interest income due to the interest paid on cash positions.

Supervisory outlier test

In 2021, the supervisory outlier test decreased from 17.2% to 8.7%. The decrease came mainly from purchases of interest rate swaps during the year. In addition, a recalibration of the prepayment parameters led to slightly higher prepayment speeds and lowered the position further. On the other hand, the continuing growth in mortgages in 2021, from EUR 2.7 billion to EUR 3.6 billion was the main factor putting upward pressure on this indicator. A decrease in the duration of savings accounts, due to higher market interest rates, created upward pressure as well. The supervisory outlier test worst-case outcome is measured in the steepener scenario where short rates decline and long rates increase.


EVE-at-Risk decreased during the first half of the year and slowly started rising again in the second half. The drivers behind the development of the supervisory outlier test and EVE-at-Risk are similar, i.e., upward pressure due to continued mortgages production and a decrease in duration of savings, and downward pressure due to the purchase of interest rate swaps and higher prepayment speeds. All in all, EVE-at-Risk decreased from 15% to 7.7% in 2021. As with the supervisory outlier test, the steepener scenario is the worst-case scenario for EVE-at-Risk.

Duration of equity

Duration of equity decreased from 6.3 to 3.2 years over the course of 2021. The developments resembled that of EVE-at-Risk, i.e. a decline in the first half of the year, and a slow increase in the second half. The underlying drivers are similar to those for the supervisory outlier test and EVE-at-Risk, although a difference is that duration of equity is calculated under the assumption of a parallel shift in interest rates.