Regulation and capital requirements
The banking industry is highly regulated. Regulations play an important role in society to ensure banks operate safely. Triodos Bank pays constant attention to comply with all regulation.
Basel III is a worldwide standard for regulation, supervision and risk management of the banking sector, developed by the Basel Committee on Banking Supervision. Basel III has been transposed by the European Union into the Capital Requirements Regulation and the Capital Requirements Directive. The Capital Requirements Regulation is directly applicable and the Capital Requirements Directive was transposed into local law by each of the members of the European Union. As Triodos Bank is formally domiciled in the Netherlands, the Dutch implementation of the Capital Requirements Directive is applicable.
There is no difference in the scope of consolidation for accounting and for prudential reporting purposes. Except for transfer of own funds of Triodos Bank UK Ltd, there is not any current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities among Triodos Bank and its consolidated companies. All subsidiaries are included in the consolidation. Triodos Bank has not made use of a derogation option with regard to the application of prudential requirements on an individual basis.
Triodos Bank calculates its internal capital adequacy requirements based on minimum requirements (Pillar 1) and supplemented with additional capital charges (Pillar 2), as described in the Capital Requirements Regulation.
The total capital ratio decreased by 0.3% from 21.3% at year-end 2021 to 21.0% at year-end 2022. This ratio is well above the regulatory minimum requirement. In October 2021, Triodos Bank issued a green subordinated Tier 2 bond in the amount of EUR 250 million to further strengthen and diversify its capital base. This green bond qualifies as Tier 2 capital in line with prudential regulations.
Minimum capital requirements (Pillar 1)
The total minimum regulatory requirement consists of capital charges for credit risk, operational risk and market risk:
• Credit risk – Triodos Bank applies the standardised approach for calculating its minimum capital requirements for credit risk and the financial collateral simple method for credit risk mitigation. The risk-weighted asset calculations apply to all on-balance sheet exposures (including the loan book and the investment book), and off-balance sheet items (such as loan offers not yet accepted) and derivatives exposures.
• Operational risk – Based on the size and limited complexity of the Triodos Bank organisation, the basic indicator approach (BIA) is used for calculating the capital requirement for operational risk, which equals 15% of the average over three years of Triodos Bank’s gross income.
• Market risk – The capital charge for Triodos Bank’s market risk is related to its exposure to FX risk. The requirement is calculated as the sum of the bank’s overall net FX position, multiplied by 8%. Triodos Bank only accepts limited net FX positions in strategic investments and in its UK activities in GBP. However, when the regulatory threshold of 2% of the actual own funds is not exceeded, the capital charge for market risk is zero.
• Credit valuation adjustment risk – A capital charge is applied for the counterparty risk of derivative transactions that are not cleared through a qualified central counterparty. Triodos Bank applies the standardised method for calculating the capital requirements.
Additional capital requirements
In order to determine its economic capital, Triodos Bank also calculates additional capital requirements. These consist of charges for risks or parts of risks that are not covered by Pillar 1. This consists of items in the areas of credit risk, strategic risk, interest rate risk in the banking book (IRRBB), model risk and operational risk. The total capital requirement consists of the Pillar 1 and 2 requirements and these combined buffer requirements.
The capital strategy of Triodos Bank is assessed in its Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP covers, for example, the measurement of risks requiring an adequate capital buffer, stress testing, capital contingency and the allocation of available capital to the different Triodos Bank business units. The ICAAP is subject to the Supervisory Review and Evaluation Process (SREP) of DNB, which is conducted on a yearly basis.
The actual capital position is stressed regularly based on a number of stress scenarios. A capital contingency process is set up for Triodos Bank in case of a (potential) shortfall in available capital, which can be a threat to its solvency. For this purpose, the Recovery Plan contains measures for restoring the bank's solvency by reducing risks and/or increasing capital and provides a specific governance structure for managing such stressed situations.
Triodos Bank aims for a sound and resilient capital base supporting our sustainable and targeted lending growth strategy.
The objective of Triodos Bank’s capital strategy is to ensure its viability by:
• maintaining sufficient capital to absorb current and future business losses, also in extreme situations (stress);
• allocating sufficient capital to its business units; and
• ensuring compliance with all applicable capital legislation and regulation at all times.
Triodos Bank’s own funds consists of Common Equity Tier 1 (CET1) capital and Tier 2 capital.
In 2021, Triodos Bank has issued the green subordinated Tier 2 bond for an amount of eur 250 million, which matures in 2032 with the option of Triodos Bank to repay early, starting in 2027. This might result in a refinancing risk, the possibility that Triodos Bank is not able or only at high costs to attract investors to invest in a newly issued Tier 2 bond that replaces the (early) matured one.
Capital allocation and monitoring
Equity is allocated to banking business units in the yearly budget and planning process based on the forecasted return on risk-weighted assets, contribution to our mission and dynamic sector strategy. Triodos Bank works with a rolling three-year capital forecast.
The Asset and Liability Committee monitors Triodos Bank’s capital position and advises the Executive Board on capital adequacy. The Asset and Liability Committee also assesses whether available capital is sufficient to support current and future bank activities on a monthly basis.
During 2022, available capital has been at sufficient levels at all times, in line with external regulatory minimum requirements. A retained portion of the 2022 profit will be added to reserves in 2023.
Leverage ratio and management of excessive leverage
The leverage ratio is a measure indicating the level of the Tier 1 capital compared to the total exposure. Its aim is to assess the risk of excessive leverage of the institution.
The risk of excessive leverage is managed inclusively in Triodos Bank’s Capital Management strategy and procedures. Triodos Bank aims for a sound capital base by avoiding high leverage risks.
Triodos Bank's risk appetite level related to the leverage ratio is set at 5%, which is significantly above regulatory requirements. At year-end, the relevant capital used to calculate the leverage ratio consists only of CET1 capital. Triodos Bank’s capital base to calculate the leverage ratio is therefore not subject to refinancing risks. The leverage ratio is part of Triodos Bank’s three-year budget. Compliance with Triodos Bank’s risk appetite level is part of the budget requirements.
In 2022, Triodos Bank repaid the participations in the TLTRO tender III.5 and tender III.7. This has a positive impact on the leverage ratio. However, compared to 2021 year-end figures, the repayment does not result in an improvement of the leverage ratio as at that time ECB regulation was in place that allowed banks to leave out amounts placed with central banks from the leverage ratio calculation.