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. 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.

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 British pounds.

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.