Triodos Bank uses and maintains a framework of systems, procedures, limits, reports and checks to manage the risks it faces. The structure and organisation of its business processes comply with the applicable legislation and regulations for financial institutions and Triodos Bank’s sustainability aims. The three lines of defence model is the basis for managing the risks within the Triodos Group. The branches, business units and departments are responsible for managing their own risks (first line of defence). Group and local risk managers (second line of defence) support and advise the branches, business units and departments in embedding these processes in the organisation. Finally, Group Audit (third line of defence) periodically assesses the design and effectiveness of internal processes and controls.
Risks are monitored by various departments and committees at group level. Risk Management consists of various risk disciplines. These various risk disciplines are coordinated by the Head of Group Risk Management. The Head of Group Risk Management reports directly to the Chief Financial Officer who is responsible for risk management within the Executive Board of Triodos Bank. Risk Management’s primary task is to support the business in identifying, assessing, mitigating and monitoring their risks. Risk Management also analyses risks, prepares policies and guidelines and coordinates the management of the various risks facing Triodos Bank.
Further responsibilities of the Head of Group Risk Management are to make sure that all business units and departments embed a coherent enterprise risk management framework. This framework integrates the individual approach of the different risk categories and coordinates the management of all financial and non-financial risks Triodos Bank faces. It also guarantees that professional knowledge in a number of relevant fields is properly managed.
Local Risk Managers at each of Triodos Bank’s business units are appointed to align the overall enterprise risk framework into the business.
Risk management policies are approved by Triodos Bank’s Executive Board on the advice of the responsible risk manager.
The Executive Board has assigned the advisory responsibility for:
- Balance sheet management and related risks to the Assets and Liabilities Committee (Alco). The Alco meets every month.
- Large loan approvals and counterparty and concentration risk to the Executive Board Credit Committee (the EBCC). The EBCC meets every week.
The Audit and Risk Committee of the Supervisory Board supervises the risk management activities of Triodos Bank.
Triodos Bank implemented the capital framework of the Basel Committee on Banking Supervision and reports according to the requirements stipulated by Basel II. Basel II Pillar I has different approaches to the capital calculations regarding credit, operational and market risks. In view of its size and stage of development, Triodos Bank has currently opted to implement the less advanced capital calculation methods. The Standard Approach for assigning capital is used to calculate credit risk and market risk. The Basic Indicator Approach is used to calculate the capital requirements for operational risk. The options chosen by Triodos Bank will not diminish its efforts to continue to improve and fine-tune its internal risk management system based on more advanced capital calculation methodologies.
As part of Pillar II of Basel II, Triodos Bank also implemented the Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP reflects the capital adequacy strategy of Triodos Bank and is used for the review by the Dutch Central Bank as part of Pillar II requirements.
The ICAAP is based on the level of risks Triodos Bank is prepared to take in order to realise its strategic objectives, the so called risk appetite. The risk appetite indicates the maximum risk that Triodos Bank considers acceptable to implement its business strategy in order to protect itself against events that could have an adverse effect on profitability, liability capital and the depository receipt price.
Pillar III of Basel II concerns the disclosure of solvency risks. Its purpose is to make data on solvency and the connected risk profile of the organisation available to stakeholders. In line with regulations, this data is published where desirable or necessary in this annual report.
The Dutch Banking Code explicitly mentions that the Executive Board is responsible for adopting, implementing, monitoring and, where necessary, adjusting Triodos Bank’s overall risk management framework. Triodos Bank implemented the recommendations set out by this Code.
The same code recommends the creation of a risk committee as a sub-committee of the Supervisory Board. Triodos Bank has opted to assign this task to the Audit Committee, which has been renamed as the Audit & Risk Committee (SB A&RC). This committee has been established and meets four times a year. The Executive Board delivers an integrated risk report to the SB A&RC to enable them to execute adequately their supervisory responsibilities on the risk profile of the bank, including the capital allocation and liquidity impact. A new product approval process, that assesses all new products and markets against Triodos Bank’s risk appetite and its duty of care to clients has been approved and will come into force in the first quarter of 2011. A lifelong learning programme for members of the Executive Board and Supervisory Board has been set up and implemented.
The aim of capital management is to guarantee that sufficient capital is available to meet Triodos Bank’s capital needs for implementation of its business strategy. Triodos Bank works with rolling three year capital planning. The Asset and Liability Committee monitors and advises the Executive Board about the capital adequacy. The Asset and Liability Committee monthly assesses whether the available capital is sufficient to support current and future activities. In 2010, the available capital was always sufficient. In the middle of 2010 new equity of EUR 34,382 was issued to support further future growth.
Business strategy, risk appetite, and capital planning form the basis for the process of:
- Capital measurement (ICAAP): measuring the risks resulting in an estimate of the demand for capital.
- Capital contingency and stress testing: managing the supply of and demand for capital
- Capital allocation: allocating capital to the different branches, business units and departments.
The capital measured at Triodos Bank concerns both the external requirements in accordance with the results of Pillar I under Basel II and the internal demand for capital in accordance with the results of Pillar II under Basel II.
The results of Pillar I and Pillar II add up to Economic Capital, which expresses the need of capital to cover Triodos Bank business activities. Therefore Economic Capital supports business decision-making at all levels within banking organisations. The Economic Capital 2010 is determined by the following risks:
- Credit risk (counterparty risk and concentration risk)
- Operational risk
- Market risk (foreign exchange risk and interest rate risk)
For non-quantifiable risks a buffer is held on top of the Economic Capital. The Dutch Central Bank may require Triodos Bank to hold additional capital on top of this outcome based on their supervisory review and evaluation process (SREP).
Capital contingency and stress testing
Capital Contingency is set up to ensure that Triodos Bank maintains sufficient capital to meet its regulatory capital requirements under stressed situations. A Capital Contingency Plan is set up for Triodos Group in case a capital crisis is foreseen. The Capital Contingency Plan sets out actions and activities to strengthen short term capital position under stressed circumstances. Twice a year the capital position is stressed based on a number of scenarios.
The total liability capital (equity and subordinated loan) is allocated to business units in proportion to the economic capital, based on their risk profile.