Interest rate risk

Interest rate risk is the current or prospective risk that earnings and/or capital are negatively affected by interest rate changes in the financial markets. This risk is inherent to banking business.

Triodos Bank uses various indicators to measure the interest rate risk. The interest rate risk position is monitored by the Asset and Liability Committee on a monthly basis. The interest rate risk is managed with an interest risk model, using guidelines and limits and by performing various interest rate stress scenarios. Limits are agreed by the Executive Board based on a proposal made by the Asset and Liability Committee.

Overview of interest rate risk indicators:

  • Earnings at Risk: a short term indicator, which shows the effect of the change of interest earnings over one year and two years in case of an interest shock of plus or minus 2% (200 basic points) on the interest income of Triodos Bank.
  • Economic Value of Equity at Risk: a long-term indicator, which represents the change of value of the Economic Value of Equity (which is the net present value of the cash flows of all assets and liabilities) in case of an interest rate shock of plus or minus 2% (200 basic points).
  • Outlier Criterion: the Economic Value of Equity at Risk in % of the Actual own Funds. This indicates the effect of interest rate shocks on the Actual own Funds.
  • Cushion: shows the difference between the Economic Value of Equity and the Actual own Funds.
  • Modified Duration of Equity: an indicator that expresses the sensitivity of the Economic Value of Equity in case of an interest rate change of 1%.

Overview of interest rate risk indicators used by Triodos Bank as at the end of the year for all currencies

Base case represents the expected results of Interest Earnings and Economic Value of Equity in an unchanged interest environment.

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Amounts in millions

Base case

Base case

Rising interest rate
(+200 bp)

Decreasing interest rate
(–200 bp)

 

2010

2009

2010

%

2009

%

2010

%

2009

%

 

 

 

 

 

 

 

 

 

 

 

Actual own Funds

€360

€319

 

 

 

 

 

 

 

 

Earnings at Risk 1 year

€84

€61

+€10

+11.8%

+€6

+ 9.9%

–€4

–4.9%

–€1

–2.0%

Earnings at Risk 2 year

€186

€137

+€30

+16.2%

+€16

+11.5%

–€13

–7.0%

–€5

–3.9%

Economic Value of Equity
at Risk

€503

€432

–€38

–7.6%

–€31

–7.2%

+€39

+7.8%

+€34

+8.0%

Outlier Criterion

 

 

 

10.6%

 

9.8%

 

10.6%

 

9.8%

Cushion

€143

€113

€105

 

€82

 

€182

 

€147

 

 

 

 

 

 

 

 

 

 

 

 

Modified Duration of Equity

3.6

3.0

3.8

 

3.7

 

4.1

 

2.7

 

 

 

 

 

 

 

 

 

 

 

 

The calculations for these indicators are based on contractual maturities and interest rates. However saving and current accounts have a non-defined interest maturity. In the past years the calculations for interest rate risk concerning saving and current accounts were mainly based on assumptions on qualitative grounds, or ‘expert opinion’. To improve the substantiation of the model assumptions, a quantitative assessment of the interest rate sensitivity of our saving accounts and current accounts was executed. The outcome of this assessment is used in the calculations for interest rate risk as from 2010. For comparison purposes the outcome of 2009 has been recalculated, and is also based on these new quantitative parameters.

The model used for the quantitative measurement of savings and current accounts predicts future volumes based on connections found in historical data over a period of 17 years, 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.

The following table sets out the remaining interest-rate term of the financial instruments held as at 31 December.

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2010
Amounts in thousands of EUR

Floating-rate

<= 3
months

<= 1
year

<= 5
years

> 5
years

Total

 

 

 

 

 

 

 

Interest-bearing assets

 

 

 

 

 

 

Cash

44,814

44,814

Banks

370,875

222,925

2,000

595,800

Loans

550,464

143,654

353,436

594,583

485,506

2,127,643

Interest-bearing securities

25,019

107,523

323,183

149,002

604,727

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

966,153

391,598

460,959

919,766

634,508

3,372,984

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

Banks

840

1,199

396

6,239

15,309

23,983

Funds entrusted

12,103

512,456

820,387

1,052,801

624,425

3,022,172

Subordinated liabilities

22,694

22,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

12,943

513,655

820,783

1,059,040

662,428

3,068,849

 

 

 

 

 

 

 

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2009
Amounts in thousands of EUR

Floating-rate

<= 3
months

<= 1
year

<= 5
years

> 5
years

Total

 

 

 

 

 

 

 

Interest-bearing assets

 

 

 

 

 

 

Cash

49,073

49,073

Banks

322,676

232,132

107,271

1,000

663,079

Loans

469,396

162,423

219,300

430,020

379,796

1,660,935

Interest-bearing securities

14,966

71,548

311,350

121,720

519,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

841,145

409,521

398,119

742,370

501,516

2,892,671

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

Banks

1,152

507

2,764

5,137

9,560

Funds entrusted

814

461,867

690,824

920,306

495,184

2,568,995

Subordinated liabilities

22,680

22,680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

814

463,019

691,331

923,070

523,001

2,601,235

 

 

 

 

 

 

 

Notes:

Only interest-bearing assets and liabilities are reported in this table, which results in differences with the balance sheet figures.

Interest-bearing securities and subordinated liabilities are valued at balance sheet value including bond premium and after deduction of discounts.

Funds entrusted without a fixed interest-rate term in the maturity calendar is the outcome of the quantitative savings and current account model, as mentioned before. 2009 has been recalculated based on this new model.

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.

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