Managing risk is a fundamental part of banking. While some banks assess risk as part of a profit-maximising strategy, Triodos Bank manages risk as part of a joined-up approach to make sure it delivers financially on a sustainable, long-term basis.
In 2010 we have taken the necessary measures to comply with the Dutch Banking Code (see “"), and explain when we don’t as the code requires. In 2010 we improved the monitoring of credit risk with new policies and reporting, and a strengthening of the central credit risk organisation. Our Interest Rate Risk management has been upgraded, introducing a number of quantitative metric tools besides qualitative expert opinion approaches. Internal Audit will now report to the Chief Financial Officer and not the Chief Executive Officer, as required by the code. However, Internal Audit will regularly report to the Chief Executive Officer about relevant developments.
Significant progress has been made to embed risk management throughout the organisation. All business units performed strategic risk assessments to identify and manage potential risks that could impede the realisation of their business objectives. The outcome of these assessments were used as input for the Executive Board’s own risk assessment and determination of Triodos Bank’s risk appetite, or the willingness to take risk in achieving its business objectives.
During the year, two internal stress test scenarios were executed with satisfactory results. We also voluntarily checked Triodos Bank’s resistance against the so called “European banks stress test” with a positive outcome. In the coming years we will continue to stress test our results, liquidity and capital against new developments and scenarios.
The of the annual report provides a description of the main risks related to the strategy of the company, a description of the design and effectiveness of the internal risk management and control systems for the main risks during the financial year, and a description of any major failings in the internal risk management and control systems which have been discovered in the financial year. These issues have been discussed on a regular basis with the Audit and Risk Committee and the Supervisory Board.
Capital requirements and Basel III regulations
At the same time as our lending and savings grow, we are and will continue to be strongly capitalised. This has become an important issue as demands for capital increase following the financial crisis. We aim for a solvency ratio of at least 12%, well above our own internal economic capital calculations, in order to guarantee a healthy and safe risk profile for our depositors. Economic capital is calculated as a result of the yearly Internal Capital Adequacy Assessment Process, which is reviewed by the Dutch Central Bank
Regulations too are changing, such as those developed by the Basel Committee on Banking Supervision, designed to build a more resilient banking sector by strengthening the solvency of the banks and introducing strict liquidity requirements. Triodos Bank already complies with both new capital and liquidity requirements, as recently published by the Basel Committee, and better known as Basel III. The regulations are required to be fully implemented by 2019.
We will need the support of existing and new investors in the future to keep meeting these requirements as we continue to grow. In 2010 we successfully raised capital from our own investors and customers, exceeding targets and raising over EUR 34 million. This has helped us to maintain a capital adequacy ratio of 14.7%, at the end of 2010, well above requirements.
In Control statement
The Executive Board is responsible for designing, implementing and maintaining an adequate system for internal control over financial reporting. Financial reporting is the product of a structured process carried out by various functions and branches under the direction and supervision of the financial management of Triodos Bank.
The Executive Board is responsible for the risk management function and compliance function. The risk management function develops and executes risk policies and procedures involving identification, measurement, assessment, mitigation and monitoring of the financial and non-financial risks and works together with management to ensure adequate adherence to these risk management policies and procedures. The compliance function plays a key role in monitoring Triodos Bank’s adherence to external rules and regulation and internal policies. The adequate functioning of the risk management and compliance function as part of the internal control system is under discussion with the Audit and Risk Committee. Triodos Bank’s Internal Audit function provides additional assurance to the Executive Board by independently and objectively evaluating the adequacy and effectiveness of Triodos’ corporate governance, internal controls, compliance and risk management systems. The Executive Board, under supervision of the Supervisory Board and its Audit and Risk Committee, is responsible for determining the overall internal audit work and for monitoring the integrity of these systems.
In 2011, risk management will extend and formalise the enterprise risk management framework that will be the basis for an integrated in control statement process. The Executive Board indicates that this process should lead to a statement providing positive assurance in the coming years.
On the basis of the above, Triodos Bank’s Executive Board states that, with reasonable assurance, regarding its financial reporting risks, as per the end of the 2010 financial year, it has no indication that the risk management and control systems have not functioned adequately and effectively.
The risk management and control systems provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation and fair presentation of its financial statements.