The aim of Risk Management of Triodos Bank is the long term resilience of the business.
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 risk management processes in the organisation. Finally, Internal 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, that are coordinated by the Group Risk Management department. Group Risk Management reports directly to 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 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.
Local Risk Managers at each of Triodos Bank’s business units are appointed to embed the overall enterprise risk framework into the business.
Risk Management policies are approved by Triodos Bank’s Executive Board on the advice and recommendation of the relevant 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 planning 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, or its ‘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, 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.
Triodos Bank has established an Audit & Risk Committee (Supervisory Board A&RC) in line with the Banking Code, which 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 and liquidity impact. The product approval process, that assesses all new products and markets against Triodos Bank’s risk appetite and its duty of care to clients is in place. A lifelong learning program for members of the Executive Board and Supervisory Board has been set up and implemented.
Triodos capital strategy defines Capital Management levels and is part of an integrated capital framework.
The aim of the capital framework 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 assesses whether the available capital is sufficient to support current and future activities on a monthly basis. In 2011 the available capital was always sufficient. During 2011 new equity of EUR 75 million was issued to support 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 in stress situations.
- 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 is determined by the following risks:
- Credit risk (counterparty risk and concentration risk)
- Operational risk
- Market risk (foreign exchange risk and interest rate risk)
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 occurs. The Capital Contingency Plan sets out actions and activities to strengthen short term capital position under stressed circumstances. Twice a year the actual capital position is stressed based against a number of stress 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.