Triodos Bank wants to be strongly capitalised to support our growth strategy and to be a strong counterparty for our clients. Therefore, we maintain a relatively high equity base, which as a consequence puts downward pressure on the Return on Equity.
The objective of Triodos Bank’s capital strategy is to ensure its viability by:
- Maintaining sufficient capital to absorb current and future business losses, also in extreme situations (‘stress’);
- Adequately allocate capital to its business units; and
- Ensuring compliance to all applicable capital legislation and regulation at all times.
All of Triodos Bank’s solvency comes from common equity.
Banking industry is highly regulated. Regulations play an important role in society to ensure banks operate safely. Triodos Bank pays constant attention to comply with all regulation.
Basel III is a worldwide standard for regulation, supervision and risk management of the banking sector, developed by the Basel Committee on Banking Supervision. Basel III has been transposed by the European Union into the Capital Requirements Regulation and the Capital Requirements Directive IV. The Capital Requirements Regulation is directly applicable and the Capital Requirements Directive IV was transposed into local law by each of the members of the European Union so is the Dutch implementation of the Capital Requirements Directive IV as Triodos Bank is formally domiciled in The Netherlands.
There is no difference in the scope of consolidation for accounting and for prudential reporting purposes. Except for transfer of own funds of Triodos Bank UK Ltd, there is not any current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities among Triodos Bank and its consolidated companies.
The capital strategy of Triodos Bank is captured in its Internal Capital Adequacy Assessment Process (‘ICAAP’).
The ICAAP covers, for example, the measurement of risks requiring an adequate capital buffer, stress testing, capital contingency and the allocation of available capital to the different Triodos Bank banking entities and business units. The ICAAP is subjected to the Supervisory Review and Evaluation Process (SREP) of the Dutch Central Bank on a yearly basis.
The actual capital position is stressed regularly based on a number of stress scenarios. A capital contingency process is set up for Triodos Bank in case of a (potential) shortfall in available capital, which can be a threat to its solvency. For this purpose, the Recovery Plan contains measures for restoring its solvency by reducing risks and/or increasing capital and provides a specific governance structure for these stressed conditions.
Capital allocation and monitoring
Equity is allocated to banking entities, in proportion to the outcome of the internal capital calculation.
Triodos Bank works with a rolling three-year capital forecast. The Asset and Liability Committee monitors Triodos Bank’s capital position and advises the Executive Board on the capital adequacy. The Asset and Liability Committee also assesses whether available capital is sufficient to support current and future activities on a monthly basis. During 2019 available capital has been at sufficient levels at all times in line with external regulatory minimum requirements. In 2019 new equity of (net) EUR 54 million was issued to finance Triodos Bank’s further growth. In addition, in line with external regulatory minimum requirements a retained portion of the 2019 profit will be added to its reserves.
Triodos Bank calculates its internal capital adequacy requirements based on minimum requirements (‘Pillar 2’) and supplemented with additional capital charges (‘Pillar 2’), as described in the Capital Requirement Regulation.
The Common Equity Tier 1 (CET1) ratio increased by 0.4% from 17.5% at the year end 2018 to 17.9% at the year end 2019. This ratio is still well above the regulatory requirement. Further quantitative information is disclosed in the Pillar 3 report which can be found on the website of Triodos Bank.
Minimum capital requirements (Pillar 1)
The total minimum regulatory requirement consists of capital charges for credit risk, operational risk and market risk:
- Credit risk – Triodos Bank applies the standardised approach (SA) for calculating its minimum capital requirements for credit risk and the simple approach for credit risk mitigation. The risk weighted asset calculations are done for all on-balance sheet exposures (including the loan book and the investment book), and off-balance sheet items (such as loan offers, not yet accepted) and derivatives exposures;
- Operational risk – Based on the size and limited complexity of the Triodos Bank organisation, the basic indicator approach (BIA) is used for calculating the capital requirement for operational risk, which equals 15% of the average over three years of Triodos Bank’s gross income;
- Market risk – The capital charge for Triodos Bank’s market risk is related to its exposure to foreign exchange risk. The requirement is calculated as the sum of the bank’s overall net foreign exchange position, multiplied by 8%. Triodos Bank only accepts limited net foreign exchange positions in strategic investments and in its UK activities in GBP. However, when the regulatory threshold of 2% of the actual own funds is not exceeded, the capital charge for market risk is zero;
- Credit valuation adjustment risk – The capital charge for the counterparty risk of derivative transactions that are not cleared through a qualified central counterparty.
Additional capital requirements (Pillar 2)
In order to determine its economic capital, Triodos Bank also calculates additional capital requirements. These consist of charges for risks or parts of risks that are not covered by Pillar 1. This consists of items in the areas of credit risk, strategic risk, interest rate risk in the banking book, model risk and operational risk.
Management of excessive leverage
The risk of excessive leverage is managed inclusively in our capital management. We aim for a strong capital base, reducing this risk.