Triodos Bank’s Executive Board provides a perspective on the wider world it operates in, its impact and activity in 2017 and its prospects for the future.
Risk and Compliance
Managing risk is a fundamental part of banking. Triodos Bank manages risk as part of a long-term strategy of resilience.
Risk Management is embedded throughout the organisation. While business managers are primarily responsible for delivering a resilient business approach, they are supported by risk managers, with local business knowledge, to identify, assess and manage risk. At a Group level, a risk appetite process is implemented to align Triodos Bank’s risk profile with the willingness to take risk in achieving its business objectives.
Periodically each business unit performs a strategic risk assessment to identify and manage potential risks that could impede the realisation of their business objectives. The results of these assessments are consolidated and used as input for the Executive Board’s own risk assessment, and to determine Triodos Bank’s risk appetite. They are also part of the business plan cycle.
Over the past year, two important external strategic risks have materialised and are expected to continue in the foreseeable future; the continuing low interest rate environment and regulatory pressure. The first has led to a decreased margin and consequently lower profitability than anticipated. The second has led to the need for additional co-workers, system adaptation and processes in order to implement these new regulatory requirements.
The strategic risk environment forms the starting point and foundation for determining the risk appetite, the assessment of the capital and liquidity requirements in relation to the risk appetite and recovery plan in case of deviation. In addition, the local risk sensitivities were reviewed to determine scenarios that were used to stress test Triodos Bank’s solvency, liquidity and profitability during 2017.
Given the scenarios that were selected, Triodos Bank is most sensitive to a long lasting, low interest environment scenario. It shows that, with projected business volumes and fee income, profitability will be under pressure in the coming years. This risk will be mitigated by a focus on cost efficiency and by diversification of income. Another scenario that leads to decreasing profits and capital ratios is exposure to government defaults. This is seen as a logical consequence of a presence in different countries.
Finally, Triodos Bank is sensitive to scenarios relating to reputation risk. To prevent such an event, it is essential to communicate clearly about the mission and to act in line with the mission.
The impact of the scenarios was calculated and assessed in relation to profitability, capital ratios and liquidity. The results of these tests were satisfactory.
A fully integrated risk management report gives insights into the Triodos Bank risk profile in relation to the accepted risk appetite. The report is an important monitoring tool for Triodos Bank’s risk profile, gives insights into specific risk themes and provides an integrated picture of risk at business unit level. This report is produced quarterly and discussed with the Supervisory Board’s Audit and Risk Committee.
Several risk committees are in place at Head Office, all representing a specific risk area. The monthly Asset and Liability Committee is responsible for assessing and monitoring the risks associated with market risk, interest rate risk, liquidity risk, and currency risk and capital management. The monthly Non-Financial Risk Committee monitors and challenges the development of the non-financial risk profile of Triodos Bank in order to determine whether the operational and compliance risks are, and will be, in line with the defined non-financial risk appetite. The quarterly Enterprise Risk Committee of Triodos Bank is the body delegated by the Executive Board to take decisions on strategic risk and reputation risk of Triodos Bank as a whole.
The Credit Risk Committee plays an important role in assessing the risk of new loans and monitoring the credit risk of the entire loan portfolio. The assessment of credit risk is as close as possible to the client and therefore primarily the responsibility of local branches, who are responsible for daily operations. The central risk function sets norms, approves large loans and monitors the credit risk of Triodos Bank’s entire loan book.
The Risk Management section of Triodos Bank’s annual accounts provides a description of the main risks related to the strategy of the company. It also includes a description of the design and effectiveness of the internal risk management and control systems for the main risks during the financial year.
The recent growth of the company has led to additional internal organisation and governance requirements. Also new legislation demanded several additional analyses, risk assessments and adjustments of systems or procedures. Policies have been updated and models have been re-designed to meet these obligations.
No major deficiencies in the internal risk management and control systems were discovered in the financial year. The developments of the main risks within Triodos Bank are described in the integrated risk management report and discussed on a regular basis in the Audit and Risk Committee of the Supervisory Board.
Capital and Liquidity Requirements
Regulations are demanding a more resilient banking sector by strengthening the solvency of the banks and introducing strict liquidity requirements, such as those developed by the Basel Committee on Banking Supervision. Based on the latest available information, Triodos Bank complies with the capital and liquidity requirements that legally come fully into effect from 2019, known as Basel III. Furthermore, Triodos Bank expects that the latest proposed changes to this regulation, referred to as the EU risk reduction package and the Basel III finalisation of post-crisis reforms, together will only have limited impact on Triodos’ capital requirements.
Triodos Bank’s capital strategy is to be strongly capitalised. This has become an even more important strategic objective as the regulation introduces new measures to strengthen the capital base of all the banks as a consequence of the financial crisis. Triodos Bank aims for a Common Equity Tier 1 ratio of at least 16%, well above its own internal economic capital adequacy models to guarantee a healthy and safe risk profile. The quality of capital is important as well as the solvency rate. All of Triodos Bank’s solvency comes from common equity. Economic capital is calculated periodically and supports Triodos Bank’s own view of capital adequacy for the purpose of the yearly Internal Capital Adequacy Assessment Process, which is reviewed by the Dutch Central Bank.
In 2017, Triodos Bank successfully raised capital of over EUR 77 million. This has helped it to maintain a regulatory Common Equity Tier 1 of 19.2% at the end of 2017, well above both external and its own internal risk assessment.
Although the liquidity portfolio decreased during 2017, Triodos Bank’s liquidity position remained strong. Its policy is to hold a sound liquidity buffer and invest liquidities in highly liquid assets and/or inflow generating assets in the countries where it has branches. In The Netherlands Triodos Bank has invested its liquidities mainly in (green) bonds of the Dutch government, agencies, and banks, cash loans to municipalities, deposits with commercial banks and the Dutch Central Bank. In Belgium most of its liquidity has been invested in Belgian regional and government bonds. In Spain the liquidity surplus is invested in Spanish regional and central bonds, Spanish regions and agencies and deposited with commercial banks and the Spanish Central Bank. In the UK excess liquidity is invested in UK government bonds and placed on deposits with commercial banks and the Bank of England. In Germany, surplus liquidities are placed with local governments and with commercial banks including the German Central bank. Due to the expansionary monetary policy by the ECB and specifically the asset purchase program, yields of government bonds and other high rated counterparties have plummeted, often even to levels below -0.40%. Hence, the profile of the liquidity buffer changed during 2017. The bonds portfolio decreased by almost 25%, due to maturing bonds being placed mostly at the central bank.
The Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are both well above the minimum limits of Basel III.
More detailed information about Triodos Bank’s approach to risk is included in the Annual Accounts section of this report starting on page 150.
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 works together with management to develop and execute risk policies and procedures involving identification, measurement, assessment, mitigation and monitoring of the financial and non-financial risks. 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 frequently under discussion with the Audit and Risk Committee. It is further supported by the Triodos Bank culture as a key element of our soft controls.
Triodos Bank’s Internal Audit function provides independent and objective assurance of Triodos Bank’s corporate governance, internal controls, compliance and risk management systems. The Executive Board, under the 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.
The enterprise risk management framework is the basis for an integrated in control statement process. Triodos Bank is working in a rapidly changing environment, which require regular upgrades of its control framework. The Executive Board has indicated that several internal projects are in place that should lead to internal statements providing positive assurance in the coming years.
The Executive Board has no indication that the risk management and control systems have not functioned adequately and effectively in 2017.
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.
Compliance and Integrity
Triodos Bank has internal policies, rules and procedures to guarantee that management complies with relevant laws and regulations regarding customers and business partners. In addition, the compliance department independently monitors the extent to which Triodos Bank complies with its rules and procedures. External aspects of the compliance department primarily concern accepting new customers, monitoring financial transactions and preventing money laundering. Internal aspects primarily concern checking private transactions by co-workers, preventing and, where necessary, transparently managing conflicts of interest and safeguarding confidential information. In addition, it concerns raising and maintaining awareness of, for example, financial regulations, compliance procedures and fraud and anti-corruption measures. Triodos Bank has a European compliance team led from the Head Office in Zeist. Compliance officers are appointed in every branch with a functional line towards the central compliance department. In 2017 a Group Data Protection Officer was appointed as part of the implementation of the General Data Protection Regulation. The Director Risk and Compliance reports to the Executive Board and has an escalation line to the Chair of the Audit and Risk Committee, that supports the independence of the Risk Control Function.
There were no significant incidents in 2017 concerning compliance and integrity. Triodos Bank was not involved in material legal proceedings or sanctions associated with non-compliance with legislation or regulations in terms of financial supervision, corruption, advertisements, competition, data protection or product liability.
Triodos Bank applies
the new GRI guidelines
at a comprehensive level.
Sustainability considerations are shared at all levels of Triodos Bank and are an integral part of its management. Social and environmental aspects are taken into account in all day-to-day business decisions. Therefore, Triodos Bank does not have a separate department that continuously focuses on sustainability or corporate social responsibility.
Triodos Bank employs specific criteria to ensure the sustainability of products and services. It employs both positive criteria to ensure it is actively doing good and negative criteria for exclusion, to ensure it doesn’t do any harm. The negative criteria exclude loans and investments in sectors or activities that are damaging to society. The positive criteria identify leading businesses and encourage their contributions to a sustainable society. Twice a year, these criteria are tested and adjusted if necessary. Triodos Bank has also defined sustainability principles for its internal organisation. These are included in its Business Principles. All sustainability criteria referred to can be found on our website.