Triodos Bank’s Executive Board provides a perspective on the wider world it operates in, its impact and activity in 2016 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.
During this process 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. The results of these assessments are part of the business plan cycle.
Over the past year, two strategic risks have materialised and are expected to continue in the foreseeable future. These are 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 assessment outcomes form 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 2016.
Given the scenarios which 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 is mitigated by a focus on cost efficiency, on interest margin 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 our presence in different countries.
Finally, we are 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 on 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 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.