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.
Strategic Risks are those that potentially have the most impact on an organisation’s ability to execute its strategies and achieve its business objectives. Therefore, Strategic Risk Assessments are performed at Executive Board level for Triodos Bank as a whole and at business unit level for each business unit, every three years, with an annual update.
The external landscape changes, in particular the low interest rate environment, climate change, energy transition, regulatory requirements, the European political landscape and technological developments. The challenges that arise from these changes has and will have impact on Triodos Bank.
Triodos Bank considers its banking model to have a modest risk profile. As a traditional retail bank, it earns its income from the transformation of interest and liquidity maturity of money and taking credit risks. Volume is an important factor in generating a healthy income. In addition, the following elements play an important role: the balancing of assets and liabilities, the capacity to set an adequate price for those assets and liabilities and other banking services. Cost control is also crucial to maintaining operational profit.
Strategic risks need to be carefully managed to realise integrated financial and mission-driven objectives. Corporate and local risk sensitivities are used to determine scenarios that are used to test Triodos Bank’s capital, liquidity, profitability and operational stability during the year. Triodos Bank has identified the following strategic risks to take into account at corporate level:
- Political and social risk: political uncertainty in the countries we operate in and at EU level and public discontent which lead to more volatility. And, like all other European banks, we are part of an ongoing discussion with the regulators about the potential implications of Brexit;
- Economic risk: increasing volatility as a result of political uncertainty, decreasing business confidence which leads to lower investment levels, intervention of central banks to stimulate economic growth which may continue longer than expected with lower interest rates as a result;
- Technological risk: Fintechs create new fields of competition and raise customer expectations which challenge our relationship approach, increasing cybercrime will force the organisation to spend more effort safeguarding systems;
- Legal risk: regulations like BRRD, CRR/CRD, PSD2 and MIFID II are still under development and can result in requirements that influence Triodos Bank’s business model.
Mitigating strategies are discussed and applied as appropriate and depending on the situation at hand. Over the past year, two of the mentioned risks have materialised and are expected to continue in the foreseeable future. These are the continuing low interest rate environment and the regulatory pressure. The first has led to a decreased margin and consequently lower profitability than foreseen. The second one has led to the need for additional co-workers, system adaptation and processes in order to implement new regulatory requirements. Without judging the new regulatory regimes, it is fair to say that most of the involved resources would otherwise have been employed elsewhere, and therefore represent an additional cost and lost (commercial) opportunity.
A risk appetite process is implemented across Triodos Bank to align its risk profile with the willingness to take risk in delivering its business objectives. The Risk Appetite Statement reflects the actual implementation of the Risk Appetite Framework. It is updated yearly and is approved by the Supervisory Board upon advice by the Audit and Risk Committee. The concept of risk appetite and the link to the Strategy and Business objectives is illustrated below:
Overview of risk capacity, risk appetite, risk limits and the relationship with Triodos Bank’s risk profile.
The risk appetite is based on three objectives that fit with Triodos Bank’s corporate goals and guarantee a sustainable banking model. They are to (1) protect identity and reputation, (2) maintain healthy balance sheet relations and (3) maintain stable growth.
Triodos Bank uses a set of indicators and limits to measure and assess the level of risk appetite and risk profile of the organisation. The risk limits, determined at corporate level, are translated into a localised limit structure for each branch. This local limit structure, or ‘cascaded’ limits structure, is being developed for some of the risk types.
Stress testing is part of Triodos Bank’s risk management. It is of critical importance in establishing a well-balanced forward-looking management view that anticipates adverse developments and circumstances that the bank might be exposed to that require measures in response. Stress testing exercises also provide valuable insights in the exposure of the portfolio toward risk events.
Since Triodos Bank is not a SIFI (Significantly Important Financial Institution) but a LSFI (Less Significant Financial Institution), it is not required to participate in the regulatory stress test conducted by the EBA, however it is required to perform its own stress tests, e.g. for the SREP.
Stress testing for capital at Triodos Bank is conducted at group-wide, at risk domain and at sector level. In addition, sensitivity tests are also carried out as part of the annual business banking sector analyses.
Triodos Bank’s stress testing framework provides an overarching basis to carry out all stress testing activities. It is meant to enhance the consistency of processes, governance and terminology of stress testing activities across Triodos Bank.
The process of firm-wide scenario stress test analysis may be broken down into a sequence of phases, where the defined stress scenarios are translated into risk events and indicators to measure the risk levels. After the determination of the impact and the aggregation of the results the outcome is reported and discussed. Scenarios that are assessed are of a varied nature, including macro-economic stress and idiosyncratic stress (e.g. operational and reputational stress).
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 Recovery Plan specifies measures Triodos Bank can take in order to survive a severe crisis that impacts its capital position, liquidity, profitability and operational stability. The aim of a recovery plan is to be prepared for a crisis and therefore to lower the probability of the organisation defaulting. It also aims to identify and quantify the effectiveness of corrective measures which are taken in different scenarios.
Enterprise Risk Reporting
The objective of the Enterprise Risk Management (ERM) report is to create a single point of reference for all risk related activities within Triodos Bank. The ERM report provides insights into specific risk themes and provides an integrated picture of risk at corporate level. This report is discussed in the Enterprise Risk Committee and shared with the Audit and Risk Committee and Supervisory Board.
Every risk discipline reports on a monthly basis (e.g. ALM Report and Business Banking Credit Risk Report) or on a quarterly basis (e.g. Non-Financial Risk Report and Compliance Report). These reports are discussed in corresponding committees, and correction measures are taken whenever needed. On a quarterly basis, they are integrated in the ERM report which provides insights into the Triodos Bank risk profile in relation to its accepted risk appetite.