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.
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.
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. The 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 at corporate level the following strategic risks to take into account:
- Political and social risk: political uncertainty in the countries we operate in and at EU level and public discontent which lead to more volatility;
- 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 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 to spend more efford to safe systems;
- Legal risk: regulations like BRRD, CRR/CRD, PSD2 and MIFID II are still under development and can result in requirements that influences our 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 the intention to judge 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 advise 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’ 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.
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. Non Financial Risk Report, 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.