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Interest rate risk

Interest rate risk is the current or prospective risk that earnings and/or capital are negatively affected by interest rate changes in the financial markets. This risk is inherent to the traditional banking business.

Triodos Bank uses various indicators to measure interest rate risk. The interest rate risk position is monitored by the Asset and Liability Committee on a monthly basis. The interest rate risk is managed with an interest rate risk model, using guidelines and limits and by performing various interest rate stress scenario analyses. Limits are agreed by the Executive Board based on a proposal made by the Asset and Liability Committee.

Overview of interest rate risk indicators:

  • Earnings at Risk: a short term indicator, which shows the effect of a gradual interest rate shock of plus or minus 2% (200 basis points) on the interest income of Triodos Bank for a one year period.
  • Economic Value of Equity at Risk: a long-term indicator, which represents the change of the Economic Value of Equity (which is the net present value of the future cash flows of all assets and liabilities) in case of an interest rate shock of plus or minus 2% (200 basis points).
  • Outlier Criterion: the Economic Value of Equity at Risk in % of the Actual own Funds.
  • Cushion: shows the difference between the Economic Value of Equity and the Actual own Funds.
  • Modified Duration of Equity: an indicator that expresses the sensitivity of the Economic Value of Equity in case of interest rate changes.

Overview of interest rate risk indicators used by Triodos Bank as at the end of the year for all currencies

Base case represents the expected results of Interest Earnings and Economic Value of Equity in an unchanged interest environment.

Download XLS

2013
Amounts in millions

Base case

Rising interest rate (+200 bp)

Decreasing interest rate (–200 bp)

 

 

 

in %

 

in %

 

 

 

 

 

 

Actual own Funds

EUR 623

 

 

 

 

Earnings at Risk 1 year

EUR 135

EUR +19

+14.2%

EUR –6

–4.5%

Economic Value of Equity at Risk

EUR 704

EUR –67

–9.5%

EUR +49

+6.9%

Outlier Criterion

 

 

10.8%

 

10.8%

 

 

 

 

 

 

Modified Duration of Equity

3.9

5.0

 

11.0

 

 

 

 

 

 

 

Download XLS

2012
Amounts in millions

Base case

Rising interest rate (+200 bp)

Decreasing interest rate (–200 bp)

 

 

 

in %

 

in %

 

 

 

 

 

 

Actual own Funds

EUR 537

 

 

 

 

Earnings at Risk 1 year

EUR 125

EUR +17

+13.5%

EUR –4

–3.3%

Economic Value of Equity at Risk

EUR 672

EUR –45

–6.7%

EUR –6

–0.9%

Outlier Criterion

 

 

8.4%

 

8.4%

 

 

 

 

 

 

Modified Duration of Equity

3.0

3.3

 

7.4

 

 

 

 

 

 

 

The calculations for these indicators are based on interest rate maturities. However saving and current accounts have a non-defined interest maturity. A quantitative assessment of the interest rate sensitivity of our saving accounts and current accounts has been executed. The outcome of this assessment is used in the calculations for interest rate risk.

The model used for the interest rate risk management of savings and current accounts predicts future volumes and interest rates based on historical data, taking into consideration the statistical significance of that data. The model combines the relationship between client interest rates and market interest rates and outflow predictions.

Remaining interest-rate terms of financial instruments

The following table sets out the remaining contractual interest-rate term of the financial instruments held as at 31 December.

Download XLS

2013
Amounts in thousands of EUR

Floating-
rate

<= 3
months

<= 1
year

<= 5
years

> 5
years

Total

 

 

 

 

 

 

 

Interest-bearing assets

 

 

 

 

 

Cash

895,755

895,755

Government paper

18,000

30,000

48,000

Banks

297,361

202,180

51,000

1,000

551,541

Loans

598,529

419,446

451,245

1,111,105

939,929

3,520,254

Interest-bearing securities

163,495

109,045

512,537

465,956

1,251,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

1,791,645

803,121

641,290

1,624,642

1,405,885

6,266,583

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

Banks

833

2,849

7,778

19,571

31,074

62,105

Funds entrusted

11,857

1,033,179

1,567,241

1,993,498

1,025,434

5,631,209

Subordinated liabilities

5,287

5,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

12,690

1,036,028

1,575,019

2,018,356

1,056,508

5,698,601

 

 

 

 

 

 

 

Download XLS

2012
Amounts in thousands of EUR

Floating-
rate

<= 3
months

<= 1
year

<= 5
years

> 5
years

Total

 

 

 

 

 

 

 

Interest-bearing assets

 

 

 

 

 

Cash

380,497

380,497

Government paper

Banks

243,121

163,546

153,500

1,000

561,167

Loans

680,848

431,387

472,551

908,810

791,763

3,285,359

Interest-bearing securities

110,058

106,513

437,640

264,774

918,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

1,304,466

704,991

732,564

1,347,450

1,056,537

5,146,008

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

Banks

919

1,879

2,956

20,527

36,518

62,799

Funds entrusted

15,964

768,716

1,225,822

1,625,260

934,265

4,570,027

Subordinated liabilities

5,283

5,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

16,883

770,595

1,228,778

1,651,070

970,783

4,638,109

 

 

 

 

 

 

 

Notes:

Only interest bearing assets and liabilities are reported in this table, which results in differences with the balance sheet figures.

Interest bearing securities and subordinated liabilities are valued at redemption value including bond premium and after deduction of discounts.

For funds entrusted without a fixed interest rate term, the outcome of the quantitative savings and current account model, as mentioned before, is used.

All other interest-bearing assets and liabilities are reported as floating rates or are broken down in the maturity calendar by their remaining contractual interest rate term.