Inhoudsopgave Bestuursverslag Corporate governance
Rabobank applies the Internal Ratings Based (IRB) approach
for the vast majority of its credit portfolio (including retail)
to calculate its regulatory capital requirements according
to CRR (CRD IV).The IRB approach is the most sophisticated
and risk-sensitive of the CRR (CRD IV) approaches for credit
risk, allowing Rabobank to make use of its internal rating
methodologies and models. Rabobank combines CRR (CRD IV)
compliance activities with an internal Economic Capital (EC)
framework. The approach represents key risk components for
internal risk measurement and risk management processes.
Key benefits are a more efficient credit approval process,
improved internal monitoring and reporting of credit risk and
the application of Economic Capital. Another important metric
is the Risk Adjusted Return On Capital (RAROC) for a transaction
as part of the credit application. This enables credit risk officers
and committees to make better informed credit decisions.
The IRB approach uses the Probability of Default (PD), Loss
Given Default (LGD), Exposure at Default (EAD) and Maturity (M)
as input for the regulatory capital formula, where:
Risk metric Abbreviation Description
Probability of PD The likelihood that a counterparty will
Default default within 1 year. This is a forward-
looking measure.
Loss Given LGD(%) The estimate of the economic loss in
Default the situation of a default, expressed as
a percentage of the Exposure at Default
(EAD).
Exposure at EAD (EUR) The expected exposure in case a
Default counterparty defaults.
Maturity M(t) The remaining expected maturity.
The Risk-Weighted Exposure Amount (RWEA) and the Expected
Loss (EL) are calculated based on these parameters.The RC
requirements are calculated as 8% of RWEA.
The differences between the actual IRB provision made for the
related exposure and the EL is adjusted for in the capital base.
The negative difference (when the EL amount is larger than
the provision amount) is defined as the Internal Ratings Based
Shortfall. According to CRR (CRD IV) rules, the shortfall amount
is deducted from the CET1 capital, AT1 capital and T2 capital.
For the deduction from the CET1 Capital a transition scheme
applies and the deduction moves from AT1 and T2 to CET1
The shortfall amount in 2015 was 1,789.
Risk classification and internal rating system
An important element in the risk analysis for credit applications
is the classification of the credit risk by assigning an internal
rating to each credit counterparty.This is a borrower rating
reflecting the likelihood of a counterparty becoming unable
to repay the loan or to fulfil other debt obligations.Together
Jaarrekening Rabobank Groep Jaarrekening Rabobank
with the introduction of the Basel II framework, Rabobank
developed the Rabobank Risk Rating (RRR) master scale,
comprising 21 performing ratings (R0-R20) and 4 default
ratings (D1-D4).The performing ratings correspond with the PD
of the client. The D1-D4 ratings represent default classifications.
D1 represents a minimum of 90 days of arrears, D2 a high
probability that the debtor is unlikely to pay, D3 that the debtor
is unable to meet its obligations and foreclosure is required
and D4 is the status of bankruptcy. In accordance with this
approach, all D-ratings constitute the total non-performing
exposure. Each RRR is associated with a range for the PD in basis
points and an average PD in basis points (seeTable 17).The RRR
for a specific counterparty is determined based on internally
developed credit risk models.These models are developed by
taking into account various risk factors including the sector,
country, size of the counterparty and type of counterparty.
When using the credit risk model, specific customer information
is entered, such as general customer behaviour, customer
financial data and market data. The credit risk models are used
as a credit decision supporting tool. The outcome of the credit
risk model is used as a starting point for determining the RRR.
Model results are combined with professional judgment and
risk management (e.g. credit committee) to take into account
relevant and material information, including those aspects
which are not (sufficiently) taken into account by the credit
risk model.
External agencies'credit ratings do not imply a specific PD,
although one can observe a default frequency for each
Standard Poor's (S&P) grade. The observed default frequency
is a backward-looking measure of PD. By matching the observed
default frequencies of the S&P grades with the average default
probabilities of associated internal RRR, a mapping has been
obtained from the external ratings by S&P to our internal ratings
for reference purposes.
The portfolio's average RRR is around R13 (PD between 0.92%
and 1.37%). For 2.6% of the portfolio the commitments are not
fully met. If such a situation is expected an adequate allowance
will be formed for this part of the portfolio.
The IRB models calculate a client PD, which is subsequently
mapped to the RRR. Each entity/type of credit facility has
its own LGD models, which are based upon Rabobank LGD
principles. Estimates for PD and LGD, together with the
exposure value (EAD), feed into the calculation of EL and
unexpected loss (UL).The latter is used to determine regulatory
and economic capital requirements.
337 6. Credit Risk
