4.3 Risk management framework 4.4 Risk Measurement Inhoudsopgave Voorwoord Bestuursverslag Corporate governance Consolidated Financial Statements Company Financial Statements Pillar 3 EDTF4 Rabobank Group maintains a robust risk management framework to identify, assess, manage, monitor and report risks. It makes decisions based on a conscious and careful risk-return trade-off in line with the defined strategy and within Risk Appetite. The mission of the Risk Management function is to ensure the financial stability and continuity of Rabobank by monitoring its risk profile and ensuring that risk management activities are executed effectively and efficiently in line with legislation and best practices in the market. The vision of the Risk Management function is to advise the business and support them in managing risk, act as the guardian of the risk profile of Rabobank by identifying risks and initiating mitigating actions with empowered employees, satisfied clients and in partnership with internal and external stakeholders. 4.4.1 Risk models and model validation Rabobank develops and uses risk models for most risk types. The models for credit, market and operational risk are the most widely used. Models are developed by the modelling departments in close cooperation with the relevant business and risk experts. In principle, models are reviewed annually. The models are the basis for internal measures of risk (RC+ I) and are at the same time key inputs for calculation of the minimum regulatory capital requirements according to the Basel-3 framework. All internal models are validated by the independent Model Validation department. Validation guidelines are specified to ensure objectivity, consistency, transparency and continuity. Models are validated according to these principles and reviewed against internal requirements and regulatory requirements. Model results are back-tested against historical loss data. Where relevant, external benchmark studies are used to support the calibration of parameters. Models require formal internal approval before implementation and use is allowed. Final internal approval for the (continued) use of a model is obtained from the Model Governance Committee (MGC), a subcommittee of the Risk Management Committee (RMC) Group. External approval, when required, is obtained from the regulator. Credit risk models The bank uses internal models to estimate Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD) parameters.These models are embedded in the credit approval and internal reporting processes and are used to measure the credit risk in exposures to individual clients and portfolios.The same parameters are also used to calculate risk-adjusted return on capital, RC+ capital and the minimum regulatory capital requirements under the Basel Advanced Internal Ratings Based (AIRB) approach. Operational risk models Operational risk loss events are systematically collected and analysed on a bank-wide basis. Operational risk assessments are key in systematically assessing operational risks in ongoing business and in proposed changes. Progress on outstanding operational risk issues is monitored through issue management and action tracking. Operational risk exposures are analysed and reported to senior management to support decision-making. Market risk models Value-at-Risk (VaR) models are used to measure market risk of exposures in both the banking and the trading book. Value- at-Risk is used for the internal monitoring and reporting of positions relative to the limits determined in the risk appetite. In addition to VaR, other instruments to measure market risk are used as well; (e.g. Equity at Risk, Income at Risk, basis point value and sensitivity and stress scenarios). 4.4.2 Capital stress testing EDTF8 Capital stress testing is an important risk management tool that provides a forward-looking assessment of risk and assists in the optimisation of risk capital. It enables the exploration of vulnerabilities in business models whilst overcoming the limitations of risk models and historical data. At Rabobank, stress testing forms an essential part of the risk management framework. Stress tests are used to measure the impact of extreme, but plausible events. Where necessary, measures in line with Rabobank's Risk Appetite are taken on the basis of stress tests results. Stress test governance Given the importance of stress testing in terms of sound risk management and regulatory compliance, the stress testing process and governance warrants the involvement of senior management up to the Executive Board and Supervisory Board of Rabobank. The Executive Board of Rabobank is ultimately responsible for the Rabobank StressTesting Framework and its execution, while the Risk Management Committee Group (RMC) acts as the delegated principal. Specific tasks of the RMC regarding capital stress testing are delegated to the StressTest Committee (STC). 317 4. Risk management

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Jaarverslagen Rabobank | 2016 | | pagina 318