6.2 Credit Risk measurement Inhoudsopgave Voorwoord Bestuursverslag Corporate governance Consolidated Financial Statements Company Financial Statements Pillar 3 by the management of the entity based on their position in the organisation, knowledge, experience and management responsibilities. Rabobank considers it a priority that the credit committees are comprised of high level (senior) management representation with a significant level of experience in the respective credit area. The credit committees play a key role in ensuring consistency among Rabobank standards of credit analysis, compliance with the overall Rabobank credit policy and consistent use of the rating models.The credit policy sets the parameters and remit of each committee, including the maximum amount they are allowed to approve for limits or transactions. Policies are also in place which restrict or prohibit certain counterparty types or industries. As a rule, all counterparty limits and internal ratings are reviewed once a year (corporate clients) at a minimum. Where counterparties are assigned a low loan quality classification they are reviewed on a more frequent basis. Credit committees may request for more frequent reviews as well. Credit Risk Measurement Framework Internal credit models are used to estimate PD, LGD and EAD parameters. Rabobank uses different modelling methodologies for the different portfolios. Ranging from statistical models to expert-based models, and taking into account quantitative and qualitative risk drivers.The credit risk parameters are used in the calculation of the capital requirements. Decisions that determine the level of credit risk accepted by Rabobank are not only based on quantitative information or model output. Practical and conceptual limitations of metrics and models using a qualitative approach including expert judgment and critical analysis are also taken into account. After obtaining permission from the Dutch Central Bank, Rabobank has been using the most advanced methods for capital calculations since 1 January 2008. 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 a Pillar II 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. 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 Default PD The likelihood that a counterparty will default within one year.This is a forward-looking measure. Loss Given Default LGD The estimate of the economic loss in the situation of a default, expressed as a percentage of the Exposure at Default (EAD). Exposure at Default EAD (EUR) The expected exposure in case a 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 2016 was 1,042. 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 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 defaulted exposure. Each RRR is associated with a range for the PD in basis points and an average PD in basis points (seeTable 1).The RRR for a specific counterparty is determined based on internally 326 Rabobank Jaarverslag 2016

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Jaarverslagen Rabobank | 2016 | | pagina 327