9. Market risk
Market risk is the risk that the bank's earnings and/or economic value may be negatively affected by
changes in interest rates or market prices. Exposure to a certain degree of market risk is inherent in
banking and creates the opportunity to realise profit and value. In the management and monitoring
of market risk, a distinction is made between market risk in the trading environment and market risk in
the banking environment. The various market risks are discussed in the sections below.
Inhoudsopgave Voorwoord Bestuursverslag Corporate governance Consolidated Financial Statements Company Financial Statements Pillar 3
Section Description Key risk indicators Monitoring
9.1 Market risk trading Market risk arising from the bank's trading activities. Rabobank's trading Value at Risk, event risk, Daily
environment activities are customer driven or for the purpose of the bank's own balance interest rate delta
sheet management.
9.2 Interest rate risk banking Interest rate risk arising from the bank's activities not related to trading. This Equity at Risk, Income at Weekly/Monthly
environment occurs mainly within the retail banking business as a result of the difference Risk, basis point sensitivity
in interest rate fixing periods between assets and liabilities and implicit
options in various customer products.
9.3 Currency risk banking Currency risk arising from the bank's activities not related to trading. This None Monthly
environment mainly concerns translation risk resulting from capital invested in foreign
operations.
Within the trading environment, the most significant types of
market risk are: interest rate risk (including basis risk), credit
spread risk and currency risk. Risk positions acquired from
clients can either be redistributed to other clients or managed
through risk transformation (hedging). The trading desks
are also acting as a market-maker for secondary markets (by
providing liquidity and pricing) in interest rate derivatives and
debt, including Rabobank Bonds and Rabobank Certificates.
Market risk in the trading environment is managed and
monitored on a daily basis within the trading market risk
framework. This framework contains all derivative books, as well
as the loan syndication books, the short term funding books,
securities finance repo books and the bond trading books.
A prudent limit and control framework is in place.
Within the banking environment the most significant type of
market risk is interest rate risk. Rabobank is mainly exposed
to interest rate risk in the banking environment as a result
of (1) mismatches between the repricing period of assets and
liabilities and (2) embedded optionality in client products.
Rabobank is also exposed to currency risk in the banking
environment. This currency risk is mainly translation risk on
capital invested in foreign activities. Other non-trading currency
risks are mostly hedged.
Where market risk in the trading environment is managed
within the trading market risk framework, market risk in the
banking environment is managed and monitored within the
Asset Liability Management (ALM) framework. The exposures
covered by the ALM framework are far more stable than the
exposures in the trading market risk framework. Therefore, they
are managed and monitored on a weekly and/ or monthly basis.
A large part of the structural interest rate and currency risks
arising from the banking activities are transferred through
internal derivative transactions to the trading environment.
Within the trading environment these risks are for the most part
hedged in the market.
EDTF22 It is not possibleto make a direct link between the
items on the bank's balance sheet and the various
figures for market risk.This is because the bank's balance sheet
only contains transactions with third parties. The published
market risk figures for the trading books are based on both
transactions with third parties and transactions with internal
parties in the banking environment.The same applies to the
disclosed interest rate and currency risk figures for the banking
books, which are based on both transactions with third parties
and transactions with internal parties in the trading environment.
351 9. Market risk