Interest rate risk
Risk management 57
of private sector lending)
1998 1999 2000 2001 2002
The relatively high percentage for 1998 was due to the crisis in Asia.
The figures for both 2001 and 2002 reflect the relative weakness of
the world economy. This had the greatest impact on the quality of
loans granted by the cyclical wholesale banking operations. The
five-year average of 0.23% is relatively low, reflecting the moderate
risk profile of the Rabobank Group's credit portfolio.
Loans to parties abroad expose the Rabobank Group not only to
the customary risk of bad debts but also to country risks. Country
risk management is based on a system of internal limits and internal
ratings for each country. Provisions for country risk are formed if
repayment problems might arise as a result of government measures
or extreme circumstances in a country.
Market risk involves changes in the value of the trading portfolio as
a result of movements in interest rates, foreign exchange rates and
share prices.The exposure is calculated and consolidated every day
and managed using a sophisticated system of limits. At a consolida
ted level, the exposure can best be expressed by the Value at Risk.
This criterion, based on historical data, indicates the maximum loss
that the Rabobank Group can suffer on a single day subject to a
certain degree of probability and in 'normal' market conditions.
Event risk scenarios measure the effect of sharp reversals in market
trends. Furthermore, statistical models generate other measures so
that traders and the risk management department can calculate
their positions at any moment of the day. The Value at Risk fluctua
ted between EUR 10 (7) million and EUR 15 (12) million in 2002,
with an average of EUR 13 (9) million.The increase on 2001 is main
ly due to more accurate registration. On balance, the risk profile did
Apart from its exposure to market risks in the trading environment,
the Rabobank Group is also exposed to structural interest rate risk
in its balance sheet. This risk results from mismatches between the
periods for which interest rates are fixed on loans and funds en
trusted. Longer-term risks are measured and managed using Equity
at Risk. This ratio expresses the sensitivity of the Group equity's mar
ket value to interest rate fluctuations. Long-term interest rates are
lower than those seen in recent years, and the loan portfolio was
built up during a period of higher interest rates. The market value of
the Rabobank Group's equity was therefore significantly higher than
its book value at year-end. Short-term risks are measured and mana
ged using the Income at Risk concept. This is the maximum amount
of net interest income that is put at risk on an annual basis, with a
reliability level of 97.5%.The maximum risk during the year under
review was approximately 4% of net interest income.
In the past five years, the Rabobank Group has worked on a sub
stantial diversification of its funding basis. By concentrating on cen
tral banks, money market funds, pension funds and asset managers,
it is less dependent on funds from other commercial banks.On the
asset side of the balance sheet, greater priority has been given to
assets that can be converted readily into cash. Liquidity risk is an
organisation-wide matter and managed by Group Treasury.
Operational risk is the risk of direct or indirect losses arising from
deficiencies in procedures and systems and from human failures or
from external events. As a matter of policy, the management of the
individual Rabobank Group entities is responsible for developing
policy, processes and procedures to manage operational risk.To
assist local Rabobanks, Rabobank Nederland has made sophisticated
instruments available to them.
At Interpolis, risk management is concerned mainly with insurance
risks. Using appropriate techniques, the risks of existing and new
products are estimated and changes in them are monitored.This
enables the Group to ascertain whether future commitments can
be met with sufficient certainty and whether calamities can be
absorbed financially. The policy of an insurance company such as
Interpolis takes full account of possible disaster scenarios.