The equity, or capital that the Rabobank Group holds serves as a buffer against unexpected loss es. Equity is scarce by definition and therefore it is very important to deploy it in the best possible way. In that context, the bank supervisors' new regulations also play an important part.They coincide with the way in which the Group manages its risks and, consequently, allocates its equity. Adjustments to the Basle II regulations Economic capital Equity position more than adequate 58 Rabobank Group Annual Report 2002 The balance between risk, returns and capital The Basle Committee for bank supervision is in the final phase of completing far-reaching proposals for restructuring of capital ade quacy regulations. Eventually, these proposals will need to be trans lated into national regulations by the national supervisors - in this case the Dutch Central Bank. The target is to achieve a flexible framework that is more closely in line with internal risk control and that will result in a more sophisticated credit risk weighting.The current, rigid setting of capital adequacy requirements is to be replaced by a system based on actual credit exposure. In the year under review, the Rabobank Group joined in a global exercise initia ted by the Basle Committee, aimed at establishing the consequen ces of the preliminary proposals. Given its traditionally low (credit) risk profile, it came as no surprise that the new capital adequacy requirements for the Rabobank Group are significantly lower than the current ones.The definitive capital adequacy accord (Basle II) is due to be finalised in the autumn of 2003. Meanwhile, the Group has started the implementation of the expected proposals. The accord on capital adequacy requirements is limited to specific regulations for credit risk, market risk and operational risk. The accord also stipulates that banks must hold capital in respect of all risks they incur. The Rabobank Group uses the most advanced statistical methods to determine the size of the economic capital to be held.These methods analyse the unexpected losses, assuming a specific degree of probability of the actual occurrence of such losses. Because the Rabobank Group wants to maintain the highest rating (AAA), it has raised the bar high for itself as regards the determina tion of economic capital. A high rating requires a high economic capital. In 2001, the Group launched a top-down approach for the determination of economic capital. In the year under review, it has started a bottom-up refinement of this method. The Rabobank Group holds capital for credit, market and operatio nal risk as well as for interest rate risk, country risk, business risk and insurance risk.Total economic capital for these risks is lower than the Rabobank Group's actual capital.The credit risk covers approxi mately one third of total economic capital. For this purpose, a

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Annual Reports Rabobank | 2002 | | pagina 60