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