Value adjustments to receivables
Country risk
Market risk
Risk, returns and capital 51
control of special management items in a single group business unit,
thereby increasing the transparency and effectiveness of the special
management process.
The development of loan losses charged to profit can be seen from
the movements in value adjustments to receivables as a percentage
of loans granted to the private sector. The graph below illustrates this
development for Retail banking, Wholesale banking, Leasing and
Rabobank Group.
The graph clearly shows Retail banking's low risk profile in lending.
Despite the weak economy of the past three years, there is only a slight
increase in bad debts. In Wholesale banking, where bad debts are at a
higher level than in Retail banking, the losses decreased. For Leasing, the
rise in value adjustment to receivables is attributable to the economic
downturn and the strong expansion of the lease activities in the United
States.These activities have a higher risk profile but also relatively high
returns. Netted at Group level, value adjustments to receivables show
a steady trend. At 24 basic points, the average for the period 1999
through to 2003 is relatively low, reflecting Rabobank Group's favourable
risk profile.
Loans to parties abroad expose Rabobank Group not only to the
customary risk of default but often also to country risks.The management
of country risks is based on a system of internal limits and internal
ratings for each country. Provisions for country risk are formed if there is
a risk of repayment problems arising in a particular country, for example
as a result of government measures or extreme circumstances.
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 on a daily basis and
managed using a sophisticated system of limits. At a consolidated level,
the exposure is expressed by the Value at Risk.This criterion, based on
historical data, indicates the maximum loss that Rabobank Group can
suffer subject to a certain degree of probability and in 'normal' market
conditions. In 2003,a 'components'Value at Risk system' was introduced.
It enables the determination of a specific unit's contribution to the total
Value at Risk. 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
Value adjustments to receivables
in basic points of 12-month average lending to the private sector
Wholesale
Rabobank Group
