Interest rate risk
Funding and liquidity risk
57 Rabobank Group Annual Report 2004
Organisation and risk management
At Rabobank Group level, the country risk outstanding, including addi
tional capital requirement and provision for country risks, is reported
every quarter to the BRMC and the Country Limit Committee. The
calculation of the additional capital requirement and the provision for
country risk is made in accordance with Dutch Central Bank guidelines
and concerns high-risk countries.
The net transfer risk before provisions for non-OECD countries is usually
less than 1% of total assets.
One of the most important risk components for Rabobank Group is inte
rest rate risk. Interest rate risk is the risk, outside the trading environment,
of deviations in interest income and/or the market value of capital as a
result of changes in market interest rates. Interest rate risk results mainly
from mismatches between the periods for which interest rates are fixed
for loans and funds entrusted. If interest rates increase, the rate for the
liabilities, such as savings, can be adjusted immediately. This does not
apply to the majority of the assets, such as mortgages, which have
longer interest rate fixation periods.
Rabobank Group's interest rate risk exposure is managed and controlled
centrally. Different methods are used for measuring and managing inte
rest rate risk, including gap analysis, scenario analysis and market value
limits. For simulation and analysis purposes, customer behaviour and
interest rate movements are modelled. Short-term interest rate risk is
monitored using the concept Income at Risk. This is the maximum
amount of interest income that is put at risk on an annual basis, based
on a confidence level of 97.5%. In the year under review, the maximum
risk was approximately EUR 200 million. Long-term interest rate risk is
measured and managed using Equity at Risk. Equity at Risk is the sensiti
vity of the Group equity's market value to interest rate fluctuations.
In the year under review, the maximum Equity at Risk was 7.5%.
Both Income at Risk and Equity at Risk are calculated and reported to
the BRMC monthly. Limits for both risk indicators are set annually.
Liquidity risk is the risk that increases in assets can not or not at reaso
nable prices be financed, or that not all (re)payment commitments can
be met. This could happen if clients or other professional counterparties
suddenly withdraw more funding than expected, which cannot be met
by the bank's cash resources or by selling assets or borrowing funds
from third parties.
Methods to measure liquidity risk include the CA/CL method (Core
Asset Core Liabilities). This analysis is based on the cash flow sche
dule of assets and liabilities. A quantification is made of the assets (and
unused facilities) and liabilities that will probably still be or come on
the balance sheet after a defined stress scenario has taken place. These
remaining assets and liabilities are referred to as the core assets (CA)
and core liabilities (CL) respectively. The CA/CL ratio is the liquidity ratio.
Given the highly conservative weightings used, a ratio of below 1.2 is
considered adequate. In the year under review, this was the case for the
scenarios used.
The liquidity position of the Group as a whole, measured according
to the guidelines of the supervisory authority, was likewise more than
adequate, with the available liquidity exceeding the requirement by an
average of 8%.
Rabobank Group's comfortable liquidity position is reflected in the
balance sheet by the substantial asset item Interest-bearing securities of
EUR 92 billion. In principle, these funds are available on demand should
a liquidity crisis occur.
Rabobank Group's funding policy is to meet the funding requirements
of the Group entities at an acceptable cost. The policy is characterised
by diversification of funding sources, flexibility of funding instruments
and active investor relations. Rabobank Group has been assigned the
highest possible credit rating by leading rating agencies. This top rating
enables Rabobank Group to raise funds at a relatively low cost.
In 2004, nearly EUR 20 billion in long-term funding was raised in the
international financial markets.
Breakdown of long-term funding in 2004 by currency
Euro
47%
US dollar
28%
Canadian dollar
7%
Pounds sterling
6%
Australian dollar
4%
Swiss franc
3%
Other
5%
A separate Investor Relations unit provides full information to Rabobank
investors about the bank's risk profile and financial and strategic deve
lopments.
www.rabobank.com
