Currency risk
Operational risk
Insurance risk
59 Rabobank Group Annual Report 2004
Organisation and risk management
Currency risk positions are taken in both trading and non-trading books.
As other market risks, the currency risk in the trading books is controlled
using Value at Risk limits. Currency risk in the non-trading books relates
exclusively to the translation risk on capital invested in foreign activities
and issues of Trust Preferred Securities not denominated in euros.
To monitor and control the translation risk, Rabobank Group uses an
interrelated two-track approach to protect the bank's capital position
against currency exchange movements. On the one hand, the hedging
strategy hedges reserves invested abroad, while on the other it immu
nises the Tier I ratio against the effects of currency exchange rate
movements. The latter is done via the components of the total of Tier
I and Tier II capital that do not form part of reserves, in particular Trust
Preferred Securities. In 2003 and 2004, these were issued in foreign cur
rencies so that the currency composition of the total of Tier I and Tier II
capital corresponded with that of the risk-weighted assets. This 'natural
hedge' was realised by issuing the Trust Preferred Securities II (in 2003)
and III to IV (in 2004), which form part of the Tier I capital, in American
dollars (USD 3,250 million), Australian dollars (AUD 500 million) and
pounds sterling (GBP 350 million).
As a risk type, operational risk has acquired its own distinct position
in the banking world. It is defined as 'the risk of losses resulting from
failure of internal processes, people or systems or from external events'.
Events of recent decades in modern international banking have shown
on several occasions that ineffective control of operational risks can
lead to substantial losses. Under the Basel II accord, banks must hold
capital for this risk. Rabobank has always recognised operational risk as a
risk to be managed properly. Examples of operational risk incidents are
highly diverse: fraud, claims relating to inadequate products, losses due
to poor occupational health and safety conditions, errors in transaction
processing, non-compliance with the law and system failures.
The Group-wide policy for operational risk management is defined and
detailed by Group Risk Management. Ultimately, line management is
responsible for the actual control and management of operational risks
within the scope of its own activities.
Rabobank Group's aim is to achieve a balanced control of operational
risks, and in this way ensure that the most stringent demands of the
relevant regulations are met. For its risk identification, Rabobank uses
two approaches. First, the main risks for each business unit are analysed
on an annual basis using the 'top-down risk identification method'.
In addition, Control Risk Self Assessments are performed for specific
processes, departments or risks. This involves workshops at which the
specific risks are identified and analysed with those directly involved.
Operational losses exceeding EUR 10,000 and incidents are registered and
reported every quarter by all Rabobank Group's entities. The validation
and analysis of any losses are performed by those closest to the source
wherever possible.
Furthermore, Group entities with responsibility for results report quarterly
on the status and quality of risk management. In addition, the key risks
and controls are monitored, using wherever possible early warning
signals in the form of key indicators for risks and controls.
Rabobank Group uses a proprietary model for calculating its capital
requirement. This model is currently being tested to determine whether
it complies with the requirements of the Advanced Measurement
Approach referred to in the BIS regulations.
At Interpolis, risk management is concerned mainly with insurance risks.
Using appropriate techniques, the risks associated with existing and
new products and the development of risks are evaluated. This enables
the insurer to ascertain whether future commitments can be met with
sufficient certainty and whether calamities can be absorbed financially.
Interpolis, too, applies the principle of economic capital.
