Interest rate risk
Impaired loans
58 Rabobank Group Annual Report 2005
Organisation and risk management: risk management
Transfer limits are determined according to the net transfer risk, which is
defined as total loans granted less loans granted in local currency less
guarantees and other collateral obtained to cover transfer risk and a
reduced weighting of specific products. The limits are allocated to the
offices, which are themselves responsible for day-to-day monitoring
of the loans granted by them and reporting on this to Group Risk
Management.
At group level, the country risk outstanding, including additional capital
requirement and provision for country risks, is reported every quarter to
the Balance sheet and Risk Management Committee Rabobank Group
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.
Beside market risk in the trading environment, Rabobank is also exposed
to a structural interest rate risk on its balance sheet. Interest rate risk
means that the bank's financial result and economic value - given
its balance sheet structure - may decline as a result of unfavourable
developments in the money and the capital markets. Interest rate risk
results mainly from mismatches between maturities of loans and due to
customers. If interest rates increase, the rate for the liabilities, such as
savings, will be adjusted immediately, whereas the interest rate for the
assets on the balance sheet cannot be adjusted until later.
Many assets, such as mortgages, have longer fixed-interest terms and
the rate for these loans cannot be adjusted until the next interest rate
reset date.
The potential loss of financial results and value can be expressed in the
basis point sensitivity (BPV), the Equity at risk (EatR) and the Income at
risk (IatR). These are the key indicators used in the management and
control of the interest rate risk at a central level.
BPV is the absolute loss of market value of equity at a parallel rise of the
interest rate curve by 1 basis point. In the year under review, the BPV
never exceeded EUR 20 million.
EatR indicates the percentage by which the market value of equity will
decline at a parallel rise of the interest rate curve by 1 percentage point.
Equity at Risk is an indication of the sensitivity of the market value of
equity to interest rate fluctuations. Equity at Risk is determined by the
absolute interest rate risk position on the one hand and the magnitude
of the buffer (the market value of equity) on the other. In the year under
review, Equity at Risk never exceeded 7.5%.
IatR is the potential loss of interest income over the next 12 months,
within a 97.5% confidence interval, as a result of an interest rate increase
in the money and the capital markets. During 2005, the Income at Risk
did not exceed EUR 250 million.
Additionally, scenario analyses are performed and client behaviour and
interest rate movements are modelled. In savings modelling for example,
the 'replicating portfolio' is used. This is a method based on long-term
developments to imitate interest rates and client behaviour in relation
to the variable savings.
Finally, the economic capital and RAROC for interest rate risk are reported
at a group level. The economic capital to be held for interest rate risk is
based on market value losses resulting from unexpected developments
in interest rates. The RAROC interest rate risk is the mismatch result in
proportion to the economic capital required by the interest rate risk.
(in EUR millions)
2005
2004
Domestic retail banking
2,706
2,211
Wholesale and international
1,843
1,488
retail banking
Leasing
242
364
Other
23
16
Rabobank Group
4,814
4,079
Distribution of economic capital for credit risk at year-end 2005
Wholesale banking and
international retail banking
Domestic retail banking
Participating interests