Market risk
Currency risk
Risk in non-OESD countries
60 Rabobank Group Annual Report 2005
Organisation and risk management: risk management
Market risk relates to changes in the value of the trading portfolio as a
result of price movements in the market. Price changes include prices of
interest rate products (interest rate), equities, currencies and certain
commodities. The exposure is calculated and consolidated on a daily
basis and managed using a sophisticated system of limits and trading
controls. At a consolidated level, the exposure is expressed by the Value
at Risk. This measure, based on historic market developments, indicates
the maximum loss that Rabobank Group can suffer subject to a certain
confidence level and in 'normal' market conditions. The level of the Value
at Risk reflects market developments and the positions taken by the
bank itself.
In order to understand the maximum potential risk as well, the effect
of certain extreme events ('event risk') on the value of the portfolios is
calculated. To this end, both actual scenarios, e.g. the stock market crash
of 1987, and hypothetical scenarios, e.g. an assumed steep rise of all
interest rates, are analysed. Sensitivity analyses are also used.
In 2005, the Value at Risk fluctuated between EUR 14 (11) million and
EUR 25 (22) million, with an average of EUR 19 (17) million. For 2005, this
means that, at a confidence level of 97.5%, losses on any one day would
not have exceeded EUR 25 million.
As the table shows, Value at Risk for the trading portfolios can be sub
divided in a number of components. The value of the trading portfolios
is sensitive mainly to changes in interest rates, equity prices and credit
spreads. Since opposite positions of different books offset each other to
a certain degree, this results in a diversification benefit which reduces
the total risk. At 31 December 2005, the consolidated Value at Risk was
EUR 22.1 million. This is a relatively limited position, as is also evident
from the fact that only a small part of total economic capital is held for
market risks from the trading activities.
Currency risk positions are taken in both trading and non-trading books.
As is the case for other market risks, the currency risk in the trading
books is controlled using Value at Risk limits. In the non-trading books,
there is only 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 rate movements. On the one hand, the
hedging strategy hedges reserves invested in foreign currencies abroad,
while on the other it immunises the BIS ratio against the effects of cur
rency exchange rate movements. The latter is done via the components
of the Tier I and Tier II capital that do not form part of equity, in particular
Trust Preferred Securities. In 2003 and 2004, these were issued in selected
foreign currencies to ensure 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 (in 2004), which form part of the Tier I capital,
in US dollars (USD 3,250 million), Australian dollars (AUD 500 million)
and pounds sterling (GBP 350 million).
in EUR millions
In Latin
In Asia/
of balance
Regions
In Europe
In Africa
America
Pacific
Total
sheet total
Economic country risk (excl. derivatives) 11
1,199
282
5,112
4,385
10,979
2.2
Risk-reducing components:
- sales in local currencies
3
2
1,851
1,106
2,962
- country risk borne by third parties
382
184
1,392
451
2,410
- less: reduced weighting of lower-risk
transactions
340
38
599
480
1,456
Net country risk before provisions
474
59
1,270
2,348
4,151
0.8
of total
provisions
Total provisions for economic country risk
259
1
119
58
436
17.9
11 total assets, plus issued guarantees, suretyships and unused lines of credit
