Internal and external capital
requirements
Basel II regulation
Pillar 1: external capital requirement
- Risk transparency: for a good insight into the bank's
positions, it is vital to identify all risks. Risks must always
be considered as accurately as possible in order to be
able to make sound commercial decisions.
- Management responsibility: Rabobank Group's business
entities are individually responsible for their results as well
as the risks associated with their operations. A balance
must be found between risk and return, while of course
duly observing the relevant risk limits.
- Independent risk control: this is the structured process
of identifying, measuring, monitoring and reporting risks.
In order to ensure integrity, the risk control departments
operate independently of the commercial activities.
Risk policy within Rabobank Group has been embedded
according to these principles. An extensive system of limits
and controls has been put in place within Rabobank Group
to manage all the different risks.
The new accord on capital adequacy ('Basel II'), which is to
come into force for Rabobank Group on 1 January 2008,
represents an integrated framework for the supervision of
banks and is founded on three pillars. In pillar 1, minimum
capital requirements are set for all banks for credit risk,
market risk and operational risk. These requirements apply
to all banks. Within each risk category, banks can choose
from a number of approaches, which vary from simple to
advanced. Moreover, regulatory bodies can set additional
capital requirements and quality standards for other risk
categories. In pillar 2, the supervisory authority stimulates
banks to manage their capital adequacy themselves. In this
context, developing an economic capital framework is an
important tool for Rabobank Group to calculate the
required financial buffers. It is important in this context that
all relevant risks, i.e. not only pillar 1 risks, are measured and
managed adequately. Under the rules in pillar 2, Rabobank
Group also looks at the interest rate risk in the banking
book and at the business risk. The supervisory authority
assesses this internal capital adequacy process and discus
ses its outcomes. Finally, pillar 3 addresses market discipline,
requiring banks to publish sufficient risk information with a
view to stimulating market forces.
The three pillars of Basel II
Pillar 1
Pillar 2
Pillar 3
Minimum
capital
requirements
Supervisors
Market
discipline
Minimum capital
requirements for
credit risk, market risk
and operational risk
Quality assessment
of risk management,
risk models and their
application within the
organisation
Risk profile and
risk management
techniques published
The Basel II accord was used in 2005 by the European
Commission as a basis for preparing the Capital
Requirement Directive (CRD). The CRD was adopted by the
European Parliament in mid-2006. The Dutch government
incorporated the CRD in the new Financial Supervision Act,
which was implemented on 1 January 2007. The new
Basel II-based regulation will be implemented on 1 January
2008 for banks opting for the more advanced methods,
among which is Rabobank Group.
In the first pillar, banks are allowed, subject to specific
conditions, to use their internal models for determining the
amount of capital to be held. Within the Basel II framework,
Rabobank Group has opted for the most advanced metho
dologies. For credit risk, Rabobank has chosen for the
'Advanced Internal Ratings Based' (AIRB) approach. A large
number of models have been developed for allocating, on
the basis of the probability of default (PD), a Rabobank Risk
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