Allocation of economic capital
RAROC: 14%
Credit risk
Credit policy
The concept of economic capital enables the bank to
quantify, analyse and subsequently manage the various
risks it is exposed to. Over the past years, Rabobank Group
has developed various models for the different types of risk.
Credit risk remains the largest risk category, with more than
half of economic capital. Twenty per cent of the economic
capital is necessary for operational risk and business risk.
Interest rate risk and market risk together account for 13%
of the economic capital. The other risks, which include
country risk and the risk arising from minority interests,
account for the remaining 11% of economic capital.
The share of credit risk in the total risk increased, mainly as
a result of further growth of the loan portfolio but also due
to model improvements. The models were refined further
in the year under review. The models will be extended and
improved further in 2007. The economic capital model for
operational risk was improved as well. Together with
Rabobank Group's organic growth, this resulted in a higher
economic capital.
Rabobank Group determines the economic capital for all
business units, including the activities performed at Group
level. Viewed by business unit, domestic retail banking
accounts for 46% of the economic capital required.
Wholesale banking and international retail banking
account for 29% of total economic capital, with 9% for
the participations. Part of economic capital is not allocated
to Group units.
For its financial control and assessment, Rabobank Group
used the RAROC (Risk Adjusted Return on Capital) concept.
This concept provides insight in the profitability of the
bank's various units and products, taking the risk exposure
into account. The RAROC is calculated by relating the profit
realised on a particular activity to the capital required for
that activity. RAROC (after tax) realised by Rabobank Group
in 2006 was 14%. In 2005, RAROC (after tax) was 14%.
The favourable risk profile of Rabobank Group's loan port
folio is partly due to the bank's prudent policy for accepting
new clients. Approval of larger credit applications is decided
on by committees. A structure consisting of various
committee levels has been established, with the amount
of the requested financing determining the committee
level. The Executive Board itself decides on the largest
financing applications.
A new structure for policy credit committees (Policy CC)
was created in 2006, which comprises the Policy Credit
Committee Rabobank Group and the Policy Credit
Committees Wholesale and Retail. Policy CC Rabobank
Group is responsible for credit risk policy and credit
management of all Group units involved in credit. The
Group policy as established by the Policy CC Rabobank
Group constitutes the framework for all Group entities.
Within this framework entities may define and operate
their own credit policy for individual counterparties.
The Policy CC Retail operates in a similar way for domestic
retail banking and the Policy CC Wholesale for wholesale
banking and international retail banking. In the Policy CC
Breakdown of economic capital,
at year-end 2006 by business units
KJ
Domestic retail banking 46%
Wholesale banking
and international
retail banking 29%
Unallocated 16%
Participations 9%
Breakdown of economic capital,
at year-end 2006 by type of risk
0
Credit risk 56%
Operational and
business risk 20%
Interest and market risk 13%
Other risks 11%
Risk management 71
