Interest rate risk
Bad debt expenses by business unit (in EUR millions)
2006
2005
change
Domestic retail banking
139
176
-21%
Wholesale banking and international retail banking
234
265
-12%
Leasing
77
92
-16%
Other
-
(10)
Rabobank Group
450
523
-14%
Bad debt expenses by business unit (in basis points of average private sector lending)
Domestic retail banking
7
9
Wholesale banking and international retail banking
39
52
Leasing
53
72
Rabobank Group 15 20
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 less 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 for reporting on this to
Group Risk Management.
At Rabobank 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
(BRMC-RG) 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.
At 31 December 2006, the net transfer risk before provisions
for non-OECD countries was 1.0% (0.8%) of total assets.
Beside market risk in the trading environment, Rabobank
Group is exposed to a structural interest rate risk in its
balance sheet. Interest rate risk means that the bank's
financial result and/or economic value - given its balance
sheet structure - may decline as a result of unfavourable
developments in the money and capital markets. Interest
rate risk results mainly from mismatches between maturities
of assets and liabilities. If interest rates increase, the rate for
the liabilities, such as deposits, will be adjusted immediately,
whereas the interest rate for the assets on the balance
sheet can only 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. In addition, client behaviour affects the
interest rate risk position. For example, clients may repay
their loans prematurely and may withdraw their savings
earlier than expected.
Basis point sensitivity (BPV), Equity at risk (EatR) and Income
at risk (IatR) are important indicators used in the management
and control of the interest rate risk at Rabobank Group
level. They indicate the potential loss of financial results and
value and are explained below:
- BPV is the absolute loss of market value of equity when
interest rates rise parallel with 1 basis point. In the year
74 Rabobank Group Annual Report 2006