Funding and liquidity risk
Risk in non-OECD countries (in EUR millions)
in Latin
in Asia-
in of
Regions
in Europe
in Africa
America
Pacific
Total
balance total
Economic country risk (excluding derivatives)1
1,319
182
5,615
6,008
13,124
2.4%
Risk-reducing components
- loans in local currency
5
1
2,062
1,909
3,977
- third party coverage of country risk
352
97
1,195
473
2,117
- deduction for transactions with lower risk
351
22
507
644
1,524
Net country risk before provisions
611
62
1,851
2,982
5,506
1.0%
in of total
provisions
Total provisions for economic country risk
107
1
121
37
266
11.4%
1) total assets, plus guarantees issued and unused committed credit facilities
under review, the BPV never exceeded EUR 20 million.
- EatR indicates the percentage by which the market value
of equity will decline if interest rates increase parallel with
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 size of
the buffer (the market value of equity) on the other hand.
In the year under review, Equity at Risk never exceeded 7%.
- IatR is the maximum loss of interest income over the next
12 months, within a defined confidence interval, as a
result of an interest rate increase in the money and the
capital markets. During 2006, the Income at Risk did not
exceed EUR 200 million.
Additionally, scenario analyses are performed on a monthly
basis, which include client behaviour modelling. In savings
modelling for example, the 'replicating portfolio' is used.
This is a method based on long-term developments to
mirror interest rate movements and client behaviour in rela
tion to the variable savings, using a portfolio of both
money market and capital market products. Also the
economic capital and the RAROC for interest rate risk are
reported at Group level. The economic capital to be held for
interest rate risk is based on market value losses resulting
from unexpected and extreme interest rate fluctuations.
Liquidity risk is the risk that the bank is unable to meet all
of its (re)payment obligations, as well as the risk that it is
unable to fund increases in assets at reasonable prices or
at all. This could happen if clients or other professional
counterparties suddenly withdraw more funding than
expected, which cannot be met by the bank's cash
resources or by selling or pledging assets or by borrowing
funds from third parties.
Several methods have been developed to measure and
control this risk. Methods used within Rabobank include
the CA/CL method (Core Asset Core Liabilities). This analysis
is based on the cash flow schedule of all assets and liabilities.
Using various time periods, a quantification is made of the
assets (and unused facilities) and liabilities that will probably
still be or come on the balance sheet after assumed and
closely defined stress scenarios have occurred. These
remaining assets and liabilities are referred to as the core
assets and core liabilities respectively. The ratio between
core assets and core liabilities is the liquidity ratio. Given the
highly conservative weightings used, a ratio of below 1.2 is
considered adequate. In the year under review, this was the
case for the scenarios used.
Risk management 75
