Operational risk
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 risks of 'abnormal' market
conditions 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. Limits have been set for this event risk, which,
if exceeded, warrant management action.
The graph shows the development of the Value at Risk at
the end of each month of the year under review. In 2006,
the Value at Risk fluctuated between EUR 18.6 million and
EUR 30.2 million, with an average of EUR 23.8 million. For
2006, this means that, at a confidence level of 97.5% and
under normal circumstances, potential losses on any one
day would not have exceeded EUR 30.2 million.
Breakdown Value at Risk (in EUR millions)
At 31 December
Credit spread 17.4
Interest rate 4.0
Equities 3.1
Foreign currency 0.2
Diversification (6.1)
Total 18.6
Operational risk has become a recognised concept in the
banking industry. Obviously, it is no news that these non-
financial risks must be controlled as well. The Basel II capital
requirement has resulted in additional efforts and increased
focus on operational risk. Rabobank Group has opted for
the highest ambition level (Advanced Measurement
Approach - AMA), under which a model developed by
Value at Risk, at month-end
in EUR millions
As the table shows, Value at Risk for the trading portfolios
can be subdivided in a number of components. The value
of the trading portfolios is sensitive mainly to changes in
credit spreads, interest rates and equity prices. Since
opposite positions of different books offset each other to a
certain degree, this results in a diversification benefit that
reduces the total risk. At 31 December 2006, the consolidated
Value at Risk was EUR 18.6 (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.
Rabobank itself is used for the calculation of the amount
in capital to be held. As a result, the capital to be held for
operational risks is aligned with Rabobank Group's situation.
Also, a great deal of attention is paid to losses from
operational risk at other institutions, so that the bank can
learn from them.
In organisational terms, Rabobank Group has decided to
place the responsibility for operational risk management
as close to the source as possible. Each entity within
Rabobank Group is responsible for the adequate organisation
Risk management 77
