Currency risk
of operational risk management. Group Risk Management
coordinates and supports local management, for example
with frameworks, best practice methods and other tools.
The quality of the risk management function in the line
organisation is monitored closely by the Group function,
using a system of incentives that is linked to the internal
allocation of the capital requirements.
Currency risk is the risk of changes in income or in equity as
a result of currency exchange movements. In currency risk
management, a distinction is made between positions in
trading and non-trading books. In the trading books,
currency risk is part of market risk and is controlled using
Value at Risk limits, just as other market risks. In the non
trading books, there is only the translation risk on capital
invested in foreign activities and issues of Trust Preferred
Securities not denominated in euros.
To monitor and control the translation risk, Rabobank
Group uses an interrelated two-track approach to protect
the bank's capital position against currency exchange rate
movements. On the one hand, the hedging strategy hedges
reserves invested in foreign currencies abroad, while on the
other hand it immunises the BIS ratio against the effects of
currency exchange rate movements. The latter is done via
the components of the Tier I and Tier II capital that do not
form part of the reserves, in particular Trust Preferred
Securities. In 2003 and 2004, these were issued in selected
foreign currencies and in such a way as to ensure that the
currency composition of the total of Tier I and Tier II capital
corresponded with that of the risk-weighted assets.
This 'natural hedge' was realised by issuing the Trust
Preferred Securities, which form part of the Tier I capital, in
US dollars (USD 3,250 million), Australian dollars (AUD 500
million) and pounds sterling (GBP 350 million).
78 Rabobank Group Annual Report 2006
