1 1
Capital requirements
(in billions of eurosat year-end 2007)
Other risks
Operational and business risk
Interest rate and market risk
Credit and transfer risk
20
15
10
5
0
25 The table below shows a breakdown of economic capital at
year-end 2007 for the various business entities and the different
risk types, taking the diversification effects into account that
exist between the different risk types. The diversification effects
between the various business entities are stated at group level,
which explains the negative value for Other activities. Note that
s the table shows RAROC by business entity. Since no RAROC
s I m target has been defined for Asset management and investment,
u
'I Real estate and Other activities, no RAROC is stated for these
business entities.
LLJ
The outcomes of the economic capital framework are applied
in a number of areas within Rabobank Group. For example, the RAROC concept is used to
assess the profitability of the various business entities within Rabobank Group in relation to
their risk profiles, thus ensuring optimum efficiency in the deployment of the available
capital. The concept of economic capital is also used in the annual budget process for the
various business entities and in credit pricing, the latter enabling differentiation based on
client creditworthiness.
Economic capital
(in billions of euros at 31-Dec-07)
Domestic
retail
banking
Wholesale
banking and
international
retail banking
Asset
management
and
investment
Leasing
Real
estate
Other
activities
Total
Credit and transfer risk
6.2
3.6
0.3
0.8
0.6
-0.1
11.4
Interest rate and market risk
2.2
0.5
0.1
0.6
0.2
3.6
Operational and business risk
0.4
0.5
0.3
0.1
0.1
2.3
3.7
Other risks
0.1
0.1
0.1
1.5
1.8
Total
8.9
4.6
0.6
1.1
1.4
3.9
20.5
RAROC (in 2007) 15.1% 8.4% 21.0% 13.0%
The economic capital model for credit risk is consistent with the AIRB model, with the
parameters based, where possible, on internally established data. For operational risk,
an AMA model has been developed that can be used both for the external capital
requirement and for economic capital. Within market risk, several sub-risk types are
distinguished, i.e. trading book risk, residual value risk, currency risk in the banking book and
real estate risk. For most of these sub-risks, a Value at Risk model is used which is developed
for each of these specific risk types. Likewise, a Value at Risk model is used for interest rate
risk in the banking book. The models for transfer risk and business risk will be improved
further in 2008.
Economic capital
by risk type at year-end 2007
Credit and transfer risk 55%
Interest rate and market risk 18%
Operational and business risk 18%
Other risks 9%
Economic capital
by Group entity at year-end 2007
Domestic retail banking 44%
Wholesale banking and
international retail banking 23%
Real estate 7%
Leasing 5%
Asset management and
investment 3%
Other activities 18%
75
Report of the Executive Board
