Liquidity risk and funding
In the management, control and limitation of interest rate risk, Rabobank Group uses three
indicators for potential loss. These are: Basis Point Value (BPV), Equity at Risk (EatR) and
Income at Risk (IatR). BPV is the absolute loss of market value of equity at a parallel, 1-basis-
point rise of the entire yield curve. In the year under review, the BPV never exceeded EUR 25
million. The EatR indicates the percentage by which the market value of equity will decline if
the yield curve shows a parallel increase by 1 percentage point. The EatR is an indication of
the sensitivity to interest rate fluctuations of the market value of equity. The EatR is
determined by the absolute interest rate exposure on the one hand and the size of the
buffer, i.e. the market value of equity, on the other hand. In the year under review, EatR never
exceeded 8%. The 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. In the year under review, IatR never exceeded EUR 150 million. In 2007,
the maximum values of these indicators remained well under the limits set.
Each month, Rabobank Group performs complementary scenario analyses to assess the
impact of changes in customer behaviour and the economic environment. In savings
modelling, the 'replicating portfolio' is used. This is a method based on long-term
developments to mirror interest rate movements and client behaviour in relation to the
variable savings, using a portfolio of both money market and capital market instruments.
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.
Liquidity risk was a prominent factor in the financial markets in 2007. Lack of trust, inspired by
doubts about the quality of certain investments that were related to the subprime mortgages in
the United States, caused the money market to become almost stagnant in a number of cases.
Central bank intervention kept the system going but could not prevent strong increases in
interest rates, particularly in December.
Within Rabobank Group, liquidity risk has long been recognised as an important risk type.
The policy within Rabobank Group therefore is that the maturity of the funding is aligned with
that of the loans. In addition, this risk is managed in three different ways, the first of which is to
limit outgoing cash flows. To this end, the bank measures and reports on a daily basis which
incoming and outgoing cash flows are to be expected over the next thirty days. In addition,
limits have been set for such outgoing cash flows for each currency and location. In order to be
prepared for possible crises, detailed contingency plans are in place, formulating the procedures
to be followed.
Secondly, a large buffer of liquid securities is being held. If necessary, these assets can be used
for borrowings from central banks, in repo transactions or for direct selling in the market as a
way of generating liquidity. Over the past years, part of Rabobank Group's mortgages portfolio
has been securitised (internally), making it eligible for refinancing with the central bank and
thus serving as an extra liquidity buffer. Since it concerns internal securitisations for liquidity
purposes only, they are not reflected in the economic balance sheet.
Thirdly, liquidity risk is limited by Rabobank Group's prudent funding policy, which is to meet
the funding requirements of the Group entities at an acceptable cost. In this context,
diversification of funding sources and currencies, flexibility of the funding instruments used and
active investor relations play an important role. This prevents Rabobank Group's
overdependence from a single source of funding. For years, Rabobank Group has enjoyed the
highest rating by prominent rating agencies, including Moody's and Standard Poor's, and
these were reaffirmed late in 2007 and early in 2008, respectively. Thanks to its top rating,
Rabobank Group has access to the money and capital market even in difficult circumstances.
Because of the flight to quality, the liquidity available to Rabobank Group was even greater than
under normal circumstances. In addition, the Triple A rating enables Rabobank Group to attract
funds at relatively low rates. In 2007, more than EUR 24 billion of long-term funding was raised
in the international financial markets.
