Liquidity risk and funding
increase, the rate for certain liabilities, such as deposits, will be adjusted immediately, whereas the
interest rate for the greater part of the assets cannot be adjusted until later. Many assets, such as
mortgages, have longer fixed-interest periods and the interest rates for these loans cannot be adjusted
until the next interest rate reset date. In addition, client behaviour affects the interest rate exposure. For
example, clients may repay their loans prematurely or withdraw their savings earlier than expected. Any
resulting interest rate exposure can be addressed by means of hedge transactions. The extent and
timing of hedging depend, inter alia, on the Rabobank Group's interest rate vision and the expected
balance sheet movements.
In the management, control and limitation of interest rate risk, Rabobank Group uses three indicators
for potential loss resulting from changes in interest rates. These are: Basis Point Value (BPV), Equity at Risk
(EatR) and Income at Risk (latR). 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 decrease if the yield curve shows a
parallel increase by 1 percentage point. In the year under review, EatR never exceeded 8%. The EatR is
an indication of the sensitivity to interest rate fluctuations of the market value of equity. The latR 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, latR
never exceeded EUR 150 million. In 2008, the maximum values of these indicators remained well under
the limits set. Further, economic capital is calculated and maintained for interest rate risk purposes.
Each month, Rabobank Group performs complementary scenario analyses to assess the impact of
changes in customer behaviour and the economic environment.
Liquidity risk based on three pillars
Liquidity risk is the risk that the Rabobank Group is unable to meet all of its payment or repayment
obligations, as well as the risk that it is unable to fund increases in assets either at reasonable prices or
at all. This could happen if clients or other professional counterparties suddenly withdraw more funds
than expected, which cannot be met by the Rabobank Group's cash resources or by selling or pledging
assets or by borrowing funds from third parties. Since the start of the financial crisis in the summer of
2007, liquidity risk has been a prominent factor in the financial markets and one of the biggest risks
for banks. Owing to the lack of confidence, markets were unable to operate properly. Banks collapsed
and central banks and governments had to intervene, sometimes through nationalisation, to prevent
further problems. Retaining the confidence of both professional market parties and private clients
proved to be crucial.
For Rabobank Group liquidity risk has always been an important risk type. Accordingly, our policy is
to match the maturity of the funding with that of the loans. Long-term lending is funded by means of
stable retail funding, amounts due to customers, and long-term professional market funding.The three
pillars Rabobank Group relies on to manage this risk proved their usefulness in 2008. Not at any time did
the turbulence in the financial markets lead to liquidity problems for Rabobank Group. The first pillar
sets strict limits to the maximum outgoing cash flows of our wholesale banking business. This prevents
excessive dependence on the professional market. 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 have been drawn up.
Via the second pillar, a large buffer of readily marketable securities is being held. If necessary, these
assets can be used for borrowings from central banks, in repo transactions or direct sellings in the market,
as a way of generating liquidity. In 2008, various central banks eased the acceptance criteria of collateral.
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 this concerns internal securitisations for liquidity purposes only, they are not reflected in the
economic balance sheet, but they do add to the available liquidity buffer.
Via the third pillar, 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.
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Report of the Executive Board
