Economic capital as an internal capital requirement
RAROC4 Economic capital (in billions of euros)
Domestic retail banking
Wholesale banking and international
4 The RAROC ratio was calculated
by linking up net profit to the average
economic capital for the year.
Over and above the external capital requirement, Rabobank Group uses an internal capital
requirement based on an economic capital framework.The key difference with the external
capital requirement is that an allowance is made for all material risks and for Rabobank's
creditworthiness. The latter is reflected in the economic capital framework that starts from a
higher confidence level (99.99%) than that used for the external capital requirement (99.90%).
A broad spectrum of risks is measured consistently to gain a more complete understanding
of risks and to allow a more rational weighing of risk and return. A series of models has been
developed to weigh the risks incurred by Rabobank Group. These risks are credit, transfer,
operational, business, interest rate and market risk. Market risk breaks down into trading book,
private equity, currency, property and residual value risk. A separate risk model is used for the
participation in Eureko.
Economic capital saw a 3% rise to EUR 22.3 (22.0) billion in 2010 due primarily to an increase
in economic capital for interest rate risk and credit risk. The interest rate risk grew due to an
increase in net interest positions and a levelling-off of the yield curve. The rise for credit risk
was attributable to an increase in receivables from counterparties. Total economic capital is
ample below the available qualifying capital of EUR 35.7 (33.0) billion. This sizeable buffer
underscores the solidity of Rabobank Group.
by group entity
at year-end 2010
Domestic retail banking 37%
by category at year-end 2010
Credit and transfer risk
Operational risk and
Interest rate and