Indicators
Liquidity risk and funding
The interest rate risk position is adjusted by means of hedge transactions.The extent and
timing of any hedging is dependent on the view on future interest rates and the expected
movements in the statement of the financial position, among other things.
Rabobank Group uses three indicators when managing, controlling and limiting interest rate
risk: Basis Point Value (BPV), Equity at Risk (EatR) and Income at Risk (latR). These indicators
measure the loss that might result from changes in interest rates.The BPV is the absolute loss
of market value of equity in the event of a parallel increase of one basis point across the yield
curve. The BPV did not exceed EUR 28 million during 2010. The EatR indicates the percentage
decrease in the market value of equity in the event that there is a parallel increase in the yield
curve of one percentage point. The EatR did not exceed 5.6% during the year under review.
The latR represents, at a defined confidence level, the maximum loss of interest income over
the next twelve months in the event of a sharp rise or fall in money market rates and capital
market rates. The latR did not exceed EUR 118 million during 2010. The maximum values of
these indicators were therefore well within their set limits during the year under review. Due to
the low interest rate environment, the lower limit for the EatR has been temporarily reduced.
In addition, economic capital is calculated and maintained for interest rate risk.
Rabobank Group performs complementary scenario analyses each month to assess, among
other things, its sensitivity to sharp increases and decreases in interest rates.
Liquidity risk is the risk that a bank will not be able to fulfil all its payment and repayment
obligations on time, as well as the risk that it will at some time be unable to fund increases
in assets at a reasonable price, if at all. This situation might arise if clients or professional
counterparties suddenly withdraw more funds than expected while, at the same time,
expiring funding arrangements are not refinanced, the bank does not have sufficient cash
resources, and no solution can be found in the form of selling or lending assets to or borrowing
money from third parties. Increasing our cash resources and retaining the confidence of both
professional market parties and retail clients have proved to be crucial in this respect.
Management liquidity risk
Rabobank Group has always recognised that liquidity risk is an important risk type. In keeping
with the Basel principles, the policy is that long-term lending is financed by means of stable
funding, being funds entrusted by customers and long-term funding from the professional
markets. Liquidity risk management is based on three pillars. The first pillar sets strict limits
on the maximum outgoing cash flows of the wholesale banking division. This ensures that
excessive dependence on the professional market is avoided. To this end, among other things
the incoming and outgoing cash flows expected over the next 12 months are calculated and
reported on a daily basis. In addition, limits have been set on such outgoing cash flows for each
currency and location. Detailed contingency plans have been drawn up in order to ensure the
bank is prepared for potential crises.
Under the second pillar, a large buffer of liquid assets is held. If necessary, these assets can
be used to generate liquidity immediately by being sold directly on the market, by being
used in repo transactions or by means of lending securities to central banks. Pending further
regulatory tightening of the liquidity requirements, Rabobank Group built a liquidity portfolio
with high-quality government paper. The buffer of liquid assets calculated on the basis of
guidelines issued by the regulator stood at over EUR 138 billion at year-end 2010.
The third pillar concerns limiting liquidity risk by pursuing a prudent funding policy that is
designed to ensure the financing requirements of group entities are met at an acceptable
cost. The diversification of funding sources, funding instruments and currencies plays an
important role in this context. As part of this, bonds were issued in 15 different currencies in
2010.This prevents Rabobank Group from becoming overly dependent on a single source of
funding. The active investor relations function also has an important role to play in this regard.
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Annual Report 2010 Rabobank Group