risks at portfolio level. Credit Risk Management is responsible for the policy for accepting credit
risk at individual customer level. Moreover, within each group entity, risk management is the
responsibility of independent risk management departments.
Risk management principles
Within Rabobank Group, an extensive system of limits and controls has been put in place to
manage risk. The primary objective of risk management is to protect Rabobank Group's
reputation and financial soundness.The following principles embed the risk policy throughout
Rabobank Group.
- Protecting Rabobank's financial soundness: risks need to be controlled in order to limit the
impact of potential adverse events on equity and financial results. Risk appetite must be
proportional to available capital. An economic capital framework has been developed to
quantify this.
- Protecting Rabobank's reputation: reputation is of major importance in banking, and it
needs to be managed prudently.
- Risk transparency: identifying all risks is essential in order to obtain proper insight into
Rabobank Group's positions. Risks must be weighed as accurately as possible to enable
sound commercial decisions to be made.
- Management accountability: each division of Rabobank Group is individually accountable for
its results as well as for the risks associated with its operations. A balance must be struck
between risk and return, and this must of course comply with the relevant risk limits.
- Independent risk control: this is the structured process of identifying, measuring, monitoring
and reporting risk. In order to ensure integrity, the risk management departments operate
independently of the commercial activities.
Risk management cycle
Rabobank identifies and manages the risks it incurs on an ongoing basis. This has led to a
comprehensive risk management model, which starts from a risk management cycle consisting
of several steps: determining the risk appetite, stress-testing different scenarios, preparing full-
scope risk assessments for each group entity and for the Group as a whole, and measuring and
monitoring risks. As part of this, Rabobank follows a risk strategy that is designed to ensure its
continuity as a going concern and is aimed at protecting profits and profit growth, maintaining
sound balance sheet ratios and protecting its identity and reputation. By building on this
strong foundation for risk management, Rabobank is in a position to make the right strategic
choices and organise its processes to further improve its client services.
Stress tests form an essential part of the risk management framework. Stress tests are used to
measure the impact of extreme, yet plausible events on Rabobank. One key area of focus in
2011 was the performance of stress tests at the request of the European Banking Authority
(EBA), which resulted in two publications demonstrating the bank's low risk profile. In the first
EBA stress test, our core Tier 1 ratio after two years of stress landed at 10.8%, more than twice
the minimum requirement of 5% that was needed to pass the stress test. The second stress
test, aimed at sovereign exposures, resulted in a core Tier 1 ratio of 12.3%, well above the
minimum requirement of 9%.
A number of internal stress scenarios were tested in 2011 as well. All stress tests have in
common that the principles underlying the scenarios are first transposed into macro-economic
effects. The macro-economic figures are then used to determine the impact on the bank.
Each scenario is reviewed separately for its impact on the bank's statement of income, equity
and solvency. The outcomes of the scenarios were reported to, and discussed with, the Executive
Board, the Audit, Compliance Risk Committee and the Supervisory Board. In addition to the
group wide stress-testing activities, stress scenarios were also developed in 2011 for the
different portfolios within the bank.
44
Annual Report 2011 Rabobank Group
