Funding and liquidity risk
Rabobank Group uses three indicators for managing, controlling and limiting short and long-
term interest rate risk: Basis Point Value (BPV), Equity at Risk (EatR) and Income at Risk (latR).
These indicators measure potential losses due to interest rate changes on a monthly basis.
latR is a key interest rate risk indicator for the bank's earnings, particularly short-term earnings.
BPV and EatR are key interest rate risk indicators for economic value and have more of a long-
term perspective.
BPV is a measure of the absolute loss in market value of Rabobank Group's equity in the event
of a 1 basis point increase across all yield curves. EatR measures the percentage decrease in
the market value of equity in the event of an increase in yield curves of 1 percentage point.
latR is a measure that Rabobank uses to estimate the impact of the greatest negative variance
in projected interest income over the next 12 months in a scenario in which yield curves
across the board show a gradual increase of 2 percentage points during that period and a
scenario in which market interest yield curves show a gradual decrease of 2 percentage points
across the board. A lower limit of 0% is used in the scenario in which interest rates fall. Owing
to the fact that money market rates continue to fall, in spite of the fact that interest rates are
already low, the scenario in which market interest rates gradual decline across the board was
adjusted on several occasions in 2012 with respect to euro interest rates. As a consequence
of this, at year-end 2012 a fall of five basis points was used as a starting point. By way of
comparison, the starting point used at year-end 2011 was 75 basis points. The latR scenarios
do not take active management intervention into consideration, but they do allow for
changes in the pricing policy of savings products as well as changes in the repayment and
savings behaviours of customers due to interest rate developments. In order to identify the
potential impact on earnings caused by interest rate changes, two additional scenarios are
applied besides the two standard scenarios. These two additional scenarios include a yield
curve steepening and flattening scenario.
BPV, EatR and latR were well within their set limits at group level in 2012. Rabobank Group's
BPV never exceeded EUR 12 million in 2012, with EatR ranging between 1.1% and 2.3% in the
year under review. latR reached EUR 110 million at its highest point in 2012, which was in the
scenario in which all interest rates (yield curve) show a gradual decrease. At year-end 2012,
the potential impact of other types of changes in the yield curve, such as steepening or
flattening, did not result in this figure being exceeded. The risk figures mentioned do not take
into account any changes in exposures if the projected scenarios were to occur.
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, the bank does not have
sufficient cash resources, and no solution can be found in the form of selling or leasing assets
or borrowing money from third parties. Maintaining sufficient cash resources and retaining
the confidence of both professional market parties and retail clients have proved to be crucial
in this respect over the past few years as access to the public money and capital markets was
guaranteed as a result.
Responsibility for the day-to-day management of liquidity exposures, the raising of professional
funding on the money market and the capital market, and the management of the structural
position lies with Rabobank Group's Treasury department, which reports to the CFO. In keeping
with the Basel principles, the policy is aimed at financing long-term loans by means of stable
funding, specifically amounts due to customers and long-term funding from the professional
markets. Rabobank Group's funding and liquidity risk policy also entails strictly limiting
outgoing cash flows at the wholesale banking business, maintaining a large liquidity buffer
and raising sufficient long-term funding in the international capital market. The retail banking
division is assumed to be largely self-funding thanks to money raised from customers.
The division raised more than enough money to fund operations in 2012, thanks to growth
in amounts due to customers at the retail banking division outpacing growth in lending.
Rabobank has developed several methods to measure and manage liquidity risk, including a
method for calculating the survival period. This is the period that the liquidity buffer will hold
up under severe market-specific or idiosyncratic stress. In all the internally used scenarios,
Rabobank more than satisfies the determined minimum survival period of three months.
The liquidity position remained comfortable in 2012. Moreover, from the perspective of the
59 High level of creditworthiness: risk management
