Significant risks and developments
EDTF recommendation 3 There is a strong interdependence between events in the environment of the bank and the
applicable risks.The risks do not occur in isolation but are interconnected and may even
mutually reinforce each other. Recent history has shown that extreme risks can occur as well.
Rabobank has a tradition and culture of prudent risk policy, as part of which it acts with a
keen awareness of risks and uses its scarce resources with caution and due consideration.
This prudence is applied in taking as well as in implementing strategic decisions. Rabobank
applies a risk strategy that is aimed at continuity and compliance with legislation and regulations.
An important task of risk management within Rabobank is to ensure that risks are adequately
identified, analysed, reported and managed. Risk management is also responsible for establishing
procedures for measuring, monitoring and reporting risks and defining escalation procedures.
Risk identification takes place both in developing the strategy and defining risk appetite and in
implementing strategic choices and regular operational activities. The principal risks are
periodically reported in the relevant risk committees. Top-down and bottom-up risk analyses
and various stress tests are performed annually as part of a comprehensive assessment of the
various risk categories. The top risks, developments in the top risks and emerging risks are a
subject of discussion in the Executive Board and the Supervisory Board.
Principal risks for Rabobank Group
There is no such thing as risk-free banking. Every day, Rabobank takes thoroughly considered
decisions on risk in its lending operations for instance, in entering into interest rate contracts
and in its other services. An extensive risk and control framework is in place to manage risks,
designed to ensure that the risks incurred remain within the bank's defined risk appetite and
that risk and return are appropriately matched.
Key risks for the bank are: interest rate, market, credit, and liquidity risks. This chapter discusses
the limits, the risks incurred in 2013 and the controls for each risk category. Fundamental residual
risks remain, however, which are:
The risk of sustained exceptional interest rate movements
The bank's interest rate risks are managed by defining limits for potential losses of income or
value adjustments in equity in the event of interest rate shocks. Flowever, sustained extremely
low or high interest rate levels generate risks for the financial system and therefore for Rabobank
as well. Stress tests and scenario analyses are used to identify the potential impact on the bank,
examine possible responses and prepare a contingency plan where possible. Rabobank is
currently in an economic environment with historically low interest rate levels. Rabobank has
opted to mitigate the impact of a potential sharp rise in interest rates by reducing a substantial
part of its interest rate risks. The residual risk consists of a sustained low level of interest rates in
combination with a relatively low interest rate risk that would put pressure on Rabobank's
profitability mainly due to the impact of this residual risk on interest rate-sensitive operations.
In addition, low interest rate levels generally have an adverse impact on the profitability of
interest rate-sensitive operations.
The risk of sustained exceptional market developments
Rabobank is exposed to market risks. These risks are monitored on a daily basis and a set of strict
limits are in place. The Value at Risk model provides a risk measure for the potential losses, on
the basis of historical fluctuations. Despite the fact that very extreme shocks and uncertainties
concerning historical losses are taken into account, sustained adverse market trends constitute
a residual risk.This risk is mitigated by adjusting the market risk position. In addition, Rabobank
62 Annual Report 2013 Rabobank Group
