Credit risk and Basel II
Credit monitoring and reporting
With the introduction of the Basel II framework, Rabobank developed the Rabobank Risk Rating
(RRR) master scale, comprising 21 performing ratings (R0-R20) and 4 default ratings (D1-D4).
The performing ratings are linked to the probability of default of the client within a period of
one year (PD; Probability of Default), for which purpose the ratings are determined on a cycle-
neutral basis in principle.The D1-D4 ratings represent default classifications. D1 represents 90 days'
arrears, D2 a high probability that the debtor will not be able to pay, D3 means that the debtor
is unable to meet his obligations and foreclosure is required and D4 is the status of bankruptcy.
In accordance with this approach, all D-ratings constitute the total non-performing exposure.
In addition to the RRR referred to above, Rabobank uses the Loan Quality System for internal
reporting.This system applies five different categories: Good, OLEM, Substandard, Doubtful and
Loss.The focus is on developments in the classified portfolio, comprising the classifications
vulnerable continuity, imminent discontinuity and discontinuity. The exposures in this portfolio
are reviewed and addressed (at least) twice a year by the Special Accounts department.
In external reports, Rabobank focuses on the impaired loans, which are defined as exposures
with a D-rating for which a provision has been recognised.
Rabobank has recently developed a policy for monitoring its forbearance portfolio every
quarter. This policy will be implemented in 2014. Forbearance means'clemency'.The forbearance
portfolio consists of the customers of Rabobank for whom forbearance measures have been put
in place. The measures under that name comprise concessions to debtors with (imminent)
financial problems. Examples include postponements of repayments and extensions of the
term of a facility. The rationale for the focus on this portfolio derives from the concerns of the
European supervisory authorities about the deterioration of the quality of the portfolio; it is
feared that forbearance measures might camouflage this deterioration of the portfolio as
debtors are able to meet their financial obligations for longer periods owing to the concessions.
The identification of forbearance measures for the corporate portfolio will be based on the
current Loan Quality Classification framework, with forbearance measures only applying to the
classified portfolio. If forbearance measures are applied to a debtor, the debtor will by definition
be dealt with by the Special Accounts department. In addition, all debtors in the retail portfolio
to whom forbearance measures are applied are required to be included in the non-performing
loans portfolio. Lastly, items in the forbearance category must be reported for up to two years
after a recovery. This period of two years is referred to as 'probationary period'.
Basel II compliance
Rabobank Group uses the Advanced Internal Rating Based (Advanced IRB) approach for credit
risk. This is the most risk-sensitive of the Basel II credit risk approaches. Rabobank Group has
professionalised its risk management further by combining Basel II compliance activities with the
implementation of a best-practice framework for economic capital. The main Basel II parameters
as far as credit risk is concerned are EAD (Exposure at Default), PD (Probability of Default) and
LGD (Loss Given Default).The economic capital and Risk Adjusted Return On Capital (RAROC)
are determined partly on the basis of these parameters. A significant advantage associated with
the use of the economic capital framework is a streamlined, efficient approval process. Using the
Basel II parameters and RAROC helps credit analysts and credit committees to take even more
thoroughly considered decisions. Every Rabobank Group entity has established a RAROC target
at corporate client level. Alongside credit quality, this is an important factor when taking
decisions on specific credit applications. In addition, the Basel II parameters mentioned above
are an important element of management information at portfolio level.
High level of creditworthiness: risk management
