Composition of equity
at year-end 2014, in billions of euros
V
Retained earnings and reserves 24.9
Capital Securities 6.5
Rabobank Certificates 5.9
Trust Preferred Secu rities 1.0
Other non-controlling interests 0.5
an Asset Quality Review (AQR), an assessment of balance sheets) and a stress test, also carried
out at Rabobank. The reviews of policy, procedures and data flows were combined with the
individual assessment of a large number of files, including valuations of collateral carried out by
external experts. The results of the assessment were published by the ECB on 26 October 2014.
Rabobank comfortably met the capital requirements set for banks in both baseline and adverse
stress scenarios.
Asset Quality Review and stress test
The financial crisis and its profound impact on the banking sector led to the creation of the
Single Supervisory Mechanism (SSM) and triggered a sector-wide review of the quality of bank
assets by the European Central Bank (ECB). The reference date for this Asset Quality Review
(AQR) was 31 December 2013. It thus covered exposures and provisions already recognised in
the financial statements for 2013. The findings with respect to the various areas of the AQR and
their effect on the common equity tier 1 capital also relate to 31 December 2013. The review
focused on a large part of the portfolio. In the Netherlands, the total loan portfolios of the local
Rabobanks and subsidiaries were included. In Ireland, the review of the commercial real estate
and the corporate loan portfolios were in scope, while in New York the review focused on the
portfolio of sizeable corporate finance transactions.
The review also assessed market risks, in particular with reference to Credit Valuation Adjustments
(CVA) and fair value assessments of the proprietary land holdings of Rabo Real Estate Group.
The effect of the AQR findings on the 2014 financial statements mainly resulted in an adjustment
to the allowance for loan losses. The amount of the allowances recognised in the statement of
financial position as at 31 December 2013 were the result of the methodology used by
Rabobank for loan losses in 2013. This methodology results in a specific allowance, a collective
allowance and a general allowance (also referred to as IBNR) and was based on the information
available at the time, events that could have led to impairments and the models used.
During the review no facts emerged that would have given rise to changes to the comparative
figures for 2013.
The total addition to the capital requirement and the allowances was established by the ECB to
be EUR 2,093 million and published in October 2014. A significant proportion of this addition
relating to loans and land holdings has been recognised in the profit and loss account for 2014
as part of the ordinary provisioning process. This mainly concerns adjustments on the basis of
information that only became available to the management in 2014.
The financial crisis has led to a more prudent assessment of credit risk. The SSM and the AQR as
carried out by the ECB have accelerated this change. For Rabobank, it will lead to the
introduction of more conservative and stricter loss indicators. An adjustment to the respective
provision levels has already been made in 2014. In addition, the more conservative approach
has led to a change in the parameters for the general provision (IBNR). For the determination of
its IBNR, Rabobank uses the Expected Loss (EL) as the starting point. In 2014 the EL estimates
were changed to reflect more prudent assumptions. Furthermore, an adjustment has been
made to the period deemed necessary to identify a loss (the Loss Identification Period).
Taking into account developments in the economy and the quality of the portfolio, this period
was extended in 2014.
The review of policies, procedures and data flows did not lead to a major adjustment. It has,
however, become clear that the increasingly onerous standards will require improvements to
policies and procedures. Higher standards will also apply in relation to the management of data
flows due to both internal requirements and the future data requirements of supervisors.
An implementation plan to improve policies and procedures and the design and operation of
data flows has been agreed with the ECB.
46 Annual Report 2014 Rabobank Group
