In addition to the RRR referred to above, Rabobank uses the Loan Quality Classification System
(LQC) 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. At year-end 2013, Rabobank
developed a policy for monitoring its forbearance portfolio every quarter. Forbearance means
'clemency'and/or 'respite', and the forbearance portfolio consists of the customers of Rabobank
for whom such measures have been put in place.The measures under that name comprise
concessions to debtors with (imminent) financial problems. A concession concerns one of the
following actions:
A change to the originally agreed conditions for a loan as an adequate solution as a result of
financial problems affecting the debtor ('problem loans'). These solutions or changes would
not be applied if the debtor was not experiencing financial difficulties.
A full or partial restructuring of the funding of a problem loan which would not have been
offered if the debtor had not been experiencing financial difficulties.
The rationale for the focus on this part of the portfolio derives from the concerns of the
European supervisory authorities about the deterioration of the quality ofthe portfolio; it is
feared that forbearance measures might camouflage this deterioration ofthe portfolio as
debtors are able to meet their financial obligations for longer periods owing to the concessions.
Basel II compliance
Rabobank uses the Advanced IRB approach for credit risk. This is the most risk-sensitive ofthe
Basel II credit risk approaches. Rabobank 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 RAROC are determined partly on the basis of these parameters. A significant
advantage associated with the use ofthe 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 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.
The EAD is the bank's expected exposure in the event and at the time of a counterparty's
default. At year-end 2014, the EAD of Rabobank's total Advanced IRB loan portfolio was
EUR 582 (574) billion. This EAD includes the expected future usage of unused credit lines.
At year-end 2014, the EAD weighted average PD of Rabobank's total performing Advanced IRB
loan portfolio stood at 1.05% (1.12%). The slightly improved PD was caused by a change in the
PD of existing debtors as well as by changes in the composition ofthe portfolio (inflow and
outflow of clients) and the implementation of new models and policy changes.
Annual Report 2014 Rabobank Group
