limits each year. Reports on the size of interest rate risk in the banking environment are
submitted to the responsible asset liability management and risk management committees
on a monthly basis. The asset liability management committees are in charge of the strategic
management of interest rate risk in the banking environment, while the risk management
committees monitor and safeguard the extent of this risk. The various treasury departments at
the bank are charged with the operational management of interest rate risk in the banking
environment. They carry out this task by means of hedging transactions. The triggers and timing
for the initiation of a hedge depends among other things on the view with respect to interest
rates and the expected development of the balance sheet. Business units have limited freedom
to make their own choices within the limits set.
Interest rate risk in the banking environment is not only measured and managed on the basis of
end dates and interest rate reset dates in contracts, but the bank's interest rate risk models also
take account of customer behaviour. Account is therefore taken of early redemption of
mortgages. Demand deposits such as balances in immediately callable variable interest savings
accounts and credit balances in payment accounts and business current accounts are modelled
using the replicating portfolio method. This method is used to select portfolios of money and
capital market instruments that most closely replicate the behaviour of the balance sheet items.
Risk measurement
Rabobank uses three standard measures for the management of interest rate risk in the banking
environment:
Equity at Risk (EatR).
Basis Point Value (BPV) or the delta of equity (total and per maturity).
Income at Risk (latR).
The EatR, the BPV of equity and the latR are used to control and manage the interest rate risk
in the banking environment arising from changes in the level of interest rates. The delta per
maturity or the delta profile is used to control and manage the risk of changes in the shape of
the yield curve, which shows the yield per maturity. These measures are used to express the risk
appetite of Rabobank.
In addition to the three standard measures of interest rate risk in the banking environment,
Rabobank regularly analyses the effect of one or more macroeconomic scenarios on its earnings
and economic value. The results of this analysis are importantfor integrated interest rate risk
management purposes and are included in reports to senior management. Furthermore,
the amount of capital required to compensate for the effect of unfavourable interest rate
developments on the books in the banking environment is calculated on the basis of both
historical scenarios and scenarios based on the opinions of experts.
Risk appetite and developments in relation to EatR and BPV of equity
The main measure used by Rabobank to manage interest rate risk from the perspective of
economic value is the EatR. The EatR shows the percentage decline in the economic value of
equity if money and capital market interest rates rise by 1 percentage point. For 2014, the
Executive Board set a lower limit of 0% and an upper limit of 6%.
Annual Report 2014 Rabobank Group
