Currency risk in the banking environment
Currency risk is the risk that the bank's financial result and/or economic value will be negatively
affected by changes in exchange rates. We can distinguish two types of currency risk: transaction
risk and translation risk.
Transaction risk is the risk that the bank will suffer losses as a result of actual or expected cash
flows in foreign currencies.Transaction risk occurs at many places within the bank, for example
as a result of attracting funding in various foreign currencies.
Translation risk arises in the preparation of the bank's consolidated financial statements, in
which all items in foreign currencies have to be converted into euros. This means that the
financial figures are affected by fluctuations in exchange rates. Translation risk arises at the bank
in three different ways:
The bank's solvency ratios can be affected by changes in foreign currencies as a result of
differences in the currency composition of the capital and the risk-weighted assets.
Fluctuations in foreign currencies can affect the value of (fully or partially) consolidated
foreign entities for which the functional currency is not the euro.
The value of non-euro denominated strategic holdings may be affected by movements in
foreign currencies.
Risk management framework
The policy of the bank is aimed at limiting transaction risk as much as possible. Group entities
must hedge their open positions in currencies other than their functional currency as far as
possible. Among other things, this is done by entering into FX forward contracts and cross-
currency swaps with the various trading desks within the trading environment. Within the
trading environment, these currency risks are managed within the market risk limits for the
trading books.
For the monitoring and management of translation risk, Rabobank uses a policy designed to
protect the common equity tier 1 ratio against the effects of exchange rate movements.
Risk measurement
Unhedged translation risks are measured using the VaR method. Translation risks are measured
using a confidence interval of 99.99% and an assumed horizon of one year. The VaR for
translation risk amounted to EUR 471 million as at year-end.
Liquidity risk
EDTF18 Liquidity risk is the risk that the bank will not be able to meet all of its (re)payment obligations
on time, as well as the risk that the bank will not be able to fund increases in assets at a
reasonable price, if at all. This could happen if, for instance, clients or professional counterparties
suddenly withdraw more funds than expected, which cannot be absorbed by the bank's cash
resources or by selling or pledging assets in the market or by borrowing funds from third
parties. Maintaining sufficient cash resources and retaining the confidence of both professional
market parties and retail clients have proved to be crucial in this respect over the past few years,
as Rabobank kept good access to public money and the capital markets.
98 Annual Report 2014 Rabobank Group
