Contents Management report Corporate governance Consolidated financial statements Financial statements Pillar 3
Risk appetite
Identifying and managing risks for its organisation is an ongoing
process at Rabobank. For this purpose an integrated risk
management strategy is applied. The risk management cycle
includes determining risk appetite, preparing integrated risk
analyses, and measuring and monitoring risk.Throughout this
process Rabobank uses a risk strategy aimed at continuity and
designed to protect profitability, maintain solid balance-sheet
ratios and protect its identity and reputation.
4.2 Strategy for the use of financial instruments
Rabobank's activities are inherently related to the use of
financial instruments, including derivatives. As part of its service
Rabobank takes deposits from customers with different terms
paying both fixed and variable interest rates. We attempts to
earn interest income by investing these funds in high-value
assets as well as by making loans to commercial and retail
borrowers. Rabobank also aims to increase these margins
through a portfolio approach of short-term funds and the
allocation to loans for long-er periods at higher interest rates,
at the same time keeping sufficient cash resources to meet all
payments that might fall due.
Rabobank improves its interest income by achieving rental
margins after deduction of provisions and by issuing loans with
a variety of credit ratings and associated risk profiles. Not only
does Rabobank have a credit risk on the loans shown on the
balance sheet. Rabobank also provides guarantees, such as
letters of credit, letters of performance and other guarantee
documents which involve a credit risk.
4.3 Interest rate risk in the banking environment
'Interest-rate risk in the banking environment' refers to the risk
that the financial results and/or the economic value of bank
books, investment books and capital books is adversely affected
by changes in interest rates on the money and capital- markets.
Bank books contain financial products and related derivatives
which are held in order to generate interest rate income and
the stable growth thereof. Investment books consist of financial
instruments which are held for strategic purposes, including for
the management of solvency risk, interest rate risk and liquidity
risk. Capital books contain financial instruments financed with
the bank's own capital.
Rabobank accepts a certain amount of interest rate risk in the
banking environment, as this constitutes a fundamental part
of banking, but at the same time the bank also aims to avoid
unexpected material fluctuations in the financial result and
the economic value as a result of interest rate fluctuations.
The Executive Board, overseen by the Supervisory Board,
therefore annually approves the risk appetite for interest rate
risk and the corresponding interest rate risk limits.
As part of its interest rate risk policy, Rabobank uses the
following two key criteria:
equity at risk, duration of equity; and
income at risk; the vulnerability of the interest income to
a gradual increase or decrease in interest rates over the next
12 months.
Interest rate risk at Rabobank arises as a result of discrepancies
in the maturities and terms of loans and funds, option risk, basis
risk and yield-curve risk. Any interest rate risk to which clients
are exposed as a result of an increase in their obligations due
to interest rate movements has no effect on the level of risk
Rabobank is exposed to. Any negative effects arising from this
exposure are regarded as a credit risk.
At group level, Rabobank's interest rate risk is managed by the
Asset and Liability Committee Rabobank Group chaired by the
Chief Financial Officer. The Central Treasury is responsible for
implementing the decisions of this committee, while Group Risk
Management is responsible for measurement and reporting.
Rabobank's interest rate risk arises primarily from mortgages
provided and business loans provided with a long fixed-
interest period.These mortgages and loans are financed with,
among other things, customers'savings, customers'current
account balances and with funding provided by professional
money market and capital market players. Measurements
of interest rate risk are not only based on the contractually
agreed data, but also on customer behaviour in the interest
rate risk models that are used. Account is therefore taken of
the early redemption of mortgages, and 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.
The definition used for managing interest rate risk varies from
the IFRS definition of equity. For interest rate risk management,
the economic value of equity is defined as the present value
of the assets less the present value of the liabilities plus the
present value of the off-balance-sheet items.Through the use
of hedge accounting and due to the fact that a large portion
of the balance sheet is stated at amortised cost (in IFRS terms)
and apart from the inherent counterparty risk therefore does
not change in value, the effects of the calculated impairments
on IFRS capital will be largely restricted to an impact on interest
income. Paragraphs 4.3.1 and 4.3.2 provide further details on
'Income at risk'and 'Equity at risk'trends.
193 Notes to the consolidated financial statements