4 Risk exposure on financial instruments
Contents Management report Corporate governance Consolidated financial statements Financial statements Pillar 3
4.1 Risk organisation
Rabobank Group manages risks at various levels. At the
highest level, the Executive Board, under the supervision of the
Supervisory Board, determines the risk strategy it will pursue,
the risk appetite, the policy framework as well as the limits.
The Balance Sheet and Risk Management Committees are the
advisory and executive committees of the Executive Board.
The Supervisory Board regularly assesses the risks attached
to the activities and portfolio of Rabobank Group.The Chief
Risk Officer, who is also a Member of the Executive Board, is
responsible for the risk management policy within Rabobank
Group. Responsibility for the risk policy within Rabobank
Group is spread across two directorates. Risk Management is in
charge of the policies relating to interest rate, market, liquidity,
currency and operational risks, as well as for the policy for credit
risks at portfolio level. Credit Risk Management is responsible for
the credit risk acceptance policy at item level. Furthermore, the
group entities practise independent risk management.
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. Rabobank accepts
deposits from customers at fixed and variable rates of interest
for a variety of terms and aims to earn interest margins on these
funds by investing them in high quality assets. Rabobank also
aims to increase these margins through a portfolio approach
of short funds and the allocation to loans for longer terms at
higher interest rates, at the same time keeping sufficient cash
resources to meet all payments that might become due.
A further objective of Rabobank is to increase its interest rate
result by obtaining above-average margins, after the deduction
of provisions, and by granting loans to commercial and retail
borrowers with various credit ratings. These risks apply not
only to loans recognised in the statement of financial position.
Rabobank also gives guarantees, such as letters of credit, letters
of performance and other guarantee documents.
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
270 Rabobank Annual Report 2015
