Contents Management report Corporate governance Consolidated financial statements Financial statements Pillar 3
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.
4.4 Credit risk
Credit risk is the risk that a counterparty is unable to meet
a financial or other contractual obligation vis-a-vis the bank.
Credit risk is inherent to granting loans. Positions in tradeable
assets such as bonds and shares are also subject to credit risk.
Rabobank restricts its credit risk exposure by setting limits
for loans to an individual counterparty, or a group of
counterparties, as well as for loans to countries. The four-eyes
principle is a key factor when granting loans. A multi-level
committee structure is in place to make decisions on major loan
applications. The competent committee is chosen on the basis
of the size of the loan. Decisions on the largest loans are made
directly by the Executive Board.
The credit risk exposure relating to each individual borrower is
further restricted by the use of sub-limits to hedge amounts at
risk, not all of which are disclosed in the statement of financial
position, and the use of daily delivery risk limits for trading
items such as forward currency contracts. Most of the resulting
items are tested against the limits every day.
Once a loan has been granted, it is continually subject to credit
management as part of which new information, financial
and other, is reviewed.The credit limits are adjusted where
necessary. Rabobank obtains collateral or guarantees for the
majority of loans.
The maximum credit risk incurred in the reporting period in the
event that counterparties fail to fulfil their obligations in respect
of financial instruments, without taking into account the fair
value of the collateral obtained, is 473,394 (2014: 490,627).
4.4.7 Derivatives
Rabobank sets strict limits for open positions, in amounts as
well as in terms. If ISDA (International Swaps and Derivatives
Association) standards apply or a master agreement including
equivalent terms has been concluded with the counterparty,
and if the jurisdiction of the counterparty permits offsetting,
the net open position is monitored.This credit risk is managed
as part of the general lending limits for clients. Where needed,
Rabobank obtains collateral or other safeguards with respect
to credit risks inherent in these transactions.The credit risk
exposure represents the current fair value of all open derivative
contracts showing a positive market value, taking into account
master netting agreements enforceable under law.
4.4.2 Collateral and credit management methods
The credit risk Rabobank is exposed to is restricted in part by
obtaining collateral where necessary.The amount and nature
of the collateral required depends partly on the assessment of
the credit risk of the loan to the counterparty. Rabobank follows
guidelines for the purpose of accepting and valuing different
types of collateral. The major types of collateral are:
Residential mortgage collateral;
Mortgage collateral on immovable property, pledges on
movable property, inventories and receivables, mainly for
business loans;
Cash and securities, mainly for securities lending activities
and reverse repurchase transactions.
The management monitors the market value of collateral
obtained and requires additional collateral where necessary.
Rabobank also uses credit derivatives to manage credit risks.
Rabobank further limits its exposure to credit risk by entering
into master netting arrangements with counterparties for
a significant volume of transactions. In general, master
netting arrangements do not lead to the offsetting of assets
and liabilities included in the statement of financial position
because transactions are usually settled gross.The credit risk is
limited by master netting arrangements, but only to the extent
that if an event or cancellation occurs, all amounts involving
the counterparty are frozen and settled net.The total credit
risk exposure of Rabobank from derivatives to which offsetting
arrangements apply is highly sensitive to the closure of new
transactions, the lapse of existing transactions and fluctuations
in market interest and exchange rates.
4.4.3 Off-balance-sheet financial instruments
The guarantees and standby letters of credit which Rabobank
provides to third parties in the event a client cannot fulfil its
obligations vis-a-vis these third parties, are exposed to credit
risk. Documentary and commercial letters of credit and written
undertakings by Rabobank on behalf of clients authorise third
parties to draw bills against Rabobank up to a fixed amount
subject to specific conditions.These transactions are backed
by the delivery of the underlying goods to which they relate.
Accordingly, the risk exposure of such an instrument is less than
that of a direct loan.
271 Notes to the financial statements of Rabobank
