Contents Management report Corporate governance Consolidated financial statements Financial statements Pillar 3
Currency risk in the banking books is the risk that manifests
itself at the moment receivables and liabilities are not covered,
due to which currency fluctuations may have a negative impact
on the financial results of the bank. Rabobank hedged the
currency risk in full in the banking books.
Translation risk becomes evident when the bank's consolidated
balance sheet and results are prepared, whereby all items in
foreign currencies must be valued in euros.This makes the
financial data sensitive to exchange rate fluctuations. Translation
risk manifests itself in two different ways within Rabobank:
Exchange rate fluctuations can potentially affect the value of
consolidated entities of which the functional currencies are
not euros.
Exchange rate fluctuations may affect the solvency ratios
of Rabobank as a result of differences in the exchange rate
composition of the capital and the risk-weighted assets.
Translation risk and currency risks in the banking books are
monitored and managed on the basis of a policy which serves
the prime purpose of protecting the Common Equity Tier 1 ratio
against the adverse effects of exchange rate volatility.
4.6 Liquidity risk
Rabobank is exposed to liquidity risk i.e. the risk that the bank is
unable to meet all of its (re)payment obligations in good time,
as well as the risk that the bank is unable to (re)finance assets
at reasonable prices or at all. This could happen if clients or
professional counterparties suddenly withdraw more funds than
expected, which cannot be met by the bank's cash resources
and when selling or pledging assets or borrowing funds from
third parties also provides no solution.
Rabobank has long recognised liquidity risk as a major risk
type. Rabobank therefore has a policy whereby the term of
the funding matches the term of the loans granted. Long-term
loans must be financed through funds entrusted by customers
or long-term funding through professional markets.
Liquidity risk is managed on the basis of three pillars.The first
of these pillars sets strict limits for the outgoing cash flows
within the wholesale banking business. Among otherthings,
Rabobank measures and reports on a daily basis what incoming
and outgoing cash flows can be expected during the first
twelve months. A limit framework applies here too. In order to
be prepared for potential crisis situations, a number of detailed
contingency funding plans (CFPs) are in place. These CFPs are
included in the internal test procedures.
The second pillar is used to maintain a substantial buffer of
liquid assets. In addition to the funds held at central banks,
these assets can be used to borrow from central banks, used
in repo transactions or in order to sell directly in the market
in order to immediately generate liquidities. The size of the
liquidity buffer is related to the risk to which Rabobank is
exposed through its balance sheet. Rabobank Group has
internally securitised a portion of its loan portfolio which means
it can be pledged from the central bank and therefore serves
as an additional liquidity buffer. Since this concerns internal
securitisations, solely for liquidity purposes, they are not visible
in the economic balance sheet but are included in the available
liquidity buffer.
The third pillar entails the restriction of liquidity risk through
a prudent funding policy aimed at meeting the financing
requirements of the group's units at acceptable cost.
Diversification of sources of funding and currencies, flexibility
of the funding instruments applied and a hands-on investor
relations approach are key factors.This prevents Rabobank
Group from being overly dependent on a single source
of funding.
Furthermore, scenario analyses are performed each month
to calculate the possible consequences of a wide range of
stress scenarios. Not only market-specific scenarios, but also
Rabobank-specific, as well as a combination of these scenarios,
are analysed. Monthly reports on the liquidity position of the
Group as a whole are submitted to the Dutch Central Bank.
These reports are prepared in accordance with the guidelines
drawn up by this supervisory authority.
4.7 Market risk in the trading environment
'Market risk in the trading environment' refers to changes in the
value of the trading book as a result of, among otherthings,
changes in interest rates, credit spreads, foreign currencies
and share prices. Analyses of the market risk in the bank book
are included in Paragraph 4.3 'Interest-rate risk in the banking
environment'and Paragraph 4.5 'Currency risk in the banking
environment'.
At the consolidated level, the risk is represented by the Value at
Risk (VaR), basis point sensitivity and event risk.The Executive
Board annually ratifies the risk appetite and the corresponding
limits. These limits are converted into limits at book level
and are monitored daily by the market risk management
departments. In addition to the VaR, basis point sensitivity
and event risk limits, an extremely detailed system of trading
controls per book is in place, including rotation risk (i.e. risk that
the yield curve will shift), delta limits per bucket, nominal
limits and the maximum number of contracts. The risk position
is reported to the senior management on a daily basis and
discussed in the various risk management committees on
a monthly basis.
273 Notes to the financial statements of Rabobank
