Contents Management report Corporate governance Consolidated financial statements Financial statements Pillar 3
The VaR indicates, based on one year of historical market trends,
the maximum loss for a given reliability level and horizon
under 'normal' market conditions.The internal VaR model
forms an integral part of the risk management framework at
Rabobank.This internal model has also been approved by DNB
to determine the solvency requirement for market risk in the
trading book. Rabobank has opted to apply a VaR based on
historical simulation for which one year's worth of historic data
is used.The VaR is calculated overtime horizons of both one day
and ten days. For internal risk management purposes, Rabobank
has opted for a confidence level of 97.5%. Furthermore, the VaR
with a confidence level of 99% is also calculated on a daily basis.
A significant advantage of a VaR model based on historical
simulation is that no assumptions need to be made about
the distribution of potential value adjustments for the various
financial instruments. A drawback is that a choice needs to be
made concerning the period of historical market trends which
could potentially affect the amount of the VaR as calculated.
Based on the requirements imposed by the regulator and
following our own research, it was decided to use an historical
period of one year. Back testing is used in orderto testthe
actual outcomes on a regular basis in orderto determine the
validity of the assumptions and parameters/factors used in
calculating the VaR.
4.8 Operational risk
Rabobank defines operational risk as the risk of losses incurred as
a result of inadequate or dysfunctional internal processes, people
and systems, or as a result of external trends and developments.
Potential legal risks and reputational risks are considered in the
assessment and management of operational risk.
In measuring and managing operational risks, Rabobank Group
operates within the parameters of the most advanced Basel
II approach, the Advanced Measurement Approach. For the
management of operational risks, Rabobank follows the'three
lines of defence model'as prescribed by the EBA.
The bank's operational risk policy is based on the principle
that the primary responsibility for managing operational risk
lies with the first line and that this must be integrated into
the strategic and day-to-day decision-making processes.
The purpose of operational risk management is to identify,
measure, mitigate and monitor various types of operational
risks.The risk quantification process supports the management
responsible for prioritising the actions to be undertaken and the
allocation of people and resources.
Within Rabobank Group, the departments involved in the
primary processes of the bank form the 'first line of defence'.
They are fully responsible for day-to-day risk acceptance and
for integrated risk management and mitigation according to
the established risk appetite. The risk management functions
within the group entities and within Risk Management together
constitute the'second line of defence'. The risk management
functions have a monitoring role when it comes to risks and
challenge 'the first line of defence'with respect to the way they
manage risks. In addition, they report on the risk profile to the
management and to the Executive Board, independently from
the first line. Internal audits form the 'third line of defence'.
At group level, the Non-Financial Risk Committee (NFRC) is
responsible for formulating policy and setting the parameters.
In addition, Risk Management also reports each quarter to the
NFRC on changes in operational risks at group level. A number
of risk management committees have been established within
the group's entities.Their responsibilities include monitoring
operational risks (including system continuity risks, IT security
risks and fraud risks) of the relevant entity.
The yearly risk management cycle consists of, among other
things, a group-wide Risk Self Assessment, in which the most
important operational risks are inventoried and, if the risks fall
outside the risk appetite, for which mitigating measures are
identified based on scenario analyses with senior managers of
the entire Rabobank Group, in orderto gain insight into the risk
profile of the group.
4.9 Legal and arbitration proceedings
Rabobank Group is active in a legal and regulatory environment
that exposes it to substantial risk of litigation. As a result of this,
Rabobank Group is involved in legal cases, arbitrations and
regulatory procedures in the Netherlands and in other countries,
including the United States.The most relevant legal and
regulatory claims which could give rise to liability on the part
of Rabobank Group are described below. If it appears necessary
on the basis of the applicable reporting criteria, provisions are
made based on current information; similar types of case are
grouped together and some cases may also consist of a number
of claims. The estimated loss for each individual case (for which
it is possible to make a useful estimate) is not reported, because
Rabobank Group feels that information of this type could be
detrimental to the outcome of individual cases.
When determining which of the claims the likelihood of them
leading to an outflow of funds is higher than fifty percent,
and therefore an estimate is made of these losses, Rabobank
Group takes into account a number of factors, including (but
limited to) the type of claim and the underlying facts, the
procedural process and history of each case, rulings from legal
and arbitration bodies, Rabobank Groep's experience and that
of third parties of similar cases (if known), earlier settlement
discussions, third-party settlements in similar cases (where
known), available indemnities and the advice and opinions for
legal advisors and other experts.
274 Rabobank Annual Report 2015
