Contents Management report Corporate governance Consolidated financial statements Financial statements
The models are the basis for internal measures of risk (economic
capital) and are at the same time key inputs for calculation
of the minimum regulatory capital requirements according
to the Basel framework. All internal models are validated by
the independent Model Validation department. Validation
guidelines are specified to ensure objectivity, consistency,
transparency and continuity. Models are validated according
to these principles and reviewed against internal requirements
and regulatory requirements. Model results are back-tested
against historical loss data. Where relevant, external benchmark
studies are used to support the calibration of parameters.
Models require formal internal approval before implementation
and use is allowed. Final internal approval for the (continued)
use of a model is obtained from the Model Governance
Committee (MGC), a subcommittee of the Risk Management
Committee (RMC) Group. External approval is obtained from
the regulator.
Credit risk models
The bank uses internal models to estimate Probability of
Default (PD), Loss Given Default (LGD) and Exposure at
Default (EAD) parameters.These models are embedded in the
credit approval and internal reporting processes and are used
to measure the credit risk in exposures to individual clients and
portfolios.The same parameters are also used to calculate risk-
adjusted return on capital, economic capital and the minimum
regulatory capital requirements under the Basel Advanced
Internal Ratings Based (AIRB) approach.
Operational risk models
Operational risk loss events are systematically collected and
analysed on a bank-wide basis. Operational risk assessments
are key in systematically assessing operational risks in ongoing
business and in proposed changes. Progress on outstanding
operational risk issues is monitored through issue management
and action tracking. Operational risk exposures are analysed and
reported to senior management to support decision-making.
Market risk models
Value-at-Risk (VaR) models are used to measure market risk of
exposures in both the banking and the trading book. Value-
at-Risk is used for the internal monitoring and reporting of
positions relative to the limits determined in the risk appetite.
In addition to VaR, other instruments to measure market risk are
used as well, e.g. Equity at Risk, Income at Risk, basis point value
and sensitivity and stress scenarios.
4.4.2 Stress testing
edtf 8 Stress testing is an important risk management tool that
provides a forward-looking assessment of risk and assists
in the optimization of risk capital and liquidity buffers. It enables
the exploration of vulnerabilities in business models whilst
overcoming the limitations of risk models and historical data.
At Rabobank, stress testing forms an essential part of the risk
management framework. Stress tests are used to measure the
impact of extreme, but yet plausible events. Where necessary,
measures are taken on the basis of the results of the stress tests
that are in line with Rabobank's risk appetite.
Stress test governance
Given the importance of stress testing in terms of regulatory
compliance and sound risk management the stress testing
process and governance warrants the involvement of senior
management up to the Executive Board and Supervisory Board
of Rabobank. The Executive Board of Rabobank is ultimately
responsible for the Rabobank StressTesting Framework and
its execution, where the RMC Group acts as the delegated
principal in cooperation with the ALCO Group. In this context,
the Executive Board with representatives in the RMC Group and
ALCO Group, represents the management body.
Accountabilities and decisions RMC Group related to
stress testing
Oversee group-wide stress testing process (including:
definition of methodology, formulation of scenarios);
Consider the impact and implications of the result of stress
testing on profit and loss and capital requirements in the
context of risk appetite;
Embed stress testing in forward-looking risk management
and decision making processes (including development of
capital planning, establishment of risk appetite, improvement
of risk management framework, review of portfolios or
complementary tools of Risk Models);
Enhance communication on stress testing results with
the entities.
Decisions
Sign-off group-wide stress tests;
Approve scenarios used for group-wide stress testing
concerning capital adequacy and reviewing and challenging
the group-wide stress testing results;
Determine mitigation actions and strategies based on the
results of stress testing.
316 Rabobank Annual Report 2015