Contents Management report Corporate governance Consolidated financial statements Financial statements Pillar 3
Banking is taking risks. When we see market opportunities,
recognise possibilities, take decisions, we also weigh up the
risks. Everyday, Rabobank takes thoroughly considered risk
decisions in its lending operations for instance, in entering into
interest rate contracts and in its other services.To manage the
material risks, risk and control processes are designed to ensure
that the risks incurred remain within the bank's risk appetite
and that risk and return are appropriately matched. These cover
the regular banking risk types: credit risk, market risk, interest
rate risk, liquidity risk and the non-financial risks including
compliance. Rabobank nonetheless recognises a number of
fundamental residual risks:
The abovementioned risks are inherent to the business model
of Rabobank. The recent changes in the governance model and
the announced cost savings operation are part of the renewed
strategy. Successful implementation of this strategy is important
for the future of Rabobank.
Credit risk
EDTF27 Credit risk is the riskthatthe bankwill suffer economic
losses if a counterparty cannot fulfil its contractual or
other financial obligations arising from a credit contract. Credit is
any legal relationship on the basis of which Rabobank, in its
capacity as a bank, has or could have a claim against a debtor as
a result of providing a product. In addition to loans and facilities
(committed or uncommitted), credit used as a generic term also
includes guarantees, letters of credit, derivatives and the like.
Rabobank has a robust framework of policies and processes in
place to measure, manage and mitigate credit risks.
Risk management framework
Credit acceptance
Rabobank's prudent credit acceptance policy is typified by
careful assessment of customers and their ability to repay
the loan that was issued (continuity perspective). As a result,
the loan portfolio has an acceptable risk profile even in less
than favourable economic circumstances. Rabobank aims
to have long-term relationships with customers that are
beneficial for both the client and the bank. Approval of larger
credit applications is decided on by committees. A structure
consisting of various committee levels has been established,
with the competent committee being determined by the
amount of the credit application. Decisions on the largest loans
are made directly by the Executive Board.
An important starting point in acceptance policy for business
loans is the 'know your customer' principle.This means that
the bank only issues loans to business customers whose
management Rabobank considers to be ethical and competent.
In addition, Rabobank closely monitors developments in the
business sectors in which its customers operate and can properly
assess the financial performance of its customers. Risk appetite
criteria are also applied when issuing loans.. Corporate
sustainability also means sustainable financing. Sustainability
guidelines have been established for use in the credit process.
Risk measurement
Credit monitoring and reporting
With the introduction of the Basel II framework, Rabobank
developed the Rabobank Risk Rating (RRR) master scale,
comprising 21 performing ratings (R0-R20) and 4 default
ratings (D1-D4).The performing ratings are linked to the
probability of default of the client within a period of one
year (PD), for which purpose the ratings are determined on
a cycle-neutral basis in principle. D1-D4 refers to default
classifications: D1 represents 90 days'arrears, D2 indicates
a high probability that the debtor is unable to pay, D3 indicates
the debtor's inability to meet its commitments and that
their properties will most likely be sold off, and D4 indicates
bankruptcy status. In accordance with this approach, all
D-ratings constitute the total non-performing exposure.
In addition to the RRR referred to above, Rabobank uses the
Loan Quality Classification System (LQC) for internal reporting.
This system distinguishes five different categories: Good, OLEM,
Substandard, Doubtful and Loss.The focus is on developments
in the classified portfolio, comprising the classifications
Substandard, Doubtful and Loss.The exposures in this portfolio
are reviewed and addressed (at least) twice a year by the Special
Asset Management department.
Sustained historically
low interest rate levels
Sustained exceptional
market developments
Unexpected loan losses
Balance sheet
imbalance
Increase and complexity
of regulations
Negative public opinion
Geopolitical and
economic instability
IT systems and security
New market players and
disruptive technology
have an adverse impact on profitability of Rabobank
mainly due to the impact on the result from
Rabobank's interest rate business,
influence the Value at Risk (VaR) and require
continuous mitigation by adjusting the market risk
position based in strict limits.
despite an effectively diversified business model and
prudent lending criteria loan losses may be higher
than estimated.
funding costs may undesirably increase due to
dependence on the capital market and the increasing
regulatory capital requirements,
the additive effect of new regulations has a direct
impact on the available strategic alternatives and
imposes a heavy burden on scarce human and
financial resources.
restore of confidence in the financial sector is an
important condition to maintain a healthy customer
base.
geopolitical unrest in the Eurozone and in the
emerging markets and continued economic instability
lead to uncertainty in the financial markets,
technology and digitalisation contribute to more
efficient business processes and improved service but
at the same time lead to greater reliance on IT systems.
Cybercrime is a main focus area,
lead to increased competition in areas such as
payment systems and credit.
87 Risk management
