Contents Management report Corporate governance Consolidated financial statements Financial statements Pillar 3
Prepayment risk. Customers wishing to repay their loans
early are not required to pay an early redemption fee in
all cases.
Withdrawal risk. A large proportion of the customer credit
balances in current accounts, payment accounts and savings
accounts is callable on demand.
Customer behaviour is an important determining factor with
respect to interest rate risk in the banking environment. It is
actually the most important differentiating factor between
interest rate risk in the banking environment and interest rate
risk in the trading environment. The risk that customers incur
as a result of an increase in their financial obligations due to
movements in interest rates does not affect the extent to which
Rabobank is exposed to interest rate risk; however it may lead
to a situation in which the bank has to deal with a higher level
of credit risk.
Risk management framework
Rabobank accepts a certain degree of interest rate risk in
the banking environment because this is an essential part
of banking. At the same time the bank endeavours to avoid
material unexpected fluctuations in earnings and economic
value because of movements in interest rates. The Executive
Board, under the supervision of the Supervisory Board, therefore
annually approves the risk appetite for interest rate risk as
well as the corresponding interest rate risk limits. Reports on
the size of interest rate risk in the banking environment are
submitted to the responsible asset liability management
and risk management committees on a monthly basis.
The asset liability management committees are in charge
of the strategic management of the interest rate risk in the
banking environment, while the risk management committees
monitor and safeguard the size of this risk. The various treasury
departments at the bank are charged with the operational
management of interest rate risk in the banking environment.
They carry out this task by means of hedging transactions.
The triggers and timing forthe initiation of a hedge depends
among other things on the view with respect to interest rates
and the expected development of the balance sheet. Business
units have limited freedom to make their own choices within
the limits set.
Interest rate risk in the banking environment is not only
measured and managed on the basis of end dates and interest
rate reset dates in contracts, but the bank's interest rate risk
models also take account of customer behaviour. Account
is therefore taken of the early redemption of mortgages for
example. Demand deposits, such as balances in immediately
callable variable interest savings accounts and credit balances in
payment accounts and 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.
Risk measurement
Rabobank uses three standard measures forthe management of
interest rate risk in the banking environment:
Equity at Risk (EatR);
Basis Point Value (BPVorthe delta of equity (total and per
maturity);
Income at Risk (latR).
The EatR, the BPV of equity and the latR are used to control
and manage the interest rate risk in the banking environment
arising from changes in the level of interest rates.The delta per
maturity or the delta profile is used to control and manage the
risk of changes in the shape of the yield curve, which shows the
yield per maturity.The risk appetite of Rabobank is expressed in
these standards.
In addition to the three standard measures for interest rate
risk in the banking environment, Rabobank regularly analyses
the impact of one or more macroeconomic scenarios on its
earnings and economic value.The results of this analysis are
important for integrated rate risk management purposes and
are included in reports to senior management. Furthermore,
the amount of capital required to compensate forthe effect of
unfavourable interest rate developments on the books in the
banking environment is calculated taking into account both
historical interest scenarios and interest scenarios based on the
opinions of experts.
The low interest rate environment received extra attention
during 2015. For a bank in general a low interest rate
environment is challenging for profitability. Non-interest
bearing liabilities and liabilities with zero or very low interest
rates, as the equity and current account balances, are less
profitable in the event of low interest rates. In 2015 the
interest rate was even negative on the short end of the
curve. In addition, a low interest rate environment is often
accompanied by a flattening of the curve resulting in that
a bank makes less profit on the transformation of short-term
liabilities to longer term assets. Scenario analysis shows that
a further interest rate decline and flattening of the curve has
negative consequences forthe interest income of especially the
retail business in case of unchanging margins. The impact of
this increases if the situation continues orthe curve becomes
more negative.
94 Rabobank Annual Report 2015