4.3 Risk management framework
4.4 Risk Measurement
Contents Foreword Management report Corporate governance
edtf4 Rabobank Group maintains a robust risk management
framework to identify, assess, manage, monitor and
report risks. It makes decisions based on a conscious and careful
risk-return trade-off in line with the defined strategy and within
Risk Appetite.
The mission of the Risk Management function is to ensure the
financial stability and continuity of Rabobank by monitoring
its risk profile and ensuring that risk management activities are
executed effectively and efficiently in line with legislation and
best practices in the market.
The vision of the Risk Management function is to advise the
business and support them in managing risk, act as the guardian
of the risk profile of Rabobank by identifying risks and initiating
mitigating actions with empowered employees, satisfied clients
and in partnership with internal and external stakeholders.
4.4.1Risk models and model validation
Rabobank develops and uses risk models for most risk types.
The models for credit, market and operational risk are the
most widely used. Models are developed by the modelling
departments in close cooperation with the relevant business
and risk experts. In principle, models are reviewed annually.
The models are the basis for internal measures of risk (RC+
l) and are at the same time key inputs for calculation of the
minimum regulatory capital requirements according to the
Basel-3 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, when required, 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
Consolidated Financial Statements Company Financial Statements Pillar 3
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, RC+ 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 Capital stress testing
edtf 8 Capital stress testing is an important risk management
tool that provides a forward-looking assessment of risk
and assists in the optimisation of risk capital. 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 plausible events. Where necessary,
measures in line with Rabobank's Risk Appetite are taken on the
basis of stress tests results.
Stress test governance
Given the importance of stress testing in terms of sound risk
management and regulatory compliance, 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 Stress Testing Framework and its
execution, while the Risk Management Committee Group (RMC)
acts as the delegated principal. Specific tasks of the RMC
regarding capital stress testing are delegated to the Stress Test
Committee (STC).
313 4. Risk management