Contents Foreword Management report Corporate governance
Consolidated Financial Statements
Company Financial Statements
Pillar 3
Rabobank applies concentration risk mitigation on, for
example, asset classes, sector and country level. For its asset
classes Rabobank has determined a risk appetite, expressed
in exposure, percentage of defaults and loan impairment
charges. Furthermore, exposure limits are set on a sector and
country level as well. Single name concentrations are limited on
exposure and loss at default (LAD) and are monitored closely.
Operational Risk
Operational risk (OpRisk) is an integral part of doing business.
Operational Risk Management (ORM) within Rabobank is
aimed at having a healthy balance between the exposure to
these risks and tools to manage these risks. The objective of
ORM is to identify measure, mitigate and monitor operational
risk, and promote risk awareness and a healthy risk culture
within Rabobank. Risk quantification and awareness helps
management set priorities in their actions and allocate people
and resources. Within Rabobank, operational risk is defined as
the risk of losses resulting from inadequate or failed internal
processes, people and systems (and includes Tax and Legal
Risk) or from external events, including potential reputational
consequences.
The primary responsibility for the management of operational
risk (including Fraud, IT Risk, Business Continuity and Conduct
Risk) lies within the business, as it should be fundamentally
woven into their strategic and day-to-day decision-making.
Risk management committees have an important role in
identifying and monitoring the operational risks of the entity.
These responsibilities are supported by Risk Management,
which provides oversight, tools, expertise and challenge to the
group entities and transparency throughout the Group and
towards senior management.
Market Risk/Interest Rate Risk
Market risk is the risk that the bank's earnings and/or economic
value may be negatively affected by changes in interest rates
or market prices. Exposure to a certain degree of market risk
is inherent in banking and creates the opportunity to realise
profit and value. In the management and monitoring of market
risk, a distinction is made between market risk in the trading
environment and market risk in the banking environment.
Within the trading environment, the most significant types of
market risk are: interest rate risk (including basis risk), credit
spread risk and currency risk. Risk positions acquired from
clients can either be redistributed to other clients or managed
through risk transformation (hedging). The trading desks
are also acting as a market-maker for secondary markets (by
providing liquidity and pricing) in interest rate derivatives and
debt, including Rabobank Bonds and Rabobank Certificates.
Market risk in the trading environment is managed and
monitored on a daily basis within the trading market risk
framework. A prudent limit and control framework is in place.
Within the banking environment the most significant type of
market risk is interest rate risk. Rabobank is mainly exposed
to interest rate risk in the banking environment as a result
of (1) mismatches between the repricing period of assets and
liabilities and (2) embedded optionality in client products.
Rabobank is also exposed to currency risk in the banking
environment. This currency risk is mainly translation risk on
capital invested in foreign activities. Other non-trading currency
risks are mostly hedged.
The internal VaR model forms a key part of Rabobank's market
risk framework. Rabobank has opted to apply a VaR model
based on historical simulation for which one year of historical
data is used. The major benefit of a VaR model based on
historical simulation is that no assumptions need to be made
in terms of distribution of possible value changes of the various
risk factors. Back testing is a risk management technique used
to evaluate the quality and accuracy of internal VaR models.
In essence, back testing is a routine comparison of model
generated risk measures (daily VaR) with the subsequent
trading outcomes (hypothetical or actual Profit Loss).
Rabobank recognises that VaR, due to its underlying statistical
assumptions, must be complemented by stress testing for
a more complete risk assessment. Stress testing is used to
measure events that are not captured by the VaR model.
Rabobank accepts a certain level of interest rate risk in the
banking environment, because this can be a major source of
earnings and economic value, but at the same time it seeks
to avoid any material unexpected swings in earnings and
economic value caused by interest rate movements. Therefore,
the Executive Board, under the supervision of the Supervisory
Board, determines the interest rate risk appetite and the
corresponding limits on an annual basis.
Rabobank uses three standard measures:
1) Equity at Risk (EatR);
2) Basis Point Value (BPV) or the delta of equity (total and per
maturity); and
3) Income at Risk (latR);
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. These measures are also
used to express the Risk Appetite of Rabobank.
59 Our output and impact: balancing risks and returns
