Contents Introduction Management report Appendices Corporate governance Consolidated Financial Statements Company Financial Statements
4.4 Currency risk in the banking environment
Currency risk is the risk that the bank's financial result and/
or economic value could be negatively affected by changes
in exchange rates.The bank distinguishes two types of non-
trading currency risks: (i) Currency risk in the banking books and
(ii) Foreign Exchange ('FX') translation risk.
Currency risk in the banking books
Currency risk in the banking books, is the risk where currency
cash flow commitments and receivables in the banking books
are unhedged. As a result, it could have an adverse impact on
the financial results and/or financial position of the Group, due
to movements in exchange rates. Banking Books should be fully
hedged. Accordingly, FX risk in banking books is fully hedged.
FX Translation risk
Translation risk is the risk that foreign exchange rate fluctuations
will adversely affect the translation of assets and liabilities
of operations - denominated in foreign currency - into the
functional currency of the parent company when consolidating
financial statements.Translation risk reveals in Rabobank's
equity position as well as in its capital ratios.
Rabobank manages its translation risk with regard to its
CET1 ratio by deliberately taking positions including not or
only partly closing positions. As a result of these (remaining)
structural positions the impact of exchange rate fluctuations on
Rabobank's CET1 ratio is limited.
FX Translation risk and currency risk in the Banking books are
covered by the Foreign Exchange Risk Policy Global Standard
on Foreign Exchange Rabobank Group ('Standard').The policy
Standard is designed in order to protect the Rabobank Group
CET1 ratio against the effects of exchange rate movements.
Potential future FX movements of structural positions including
the FX Capital Securities are measured within the internal Pillar II
capital.
4.5 Interest rate risk in the banking environment
'Interest rate risk in the banking environment'refers to the risk
that the financial results and/or the economic value of the
banking book are adversely affected by changes in market
interest rates.
Interest rate risk at Rabobank arises as a result of repricing
and maturity mismatches between loans and funding, and
optionality in client products. Customer behaviour is an
important determining factor with respect to interest rate
risk in the banking environment. The modelling of customer
behaviour is therefore one of the core elements of the interest
rate risk framework. There are behavioural models in place
for mortgage prepayments, savings accounts and current
accounts. Movements in interest rates may also affect the
creditworthiness of customers. Higher interest rates might
for example lead to higher borrowing costs and, hence, have
a negative impact on the creditworthiness of a customer.
Any such effects are however regarded as credit risk rather than
interest rate risk.
Rabobank accepts a certain amount of interest rate risk in the
banking environment; this is a fundamental part of banking.
But at the same time the bank also aims to avoid unexpected
material fluctuations in the financial result and the economic
value as a result of interest rate fluctuations. The Managing
Board, overseen by the Supervisory Board, therefore annually
approves the interest rate risk appetite and the corresponding
interest rate risk limits.
At group level, Rabobank's interest rate risk is managed by
the Asset and Liability Committee Rabobank Group chaired
by the Chief Financial Officer. The Treasury is responsible for
implementing the decisions of this committee, while Risk
Management is responsible for measuring and reporting the
interest rate risk position.
The definition used for managing interest rate risk varies from
the IFRS definition of equity. For interest rate risk management,
the economic value of equity is defined as the present value of
the assets less the present value of the liabilities together with
the present value of the off-balance-sheet items. Through the
use of hedge accounting and because a large proportion of the
balance sheet is carried at amortised cost (in IFRS terms) and
(except from the inherent counterparty risk) is therefore not
exposed to value changes, the effects of the value changes on
IFRS capital will largely impact only interest income.
As part of its interest rate risk policy, Rabobank uses the
following two key indicators for managing and controlling
interest rate risk:
Earnings at risk; the sensitivity of net interest income to
gradual increases or decreases in interest rates during the
coming 12 months; and
Modified duration of equity.
Sections 4.5.1 and 4.5.2 provide further details on 'Earnings at
risk'and 'Modified duration'developments.
4.5.1 Earnings at Risk
Earnings at risk is calculated once a month based on a standard
interest-rate-sensitivity analysis. This analysis shows the main
deviation, in a negative sense, of the projected interest income
over the next 12 months as a result of a scenario in which
all money market and capital market interest rates gradually
increase by 2 percentage points and of a scenario in which
all money market and capital market interest rates gradually
decrease by a maximum of 2 percentage points.The projected
interest rate income is based on a scenario in which all interest
rates and other rates remain equal.
Rabobank Annual Report 2017 - Consolidated financial statements
194
