Contents Introduction Management report Appendices Corporate governance Consolidated Financial Statements Company Financial Statements
Throughout 2017, Rabobank's interest income was vulnerable
to a decrease in interest rates. On 31 December 2017, the
Earnings at Risk amounted to EUR 148 million. Compared to the
end of 2016, the Earnings at Risk was at a higher level.This is
mainly caused by a larger assumed downward shock of the EUR
yield curve (25bps in December 2017 vs 10bps in December
2016).The change of the size ofthe downward shock is largely
the result of a change in the scenario methodology as of June
2017.
Earnings at Risk
in millions of euros 31 December 2017 31 December 2016
EUR interest rate 25 bp decline 10 bp decline
148 82
4.5.2 Modified duration
The Modified duration (MD) or duration of equity indicates by
what percentage the economic value of equity will fall if the
money market and capital market interest rates increase by one
percentage point.The Managing Board has set a lower limit of
0% and an upper limit of 6% for this purpose. Additional limits
apply for the basis point value (BPV) of equity and the delta
profile (BPV per term point) for equity.
Equity at Risk
31 Decern ber 2017 31 Decern ber 2016
2.0% 1.4%
4.6 Market risk in the trading environment
Market Risk arises from the risk of losses on trading book
positions affected by movements in interest rates, equities,
credit spreads, currencies and commodities.These movements
have an impact on the value ofthe trading portfolios and
could lead to losses. 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 monitored daily within
the market risk framework, which is put in place to measure,
monitor and manage market risk in the trading books. An
important part ofthe framework is an appropriate system of
limits and trading controls. The relevant risk appetite limits are
translated into limits and trading controls at book level and are
monitored on a daily basis by the market risk departments.
Due to Rabobank's strategy of client risk redistribution, risk
transformation (hedging) and the low secondary market
activity, the real market risk exposure ofthe trading portfolio is
well within the risk appetite boundaries. If limits are breached,
remedial actions will be stipulated which decrease the chance
of large actual losses. The risk position is reported to senior
management and discussed in the various risk management
committees each month.
At consolidated level, the market risk appetite is represented by
the Value at Risk (VaR), Interest Rate Delta and Event risk.
The VaR indicates the maximum loss for a given confidence
level and horizon under'normal'market conditions, based
on one year of historical market movements. Daily risk
management uses a confidence level of 97.5% and a horizon
of 1 day. Under this method, VaR is calculated on the basis
of historical market movements and the positions taken.
The table below presents the composition of the VaR. The VaR
is divided into a number of components. A diversity advantage
is achieved in this case by the opposing positions of various
books which partially cancel each other out. In 2017, the VaR
fluctuated between EUR 3.0 million and EUR 4.9 million, the
average being EUR 3.8 million.The VaR amounted to EUR 3.1
million on 29 December 2017. VaR has moved little during the
year with some fluctuations being driven by client related deals
and volatility in the financial markets.
VaR (1 day, 97.5%)
in millions of euros
Interest
Credit
Currencies
Shares
Commodities
Diversification
Total
2017-29 December
2.9
0.8
0.2
0.0
0.1
-0.8
3.1
2017 - average
3.4
0.8
0.2
0.0
0.2
0.0
3.8
2017 - highest
4.7
1.3
1.2
0.1
2.4
0.0
4.9
2017-lowest
2.6
0.6
0.0
0.0
0.1
0.0
3.0
2016-30 December
4.5
0.6
0.4
0.0
0.2
-1.5
4.3
2016- average
4.1
1.1
0.2
0.2
0.2
0.0
4.4
2016- highest
6.3
1.7
0.7
0.7
0.8
0.0
6.9
2016- lowest
3.3
0.6
0.1
0.0
0.1
0.0
3.5
Rabobank Annual Report 2017 - Consolidated financial statements 195
