Contents Introduction Management report Appendices Corporate governance Consolidated Financial Statements Company Financial Statements
The overview presented on the previous page, has been
composed on the basis of contractual information and
does not represent the actual behaviour of these financial
instruments. However, this is taken into account for the day-
to-day management of the liquidity risk. Customer savings are
an example. Under contract, these are payable on demand.
Experience has shown that this is a very stable source of
long-term financing that Rabobank has at its disposal.
The regulations of the supervisory authority also factor this in.
The European Commission Delegated Act 'Liquidity Coverage
Ratio'(DA LCR) became a regulatory requirement as of October
1st 2015. With 123% as per 31 December 2017, Rabobank
complies with the minimum 100% requirement as set by the
Dutch Central Bank(DNB).
The liquidity requirements to meet payments under financial
guarantees are considerably lower than the amount of the
liabilities because Rabobank does not generally expect that
third parties to such arrangements will draw funds.The total
outstanding amount in contractual obligations to provide credit
does not necessarily represent the future cash resource needs
of Rabobank because many of these obligations will lapse or
terminate without financing being required.
4.8 Operational risk
Rabobank defines operational risk as the risk of losses being
incurred as a result of inadequate or dysfunctional internal
processes, people and systems or as a result of external trends
and developments, including legal and reputational risks. In
measuring and managing operational risk, Rabobank operates
within the parameters of the most advanced Basel II approach,
the Advanced Measurement Approach, and follows the'three
lines of defence model'as prescribed by the EBA.
The bank's operational risk policy is based on the principle that
the primary responsibility for managing operational risk lies with
the first line and that this must be integrated into the strategic
and day-to-day decision-making processes.The purpose of
operational risk management is to identify, assess, mitigate and
monitor the various types of operational risk. The operational
risk measurement supports those responsible for operational
risk prioritisation and deployment of people and resources.
Within Rabobank Group, the departments involved in the
primary processes of the bank form the'first line of defence'.
They are fully responsible for day-to-day risk acceptance and
for integrated risk management and mitigation within the
approved risk appetite.The Compliance, Legal and Risk(CLR)
functions together constitute the 'second line of defence'.
The second line functions have a monitoring role with regard
to all types of operational risk and they monitor the way in
which'the first line of defence'manages these risks. In addition
and independently from the first line, they report on the risk
profile and appetite breaches to senior management and the
Managing Board. Internal Audit forms the'third line of defence'.
At group level, the Risk Management Committee (RMC) is
responsible for formulating policy and setting parameters.
Compliance, Legal and Risk also report quarterly to the RMC
on changes in operational risks at group level. Delegated risk
management committees have been established within the
group's entities.Their responsibilities include monitoring all
operational risks at entity level (amongst others: conduct risk,
continuity risk, information security risk, fraud risk including the
legal and reputational impact thereof).
The annual risk management cycle consists of a group-wide
Scenario programme and Risk Self-Assessment that identifies
the more material operational risks of Rabobank Group.
After assessment, if and when risks fall outside the defined
risk appetite, mitigating measures are taken by first line and
monitored by second line.
4.9 Fair value of financial assets and liabilities
For fair value measurement Rabobank assumes that the
transaction to sell the asset or transfer the liability is conducted
in the principal market for the asset or liability. Alternatively, in
the most advantageous market if there is no principal market.
Market prices are not available for a large number of the
financial assets and liabilities that Rabobank holds or issues.
For financial instruments for which no market prices are
available, the fair values shown in the following table have
been estimated using the present value or the results of other
estimation and valuation methods, based on the market
conditions on the reporting date.The values produced
using these methods are highly sensitive to the underlying
assumptions used for the amounts as well as for the timing of
future cash flows, discount rates and possible market illiquidity.
The following methods and assumptions have been used.
Cash and cash equivalents
The fair value of cash and cash equivalents is assumed to be
almost equal to their carrying amount.This assumption is
used for highly liquid investments and also for the short-term
component of all other financial assets and liabilities.
Loans and advances to banks
Loans and advances to banks also includes interbank placings
and items to be collected.The fair values of floating rate
placings, that are re-priced regularly and do not vary significantly
in terms of credit risk, and overnight deposits are their carrying
amounts. The estimated fair value of fixed-interest deposits is
based on the present value of the cash flows, calculated on the
basis of appropriate money market interest rates for debts with
comparable credit risks and terms to maturity.
Rabobank Annual Report 2017 - Consolidated financial statements
199
