4.6 Market Risk in the Trading Environment About this Report Chairman's Foreword Corporate Management Report Appendices Governance Consolidated Financial Company Financial Statements Statements banking book are adversely affected by changes in market interest rates. Interest rate risk at Rabobank arises because of repricing and maturity mismatches between loans and funding, and optionality in client products. Customer behavior is an important determining factor with respect to interest rate risk in the banking environment. The modelling of customer behavior is therefore one of the core elements of the interest rate riskframework. There are behavioral 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 because 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 minus 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 ofthe balance sheet is carried at amortized cost (in IFRS terms) and is therefore not exposed to value changes due to changes in market interest rates, the effects ofthe value changes on IFRS capital will be limited. 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 EaR is the largest deviation in negative terms ofthe expected net interest income in the next 12 months as a result of different interest rates scenarios; 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, ofthe projected interest income overthe next 12 months because of a scenario in which all money market and capital market interest rates gradually increase by 2 percentage points, of a scenario in which all money market and capital market interest rates gradually decrease by a maximum of 2 percentage points, and two scenariosin which the yield curve steepens or flattens. The projected interest rate income is based on a scenario in which all interest rates and other rates remain equal. In 2018, Rabobank's net interest income suffers the most under an interest rate downward scenario throughout the year. On 31 st of December 2018 the EaR ended up at EUR 109 million, lower than the EaR of EUR 148 million in 2017. This is mainly driven by Nil risk management by ALCO/Treasury. Earnings at Risk 3 1 December 2018 31 December 2017 Earnings at Risk 109 148 Split by main currencies Earnings at Risk-EUR 76 104 Earnings at Risk-USD 32 37 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. Modified Duration 31 December December 31 2018 2017 Modified Duration Group level in EUR 2,80% 2,00% Split by main currencies Modified Duration - EUR 3,20% 2,30% Modified Duration - USD -2,20% -3,40% Market Risk arises from the risk of losses on trading book positions affected by movements in interest rates, equities, credit spreads, currencies and commodities. Risk positions acquired from clients Annual Report 2018 - Consolidated Financial Statements 159

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Annual Reports Rabobank | 2018 | | pagina 161