About this Report Chairman's Foreword Management Report Appendices Corporate Governance Consolidated Financial Statements Company Financial Statements amount of 15.25%, a recapitalization amount of 11.65%, and a market confidence amount of 4.06%. The amounts for recapitalization and market confidence include a correction for the expected depletion (loss absorbing amount) of the balance sheet. The 30.96% requirement is based on BRRD I. Future MREL requirements are subject to ongoing political developments (e.g., European Trilogue) concerning the risk reduction package proposed by the European Commission in November 2016. As under BRRD I, Preferred Senior is MREL eligible, Rabobank already meets its MREL requirement, soa transition period has not been set. Overtime, Rabobank intends to use only a combination of own funds and Non-Preferred Seniorto meet its MREL requirement. In the second half of 2018, Rabobank issued 3 tranches of Non-Preferred Seniors: EUR 1 billion, USD 1 billion and USD 0.25 billion. With MREL eligible capital of 28.25%, the additional MREL needs are manageable. We define our MREL eligible capital buffer as qualifying capital plus the non-qualifying part of the grandfathered additional tier 1 instruments, the (amortized part of) tier 2 with a remaining maturity of at least one year and Non-Preferred Senior bonds with a remaining maturity of at least one year. The buffer increased from EUR 53.2 billion to EUR 56.6 billion due to profit retention and the issuance of new instruments. This increase corresponds to 28.25% (2017:26.82%) of risk-weighted assets. MREL Eligible Capital and Non-Preferred Senior Bonds Buffer in billions of euros Qualifying capital Non qualifying grandfathered additional tier 1 capital Amortized tier 2 >1 year remaining maturity Non-Preferred Senior bonds 1 year remaining maturity MREL eligible capital and Non-Preferred Senior bonds buffer Risk-weighted assets MREL eligible capital and Non-Preferred Senior bonds buffer risk-weighted assets 12-31-2018 12-31-2017 53.3 0.0 1.3 56.6 51.9 0.0 1.3 53.2 Regulatory Capital Regulatory capital, 8% of our risk-weighted assets, is our external capital requirement. It representsthe minimum amount of capital which Rabobank is required to hold under CRR and CRD IV. Our regulatory capital requirement amounted to EUR 16.0 billion (2017: EUR 15.9 billion) at December 31, 2018, of which 84% related to credit and transfer risk, 14% to operational risk and 2% to market risk. This is in line with the regulatory capital at the end of 2017. Rabobank calculates its regulatory capital for credit risk for almost the entire loan portfolio using the advanced IRB approach approved by our supervisory authority. In consultation with the DNB, Rabobank applies the standardized approach to portfolios with relatively limited exposure and to some smaller portfolios outside the Netherlands which are not suitable for the advanced IRB approach. We measure operational risk using an internal model, approved by DNB, that is based on the advanced measurement approach. For market risk exposure, DNB has given Rabobank permission to calculate our general and specific position risk using our own internal value-at-risk (VaR) models, based on the CRR. Regulatory Capital by Business Segment in billions of euros Domestic Retail Banking Wholesale, Rural Retail Leasing Real Estate Other Rabobank 12-31-2018 12-31-2017 6.5 6.6 1.5 0.4 1.0 16.0 6.3 6.0 1.4 0.8 1.4 15.9 Renewed Pillar II Capital Framework The relevant rules and regulations for the capital adequacy process of EU banks are addressed in the CRR/CRD IV comprehensive frameworks. They take a three-pillar approach to risk and capital management: Pillar I on minimum capital requirements for credit, market and operational risk; Pillar II on the supervisory review process (SREP) and internal capital and liquidity adequacy assessment, and Pillar III on market discipline, under which banks disclose to the public their overal I risk profiles. In order to adequately assess the capital resources needed to cover the risks inherent in its current activities, Rabobank renewed its Pillar II modeling landscape. The renewed Pillar II capital framework became effective on January 1, 2017. It covers those areas that Rabobank believed either did not address the risk or failed to adequately address the risk. Rabobankdeveloped mostly statistical approaches and methodologies that: (1) challenge regulatory capital requirements; (2) cover risks not addressed in CRR/CRD IV, and (3) identify possible future events or changes in the market conditions that could impact Rabobank's strategic planning. The renewed Pillar II modeling landscape reflects the changing regulatory environment and similar developments in the industry. The outputs of the renewed Pillar II models are used for various purposes within the bank, such as deal acceptance and pricing, strategy and planning of the company's operations, and performance evaluation. Moreover, the regulators and Annual Report 2018 - Management Report 57

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Annual Reports Rabobank | 2018 | | pagina 59