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The DNB, in conjunction with other bank supervisors, regards the risk asset ratio developed by the BaselCommittee as a key supervisory tool and sets individual ratio requirements for banks in the Netherlands. Thisratio was designed to meet the dual objectives of strengthening the soundness and stability of the internationalbanking system and of creating a fair and consistent supervisory framework for international banks by meansof an international convergence of capital measurement and capital standards. The technique involves theapplication of risk weightings to assets (which for this purpose includes both balance sheet assets and offbalancesheet items) to reflect the credit and other risks associated with broad categories of transactions andcounterparties.The Basel Committee guidelines set a minimum total risk asset ratio for all international banks of 8 per cent.Bank capital adequacy requirements have also been established pursuant to EU directives. These directives, asimplemented in the Netherlands, set forth capital standards similar to those of the Basel Committee guidelines.On 1 January 2008, Rabobank Group adopted the Advanced Internal Rating Based (“AIRB”) Approach to themajority of its significant portfolios that contain credit risk in accordance with the approvals granted by theDNB, and various local regulators, as required. However, there remains a small portion of the portfolio that issubject to the Standardised Approach (“SA”). Individually, these portfolios are relatively small or are relatedto new acquisitions in companies that themselves did not yet follow the AIRB Approach.In addition, the EU Capital Adequacy Directive (“CAD”), which became effective on 1 January 1996,established minimum capital requirements for banks and investment firms for market risks. The CAD wasbased on a proposal by the Basel Committee and has now been recast by later EU directives.The risk asset approach to capital adequacy emphasises the importance of Tier I (core) capital. In determininga bank’s risk asset ratio, the rules limit qualifying Tier II supplementary capital to an amount equal to Tier Icapital. Tier II capital includes subordinated debt and certain fixed asset revaluation reserves.The concept of risk weighting assumes that banking activities generally involve some risk of loss. For riskweighting purposes, commercial lendings are taken as a benchmark to which a risk weighting of 100 per cent.is ascribed. With the introduction of the Basel II framework the risk weighting is more risk sensitive and basedon internal assessments of the creditworthiness of counterparties. In practice, this leads to an exposure-specificrisk weighting. Off-balance sheet items are generally converted to credit risk equivalents by applying creditconversion factors. The resulting amounts are then again risk-weighted according to the nature of thecounterparty.In the case of interest and exchange rate related contracts, the risks involved relate to the potential loss of cashflows rather than notional principal amounts. These risks are represented by the replacement cost (as definedby the DNB) of the contracts plus an add-on to reflect potential future volatility in replacement cost arisingfrom movements in market rates.For a discussion of the Basel II framework, see “Regulation of Rabobank Group”.The Tier I ratio and the BIS ratio are the most common ratios used in the financial world to measure solvency.The Tier I ratio expresses the relationship between core capital and total risk-weighted assets. At 30 June2009, Rabobank Group’s Tier I ratio stood at 13.0 per cent. (2008: 12.7 per cent.). The minimum requirementset by the external supervisors is 4 per cent. The high Tier I ratio is one of the reasons for RabobankNederland’s high credit rating.In the first half of 2009 total risk-weighted assets increased by € 1.6 billion to € 239.7 billion and Tier I capitalincreased by € 0.8 billion to € 31.2 billion at 30 June 2009. Retained earnings and the issue of CapitalSecurities contributed to this increase.274