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RISK MANAGEMENTRabobank Group places a high priority on the management of risk and has extensive procedures in place forsystematic risk management. Within Rabobank Group, the risk management policies relating to interest raterisk, market risk and liquidity risk are developed and monitored by the Balance Sheet and Risk ManagementCommittee Rabobank Group (“BRMC-RG”) in co-operation with the Group Risk Management department.The BRMC-RG is responsible for balance sheet management, establishing risk policy, setting riskmeasurement standards, broadly determining limits and monitoring developments and advising the ExecutiveBoard on all relevant issues regarding risk management. Rabobank Group’s risk management policies relatingto credit risk are developed by the Policy Credit Committee Rabobank Group in co-operation with the GroupRisk Management and the Credit Risk Management department. These two committees report to theExecutive Board, which is ultimately responsible for risk management within Rabobank Group.The principal risks faced by Rabobank Group are credit risk, market risk, interest rate risk, country risk,liquidity risk and operational risk. Rabobank has implemented an economic capital framework to determinethe amount of capital it should hold on the basis of its risk profile and desired credit rating. Economic capitalrepresents the amount of capital needed to cover for all risks associated with a certain activity. The economiccapital framework makes it possible to compare different risk categories with each other because all risks areanalysed by using the same methodology. See also “Risk Factors”.Risk Adjusted Return On CapitalRelating the profit achieved on a certain activity to the capital required for that activity produces the Risk-Adjusted Return On Capital (“RAROC”). RAROC is calculated by dividing economic return by economiccapital. The calculation and review of RAROC across Rabobank Group’s business activities and entitiesassists Rabobank Group in striking a balance between risk, returns and capital for both Rabobank Group andits constituent parts. This approach encourages each individual group entity to ensure appropriatecompensation for the risks it runs. RAROC is therefore an essential instrument for positioning products in themarket at the right price.The use of the RAROC model to classify Rabobank Group’s activities also plays a significant part in theallocation of capital to the various group entities and the different risk categories. If the calculated RAROClags behind a formulated minimum result to be achieved, which is a reflection of the costs of the capitalemployed, economic value is wasted. A higher RAROC implies the creation of economic value. For the sixmonths ended 30 June 2009, Rabobank realised a RAROC after tax of 11.8 per cent.Market riskMarket risk relates to the change in value of Rabobank Group’s trading portfolio as a consequence of changesin market prices, such as interest rates, foreign exchange rates, credit spreads, commodity prices and equityshare prices. The BRMC-RG is responsible for developing and supervising market risk policies and monitorsRabobank Group’s worldwide market risk profile. On a daily basis, the Market Risk department measures andreports the market risk positions. Market risk is calculated based on internally developed risk models andsystems, which are approved and accepted by the DNB. Rabobank Group’s risk models are based on the“Value at Risk” concept. Value at Risk describes the maximum possible loss that Rabobank Group can sufferin a single day, based on historical market price changes and a given certain confidence interval. Value at Riskwithin Rabobank Group is based on actual historical market circumstances. To measure the potential impactof strong adverse market price movements, stress tests are applied. These “event risk scenarios” measure theeffect of sharp and sudden changes in market prices. Statistical models are also used to generate other riskmeasures which assist the Market Risk department, as well as the BRMC-RG in evaluating Rabobank Group’smarket positions.287