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use internal credit rating systems to assess the adequacy of their capital. The Foundation Internal RatingsBased Approach allows banks to use their own credit rating systems with respect to the “Probability ofDefault”. In addition to this component of credit risk, the Advanced Internal Ratings Based Approach allowsbanks to use their own credit rating systems with respect to the “Exposure at Default” and the “Loss GivenDefault”. Rabobank Group has chosen the most sophisticated approach, the “Advanced Internal Ratings BasedApproach”.For operational risk, banks can also choose between three approaches with different levels of sophistication,the most refined one being the Advanced Measurement Approach. Rabobank Group has chosen the“Advanced Measurement Approach”.European Union standardsThe European Community had adopted a capital adequacy regulation for credit institutions in all its memberstates based on the Basel I guidelines. In 1989, the EC adopted the Council Directive of 17 April 1989 on the“own funds” of credit institutions (the “Own Funds Directive”), defining qualifying capital (“own funds”),and the Council Directive of 18 December 1989 on a capital base ratio for credit institutions (the “CapitalBase Ratio Directive” and, together with the Own Funds Directive, the “Capital Directives”), setting forththe required ratio of own funds to risk-adjusted assets and off-balance sheet items. The Capital Directivesrequired EU member states to transform the provisions of the Capital Base Ratio Directive and the provisionsof the Own Funds Directive into national law directly binding on banks operating in the member states. TheCapital Directives permitted EU member states, when transforming the Capital Directives into national law, toestablish more stringent, but not more lenient requirements. In 1993, the EC adopted the Directive of 15March 1995 on the capital adequacy of investment firms and credit institutions (“EEC Directive 1993/6”) andin 2000 the Directive of 20 March 2000 on the taking up and pursuit of the Business of Credit Institutions(“EC Directive 2000/12”), which directive consolidated various previous directives, including the CapitalDirectives.EC Directive 2000/12 and EEC Directive 1993/6 have been recast by EC Directives 2006/48 and 2006/49,respectively, to introduce the new capital requirements framework agreed by the Basel Committee on BankingSupervision. The new rules on capital requirements reflect the flexible structure and the major components ofBasel II, tailored to the specific features of the EU market. The simple and intermediate approaches of Basel IIhave been available from January 2007 and the most advanced approaches since January 2008.On 16 December 2002, the EU adopted a directive on the supplementary supervision of credit institutions,insurance undertakings and investment firms in a financial conglomerate. This directive aims to address thesupervisory issues that arise from the blurring of distinctions between the activities of firms in each of thebanking, securities, investment services and insurance sectors. The main objectives of the directive are to:• ensure that a financial conglomerate has adequate capital;• introduce methods for calculating a conglomerate’s overall solvency position;• deal with the issues of intra-group transactions, exposure to risk and the suitability andprofessionalism of management at financial conglomerate level; and• prevent situations in which the same capital is used simultaneously as a buffer against risk in two ormore entities which are members of the same financial conglomerate (“double gearing”) and where aparent issues debt and downstreams the proceeds as equity to its regulated subsidiaries (“excessiveleveraging”).The directive was implemented in the Netherlands in the Financial Supervision Act that came into effect on 1January 2007.308