Rabobank’s market risk charges jump 54% in H1

Increases in commodity and FX risk push up SA RWAs

Rabobank’s capital requirements to cover trading risks jumped 54% over the first half of the year, as the bank built outsized positions in commodity and currency markets.

Market risk-weighted assets (RWAs) hit €6.5 billion ($7.65 billion) at end-June, resulting in capital charges – set at 8% of RWAs – of €522 million. This compares with RWAs of €4.2 billion six months earlier, and €339 million in capital requirements.

 

 

The increase stemmed from the bank’s standardised approach (SA) portfolio, which accounted for 48.5% of total market RWAs compared with 13.3% six months prior.

Over the first half of the year, commodity RWAs rose 461% to €2.1 billion, driven by higher deal volumes in energy products. Meanwhile, a single foreign currency position produced €1.1 billion in new RWAs, as it pushed the bank’s total FX positions above the threshold where they have to be risk-weighted.

What is it?

Market RWAs are calculated using either the internal models approach or the standardised approach.

Under article 351 of the EU’s Capital Requirements Regulation (CRR), a bank is only subject to capital requirements for FX risk when its overall net total FX positions exceed 2% of own-funds. Said positions include gold contracts.

Why it matters

On the commodity front, it is likely that the RWA boom over the first six months of the year is a product of Rabobank’s structured products desk churning more business. Loans to securities and commodities brokers increased 48% over the period.

The sudden jump in capital charges for FX positions is harder to explain. Rabobank declined to comment on what exactly drove the increase, and only said it was due to “a number of revaluations of foreign currency investments”.

It’s possible these revaluations were routine, but inflated positions were enough to become subject to risk-weighting. Perhaps some hedges the bank had put in place to protect its capital ratios from currency hits – which, under CRR, can be excluded from total FX positions – suddenly didn’t qualify for special treatment anymore, tipping the bank’s FX book across the ‘2% of own funds’ threshold.

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