RI - tackling the crisis
economy
With parts of the world's economies already in either deep depression or rapidly
sinking into recession, we look at how some of the worst hit countries are
handling the situation and how threats to others are affecting our people on the
ground. This against a backdrop of recent tough austerity measures to ensure RI
weathers the storm.
Central bank provisions
Little appetite
Credit risk
Self-fulfilling prophesies
Creative structuring
6 What sNewS Issue 10'October 1998
Recently, our bank chairman Herman
Wijffels was on the main evening
news. For once, a representative of one of
Holland's big three banks was not
announcing a profit warning. Both ABN
Amro and ING Barings had been obliged
to issue a warning to shareholders in the
preceding days. Said Wijffels: 'The
economie crisis has hit Rabobank less
hard than other banks. And if we were
listed, we would not have to give a profit
warning at this time.' The news is
comparatively good, but even though the
whole organization is still in good shape,
there is absolutely no room for
complacency - as comments from
managing board, risk managers and the
bank's economists along with the brief
reports provided from eight of our offices
here will show. (Please note: the situation
is changing daily, so these reports are by
definition more a general picture at the
end of week 41.)
The fact that profit warnings have been
announced in the Netherlands goes some
way to understanding the Dutch central
bank's (DNB)
recent imposition
of very high
general provisions
on all the
Netherlands'
financial
institutions.
Rabobank has
already made provisions to absorb the
inevitable shock waves. 'But we will of
course meet the new DNB requirements,'
confirnts Hanno Riedlin, 'not least
because we see this kind of imposition as
one of the underlying fundamentais of the
Dutch banking sector - we're well
regarded in international markets because
we have this kind of regulatory
environment.' The provisions made as
early as last year will be sorely needed.
Compared to many banks operating on
international markets, and especiallv the
US, Riedlin says: 'I suppose you could say:
"so far, so good". Our focus strategy and
the fact that we have stuck to our policies
mean we don't have massive risk
positions. And I still think it is likely that
if we pursue these, we could come out in a
better position than when we went in.'
But according to managing board's
outlook for RI in the near to medium
term, that will depend on our ability to
act and maintain a cluster of austerity
measures. RI's senior managers are
pushing for far greater emphasis on an
intermediary function, especially in
markets such as Russia, where we have
little appetite for the risk involved in
traditional lending. Frankly, although it
was not audible, there must have been a
collective sigh of relief when our almost
negligible exposure to Russia became
common knowledge throughout the
network. Again, the temptation is a
certain smugness. At the same time, we
should remember how often we've
complained about country limits - which
are set to fall even further following
action from the managing board.
Jaap Slotema who heads up global credit
risk management says his team appears to
have acquired a popularity around the
network unheard of in the days of 'the
sky's the limit' - at least for other banks.
'Everyone always
complains about
country limits,' he
says. 'Fm always
hearing about how
X or Y bank has
this or that limit -
always much higher
Jaap Slotema than ours which
have never been and
will never be great. We could have done
billions in business in, say, Russia. Now
all those banks have much higher losses
than ours. We are by nature conservative
and we've been even more careful than
usual recently. The crisis came as no
surprise. The depth of the crisis is another
matter - that wasn't predicted. But as a
cautious institution, you respond by even
more prudence into your business.'
In fact, both the Russian and the recent
hedge-fund related crises have passed us
by, although there have been considerable
indirect effects. We have not been so
lucky elsewhere. DNB requirements and
our own provisions for Asia will take
their toll. Nor can we think the US and
Europe will be immune to the infection
that is souring economies world-wide.
Economist Wim Boonstra is not grirnly
pessimistic about
the EU and US - t
after all, he says, in
a macro sense both
are relatively closed
economies, more
dependent on
interna! than
Wim Boonstra external factors.
But what his team
believes is that people could easily talk
themselves into a recession that according
to the numbers and fundamentais should
be no more than a slow down. 'There is a
lot of psychology at work here,' he says.
'If everyone believes there will be a
recession, there will be. It becomes a self-
fulfilling prophesy.'
Seeing things as they are is what senior 1
management wants from us now. What
we must do is take on board unreservedly
the measures already in hand for the
remainder of this year and into 1999.
These include:
cut backs in solvency use;
cost reductions;
reduced country limits.
That's the bad news - or is it? It may do
wonders for our efficiency. It should
certainly add to our creativity - and that
is the upside. The flight to quality is a
reality and we can take advantage of that,
specifically through focusing on quality at
every stage. The managing board is asking
for a real commitment to growing our
intermediary role - we're talking here
creative structuring, restructuring,
advisory, M&A, sales/hedging capabilities^
and forfeiting. Basically, the message is:
Times have changed, and these need to be
tackled in a thoughtful manner without
affecting our strategie objectives adversely.
Hanno Riedlin
