Managing limits Limits form the basis of creative growth. Any banking deal is subject to several limits, not the least of which is the availability of capital to finance it. This question, in turn, is conditioned by still other limits: for example country limits and counterparty limits for financial institutions and for clients. All of them are designed to insure that we make the best use of our available funds while weighing potential risk. Concentrating activities Limit management Creating incentives Improving systems What'sNewS Issue 4-April 1999 Anumber of mechanisms have been in place for many years to guarantee the smooth implementation of such creative restraints. For example, for some time, country limits have been managed on the basis of assessments by the international research arm of Rabobank Nederland. Other entities are involved as well. The registration and monitoring of counterparty (or bank) limits has been performed by the Rabobank International (RI) international credit department, with bank limits in trade finance transactions additionally registered by international trade finance in Utrecht. By late last year, a separate system was under development for global financial markets (then investment banking). To further complicate the picture, limits for corporate clients and for non-bank financial institutions have been registered in the offices which requested them; they were responsible for monitoring their own utilization (as they will remain under the new system explained below). Recently, a decision was taken by the man aging board to simplify things by concen trating all limit registration activities, as well as those for limit reallocation, into a new department known as limit manage ment. This decision was taken against the background of rapid market change. On one hand, the turbulence on global finan cial markets has enhanced the importance of both country and counterparty limits. Moreover, there is substantially increased demand for allocations coming from the new geographic and functional segments of the bank. Hence, it is even more imper- ative to insure an optimal allocation of resources, which implies not just directing allocations to areas generating the most attractive returns, but also insuring that the allocation procedure is more dynamic, so that we can rapidly capture market opportunities as they arise. Jaap Slotema With these priorities in mind, the managing board last year took the initial step of approving the formation of a so- called 'department X' which was tasked with the independent (re-)allocation and administration both of country and counterparty risk. This department has now been transformed into limit management, a unit within global credit risk management. The keyword for the new unit is independence: the starting assumption is that its tasks must be separated from those of relationship management in order to avoid conflicts of interest that could be detrimental to the overall interests of the bank. Limit management will henceforth take charge of the registration and re-allocation of both bank limits and country limits, it will dynamieally monitor the actual status and usage of allocations {based on reports from the network), and it will also register country limits and bank limit allocations for non-RI businesses in other parts of the Rabobank Group. Moreover, it is also investigating a method whereby country limits can be purchased on the open market, as well as new accounting procedures whereby the market cost associated with the use of country limits is properly accounted for in the offices' profit-and-loss statements. 'We're not going to send around invoices to all of the offices, but we want an accounting system that better reflects costs and gives the offices an incentive to substantially increase their margins,' says Jaap Slotema, who is head of global credit risk management. Slotema likes to compare the new system with the dynamic of privatization. Instead of receiving country limit 'free handouts' from head office, individual offices will henceforth be encouraged to become more entrepreneurial. The system will be redesigned to create incentives for them to earn their allocations. The overall goals? 'You want to get better yields, to encourage business in your core sectors, and generally direct limits towards those areas where you want to create your assets at the end of the day,' Slotema says. 'You also want to get away from static management and attain more flexibility. If relationship management in an office in one part of the network needs a country limit for a three-month deal, you should have a sufficiënt overview on which to base a decision to allow them to "borrow" from the limit available to an office in another part of the network, provided of course that this is eventually returned.' Clearly, the introduction of this kind of flexibility will require better systems and reporting procedures. There is at present a proliferation of limit registration systems, as mentioned above: moreover, while reg istration and (re-)allocation takes place at head office level, data on allocation and utilization are registered at the individual office level, resulting in doublé bookkeep- ing, reporting deviations, delays, and errors in registration. The intent is to sharply limit this tendency, to substantially speed up the information flow between LItrecht and other offices in the network, particularly with respect to changing allo cations, and also to improve reliability overall. The benefits of designing a more creative system of limits cannot be suffi- ciently underscored.

Rabobank Bronnenarchief

blad 'What's news' (EN) | 1999 | | pagina 4