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.