solvency
Serious about solvency
For all of us, 2001 is a year of new beginnings. Armed with strong results from
2000, and back on a very dear track with the positioning paper and operating
model firmly in place, new opportunities, challenges and goals are the business of
today. A look at our 2001 financial targets reveals one of the biggest current chal
lenges - effective solvency management. With the recent decreases in solvency
allocation, we all know there's less to go around than before. And now there's even
a price to pay. What's NewS looks into this hot topic to see what it means for us
today and tomorrow.
Price to pay
Target rewards
Risky business
What'sNewS Issue 3 May/June 2001
Solvency has become what you might
call 'a scarce resource'. As we all know,
RI's allocation in 2001 has been reduced
from EUR 2.2 billion to EUR 2 billion.
And by 2002, it will be brought back even
further to EUR 1.5 billion. With budget
targets remaining at last year's levels, al-
ternate ways to regulate and manage sol
vency are top priority. 'Essentially we have
to change the way we think about sol
vency in RI,' says Jan Bos (pictured near
right) recenrly appointed head of control
RI. Bos leads the solvency team, which in-
cludes controllers Sammy Woe (pictured
right) and Emiel Faber (not pictured here).
'The solvency limit has decreased, hut the
bottom-line has not. That means people
have to choose wisely, and creatively, in
the way they use their allocation. A funda-
mental change in our methods and ap-
proach to the lending business is also part
of the plan.'
Probably the most significant change in
solvency operations is the introduction of
a 'cost for capital' principle. New in 2001,
solvency-users are now required to 'pay'
for the capital they use. Bottom-line: sol
vency is no longer for free. When the
Rabobank Group makes annual alloca-
tions to its various members - Rabobank
International, De Lage Landen, Interpolis
- each institution is expected to return
10% of that amount by year's end. Of
course that's always been a top priority,
but 'cost for capital' drives the urgency
even deeper into the business. In
Solvency allocation has been a hot
topic of discussion since the start of
2001. Many of you will have seen the
memo sent by Rik van Slingelandt ad-
dressing the issue of solvency alloca
tion. Here's a recap:
- good results for RI in 2000, with the
exception of the credit portfolio and
its effect on net results
- based on analysis of results from
1992-2000, the following conclusions
are made:
1enormous growth in our portfolio;
2. enormous growth of new provisions;
3. reasonable releases in provisions;
4. RI's net results are strongly
alignment with Group expectations, RI
'charges' solvency-users 10% of the capi
tal they use. Solvency charges for business
activities are determined every month, tak
ing an average of the solvency at the be
ginning and end of the reporting month.
The target for each business activity is to
influenced by P&L effect of provisions;
5. 2000 seems less dramatic than
previous years but credit losses still
wipe out a large percentage of our
profit.
- To change this trend, we must control
credit losses/provisioning bettcr at
source. Top priorities: pursue quality
clients only, severely cut-back on sol
vency usage.
- To reflect inherent risk in our portfo
lio the moment a deal is done, per
formance measurements in 2001 will
include both 'costs of capital' and 'ex
pected losses' for country and credit
risk.
achieve net profit (or Economie Value
Added) of more than zero after cost of
capital.
Tools like securitization of assets also play
an important role in solvency manage
ment. Capital that is freed up through se
curitization programs like Atlantis and
Sundial - EUR 900 million in 2001 is
charged at a lower ra te than the 10% re
quired by the Rabobank Group, reflecting
the regulatory arbitrage of securitization.
Because securitization is relatively
'cheaper', the idea is that people should be
motivated to generate assets that can eas-
ily be used in a securitization vehicle. To-
gether with Graham Bruce of the securiti
zation desk in London, a system is being
developed that offers rewards where good
assets are generated and takes measures
when 'bad assets are created.
Success in this equation is also a question
of effective risk management. In a situa-
tion where solvency limits are lowered,
but budgets must be made, it's tempting to
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