BIS II
Greater transparency
Market trend
BIS ll/EC
What is BIS?
reason, operational risk will now
be governed by a specific set of
capital requirements. Liquidity and
interest-rate risk requirements will
be assessed and monitored by a
bank's supervisor, in RI's case this is
the Dutch Central Bank as lead, but
we must also continue to adhere to
local regulations in our countries of
operation.
A third component, alongside
capital requirements and supervisory
assessment, is transparency. Corpo-
rate governance has become increas-
ingly important. These new levels of
transparency are designed to facili-
tate assessment by market and
sector analysts and investors.
Although as a cooperative organi-
zation, Rabobank is not listed,
there is a growing trend towards
greater disclosure, in line with
other financial institutions. By
embedding strong corporate gover
nance structures in all our processes,
we facilitate even greater financial
and risk management.
So what does this mean for the
Rabobank in general and for RI in
particular? 'Before we go into
practical specifics,' comments Ben
Vergouw, Manager of the BIS II/EC
program, 'let me just say this. The
BIS II environment is important for
everyone in RI because it means
changes in the way capital is allo-
cated to our various business units
around the world. Businesses in
emerging markets will rcquire far
greater reserves than, say, loans to
a rated company. And because re
serves will be much greater for that
kind of business, we will have to
change the way sorne of our prod-
ucts are structured. Most of our
sound clients will not notice a lot of
difference. But some, espeeially
higher-risk corporates will certainly
have to pay more for funding. This
is not a new phenomenon ensuing
directly from BIS II; in fact, it has
been happening for quite some
time. Banks are less inclined to
finance higher-risk activities; they
are more cautious. They are already
driving better risk analysis and
evaluation, leading to better pricing.
It is a clear trend in the market and
Rabobank can't afford to be left
behind.'
One of the problems with the origi-
nal BIS regulations was its focus on
so-called regulatory capital. The
amount held by the bank in reserve
was based on the very general
weightings and did not always re-
flect the true 'economie' risk. This
is why we have a new acronym -
EC or Economie Capital. In the
past, regulatory capital was used
as basis for calculating Return on
Solvency (ROS). Now, EC will be
used to generate our Risk Adjusted
Return on Capital or RAROC.
Sounds straightforward and sensible
enough, espeeially in light of
greater transparency requirements.
However, not all our systems are
One of the key figures
in any bank's Annual
Report is the BIS percent
age. This percentage indi-
cates the amount of capi
tal held in reserve to cover
counterpartycredit and
implicitly, operational
risk. In 1988, the Bank of
International Settlement,
with head quarters in
Switzerland's Baselset the
minimum percentage at
8%. However, the BIS or
Basel regulatory environ
ment, as it is often known,
is much older. Established
in the 1970s, the Banks'
Committee on Banking
Supervision, housed in the
BIS building, is responsi-
ble for standards govern-
ing international banking.
The Committee is com-
prised of representatives
from central batiks and
other supervisors from the
G-10 states. lts aim is to
contitiually improve stan
dards and to reduce the
risk of the collapse of a fi
nancial system following,
say, the bankruptcy of a
single or many banks.
Over time, the BIS regula
tions have become Stan
dard practice around the
world. Internationally ac-
tive banks in more than
100 countries adhere to
BIS, with smaller domes-
tic financial institutions
applying the regulations
as Standard, although they
were not originally in-
tended for 'home' use. In
1996, an amendment was
introduced requiring addi-
tional solvency for market
risk. However, general
consensus on the total of
these regulations is that
they are inadequate to the
needs of today's markets.
This is why solvency regu
lations for banks are now
set to change.
Bank for International Settlements - Basel
The Word I 29
