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COVER STORY
So, here we are.on the surface it appears that nothing has changed in the banking land
scape. It's the same every day. National and international headlines steadily cover the finan-
cial market and the banks active in it. The norm has become the continual change and more
change is afloat. There are major capital issues in the market. The gap is widening between
those financial institutions with excess capital and those without. Between those buying
at one extreme, and those fire-selling assets at the other. Some turn to capital rights issues
and sovereign wealth funds. Others are being supported by federal banks' special liquidity
schemes. These mechanisms make it possible to swap illiquid assets for those more tradable
like treasury bills and others.
Rapid flow
SOLID AS A ROCK
Market developments spring from a contagion finding its
origins in the US sub-prime market practices. It is common
knowledge that what turned out to be bad loans repack-
aged and reissued in Collateralised Debt Obligations (CDOs)
and other capital markets facilities are a trigger being carried
downstream into other economie segments. For example,
into consumer goods markets and the construction industry.
For our own account, Rabobank has no direct exposure to
sub-prime mortgages. Rabobank International contained
a limited indirect exposure in the form of Residential-Mort-
gage Backed Securities and CDOs. These investment prod-
ucts have been conservatively revalued resulting in value
adjustments of €284 million charged to the profït and loss
account in 2007 and €127 million to reserves. The impact on
the first half year 2008 figures remains to be seen.
Why it has been sub-prime mortgage lending. Why it's
become contagious is a much more complex story. One that
includes a rapid flow of fundamental change in the nature of
banking across more than two decades. During this period,
run of the mill banking business like deposits and loans have
made room for new financial market instruments, includ-
ing off-balance sheet items such as securitisations. Asset
risk took increasing distance from origination, and involved
whole new approaches to weighing and distributing risk. For
10 years, this has been very successful in terms of profits.
Current market volatility has unveiled the resultant chal-
6 issue 16 THE WORD
