FINANCIAL INSTITUTIONS
Reducing risk
The main priority for most fïnancial institutions right now
is to reduce their own exposure to risk. One result of this is
that banks are not lending to cash-starved hedge funds and
are shutting down their propriety trading units - effectively
in-house hedge funds - or merging them with their normal
trading activities.
De Groot: "Hedge fund investors are also looking to pull
out and this is forcing the funds to sell assets in very illiquid
markets and take big losses. But even very conservative players
have been hit by the crisis. Pension funds, for instance, have
been hit badly by the sharp fall in equity prices, which has
cut the value of their assets. Meanwhile, their long-term
liabilities have ballooned
because long-term interest
rates have come down sharply.
So while coverage ratios were
normally 140 percent to 150
percent of liabilities - future
pension payments - these
have now fallen to around
110 percent, or even lower in
some cases."
And because so many fïnancial
institutions are now unwilling to
commit capital to the markets,
liquidity has dropped sharply
and lending rates have become
very volatile. This, says De Groot,
has made it diffïcult for Rabobank's
clients to hedge their liabilities.
One result of this lack of funding is that banks are now
concentrating on their existing cliënt base. "As banks reduce
their lending, they're bound to focus more on their existing
clients," De Groot says. "But even some existing clients are
being turned away. This means the pool of clients looking
for a new bank is probably increasing, but these clients are
fïnding it very diffïcult to get funding from other banks.
Let's face it, there just isn't enough money to go around."
So what about the billions that governments around the
world have thrown at the banking sector? This could have
been done better, De Groot says. "European governments
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THE WORD
