The deposit and savings
base is crucial for any
banky but it's the stickiness
of those deposits and
savings that really count 5
COVER STORY BANKING AFTER BASEL III
Funding
g Sipko Schat, Executive Board member:
A financial environment that is safer, more transparent and
better able to withstand an economie crisis is something that
the banking sector has said it welcomes warmly - but not
unconditionally. For many bankers the sting in the tail of new
regulations, such as Basel III, is the answer to the 'But at what
cost?' question. Banks are concerned that having to retain more
Tier 1 capital, while increasing their pool of liquid assets to
survive a 30-day crisis, will crimp their ability to carry out their
day-to-day business, thereby depressing income and profit.
So how does the situation look from within Rabobank?
Sipko Schat, Executive Board member responsible for Wholesale
Banking, explains that although Rabobank's capital base is very
healthy, the fact that the bank can't issue share capital, or carry
out a rights issue, means that its flexibility in terms of capital
is slightly lower than some of its competitors, Consequently,
the primary way for Rabobank to preserve its capital is to make
decent returns on a sustainable basis, thereby increasing its
reserves through retained profit.
Niek Vogelaar, Executive Vice President Group Finance, expects
the increased Tier 1 capital requirements to bite into Rabobank's
profit, although he accepts this as an inevitable consequence of
being both a Triple-A rated institution and a cooperative bank.
He explains that the bank is already implementing changes that
are in-line with the expected Basel III requirements. "We have
already re-tooled our return on equity requirements from 10
percent to 8 percent, and this is for two main reasons. Firstly,
in relative terms our capital base has risen compared to our
risk-weighted assets, so our Tier 1 ratio has gone up from around
12.5 percent to its current level of over 14 percent. In other
words, the capital we keep compared to the capital we need
to keep - the surplus of capital - is now larger. And when you
have a large buffer of capital, clearly the return on capital will be
lower, and that's basically where we are today. And the second
reason is the lower risk profile, which the bank aims for and is a
fundamental element of the Basel III proposals as well."
For Sipko Schat, one of the key issues is balancing Rabobank's
funding needs with the requirements laid out by Basel III, which
wants to reduce banks' reliance on short-term funding. Schat:
"The deposit and savings base is crucial for any bank, but it's
the stickiness of those deposits and savings that really count.
The question Basel III makes us ask is: how do you retain those
deposits? We know that in the Netherlands we are in a strong
position. We are by far the largest retail bank and we have the
protection of the Deposit Guarantee Scheme which guarantees
up to EUR 100,000 of savings per depositor per bank. But
outside the Netherlands, especially for Rabobank International
(Rl), we may well have to pay a premium to retain deposits -
such as offering very competitive interest rates - for both our
retail banking and our International Direct Banking channels. But
retaining an additional deposit base outside of the Netherlands
will be a crucial part of our strategy, as we don't want to have to
rely solely on the capital markets."
Niek Vogelaar explains that with around EUR 120 billion held on
deposit at local member banks in the Netherlands, the savings
market will remain a critical source of funding for the bank,
although the bank will be eminently capable of complying with
the new regulatory ratios. "What we try to do is encourage local
banks to get even more funding through the door, so that at a
local banking level we have a deposits-to-loan ratio of over 70
percent. However, it's difficult. We have a 40 percent market share
in the Netherlands, and at such a level it takes a lot of extra effort
to achieve relatively modest returns."
Within RI's Wholesale environment, meanwhile, the Group and
the capital markets will remain funding cornerstones. Schat: 'This
means we have to find the right balance between our assets and
our liabilities, and we also have to look carefully at the tenors
[length of maturity, ed.] of our assets, because it's quite clear that
if we go for long tenors under Basel III it will be a costly exercise.
Within Rl we will have to look at more ways to syndicate or sell-off
parts of our assets, not necessarily with the intention of getting rid
of all of them, but more to retain a substantial stake in the exposure
while freeing up some of their capital, and then concentrating our
activities on other products. For example, we are currently seiling off
some of our renewable long-term assets to the institutional market,
ISSUE 25 OCTOBER 2010 Rl WORLD
