Credit risk will
killyou slowly,
but liquidity risk
will killyou fast
BANKING SPECIAL
Pieter Emmen:
Pieter Emmen
One criticism banks have had about the Basel III capital and
liquidity proposals is that they will almost certainly hinder
growth in the short to medium term, as both lending and
investment decline to comply with the new requirements,
For Rabobank, which has seen its balance sheet grow at a
rateofaround 12 percent perannum over the past century,
there will be a clear limit on how much growth is possible.
Emmen: "Before the crisis, neither funding nor capital was an
issue at Rabobank, as we could always attract Tier 1 capital
externally to fill any gap we might have had. So there was no
limit in that sense on growth. However, things have changed.
Because we're a cooperative member bank, and therefore
unable to raise funds through share offerings, our core Tier
1 capital will have to come primarily from retained profits.
And clearly the only way to retain profits is to first earn them."
De Roo, meanwhile, is straightforward about the impact
decreased growth will have on Rabobank. He explains that
if banks have to live with lower risks, then they will have to
accept a decrease in income. "At the same time banks have
to strengthen their capital base, which will be difficult in the
current market, so you have to take it from your profit. And
profit is a very simple thing, consisting of income and costs,
so either our customers have to pay more for their products,
or we have to lower our costs, such as by cutting employees'
salaries. Neither are particularly popular topics in banking,
but in the longer run, if profitability is to increase, one or
both of these measures will have to be implemented.This
will undoubtedly be a real challenge going forward, but it's
important that everyone is aware that these are issues that
not only Rabobank, but the entire sector, will have to deal
with in what will be a new-look banking sector."
within the banking sector, including credit risk modeling,
operational risk, and capital management. However, there was
one area that he believes wasn't covered adequately. Emmen:
"When the financial crisis hit, we very quickly saw that the big
issue was liquidity risk management, which is not part of Basel II.
One of the reasons Rabobank remained stable throughout
the crisis is that we've always had a keen eye on liquidity, and
we've been one of the few issuers able to attract long-term
funds in both the good times and the bad times. And we
saw that it was the dependence on short-term professional
wholesale funding that killed most of the banks during the
crisis. If you hold such liabilities, and the lender doesn't want
to refund you, you're gone no matter how good your asset
base is. This is why the Basel Committee introduced the NSFR
and liquidity coverage ratios, because they understand that
liquidity is an even more important measure for the short-term
survival of a bank than credit risk. Credit risk will kill you slowly,
but liquidity risk will kill you fast. It doesn't matter if your assets
deteriorate slowly and your profits decline gradually - if your
liquidity is gone, you're gone."
8 issue 25 o Rl WORLD
