Dear colleagues
EDITORIAL
The financial crisis made such an enormous impact on
the global economy, that reform of the financial sector
was inevitable. The Basel Committee on Banking Super-
vision decided that tighter regulation of banking was
necessary and presented its first draft of the third Basel
Accord (Basel III) at the end of 2009. It presented banks
with severe measures in capital and liquidity requirements.
The ratios for the amount and stability of long-term assets
were formulated so tightly that many banks thought it
would harm the economy at large. They explained that
funding would become so scarce that a credit price spiral
was likely to happen.
Aftera period ofdialogue with governments and central
banks, the Basel Committee released a revised set of
proposals, in July and September 2010. And although
the liquidity measures have been toned down and
implementation of certain parts has postponed until 2019,
it is clear that all banks need to modify their business
model. One that will be driven by higher solvency ratios.
This will impact all banks and their customers. As Wim
Boonstra, our bank's Chief Economist, says in the cover
story: "One of the consequences of this will be either
higher prices for products or lower costs for the banks."
Basel III stipulates that banks hold more capital and
liquidity to ride out future crises without government
help. Rabobank is probably in a better position than some
of our peers when looking at these measures. We already
re-tooled our return on equity requirements from
10 percent to 8 percent. This also means that our capital
base has to rise compared to our risk-weighted assets.
As a result, our Tier 1 capital ratio has already gone up
from 12.5 percent to 14 percent. This creates a buffer
between the capital we have and the capital we need
to keep. Re-tooling our return on equity requirements
also means applying a lower risk profile; a fundamental
element of Basel III. All good, of course, but there is
a downside to this development: our return on capital
will be lower because we retain a larger buffer of capital,
a situation we have to deal with over the coming years.
Upcoming regulation also means that we have to decide
more carefully between asset and liability generation.
As Dick Klaasse explains in the region special: "Either we
decide on asset shrinkage or we go for asset growth
accompanied by long-term wholesale funding or cliënt
funding, which we have defïned as self-funding. There is
a limit to our capacity to generate long-term wholesale
funding, but there is also a limit to the amount of client-
funding we can raise - especially in the light of increasing
competition."
Considering liability generation, we will have to look
at possibilities for syndication and selling off parts of
our assets in order to free up capital to invest in other
products. And we have to be creative with our businesses
that face more difficulty in generating liabilities. Such as
Rabo AgriFinance (RAF) in the US, a finance company
for farmers that cannot take deposits. Fiere we identified
a programme of the Federal Agricultural Mortgage
Company (Farmer Mac) as an opportunity to fund farmers'
real estate loans at an attractive rate. RAF CFO Mark Grass
explains in the sector special.
All in all, Basel III will undoubtedly be a challenge. We are
still studying how we can best manage this new regulation.
What is important though, is that this change will also
lead to a new level-playing field with new opportunities
for the financial world. And for a well capitalised bank
like Rabobank, the opportunities are numerous.
We hope this edition of Rl World will provide you with
more clarity on Basel III and especially what it will mean
for Rabobank. If you have questions on the different
articles, please let us know by mailing your response to:
RIWorld@rabobank.com
Flappy reading.
Sipko Schat
ISSUE 25 OBER RI WORLD