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

Rabobank Bronnenarchief

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