Funding and liquidity risk
Bad debt expenses
59 Rabobank Group Annual Report 2005
Organisation and risk management: risk management
Liquidity risk is the risk that not all (re)payment commitments can be
met as well as the risk that increases in assets cannot be funded at
reasonable prices or not at all. This could happen if clients or other pro
fessional counterparties suddenly withdraw more funding than expected,
which cannot be met by the bank's cash resources or by selling or
pledging on assets or by borrowing funds from third parties.
Methods to measure this risk include the CA/CL method (Core Asset
Core Liabilities). This analysis is based on the cash flow schedule of all
assets and liabilities. Using various time periods, a quantification is made
of the assets (and unused facilities) and liabilities that will probably still
be or come on the balance sheet after assumed and closely defined
stress scenarios have occurred. These remaining assets and liabilities are
referred to as the core assets (CA) and core liabilities (CL) respectively.
The CA/CL ratio is the liquidity ratio. Given the highly conservative
weightings used, a ratio of below 1.2 is considered adequate. In the year
under review, this was the case for the scenarios used.
The supervisory authority also has extensive guidelines for measuring
and reporting the Group's liquidity position. The liquidity position of the
Group as a whole, measured according to the guidelines of the super
visory authority, was more than adequate, with the available liquidity
exceeding the requirement by an average of 8%. Rabobank Group's
comfortable liquidity position is reflected in the balance sheet by the
substantial asset items 'Financial assets available for sale', 'Financial assets
held for trading' and 'Other financial assets carried at fair value through
profit or loss, together totalling EUR 105 billion. In principle, these assets
are directly available to create liquidity.
In addition, the bank monitors and reports on a daily basis which cash
flows are to be expected over the next 30 days and how much collateral
is available in which location. For unexpected crisis situations, detailed
contingency plans are in place formulating which procedures are to be
followed should a crisis situation occur.
Rabobank Group's funding policy is to meet the funding requirements
of the Group entities at an acceptable cost. The policy is characterised
by diversification of funding sources and currencies, flexibility of funding
instruments and active investor relations. Rabobank Group has been
assigned the highest possible credit rating by leading rating agencies.
This top rating enables Rabobank Group to raise funds at a relatively
low cost.
In 2005, over EUR 20 billion in long-term funding was raised in the inter
national financial markets. A separate Investor Relations unit is in place
to provide full information to investors in Rabobank paper about the
bank's risk profile and financial and strategic developments.
In order to limit the need for long-term funding, EUR 2 billion of
Rabohypotheekbank's centrally available mortgages portfolio was
securitised for liquidity purposes in 2005. The mortgages were sold to a
dedicated entity that finances them by the issue of bonds. These bonds
were subsequently bought by Rabobank and can be used as collateral
to raise funds, if needed. By converting mortgages into in marketable
paper, non-liquid assets have been converted into liquid assets.
in basis points of average private sector
lending
2005
2004
Domestic retail banking
9
14
Wholesale banking and international
retail banking
52
21
Leasing
72
73
Rabobank Group
20
18
Long-term funding in 2005, by currency
Euro
40%
Pound sterling
14%
US dollar
12%
Canadian dollar
9%
Australian dollar
7%
Swiss franc
5%
Japanese yen
4%
Other
9%
