Liquidity risk and funding
Liquidity risk is the risk that a bank is unable to meet all its payment or repayment obligations
in time, as well as the risk that it is unable to fund increases in assets either at reasonable prices
or at all. This could happen if clients or professional counterparties suddenly withdraw more
funds than expected while terminating funding arrangements are not refinanced or the bank
has insufficient cash resources or is unable to sell or pledge assets or to borrow funds from
third parties. Since the start of the financial crisis in the summer of 2007, liquidity risk has
been a prominent factor in the financial markets, and it is one of the biggest risks for banks.
The money and capital markets continued to function only thanks to intervention by
governments and central banks. Retaining the confidence of both professional market parties
and private clients proved to be crucial.
Liquidity risk management
Rabobank Group has always recognised that liquidity risk is an important risk type.The policy
is that long-term lending is financed by means of amounts due to customers and long-term
funding from the professional markets. Liquidity risk management is based on three pillars.
The first pillar sets strict limits on the maximum outgoing cash flows of the wholesale banking
division. This ensures that excessive dependence on the professional market is avoided. To this
end, the incoming and outgoing cash flows expected over the next 30 days are calculated and
reported on a daily basis. In addition, limits have been set on such outgoing cash flows for each
currency and location. Detailed contingency plans have been drawn up in order to ensure the
bank is prepared for potential crises.
Under the second pillar, a large buffer of liquid assets is held. If necessary, these assets can
be used to generate liquidity immediately, either by being used in repo transactions or being
sold directly on the market, or by means of securities lending to central banks. This buffer,
calculated on the basis of guidelines issued by the regulator, stood at EUR 112 billion at
year-end 2009.
The third pillar is to limit liquidity risk by pursuing a prudent funding policy that is designed
to ensure that the financing requirements of group entities are met at an acceptable cost. The
diversification of funding sources and currencies, the flexibility of the funding instruments used
and an active investor relations function play an important role in this context. This prevents
Rabobank Group from becoming overly dependent on a single source of funding.
Several methods have been developed to measure and manage liquidity risk. Methods used
include the CA/CL (core assets/core liabilities) method. This analysis is based on the cash flow
schedule of all assets and liabilities. Using various time periods, a calculation is made of the
assets, unused facilities and liabilities that are likely to appear on the balance sheet after running
implied, carefully defined stress scenarios. These remaining assets and liabilities following the
stress tests are defined as core assets and liabilities. The ratio of core assets to core liabilities is
the liquidity ratio. Given the highly conservative weightings used, a ratio of less than 1.2 is
considered adequate. In 2009, this was once again the case in the scenarios used.
The Dutch regulator also provides extensive guidelines for measuring and reporting the
liquidity position of Rabobank Group. According to these guidelines the liquidity position is
more than adequate, with available liquidity exceeding the requirement by 28% on average.
Asset-backed commercial paper conduits
Outstanding asset-backed commercial paper fell to EUR 15.3 (17.5) billion at year-end 2009,
mainly as a result of the termination of the Neptune programme. These conduits are mainly
used for funding own originated loans as well as customer loans and receivables. These
structures form an integral part of Rabobank Group's liquidity risk management, and have since
the introduction of the International Financial Reporting Standards, largely been included in
the consolidated Rabobank Group balance sheet.
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Report 2009 Rabobank Group
