ABN AMRO’s experience of managing its own capital can be helpful in addressing clients needs, from asset liability management to meeting Basel II compliance deadlines, says Huibert Bouwmeester.
As a global bank with multiple home markets and a highly diverse retail, commercial and wholesale client base, ABN AMRO has developed a rigorous framework to manage its own capital, funding, liquidity, interest and currency exposures. Risk management has, out of necessity, become a core competency of the bank.
The knowledge that the bank has gained from managing capital and funding requirements is very helpful when addressing clients’ specific needs. ABN AMRO has developed centres of excellence located in different parts of the bank that can be brought together on specific client assignments.
Gathering expertise
For example, the bank identified at an early stage that the expertise it had developed within its risk function was a strong core competency and could be of use to its clients. Risk Advisory Services (RAS) was set up two years ago as a ring-fenced unit within the bank’s risk department, focusing on advising clients. The demand for its services has grown quickly and there are now more than 20 people on the team.
In addition to RAS, the bank has a Capital and Asset Liability Management Advisory Team (CALMA), which is part of the investment banking business. Within CALMA there are people with backgrounds in FI corporate finance, capital optimisation (both hybrid capital and structured finance) and bank asset liability management. This team systematically seeks to leverage the expertise of Group ALM (which looks after in-house needs) on assignments for external clients.
ABN AMRO can offer its clients not only outstanding advisory and structuring capabilities, but also the distribution strengths of its fixed income and equity capital market businesses.
Two major current pre-occupations for ABN AMRO’s clients are the new Basel II capital adequacy rules and the IFRS accounting rules. The bank successfully implemented IFRS last year and is now making use of that experience to help smaller, regional financial institutions that have less resources at their disposal do the same.
Accounting rules
IFRS accounting rules will have an important impact on how banks will view their businesses in the future. For instance, fair value accounting on financial instruments (IAS 39) and debt/ equity treatment (IAS 32) of Tier I capital securities will lead to greater volatility of reported earnings and capital for most (if not all) banks.
With regard to Basel II, ABN AMRO has already made significant investments in what will be the ongoing task of compliance. It has been working to improve the alignment of its internal risk monitoring and management systems with the actual risks inherent in the businesses for many years. The systems and working practices that have already been put in place are being used as a platform with which to face the challenges of Basel II compliance, and the bank is confident that it will be part of the first wave of banks to adopt the advanced internal ratings-based (IRB) approach of Basel II.
If the challenges are great for large global players such as ABN AMRO, then the challenges for some of its bank clients in less developed markets, or smaller regional players in developed markets, will be significant. The true extent of these challenges for specific banks will depend greatly on the type of business that these banks are in and their stated ambitions with respect to Basel II, and whether they wish to adopt standardised, foundation or advanced IRB practices.
Internal challenge
Banks that wish to run internal models will face significant challenges in meeting regulators’ requirements. To cite one example, in the domestic Dutch market alone ABN AMRO has had to develop more than 20 internal models to cater for all the different asset classes for which it provides banking services. Each of these models has to be rigorously tested and externally validated before the bank’s regulators sign them off.
With the benefit of its in-house experience, the bank’s RAS team is helping clients to improve their risk management processes (including operational risk). ABN AMRO is advising clients in Europe, the Middle East and Asia, and is at the forefront of offering advisory services on asset liability management, especially linked to Basel II compliance.
ABN AMRO stands ready to provide innovative thinking and critical assistance to financial institutions around the world, and help to fast-track deadlines to ensure that they comply with Basel II.
Huibert Bouwmeester is a member of ABN AMRO’s managing board.
