Annual report 2006 - Dexia.com

RISK MANAGEMENT
MANAGEMENT REPORT
COMPTES CONSOLIDÉS
Exposure by geographical region
As of December 31, 2006, the Group’s exposure was concentrated
in the European Union (53.7%, EUR 426.9 billion
at year-end 2006 against EUR 384 billion one year earlier),
particularly in France (12.4%) and in Belgium (11.9%). The
Group’s exposures in the United States and Canada represented
40.0% of total exposure, slightly lower than as of
December 31, 2005.
FSA RISK MANAGEMENT
Financial Security Assurance (FSA) restricts its business to
market sectors characterized not only by low probability of
default but also by low loss severity and high recovery rates in
the unlikely event of a claim on its guarantee. All transactions
must be at least investment-grade quality before FSA insures
them; they must meet FSA’s legal and structuring requirements
and fit within single and aggregate risk limits.
Before insuring a municipal revenue bond, FSA typically
requires a pledge of tax revenues or a claim on a dedicated
revenue stream from essential public services. In the assetbacked
market, FSA guarantees senior tranches structured
to withstand substantial deterioration in the underlying asset
performance, before FSA would be called upon to pay a
claim. Most of its asset-backed securities (ABS) transactions
are structured to have collateral protection that increases
over time, and to have self-correcting mechanisms that are
triggered to restore protection if collateral performance falls
below established minimums. For example, cash flows may be
shifted from subordinate to senior insured tranches or accumulated
in a reserve fund. Where circumstances warrant, FSA
transfers servicing or replaces collateral management.
Thorough due diligence is the hallmark of FSA’s underwriting
process. FSA routinely conducts site visits and file reviews to
verify issuer information. Internal legal staff review documents
and, in many cases, solicit opinions from outside counsel to
ensure that structures perform as intended. Once a transaction
is guaranteed, FSA monitors the issue throughout its life,
so that potential problems can be spotted and action taken
before they become serious.
Reinsurance also plays a key role in the overall risk management
program. Just as banks syndicate loans in order to
address single-risk concerns, FSA reinsures transactions with
a group of AA and AAA reinsurance companies.
Through its disciplined underwriting approach, FSA has assembled
an extremely conservative insured portfolio, as evidenced
by the underlying credit quality of its insured portfolio: 87%
of net par insured is of A quality or higher, and 55% is AA or
higher (see charts).
THE BASEL II PROJECT
2006 was a year of stabilization for Basel II organization, a year
of transition from project status to implementation and day-today
operation. At year-end, most of our internal models were
developed, documented, internally validated and implemented.
Dexia officially applied in December 2006 to use the advanced
COMPTES SOCIAUX
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JK
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A
B
C
D
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K LM N A B
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D
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Public Finance (67%)
Asset-backed (33%)
BREAKDOWN OF DEXIA
EXPOSURE BY GEOGRAPHICAL
REGION (AS OF DECEMBER 31, 2006)
CONSOLIDATED EXPOSURE:
EUR 794.3 BILLION
A FRANCE 12.4%
B BELGIUM 11.9%
C GERMANY 5.3%
D ITALY 7.5%
E LUXEMBOURG 1.3%
F OTHER EU COUNTRIES 15.4%
G REST OF EUROPE 1.1%
H UNITED STATES AND CANADA 40.0%
I JAPAN 1.1%
J SOUTH EAST ASIA 0.3%
K SOUTH AND CENTRAL AMERICA 0.1%
L TURKEY 1.1%
M OTHER 2.5%
FSA INSURED PORTFOLIO
AS OF DECEMBER 31, 2006
TOTAL NET PAR OUTSTANDING:
USD 376.5 BILLION
A COLLATERIZED
BOND OBLIGATIONS (CBOs) 2%
B COLLATERIZED
LOAN OBLIGATIONS (CLOs) 6%
C POOLED CORPORATE CREDIT
DEFAULT SWAPS (CDS) 9%
D CONSUMER RECEIVABLES 3%
E RESIDENTIAL 6%
F OTHER ASSET-BACKED 7%
G GENERAL OBLIGATIONS OF CITIES,
STATES AND SCHOOL DISTRICTS 28%
H TAX-SUPPORTED NON-GENERAL
OBLIGATIONS 12%
I HOUSING 2%
J UTILITY 10%
K HEALTH CARE 3%
L TRANSPORTATION 4%
M EDUCATION/UNIVERSITY 1%
N OTHER MUNICIPAL 6%
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Dexia / Annual Report 2006