Annual report 2006 - Dexia.com

RISK MANAGEMENT
MANAGEMENT REPORT
COMPTES CONSOLIDÉS
COMPTES SOCIAUX
ORGANIZATION OF THE CONTROL
Dexia’s Management Board, advised by Risk Management
Group (RMG), retains ultimate responsibility to set the strategic
direction of Market Risk Management (overall risk
appetite, methodological choices, organization of reporting
and of the decision processes).
It is the task of RMG, in collaboration with the Risk Management
teams of the different entities, to translate these
decisions into precise and written policies, guidelines and procedures
and to oversee their effective application. RMG is also
in charge of defining the calculation methods that are to be
applied at Group level as to P/L and risk measurement.
Day-to-day responsibility for ensuring sound and robust market
risk management and follow-up lies within the entities
(computation of the risk indicators, control of the limits...).
Each entity is responsible for the follow-up of its market activities
(subsidiaries included), for their monitoring and reporting
to local authorities. The entire process is coordinated at Group
level to ensure the coherence and the quality of risk control
within the entire Group.
As a next step, risk indicators are consolidated at the level of
each activity line by the Risk Competence Center. Since the
beginning of 2006, market risk management has been organized
by specialized Competence Centers (CC). The CC are transversally
responsible for the analysis, follow-up and reporting of
risks and results of their activity line on a Group-wide basis. In a
final stage, Risk Management Group consolidates the risk and
P/L-data per activity line into Group-wide figures.
The Market Risk and Guidelines Committee, which is composed
of the members of the Management Board of the Group
in charge of “Treasury and Financial Markets” and “Risk Management”,
the Activity Line Heads and Group and Local Heads
of Market Risk Management and ALM meets at least monthly
and deals with all the topics related to market risk.
Moreover, the Management Board of the Group is informed
by RMG of any change in the risk profile at least every three
months or more frequently if necessary.
RISK EXPOSURE
The Treasury & Financial Markets activities of Dexia are mainly
oriented as a support function for the Group. The detailed
VaR usage of Dexia Group is in the table below. The risk consumption
of the financial activities of Dexia is EUR 29.8 million
VaR on average in 2006 (not including DenizBank).
ASSET AND LIABILITY
MANAGEMENT (ALM)
Structural interest rate, forex, equity and liquidity risks are
managed and supervised by the Group’s Asset and Liability
Management function (or ALM).
The ALM interest rate risk management is split into two
categories:
• short-term ALM (up to 2 years and longer on some delegated
currencies), which is delegated and captured by the
market risk management driven approach (VaR limits, sensitivity
limits, triggers, stop loss, daily follow-up...);
• long-term ALM, which is not delegated and subject to a
dedicated follow-up by the ALCO Group (ALM Committee),
which meets on a monthly basis.
Measurement of balance-sheet risks is harmonized among the
Group’s various entities.
Regarding the interest rate risk management of Dexia balance
sheet, a calculation of the sensitivity of the net present value
of the ALM positions is used as the main ALM indicator. The
risk exposure is primarily on long-term interest rates in Europe
and results from the structural difference between the amortization
profiles of the fixed-rate assets and liabilities.
The Basis Point Value (BPV) measures the change in the balance
sheet net economic value if interest rates rise by 1%
across the entire curve. The BPV of the Dexia Group (insurance
companies and pension funds excluded) amounts to
EUR -494 million as of December 31, 2006.
Regarding the equity investment portfolio of Dexia, it is also
the role of Dexia ALM to follow it up. This portfolio contains
available-for-sale equities managed by the ALM committees
with the VaR model.
The Equity Value at Risk (VaR) measures the potential change in
market value, whereas the Equity Earnings at Risk (EaR) measures
the impact in the P/L statement if the VaR materializes.
The Equity VaR calculated by Dexia is a measure of the potential
loss that can be experienced with a level of confidence of
99% and for a holding period of 10 days.
The Equity EaR is much lower than calculated Equity VaR exposures
as most of the listed shares have a positive AFS reserve
cushion. Dexia’s impairment procedure is activated whenever
the market value falls beneath 75% of the initial purchase
price and/or when there is a lasting decline in the fair value.
EVOLUTION OF VALUE AT RISK
2005 2006
IR&FX EQ IR&FX EQ Spread Trading
(in millions of EUR)
(only fourth quarter)
Individual Avg 24.2 Avg 2.8 Avg 25.2 Avg 2.3 Avg 11.7
Max 34.5 Max 7.6 Max 43.7 Max 6.6 Max 16.0
Global Avg 26.9 Avg 29.8
Max 38.5 Max 58.9
Limit 75 Limit 142
IR = interest rate; EQ = equities; FX = forex.
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Dexia / Annual Report 2006