Annual report 2006 - Dexia.com

RISK MANAGEMENT
Even though the operational Asset and Liability Management
remains decentralized in Dexia’s three major entities, ALM
risks are supervised and managed globally by the Dexia Group
ALM Committee, which includes the members of the Management
Board. The ALM Committee monitors the overall
consistency of the Group’s Asset and Liability Management
process, decides on the methodologies and the risk measurement
guidelines, notably on the investment of shareholders’
equity and on internal transfer pricing mechanisms and also
decides on investment strategies in local entities (interest,
forex, equities).
In addition, the Management Board is kept periodically
informed of ALM main risks and positions.
CURRENCY RISK
Currency risk is the risk of loss resulting from changes in
exchange rates.
TRADING
Dexia is an active participant in currency markets and carries
currency risk from these trading activities, conducted primarily
in the Treasury and Financial Markets business line. These trading
exposures are subject to VaR (Value at Risk) and are included
in the VaR mentioned on page 208 of this annual report.
NON-TRADING
Dexia's reporting currency is the euro but its assets, liabilities,
income and expense are denominated in many currencies
with significant amounts in USD. Reported profits and
losses are exchanged at each closing date into euro or into
the company's functional currency, reducing the exchange
rate exposure.
Within its Assets & Liabilities Committee, Dexia proactively
decides on the opportunity to hegde expected foreign currency
risks in its results in the main currencies (mainly in USD).
HOLDINGS
Dexia analyzes the opportunity to hedge all or part of the
currency risk relating to participation investments in foreign
currencies.
In 2006, Dexia hedged the payment of the acquisition of
DenizBank in foreign currencies, i.e. the payment in USD of
the amount due to the majority shareholder and the payment
in TRY of the amount due to the minority shareholders in
accordance with the mandatory tender offer. The holding in
DenizBank is not hedged due to the cost of the transaction.
LIQUIDITY MANAGEMENT
Dexia adopts a sound and prudent policy on liquidity management.
The balance between its available funding sources
and their use is carefully managed and supervised. In practice,
particular attention goes to:
• assessing the adequacy of expected new lending production
(in terms of maturity and amount) as opposed to available
resources;
• assuring Dexia’s liquidity, within distressed market circumstances.
The first question is addressed in the annual planning process.
Each year, the forecasts for the new lending production
are compared with the funding capacity. The purpose is to
preserve an acceptable liquidity gap profile for the Group. In
order to reflect the funding cost of the transactions originated
by the business lines more accurately, whether they require
funding or bring funding, the Group has improved its analytical
accounting process. The purpose of this kind of “internal
market“ for liquidity is to provide the right incentive to the
business lines to achieve a natural match between the lending
and the funding capacities.
The second question is addressed by assessing Dexia’s liquidity
profile under various distressed liquidity scenarios. The
results and impacts observed under the different scenarios
are analyzed and subsequently translated into a set of limits
and ratios. The Dexia liquidity framework is conceived in
such a way that by virtue of its liquidity reserve (notably the
Credit Spread Portfolio), Dexia can withstand a total squeeze
of funding and a stress on deposits for one year whilst maintaining
its lending activity. The liquidity position is monitored
and controlled from one day up to several months. Hence
great care is paid to the forecast of expected liquidity needs in
the main currencies as well as to the estimate of the liquidity
reserve. Special attention is also paid to the Group’s off-balance-sheet
liquidity commitments.
Given their importance, all the main issues regarding the
liquidity of the Group are directly managed by the Group’s
ALM Committee, which includes all the members of the
Management Board.
A global liquidity contingency plan is part of the guidelines
and is tested on a regular basis.
MANAGEMENT REPORT
COMPTES CONSOLIDÉS
COMPTES SOCIAUX
EQUITY INVESTMENT PORTFOLIO AS OF DECEMBER 31, 2006
Market Equity % Equity
(in millions of EUR) Value VaR VaR/MV (1) EaR
Banking companies 1,527 106 7.0% -1.8
Insurance companies 1,795 100 5.6% -1.1
(1) % VaR/MV represents the percentage loss that can be experienced on the market value, excluding DenizBank.
Dexia / Annual Report 2006 | 67