Annual report 2010 - Dexia.com

Capital managementEconomic capitalEconomic capital adequacyManagement reportConsolidatedfinancial statementsEconomic capital is defined as the potential deviation of theGroup’s economic value in relation to the value expected at agiven interval of confidence and time horizon. The economiccapital quantification process is organised in three phases: riskidentification (definition and cartography updated annually upto a local level), their assessment (essentially on the basis ofstatistical methodologies) and their aggregation on the basisof an inter-risks diversification matrix. The majority of risks arecapitalised in relation to a measure of expected loss; certainrisks are not however capitalised if other management modes(limits, scenarios, governance and so on) are considered moreappropriate to cover them.Capitalised risks are assessed at a high level of severity(99.97% at one year).During 2010, economic capital reporting was totallycentralised, in line with the new Group organisation.A series of methodological evolutions was made to calculationmethods in order to learn from the crisis, and to respond tointernal recommendations as well as those from the regulatorswho audited the mechanism at the end of 2009.Dexia’s economic capital is EUR 14,022 million at year-end2010.Credit risk represents approximately one half of the utilisationof economic capital.Market risk, which includes interest-rate risks, foreignexchangerisks and the equity-price risk, is the second riskfactor.Created in 2009, the Economic Performance AnalysisCommittee (EPAC) manages the capital adequacy processand in this context has to propose solutions suited to Dexiastrategy. On a quarterly basis, the EPAC examines (regulatoryand economic) ratios, limits and triggers defined in the riskappetite policy and the budget framework, and possibledivergences in relation to forecasts. It assesses the Group’scapacity to absorb them and studies action proposals. Theinformation in the EPAC report is established jointly by theRisks and Finance support lines; the Management Boardreads it.ECONOMIC CAPITAL BY TYPE OF RISKAS AT 31 DECEMBER 2010OperationalriskMarketrisk32%17%51%CreditriskOperational risk (including commercial risk) is the third riskfactor.ECONOMIC CAPITAL BY BUSINESS LINEAS AT 31 DECEMBER 2010Additional information Annual financial statementsThe Legacy division consumes almost one quarter of economiccapital. It includes the bond portfolio in run-off (comprisingthe former credit spread portfolio, the public bond portfolioand some trading portfolios), the Financial Products portfolioand some non-core public loans as well as off-balance sheetcommitments, mainly liquidity lines in the United States.Public and Wholesale Banking and Retail and CommercialBanking both consume approximately 20% of capital. AssetManagement and Services consume almost 10% of capital,and the remainder is allocated to the Group Center (ALM,holdings…).LegacyGroupCenter23%28%9%19%21%Public andWholesaleBankingRetail andCommercialBankingAssetManagementand Services98Dexia Annual report 2010