Annual report 2010 - Dexia.com

Risk managementIntroductionIn 2010, the Risk Management activities were severelyimpacted by a disrupted economic environment, marked bysignificant interest and exchange rates volatility as well asconsiderable investor distrust for some sovereign issuers inthe euro zone. Despite this difficult context, Dexia continuedto implement its transformation plan successfully, furtherreducing its short-term funding requirement and thus its riskprofile.This reduction of the Group’s risk profile continued in particularthanks to a voluntarist policy of reducing the portfolio in runoffsince the end of 2008. In line with the agreement withthe European Commission, the Group also disposed of variousholdings in 2010 (cf. chapter “Update on the transformationplan” on page 13) which, combined with the reduction of theportfolio in run-off, is reflected by a fall of EUR 38.5 billionin the Group’s credit risk exposure compared to the end of2009. Risk weighted assets naturally followed the same trendand decreased by EUR 2.3 billion over the year, despite theunfavourable impact of the price of the euro against the USdollar, whilst the Tier 1 ratio improved from 12.3% at yearend2009 to 13.1% at year-end 2010. We can also notice asignificant reduction of the cost of risk excluding the FinancialProducts portfolio which amounted to EUR 641 million in2010 against EUR 1,096 million in 2009. The decrease wouldbe higher by excluding the Financial Products portfolio.Over the year, the Group considerably reduced its short-termliquidity gap and continued to improve the mix of its short-termfunding sources. This improvement of its liquidity situationenabled Dexia to exit the State guarantee on its financingfour months before the formal end date of 30 October 2010.In fact, on 30 June 2010, the Group stopped issuing guaranteeddebt, in line with its undertakings to the EuropeanCommission. More detailed information on the State guaranteeis provided in the note to the consolidated financial statements9.4.C. (page 184).Dexia was subject to the 2010 European Union-wide stresstesting exercise, coordinated by the Committee of EuropeanBanking Supervisors (CEBS). The conclusion of that stress test,based on various scenarios of credit quality deterioration (1) ,is that Dexia does not require additional capital to withstandthe CEBS two-year adverse scenario, including the additionalsovereign shock. More detailed information on the stress testsis provided in the section dedicated to stress tests (page 93)in this chapter.Market activity monitoring was improved with the launch in2010 of the “Market Risk Engine” project aimed at having anintegrated system for the calculation of historical VaR over allrisk factors. Considerable progress was also made in valuingstructured instruments and back-to-back derivatives.Dexia continued the development and implementation ofvarious transversal projects:• new models were developed and will be gradually used forthe calculation of regulatory capital;• Dexia put in place in 2010 an action plan related tostress-testing in 2010: the development of new governanceenhancing and optimising the organisation in place was madea priority in 2010. Furthermore, Dexia participated actively inthe regulatory exercises run by the CEBS, the first results ofwhich were provided by Dexia in May 2010;• a formal framework of risk appetite indicators was put inplace at Dexia SA level and will be gradually introduced in themain entities during 2011;• an action plan was put in place to answer the recommendationsmade by the Dexia regulators within the contextof the Pillar 2 of Basel II mission;• potential impacts of the regulatory developments proposedby the BIS (Bank for International Settlements) were quantified,particularly regarding the definition of capital, leverage ratioand liquidity ratios;• Dexia took part in international consideration of theevolution of IFRS regulations on classification and provisioning,with presentation of the exposure draft in June 2010, as wellas on the hedging of financial instruments.Management reportConsolidatedfinancial statementsAdditional information Annual financial statements(1) The test was conducted using the scenarios, methodology and keyassumptions provided by the CEBS, detailed in the aggregate report publishedon the CEBS website: http://www.c-ebs.org/EU-wide-stress-testing.aspxAnnual report 2010 Dexia77