Annual report 2010 - Dexia.com

Risk managementManagement reportConsolidatedfinancial statementsAdditional information Annual financial statementsGovernance2010 was marked by the effective reorganisation of theRisk Management support line with the approach aligned tothe general organisation of the Dexia Group and based ona directive model in which the local chief risk officer (CRO)reports directly to the Group CRO. In this context, the missionof the Risk Management support line was redefined: the mainchallenges are to define the Dexia risk appetite, to put inplace independent and integrated risk measures for all typesof risks, to manage all risks and proactively to identify andaddress any emerging risk.The support line is now organised transversally by businessline: “Retail and Commercial Banking” credit risk, “Public andWholesale Banking” credit risks and risks linked to financialmarket activities. This organisation is based on competencecentres on which local risk management can rely, in accordancewith the Service Level Agreements (SLA) concluded in 2010.Credit riskDefinitionCredit risk represents the potential loss (decrease of assetvalue or payment default) which Dexia may incur as a resultof deterioration in the solvency of any counterparty.OrganisationThe Dexia risk management oversees Dexia credit risk, underthe supervision of the Management Board and specialistcommittees. It is in charge of defining Group policy on creditrisk, particularly the decision-making process for grantingloans, and supervising the processes for rating counterparties,analysing credit files and monitoring exposure.In 2010, in order to increase its efficiency and to make themost of Group competences, the Risk support line evolvedtowards an organisation by specialist expertise centres,in relation to the various Dexia business lines (Retail andCommercial Banking, Public and Wholesale Banking andfinancial market activities). Specialist risk committees werealso set up per expertise centre, while coordination is providedby transversal teams and committees.Transversal committeesThe Risk Policy Committee defines risk policies includingthe credit assigment rules for different sectors and types ofcounterparty.The Executive Risk Committee meets weekly to decide onthe risk management strategy and the organisation of thesupport line.The Management Credit Committee, organised on a weeklybasis, is in charge of undertaking decisions.Committees specialising per expertise centreIn order to fluidify the decision-making process, theManagement Credit Committee delegates its decision-makingpower to Credit Committees organised per entity and/orexpertise centre. This delegation is based on specific rules, inrelation to the type of counterparty, the level of counterpartyrating and credit risk exposure. The Management CreditCommittee remains the decision-making body of lastresort for larger credit files or those presenting a risk leveldeemed to be sensitive. For each file presented to the creditcommittee, an independent analysis is performed, presentingthe main risk indicators, as well as a qualitative analysis ofthe transaction. Dexia updated credit granting procedures inaccordance with the request by the European Commission toensure a minimum RAROC of 10% for transactions of thePWB business line.At the same time as monitoring the credit process, differentcommittees are responsible for the supervision of specificrisks. These committees are organised par expertise centreand per entity and meet quarterly.“Watchlist” committees supervise assets deemed to be“sensitive” and placed on watchlist.Default committees qualify and monitor counterparties indefault in accordance with Basel II regulations, applying rulesprevailing at Dexia.Provision committees settle the amount of provisions allocatedand monitor the cost of risk.Rating committees ensure the correct application of internalrating systems and the appropriateness of rating processes inrelation to established principles and the consistency of thoseprocesses within the different entities.Credit Risk Management in each Group entity focuses onlocal credit risk management and is in charge of analysingand monitoring local counterparties. This also includes thedevelopment and the update of internal rating systemsrelative to these counterparties and the production of localreportings.Market riskDefinitionMarket risk comprises the Group’s exposure to adversemovements in market prices as a result of interest-rate risk,equity-price risk and foreign-exchange risk.The interest-rate risk consists of a general interest-rate riskresulting from market evolution and a specific interest-raterisk (credit spread) linked to the issuer. The latter arises fromvariations in the spread of a specific signature within a ratingclass. The risk associated with the equity price representsthe risk arising from the reduction in value of equity. As forforeign-exchange risk, this represents the potential decreaseof the value due to currency exchange rate movements.OrganisationRisk management and more particularly Financial MarketsRisk Management (FMRM) oversees market risk under thesupervision of the Management Board and specialist riskcommittees. FMRM is a support line integrated into the Risksupport line. On the basis of its global risk managementapproach, it is responsible for identifying, analysing,monitoring and reporting on risks and results (including thevaluation aspect) associated with financial market activities.The policies, guidelines and procedures documenting andgoverning each of the activities are defined within Dexia SAand applied to all the entities of the Dexia Group. Centralteams within expertise centres or transversal teams also havethe responsibility to define methods of income statement78 Dexia Annual report 2010