Annual report 2010 - Dexia.com

Risk managementThe Operational Risk Guidelines Committee, chaired on aquarterly basis by the Group Chief Risk Officer, reflects indetail the policy approved on recommendations suited tocommercial activities. It transversally reviews operational riskevents as well as analyses performed.As to risk management of derivatives, Dexia closely monitorsthe conclusion of appropriate legal documentation relating tonetting agreements and the exchange of collateral.Fundamentals of Dexia credit risk in 2010Management reportConsolidatedfinancial statementsAdditional information Annual financial statementsThe Operational Risk Management Committee, chaired ona monthly basis by the Group head of operational risks,develops a consistent mechanism for the entire Group,including business continuity, crisis management, informationsecurity and insurance policy.Dexia Group Middle Management is principally responsiblefor operational risk management. In its field of activity, itappoints a correspondent for operational risks whose role isto coordinate the gathering of data and the self-assessmentof risks, with the support of the local operational riskmanagement function.Risk monitoringCredit riskDexia policyDexia Credit Risk Management (CRM) sets a global frameworkof policies and guidelines in coherence with the risk appetiteof the bank, framework that guides CRM in its differentfunctions of risk analysis, risk decision, and risk surveillance.CRM manages the credit granting process by givingdelegations within the framework set by the top managementof the bank, and by chairing credit committees. As a partof its credit surveillance function, CRM monitors the creditevolution of its portfolios by performing, on a regular basis,credit reviews and by updating ratings. CRM also definesand implements the impairment policy. As such it decides onspecific impairments and qualifies defaults.Risk measuresCredit risk measures rely principally on internal rating systemsput in place by Dexia under Basel II. Each counterparty israted by analysts in charge of credit risk or by dedicatedscoring systems. This rating corresponds to a valuation of thecounterparty’s level of default risk, expressed on an internalrating scale, and is a key element in the loan granting processby the credit committee or by automated granting systems.Ratings are reviewed at least annually, and this allows aproactive identification of counterparties requiring regularmonitoring by the “watchlist” committee.In order to control the Group’s general credit risk profile andto limit risk concentrations, credit risk limits are defined foreach counterparty, fixing the maximum exposure to credit riskdeemed acceptable for a given counterparty. Limits may alsobe imposed per economic sector and per product. The riskdepartment proactively monitors these limits, in relation tothe evolution of the perception of risks run by the Group. Inorder to take more recent events into consideration, specificlimits may be frozen at any time by the Risk Managementdepartment.At a macroeconomic level, the year 2010 saw a gradualimprovement of the economic environment in the majorityof countries in Europe. However, the year was also markedby a crisis of confidence as to the ability of some EuropeanStates to fulfil their financial obligations, resulting in tensionson the financial markets and difficulties for those countriesto obtain financing. The crisis led all European countries toadopt financial austerity measures aimed at reducing theirpublic debt.Within Dexia, a clear slowdown was observed in thedeterioration of the average rating of portfolios, reflecting theimprovement of the economic situation. That more generaltrend is particularly visible on a certain number of sectorsweakened by the financial crisis and on which collectiveprovisions were booked in 2008 and 2009, in particular theharbour, textiles, motorway and shipping sectors, giving riseto write-backs of collective provisions.With regard to Retail and Commercial Banking activities, animprovement is also to be noted. In Belgium, the persistenceof mitigated macroeconomic indicators is reflected by newdefaults which, although down compared to 2009, are stillbeyond pre-crisis levels. The mortgage loan portfolio hasproved particularly resilient whilst professional loans did notescape certain granularity effects but presented a cost ofrisk down compared to 2009. In Turkey, the sharp economicrebound is reflected by sustained production volumes, a returnof defaults to a pre-crisis level and significant recoveries. As aconsequence, the cost of risk is well down on 2009, both forindividual and for SME loan portfolios.In order to cope with the crisis affecting the sovereign debtof some European States, principally Greece, Ireland, Portugaland Spain, Dexia not only blocked the granting of credit tothe sovereigns concerned but also reduced those exposuresvia its asset cession programme (1) . Dexia continues to monitorthis issue, particularly the impact of interventions by theEuropean Support Fund and the IMF to sustain those Statesexperiencing difficulties.Against that background, it is important not to extrapolatethe sovereign default risk to that of local authorities.A certain number of elements enable relativisation of the riskof systemic contagion.• The prudential framework to the management of localauthorities is constraining. In the majority of countries inwhich Dexia is active, local authorities are obliged to presentbalanced budgets. The contracting of debt is reserved forinvestment and not for operating expenditure, which is 80%guaranteed by grants and subsidies. The debt level is generallylimited. As a consequence, although local authorities haveseen their debt grow over the recent period, it remains atreasonable levels (8% deficit and 9% public debt in theEuropean Union).(1) More details on the Dexia exposures on these countries are given in thepart dedicated to Credit risk exposure on page 82 of this chapter.80 Dexia Annual report 2010