Annual report 2010 - Dexia.com

Risk managementLiquidityDexia PolicyIn 2010, Dexia completely revised its internal process formanaging liquidity risk, including its contingency fundingplan.The new framework aims at providing more effective andcoordinated liquidity management. The cornerstone of thisnew framework is the Funding and Liquidity Committee(FLC) (1) , a central committee of all those parties concerned byliquidity and funding, coordinating their actions.Dexia ensures that it maintains liquidity reserves proportionalto its future funding requirement under several scenarios, ina normal situation and in a stress situation. These liquidityreserves consist of assets eligible to refinancing with centralbanks to which Dexia has access (BCE, Fed and Central Bankof Turkey). Dexia’s expected funding requirements are assessedprudently, dynamically and fully, taking existing and plannedon and off balance sheet transactions into consideration. Themonitoring of short-term liquidity risk is organised on a dailybasis whilst the supervision of long-term liquidity risk is on aquarterly basis. Furthermore, liquidity is at the centre of thedefinition of Dexia’s annual business plan.Globally, Dexia’s internal framework for managing liquidityrisk allows a monitoring of short term liquidity on a dailybaisis and a prospective view of long term liquidity.The updated contingency funding plan modifies thegovernance structure to make it more reactive in the case ofliquidity stress requiring rapid measures to be taken.Risk measuresDexia’s new internal framework for managing liquidity riskalso defines a certain number of liquidity indicators which,alongside regulatory liquidity indicators, guarantee Dexia’sresistance to liquidity risk. These indicators include but are notlimited to normal “liquidity ratios” comparing liquidity reservesto liquidity deficits. They also include limits on the absolutesize of liquidity deficits. All of these indicators are assessedaccording to different scenarios, in the principal currenciesand at all relevant consolidation levels. They are part of theDexia Risk Appetite framework and are communicated to theManagement Board and to the Audit Committee on a regularbasis.Dexia liquidity risk is also monitored by regulatory liquidityratios. These ratios are communicated to the CBFA ona monthly basis and to the CREFS (Comité des Risques etEtablissements Financiers Systémiques) on an annual basis.Exposure to liquidity riskIn 2010, the Group raised EUR 44.4 billion of medium andlong-term wholesale funding. The funds raised consisted ofEUR 23.2 billion in State guaranteed debt, EUR 13.6 billion incovered bonds, EUR 4.4 billion in long-term secured fundingother than covered bonds and EUR 3.2 billion in seniorunsecured funding.The Group made considerable progress in reducing its shorttermliquidity gap. Short-term funding requirements fell byEUR 48 billion in 2010, to EUR 119 billion as at the end ofDecember 2010.This good performance was achieved by virtue of:• the sustained pace of deleveraging programme.EUR 22.4 billion of bonds and EUR 4.8 billion of Publicand Wholesale Banking run-off loans were sold in 2010.More detailed information on balance-sheet deleveraging isprovided in the chapter “Update on the Transformation Plan”(page 14) in this annual report;• the swift execution of the long-term funding programme;• the reduction of the Public and Wholesale Banking lendingactivity, this being aligned to the Group’s long-term fundingcapacity;• the increase of retail deposits, particularly in Belgium andTurkey. These were EUR 87.7 billion at the end of 2010,against EUR 81.5 billion at the end of 2009.Dexia also considerably improved its short-term fundingmix. Indeed, Dexia accelerated the decrease of central bankborrowings (EUR -32 billion compared with the end ofDecember 2009) and since June 2010 was no longer fundedby short-term guaranteed debt, in view of the repayment ofshort-term guaranteed loans. The shift towards longer-termfunding bilateral and tri-party repos was confirmed in 2010.As at 31 December 2010, the total amount of central bankeligible securities amounted to EUR 108 billion, of whichEUR 42 billion were unencumbered allowing for a majorliquidity buffer despite the Group’s active deleverage policy.With the reserves available within one month, EUR 66 billionare available to cover the one month liquidity gap.This significant reduction of the short-term fundingrequirement was under unfavourable interest-rate conditionsresulting in an increase of the amount of cash collateral ofEUR 8 billion in 2010 despite a very disrupted macroeconomicenvironment, marked by the sovereign crisis which weighedheavily on the funding of many European banks.In 2010, Dexia also ended transactions guaranteed by theBelgian, French and Luxembourg governments. In fact, on30 June 2010, considering the improvement of its liquiditysituation and in line with its undertakings to the EuropeanCommission, the Group ceased to issue guaranteed debt fourmonths before its formal end date of 30 October 2010. Totaloutstanding guaranteed debt amounted to EUR 44 billion asat 31 December 2010 (against EUR 50 billion at the end ofDecember 2009). This guaranteed outstanding will be totallywritten down in 2014 of which about 40% in 2011.More detailed information on Dexia’s liquidity profile isprovided in the chapter “Update on the Transformation Plan”(page 15).Management reportConsolidatedfinancial statementsAdditional information Annual financial statements(1) This committee is described in the part “Governance – Balance sheetmanagement” of this chapter (page 79).Annual report 2010 Dexia87