Annual report 2010 - Dexia.com

Risk managementover a period of several years leading up to the discovery ofthe fraud scheme operated by, and the subsequent bankruptcyof BMIS (so-called clawback claims).Dexia Banque Internationale à Luxembourg and its affiliateDexia Private Bank (Switzerland) have been named asdefendants in certain civil actions based on these clawbackclaims for an estimated amount in principal of approximatelyUSD 79 million. The major part of this amount relatesto investments made by Dexia Banque Internationale àLuxembourg for the account of third party investors.Dexia is not able at present reasonably to predict the durationor the outcome of the legal proceedings in progress, ortheir potential financial repercussions. If and to the extentthese clawback claims would be supported by the courts,Dexia Banque Internationale à Luxembourg intends toseek reimbursement of any amounts to which it would becondemned from the beneficiaries for whose account itacted.As at 31 December 2010, no provision has been set up withrespect to the clawback claims.In addition, Dexia Banque Internationale à Luxembourg is adefendant in a limited number of proceedings brought byclients who invested in Madoff-linked products.Dexia Asset ManagementDexia Asset Management is defendant in proceedings broughtagainst it by a professional investor before the Irish Court,filed in December 2010, seeking unquantified damages foralleged breach of contract.The claims relate to investments made by this professionalinvestor in two Irish funds managed by Dexia AssetManagement.The proceedings have been commenced and served uponDexia Asset Management, but have not yet been advancedby the claimant beyond the document initiating theproceedings.As at 31 December 2010, a provision in an amount ofEUR 2 million has been set up to cover expected legal fees andcosts in relation to the defence against these allegations.Dexia Crédit LocalEarly in 2011, claims have been filed against Dexia CréditLocal by two clients in relation to structured financings.Dexia is analysing these claims but at this stage, is not ablereasonably to predict the duration and the outcome of theseproceedings, or their potential financial repercussions.Dexia IsraelIn May 2002, a complaint was filed in relation to the purchaseby Dexia of shares held by the State of Israel claiming noncompliancewith company law. In April 2009, the CentralDistrict Court rejected the application for a class actionformulated by the complainants. In June 2009, the latterappealed to the Supreme Court. The hearing was held inNovember 2010. The Court has not yet passed judgement.No provision has been set up.Stress testsDexia put an action plan in place in 2010 regarding stresstesting: the development of new governance enhancing andoptimising the organisation in place was made a priority in2010.In terms of Pillar 1 stress tests (individual stress tests onBasel II internal rating models), Dexia maintains its target tocover more than 80% of weighted credit risks.In terms of Pillar 2 stress tests (global stress tests), the stresstest performed by Dexia on the basis of an expert scenario ofeconomic recession led to the maintenance of a Tier 1 ratioat a level above 8%.In addition to the “classic” stress tests for market and liquidityrisks, Dexia now has a full range of stress tests (sensitivityanalyses, the implementation of stress scenarios and potentialvulnerability assessments), enabling it to assess the potentialeffects of a hypothetical event or combination of events on itsfinancial health, and to obtain a global view of the possibledeformation of elements of the statement of income or itscapital ratios under stress. Such simulations were made in2010 for ABS, Assured-FSA and local authorities in particular.Finally, in 2010 Dexia was among 91 European establishmentssubjected by the Committee of European Banking Supervisors(CEBS) to a common stress test, built on different scenarios ofcredit quality deterioration (1) . the conclusion of the stress testsis that Dexia does not require additional capital to withstandthe CEBS two-year adverse scenario, including the additionalsovereign shock. Dexia’s strong capital base would enable itto resist to the conservative set of assumptions of the stresstests over the next two years, while still maintaining strongcapital ratios. More specifically, as a result of the assumedshock under the adverse scenario, the estimated consolidatedTier 1 ratio of the Group would change to 11.2% in 2011compared to 12.3% by the end of December 2009. Anadditional sovereign risk scenario would have a further impactof 0.29 percentage point on the estimated Tier 1 ratio,bringing it to 10.9% at the end of 2011, compared with theregulatory minimum of 4%.Management reportConsolidatedfinancial statementsAdditional information Annual financial statements(1) The test was conducted using to 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 Dexia93