Annual report 2009 - Dexia.com

Notes to the consolidated fi nancial statements(Structural) Foreign exchangeAlthough Dexia’s reporting currency is the euro, assets, liabilities,income and expenses are also denominated in othercurrencies. The Group ALCo decides on the hedges to beimplemented in order to reduce both earnings volatilityresulting from the structural foreign exchange risk and thevolatility of the solvency ratio related to exposures (credit,participations) in foreign currencies.Insurance companies and pension fundsSpecific reports on insurance companies and pension fundsare presented to the Group ALCo, covering interest rate,inflation and equity risk factors. Risk indicators are calculatedon the basis of a Group harmonised risk methodology complementedwith specific risk management factors.3.3.4. LiquidityStrong improvement of the liquidity profileSignificant progress was made in 2009 in terms of liquidityconsolidation.To recall, a guarantee on a major proportion of Dexia’s shortand long-term funding was granted in October 2008 by theBelgian, French and Luxembourg States. With an endorsementsigned on 14 October 2009, this guarantee wasextended until 31 October 2010 and the following changeswere made to the mechanism:• the cap on guaranteed outstandings was lowered from EUR150 billion to EUR 100 billion;• the maturity of new long-term debts issued was extendedto a maximum of four years.In addition, since 16 October 2009, Dexia has waived thebenefit of the guarantee for all new contracts with a maturitybelow one month and for all new contracts with no fixedmaturity. Dexia could easily replace guaranteed with nonguaranteedfunding.On 30 October 2009, the European Commission provisionallyauthorised the extension of this funding guarantee until theend of February 2010. Then, within the context of the agreementwith the European Commission on 5 February 2010,an early exit from the guarantee mechanism was announced,the details of which are given in the chapter “2009 and early2010 highlights” on page 13 of this annual report.In 2009, the Group issued a total of EUR 45.7 billion ofmedium and long-term funds (with an average maturity of 5years). The portion of debt not covered by the State guaranteewas 51%, rising constantly over the year.This good performance was made possible by:• the reopening of the covered bond market in the secondquarter 2009, which allowed a total of EUR 13.0 billion incovered bonds to be issued in 2009 via its three issuers DexiaMunicipal Agency, Dexia Kommunalbank Deutschland andDexia Lettres de Gage;• the renewed access to unsecured non-guaranteed funding,particularly from the third quarter 2009, reflected by a volumeof medium and long-term unsecured non-guaranteedissues of EUR 10.3 billion in 2009.The short-term liquidity profile was also improved considerablyin the second half of the year with the gradual increase offunding raised on the bilateral and triparty repo market andthe improved access to non-guaranteed short-term liquidity.Globally, the Group’s short-term funding needs fell sharplyin 2009 by virtue of the active deleveraging policy initiatedby the Group since the fourth quarter 2008 (sale of bondswithin the portfolio in run-off for an amount of EUR 15 billionin 2009, with a maturity of 4.5 years) and the strongmomentum of the long-term issue programme.The result of all these elements combined was a sharp reductionof guaranteed short and long-term debts. They amountedto EUR 50.4 billion as at 31 December 2009, compared to amaximum of EUR 95.8 billion in May 2009.In 2010, liquidity consolidation efforts will continue with theprincipal aim of fully exiting the guarantee mechanism at thelatest on 30 June 2010, which means that no new governmentguaranteed debt will be issued by the Group after this date.Liquidity risk managementDexia's approach to liquidity risk management was reviewedin the light of the financial and liquidity crisis. It is basedon the general principle that Dexia's future funding needsshould never exceed its proven covered funding capacity. Inother words, Dexia ensures that its short-term funding needscan always be covered by the use of liquid assets in the interbankmarket.Dexia ensures that it maintains a liquidity buffer which is sufficientto face cash exits under different scenarios. That liquiditybuffer is formed of freely available securities accepted asunderlying by the central banks to which Dexia has access.Future funding needs are assessed dynamically and comprehensively,taking into account liquidity needs arising from currentand programmed on and off-balance-sheet transactions.Its covered funding capacity is determined conservatively, takingthe lessons from the current crisis into consideration. Theadequacy of Dexia's future liquidity needs with its coveredfunding capacity is tested under an ungoing scenario as wellas under a variety of severe stress scenarios including bankspecificand market stresses and even a combination of both.Short-term funding needs are monitored on a daily basis.Longer-term funding needs (up to three years) are monitoredon a monthly basis. More generally, liquidity risk managementis at the very heart of the definition of Dexia's triennial financialplan. The result of that monitoring is presented weeklyto the FLC, which determines the major orientations of theliquidity management. This framework is back-tested andupdated regularly in accordance with best risk managementpractices and integrating all the local regulatory constraints.The diversity of Dexia's funding sources is a key-mitigant ofits liquidity risk. Dexia's principal funding sources are:• retail bank deposits (essentially in Belgium, Luxembourgand Turkey);• long-term funding:- covered bonds;- unsecured bonds, benefiting from the State guarantee ornot (notably bonds distributed via the Dexia networks);• short-term funding:- bilateral and triparty repo transactions;- central bank tender operations;- a wide variety of wholesale short-term unsecured fundingsources, some of which benefit from the State guarantee.Dexia's liquidity risk is managed using a centralised approach.Although liquidity positions are managed by the differententities of the Group, the Dexia funding strategy is managedon a centralised and integrated basis.Annual report 2009 Dexia 123Management reportConsolidatedfinancial statementsAnnual financial statementsAdditional information