Annual report 2009 - Dexia.com

Risk managementManagement reportConsolidatedfinancial statementsAnnual financial statementsAdditional informationThe Basel II frameworkSince 1 January 2008 the Dexia Group has used the AdvancedInternal Rating Based Approach (AIRBA) for calculating itscapital requirements and its solvency ratios. New models havebeen developed and will progressively be used for calculatingregulatory capital as from 31 December 2010.The year 2009 was marked by progress in the implementationof Pillar 2. This mechanism, applicable since 31 December2008, requires banks to demonstrate to their regulatorsthe appropriateness of their risk profile and their capital.To do so, they must in particular have internal systems forthe calculation and management of their risks, capable ofmaking a valid assessment of their economic capital needs(Internal Capital Adequacy Assessment Process − ICAAP). Thisprocess is thus based on two main processes: risk analysisby the Risk Management and the financial plan (includinga capital allocation and an analysis of the evolution of theresults of business lines as well as the internal capital supply)by the Finance department. As Pillar 2 of Basel II is a totallyintegrated and transversal process, the Pillar 2 file essentiallyconsists of the file established at Dexia SA level, of whichsome parts have been set at entity level.The first quantitative ICAAP report was submitted on15 March 2009 and a first presentation on Dexia’s Pillar 2approach was made on 25 March 2009 to its 12 principalregulators. The complete file was submitted on 30 June 2009on the basis of the Group’s strategic reorientation. In-depthPillar 2 inspections were performed by the college of regulatorsin the fourth quarter of 2009.The Board of Directors and the Management Board ofDexia SA have been kept fully informed of developmentswith regard to Pillar 2.Pillar 3, which defines a range of qualitative and quantitativeinformation in relation to risks distributed to marketoperators, is applicable at the highest consolidated level ofthe Dexia Group and has been part of the external communicationof Dexia SA since 2008 (see the document RiskReport – Pillar 3 of Basel II published on Dexia’s websitewww.dexia.com).Finally, Dexia is closely involved in national and internationalconsultations on the subject of amendments to the CapitalRequirement Directive and, more generally, in the ongoingdiscussion on the optimum level of capitalisation for banks(dynamic funding, leverage ratio, definition of capital and soon).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.GovernanceDexia Risk Management oversees its credit risks under thesupervision of the Management Board and specialist riskcommittees. It is responsible for elaborating credit-risk policiesand guidelines, including the decision-taking process andthe framework for delegations, and supervising the rating/analysis processes as well as the exposure surveillance functions.In order to optimise the appropriateness of the skillsin the Risk department and their field of intervention, RiskManagement will evolve over 2010 into an organisationwith specialist expertise centres consistent with the variousDexia business lines (Retail and Commercial Banking CreditRisk, Public and Wholesale Banking Credit Risk, and MarketOperations Credit Risk) giving rise to the establishment ofrisk committees specialising per expertise centre, the overallcoordination of which will be in the hands of transversalcommittees.Transversal committeesThe Risk Policy Committee, organised quarterly, approves thecredit assignment rules, which are detailed in the credit-riskpolicies.The Risk Executive Committee, organised weekly, decides onthe risk management strategy and the organisation of thesupport line.The Management Credit Committee, organised weekly,takes binding decisions on major files or credit files with anincreased credit risk.Credit-risk management falls within the more general frameworkof the internal capital adequacy process (cf. internalcapital adequacy in this chapter).Committees specialising per expertise centreThe decision-making process applied to transactions isorganised via a series of credit committees. These areorganised per specialist expertise centre, and approve transactionswhich are not delegated to the entities. All of thesecommittees operate under the delegation of the ManagementCredit Committee. A transaction is delegated on thebasis of specific delegation rules, depending upon the type ofcounterparty, rating levels and credit-risk exposure. Subcommitteeshave been created within the Group (entities, subsidiariesand branches) to deal with credit delegations. Eachfile presented to a credit committee contains an independentanalysis made by the Risk Management department.The Special Mention and Watchlist Committees of the expertisecentres and of the entities monitor “sensitive” assetsplaced on watch. The committees are organised quarterly.The Default Committees of the expertise centres and of theentities define and monitor counterparties in default accordingto Basel II applying the rules which prevail at Dexia. Thesecommittees are organised quarterly.The Impairments Committees of the expertise centres andof the entities draw up quarterly reports on the amount ofprovisions allocated and monitor the cost of risk. These committeesare organised quarterly.56Dexia Annual report 2009