Documents | Cour des comptes

Télécharger le PDF, 441 Ko
Page de la publication
Envoyer à un ami
Partager cette page sur Facebook
Partager cette page sur X
Partager cette page sur LinkedIn

OURT OF

CCOUNTS

DEXIA:

a high cost with persistent risks

July 2013

Disclaimer

Summary

of the

Thematic Public Report

his summary is intended to facilitate reading and use

of the report from the Court of Accounts.

Only the report implicates the liability of the Court of

Accounts. The responses from the administrations,

organisations and individuals concerned are appended

to the report.

Introduction

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Until 2008: development of a high-risk

transnational bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Attempted bail-out

(October 2008 - October 2011)

. . . . . . . . . . . . . . . . . . . . .

From the sovereign debt crisis to the break-up

of the group (October 2011 - early 2013)

. . . . . . . . . . . . .19

Consequences for public finances

. . . . . . . . . . . . . . . . . . . .25

Potential areas of improvement for the future

. . . . . . . . .29

Main focuses and recommendations

. . . . . . . . . . . . . . . . .31

Summary of the

Thematic Public Report from the

Court of Accounts

Contents

At the end of 2008, the Dexia banking group posted consolidated balance sheet assets of

€651 billion, net banking income of approximately €3.6 billion and a total workforce of

37,000 employees around the world.

The Court only had authority to audit the French subsidiary of Dexia starting in October

2008, when the group, operating under Belgian private law, received public financial aid.

Over the course of 2012, the Court conducted its investigations with the Agence des par-

ticipations de l’Etat, the Treasury Division, the Banque de France, the Autorité de contrôle

prudential (French Prudential Supervisory Authority), the Caisse des dépôts et consignations

and the CNP Assurances group. Its assessments specifically covered the interventions of French

public entities, which represented only part of the whole, and did not cover the interventions

of Belgian public entities.

The events managed by public entities due to Dexia’s failure constitute an exceptional

situation in France since the hive-offs of the 1990s, including that of Crédit Lyonnais.

This report was prepared more than four years after Dexia first began receiving public

aid, at the end of a long phase during which the break-up plan was negotiated. Consequently,

the findings (particularly financial) are provisional, as the break-up or “orderly resolution” of

Dexia will not be complete until 2020.

The report is organised around the major steps in the group’s timeline: its creation and

expansion until the advent of the crisis in 2008; the attempted bail-out (October 2008 -

October 2011) ; the break-up plan (October 2011 - early 2013) and the consequences Dexia

has had and will continue to have on public finances.

Finally, the report examines the potential areas of improvement for the future, mainly

relating to corporate governance and banking regulation.

Summary of the

Thematic Public Report from the

Court of Accounts

Introduction

Summary of the

Thematic Public Report from the

Court of Accounts

Until 2008: development

of a high-risk transnational

bank

Creation of a

transnational bank

Binational origins

The Dexia group was created in

1996 from the merger of Crédit Local

de France, which specialised in the fun-

ding of local authorities, and retail bank

Crédit Communal de Belgique.

In 1999, the two listed holding

companies - one French (Dexia France)

and the other Belgian (Dexia Belgium)

merged to create Dexia SA, a financial

company under Belgian law not opera-

ting with the status of a bank, which

wholly owned the three main operating

entities

France,

Belgium

and

Luxembourg: Dexia Crédit Local, Dexia

Banque Belgique and Dexia Banque

Internationale à Luxembourg.

Since its inception, the group’s

governance has been equally divided

between the two main executive mana-

gers: the Chairman of the Board of

Directors

and

the

Deputy

Chief

Executive Officer, who is the actual head

of the group. In reality, the corporate

shareholding structure has been predo-

minantly Belgian, particularly since the

2001 absorption of Artesia Banking

Corporation.

Weaknesses in the

management approach

Starting in 2006, the members of

the group’s Management Committee

joined the Management Committees of

the main subsidiaries housing the core

businesses, and the heads of the business

divisions (local public sector financing,

retail banking and private banking) took

charge of the cross-disciplinary oversight

of the businesses. The result was a disso-

ciation of responsibilities between the

entities’ decision-making bodies and the

executive managers running the Dexia

SA businesses, particularly concerning

the international expansion strategy

implemented in the local public sector

financing business.

The financial crisis unearthed major

weaknesses in the group’s management

approach: no centralisation of processes,

dispersion of market activities, a flawed

consolidated overview of cash manage-

ment, and serious failures in risk mana-

gement at certain international subsidia-

ries, including US subsidiary FSA.

Summary of the

Thematic Public Report from the

Court of Accounts

Until 2008: development

of a high-risk transnational bank

Rapid expansion

Market penetration

strategy

Dexia’s managers aimed to develop

the group as both a full-servicing bank

in Europe and as a major player in local

public sector financing on a global scale.

In the 2000s, the group focused predo-

minantly on acquisitions and improving

profitability.

While continuing to develop its his-

toric markets in France and Belgium,

Dexia Crédit Local also expanded

abroad: in addition to establishing many

operations in Eastern Europe, Israel and

Spain with the creation of Dexia

Sabadell, two major acquisitions were

made in Italy with Crediop and in the

United States with Financial Security

Assurance (FSA). FSA operated in the

credit enhancement sector, particularly

for local authorities in the United States.

Several purchases in the full-service ban-

king sector accelerated the group’s deve-

lopment, including a number of expen-

sive and not always successful acquisi-

tions.

The size of Dexia’s balance sheet

grew substantially with the change in its

scope and the development of its assets,

particularly in bond portfolios, mostly

financed on the short-term financial

markets. The group’s balance sheet

structure thus held a number of structu-

ral weaknesses.

The group was still mid-sized com-

pared to the other major European ban-

king groups and did not have an ade-

quate deposit base like the diversified

banking groups. Knowing this, Dexia’s

managers tried to merge with other

banks to make up for the lack of depo-

sits supporting the group’s credit activity

and uses of funds. Two planned mergers

fell through, the first in 2004 with

Italian bank Sanpaolo IMI, and the

second in 2005 with Belgian group

Fortis.

Summary of the

Thematic Public Report from the

Court of Accounts

Until 2008: development

of a high-risk transnational bank

Diagram No. 1: the Dexia Group in 2006

Heightened ambition

despite a poorly adjusted

balance sheet structure

The Dexia Group generated robust

profits of around 20% in 2005. The

group’s growth and poorly adjusted

balance sheet were under the responsibi-

lity of managers who knew the risks.

Between 1999 and 2008, the size of

the consolidated balance sheet was mul-

tiplied by 2.7. The group’s net income

climbed

continuously,

reaching

€2.75 billion in 2006.

Source: Court of Accounts

Summary

of the Public thematic report by the

Court of Accounts

Until 2008: development

of a high-risk transnational bank

Table No. 1: development of Dexia’s balance sheet and income (in

€

bn)

The group’s growth was primarily

driven by the increase in the portfolio of

invested assets. The bond portfolio

stood at €162 billion at end-2007, ver-

sus €106 billion at end-2005 (+53%).

The unique nature of the group’s

economic and financial model also had

to do with its local public sector finan-

cing activity, as the loans granted had a

very long maturity while the bank’s

resources were not sufficiently based on

long-term, stable funding or on depo-

sits. In fact, more than 40% of the

balance sheet was covered by short-term

funding. The group was structurally

dependent on liquidity.

The Dexia Group used interest rate

swaps to hedge interest rate risk on both

the asset and liability sides of the balance

sheet. It borrowed in the very short

term, taking advantage of its excellent

financial rating to obtain favourable

terms but having to protect itself against

the risk of rising interest rates. The deri-

vatives used to hedge interest rate risks

on both sides of the balance sheet

constituted one of the group’s liquidity

problems beginning in 2008.

The group’s financial model intrinsi-

cally relied on the smooth operation of

the money market and interbank mar-

ket, easy access to these markets and to

central banking funds, and the sustaina-

bility of the group’s excellent financial

rating, all of which fell by the wayside as

of 2008.

Accelerated growth rooted

in poorly thought-out

ambitions

ten-year

development

plan,

approved by the group’s governance

bodies in early 2006, set a growth target

of 10% per year from 2005 to 2015 for

the business. In the three-year plan for

the 2006-2009 period, a dividend

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Total balance

sheet assets

(€

bn)

245

258

351

350

405

509

567

605

651

Net income

(

€

761

1,001

1,426

1,299

1,431

1,822

2,038

2,750

2,533

-3,326

Source: Dexia’s annual reports

Summary of the

Thematic Public Report from the

Court of Accounts

Until 2008: development

of a high-risk transnational bank

growth target of 10% per year was set,

with a target ROE of 15% per year.

This strategy increased the group’s

risks, with the development of new acti-

vities abroad, the ramping-up of the

banking transformation (longer-term

loans, financed in the shorter term), the

diversification of increasingly complex

structured products proposed to local

authorities, and the creation of a gro-

wing portfolio of financial investments.

This growth strategy was even stepped

up from mid-2007 to mid-2008, when

the first signs of the crisis in summer

2007 should have led Management to

be more cautious.

The Board of Directors was lacking

in foresight as well as vigilance. The

individual

accountability

the

Directors was diluted by the fact that the

participants were rendered anonymous

in the the minutes of the Board mee-

tings starting in 2006.

Caisse des dépôts et consignations,

which held only a minority stake in the

holding company’s capital, contributed

little to the supervision of the group’s

strategy and managers, as it considered

its stake to be a non-strategic financial

investment, despite its expertise in

France in respect of its general-purpose

roles, and should have paid closer atten-

tion to the local public sector. Before

2008, neither the French nor the

Belgian government held a share in

Dexia’s capital.

Prudential

supervision failures

Before the crisis, the French super-

visor (the “Commission bancaire”, or

French Banking Commission, which is

now the “Autorité de contrôle pruden-

tial” or French Prudential Supervisory

Authority) took little action regarding

Dexia Crédit Local, having focused its

resources on implementing Basel II.

Meanwhile, FSA, a US insurance com-

pany excluded from the tighter controls

imposed by the European Financial

Conglomerates Directive, was sympto-

matic of the lack of unified supervision

of multinational groups and the frag-

mentation of financial supervision bet-

ween countries.

After the bail-out in October 2008,

the national supervisors conducted a tri-

partite inspection led by the French

Banking Commission, whose January

2009 report was not given to the com-

pany by the Belgian supervisor until

March 2010, and even then only in a

provisional form. The report undersco-

red major flaws in the group’s manage-

ment but imposed no penalties.

As such, the supervisory authorities

were not in a position to prevent any

risks before 2008, and after 2008 they

refrained from establishing and penali-

sing the failures identified even though

several breaches of prudential regula-

Until 2008: development

of a high-risk transnational bank

Summary of the

Thematic Public Report from the

Court of Accounts

tions and internal control obligations

were observed.

Basel standards had positive impacts

on the expansion of the group’s balance

sheet, while fair value accounting played

a role in the impairment of available-for-

sale assets, as a result of which the group

was forced to recapitalise in autumn

2008.

Attempted bail-out

(October 2008 - October 2011)

First public bail-out

initiatives

A steep decline in

fundamentals

At the end of the 2007 financial

year, and despite the signs of crisis emer-

ging on the US subprime mortgage mar-

ket, Dexia continued to vaunt the soli-

dity of its model and its intention to

steadfastly continue developing its busi-

nesses.

By 30 June 2008, Dexia’s fundamen-

tals had deteriorated significantly. The

group’s consolidated equity had dropped

considerably to €8.6 billion in June

2008, versus €16 billion at end-2007,

for two reasons: available-for-sale finan-

cial assets had suffered an impairment

loss of approximately €12 billion; and

the major struggles of the US subsidiary,

FSA, led to the write-down of its shares

in the holding company’s accounts.

Despite its satisfactory prudential capital

ratio (Tier 1 equity of 11.4%), the

group’s accounting losses were enough

to negatively alter the perception of its

lenders.

The eruption of the crisis in

September 2008 caused the group’s risks

tomaterialise. The rating agencies placed

Dexia’s long-term rating on negative

outlook, further undermining its borro-

wing capacities on the financial markets.

A hastily decided capital

increase

Given the problems encountered by

the group, and with the banking system

in general on the brink of collapse, the

Belgian,

French

and

Luxembourg

governments were forced to negotiate

the recapitalisation of the group. Carried

out hastily, without calling on members

of the public sector that became share-

holders after the company was listed,

this capital increase led to the write-

down of the shares held by public enti-

ties.

The capital increase was equally car-

ried out between a block of French

public entities and a block of Belgian

public entities, in the amount of €3 bil-

lion each. The Belgian public sharehol-

ders were financially unable to partici-

pate in the capital increase, and two had

to borrow from Dexia Banque Belgique.

The French government invested €1 bil-

lion via SPE, and Caisse des dépôts

invested €2 billion, including €445 mil-

lion for Fonds d’épargne and €288 mil-

lion for CNP Assurances.

The additional stake purchased for

the Fonds d’épargne was highly questio-

nable, given that its investment portfolio

is required to diversify risks. The risk

associated with Dexia’s recapitalisation

was ultimately borne by the State, as the

guarantor of the Fonds d’epargne’s liqui-

dity. The conditions in which CNP

Summary of the

Thematic Public Report from the

Court of Accounts

Assurances took part in the capital

increase were also cause for criticism in

that the majority of the risks was borne

by life insurance policyholders.

In accordance with Belgian law, the

acquisition price was based on the ave-

rage price over the past 30 calendar days.

At €9.90, this price was 40% higher

than the share’s value on the day before

the capital increase (€7.07).

Critical liquidity support

The recapitalisation did not resolve

all the group’s problems, however, parti-

cularly its major liquidity crisis which

could have caused it to default on pay-

ment.

In addition to the highly unfavoura-

ble environment, this liquidity crisis can

be attributed to three factors: the group’s

excessive confidence in its oversight of

Summary of the

Thematic Public Report from the

Court of Accounts

Attempted bail-out

(October 2008 - October 2011)

31/12/2007

31/12/2008

Caisse des dépôts Group

(general section and «fond

d’épargne»)

11.9%

17.61%

CNP Assurances

2.0%

2.97%

French State (

via

SPPE)

5.73%

Holding company

16.2%

14.34%

Arco Group

17.7%

13.92%

Ethias Group

6.3%

5.4%

Belgian State (

via

SFPI)

5.73%

Flemish region

2.87%

Walloon region

2.01%

Brussels (capital) region

0.86%

Others

45.9%

28.92%

Table No. 2: Dexia’s shareholding structure from end-2007 to end-2008

Source: Dexia’s annual report, restated by the Court of Accounts

Summary of the

Thematic Public Report from the

Court of Accounts

Attempted bail-out

(October 2008 - October 2011)

liquidity management; its lack of res-

ponse to the diminishing confidence

affecting the credit enhancement acti-

vity in the US, among other things; and

its very poorly adjusted balance sheet.

As Dexia was unable to obtain the

usual market financing and the group

was at risk of “systemic” default liable to

affect its financial stability, the central

banks took massive intervention, parti-

cularly in the third quarter of 2008. In

October 2008, the State governments

had to provide guarantees for the group’s

debt issues to help it regain investor

confidence: the maximum limit on this

guarantee initially stood at €150 billion,

divided between Belgium (60.5%),

France (36.5%, i.e. a max of €54.75 bil-

lion) and Luxembourg (3%).

This limit

was later lowered to €100 billion until

Dexia fully exited the guarantee mecha-

nism in July 2010. The central banks

also provided emergency liquidity funds

pending the group’s gradual return to

the markets in 2009 and 2010.

Very little accountability

for Dexia’s Executive

Management

In 2008, the main measure taken

against the group’s Management was the

removal, at the State governments’

request, of the Chief Executive Officer

and the Chairman of the Board of

Directors, along with the establishment

of a bi-national Management team.

Renewal of the Board of Directors was

very partial until 2009.

The group’s executive managers were

not held accountable, either on the civil

or criminal front, by the regulators, sha-

reholders or State governments investing

in its capital. The two main investigative

reports by the Parliaments in France and

Belgium only vaguely referred to this

issue. The Court of Accounts noted that

the executive managers’ substantial

indemnities and benefits were maintai-

ned, with the notable exception of the

French government’s opposition to a

severance payment of €3.7 million to

the resigning Chief Executive Officer.

The Board of Directors granted him one

year’s fixed salary.

The benefits maintained for execu-

tive managers who stepped down or

were forced to resign consisted of a sup-

plementary pension scheme and transac-

tional termination agreements.

A supplementary pension scheme

(“top-hat pension”) was set up in 1996

for a number of French executive mana-

gers. This scheme was questionable for

two reasons: it was not actually a collec-

tive scheme and the guaranteed amount

did not deduct the amount of public

pensions received, despite the fact that

some beneficiaries had worked several

years in civil service jobs. This scheme

was terminated as of January 2010;

however, six former executive managers

were able to keep the benefits of the

scheme, and four of the six had pre-

viously held civil service jobs. Only the

former Chairman of the Board of

Directors (previously a civil servant) was

forced to give up half the amount of his

top-hat pension, while the company

ended up not instigating a procedure

aimed at cancelling the Board’s decisions

that were possibly in violation of Belgian

law.

The transactional agreements were

entered into with four former managers

who left the company, three of whom

were also originally civil servants. Two

took jobs in the public sector again after

leaving the Dexia Group, which is

authorised by the civil servant status but

which, in the Court’s opinion, should

exclude them from receiving indemni-

ties associated with the termination of

executive management positions in a

public company or a company receiving

State financial aid.

All in all, in the wake of the public

financial aid provided in 2008, the mea-

sures taken to hold the group’s Executive

Management accountable were highly

insufficient. At the time, it was conside-

red enough to change the Management

team, and the severance pay was main-

tained. The top-hat pension schemes

have not been called into question for

the future.

Restructuring plan:

a compromise and a

tenuous gamble

The Dexia Group’s public bail-out

plan consisted of State aid within the

meaning of Community law: the

European Commission authorised the

plan under certain conditions, particu-

larly the implementation of a restructu-

ring or transformation plan in accor-

dance with competition law.

Restructuring plan approved

and implemented

The definition of a restructuring

plan and its approval by the European

Commission were marked by a long and

difficult process. On the French side of

things, several intermediaries were invol-

ved, and the definition of the plan met

with coordination problems, mainly

between the French and Belgian govern-

ments.

The plan was initially submitted on

18 February 2009. It was deemed insuf-

ficient by the European Commission,

which called for the expansion of the

scope of disposals without going as far as

expecting the sale of Turkish subsidiary

DenizBank. In the additional measures

submitted by the governments in

February 2010, the creation of a defea-

sance (or “bad bank”) structure was

ruled out, as the resulting losses were

deemed excessive by the intermediaries.

The

solution,

approved

the

Commission, was to segregate a legacy

assets portfolio containing the group’s

lowest-quality assets.

With these choices, there was no

basic questioning of Dexia’s economic

model, and the recovery assumptions

adopted tended to suggest that the 2008

crisis would not have a lasting impact.

With a 35% reduction in the size of

Dexia’s balance sheet over six years to

€427 billion by end-2014, the European

Commission’s requirements were relati-

Attempted bail-out

(October 2008 - October 2011)

Summary of the

Thematic Public Report from the

Court of Accounts

vely moderate, within the average for the

plans approved after the crisis.

Between 2008 and 2011, the targets

assigned to the Group were achieved on

the whole: the balance sheet reduction

was globally in line with the plan’s objec-

tives, cost-cutting goals were met and

the scheduled disposals were carried out

in due time (the most significant being

that of US subsidiary FSA). However,

Dexia was unable to sell either its Italian

subsidiary, Crediop, or its Spanish subsi-

diary, Sabadell. Keeping them on Dexia

Crédit Local’s balance sheet accounted

for around €250 billion in legacy assets

at end-2012.

Persistent balance sheet

risks

During the period from 2009 to

mid-2011, Dexia did not change its stra-

tegy concerning the disposal of sove-

reign bonds. The positive outcome of

the stress tests boosted the confidence of

the company, the governments and the

Commission in what proved to be an

overly optimistic evaluation of the

group’s capacity to handle the credit risk

associated with sovereign debt without

having to increase its capital. The sove-

reign bonds were necessary to refinance

the group, which offered them as colla-

teral to the European Central Bank or

on the interbank market, and the secu-

rity of liquidity sources was critical.

Given the massive discount of the bonds

on the markets, however, substantial

losses should have been recognised.

Finally, Dexia, like other French banks,

contributed to euro zone solidarity at

the request of the public authorities.

From 2008 to 2011, the search was

on for a partner with a deposit base that

could be used to shore up the group.

The contacts and discussions at both the

international and national levels proved

unsuccessful in this regard. The result

was the permanent realisation of Dexia’s

isolation, which compromised the conti-

nuation of the business in the form it

had maintained from the beginning.

This isolation had a lot to do with the

subsequent decision to break up the

bank.

Attempted bail-out

(October 2008 - –October 2011)

Summary of the

Thematic Public Report from the

Court of Accounts

Summary of the

Thematic Public Report from the

Court of Accounts

From the sovereign debt

crisis to the break-up of

the group

(October 2011 - early 2013)

Systemic risk

Three liquidity shocks

In early 2011, the volume of Dexia’s

short-term funding requirements had

been reduced to €96 billion, going

beyond the target set in the 2008

restructuring plan. However, a wave of

three liquidity shocks beginning in the

second quarter of 2011 thwarted the

recovery efforts undertaken up to then.

The first shock affected USD fun-

ding, caused when the US Congress

challenged the opening of refinancing

facilities to European banks by the

Federal Reserve. At the time, Dexia still

had a very large volume of US funding,

but it was able to handle this first shock

successfully.

The second shock took place in

spring

2011,

when

Moody’s

and

Standard & Poor’s threatened to place

Dexia’s rating on negative outlook due

to the risks associated with its sovereign

debt holdings. This decision cut off

Dexia’s access to the short-term market

funding it needed.

The third shock was fatal: it came

with the exacerbation of the sovereign

debt crisis in October 2011, at which

point Dexia’s credit rating was officially

placed on negative outlook. This deci-

sion triggered a flight of deposits that

topped €4 billion in one week at the

Belgian and Luxembourg subsidiaries,

creating a highly sensitive situation for

the public authorities in these countries.

As a result of these events, the group

was no longer able to cover its liquidity

requirements through the usual market

channels, and thus in order to prevent

the company from defaulting on pay-

ment the central banks and public enti-

ties had to exceptionally intervene.

Furthermore, these liquidity require-

ments were increased due to the interest

rate swaps entered into with its counter-

parts, with Dexia having to offset the

drop in the market value of the swaps as

interest rates fell.

Systemic effects of filing

for bankruptcy

Filing for bankruptcy was ruled out

due to the considerable effects this deci-

sion would have generated.

In November 2011, Dexia was listed

among the world’s systemically impor-

tant banks by the Financial Stability

Board. Had it filed for bankruptcy, the

Summary of the

Thematic Public Report from the

Court of Accounts

From the sovereign debt crisis to the

break-up of the group

(October 2011–early 2013)

terms of sale of its assets and terms of

repayment of liabilities would have

undermined not only State public

finances but also financial stability itself.

In addition, Dexia had entered into

massive derivatives contracts with other

financial institutions (notional amount

of €605 billion in September 2011). A

sell-off could have destabilised the

secondary sovereign bond market.

Finally,

the

earnings

the

Eurosystem central banks could have

been impacted, as they would have also

seized the Dexia shares provided as col-

lateral and resold them on the market,

generating discount risks.

New emergency

measures

Given its highly deteriorated cash

position in Q3 2011, Dexia received

exceptional facilities from the national

central banks. In September 2011,

emergency liquidity funds were jointly

provided by the French and Belgian cen-

tral banks, as in 2008. As from end-

September 2011, the group also borro-

wed from Agence France Trésor, in the

form of an unsecured government cash

deposit, on an overnight basis.

Breaking up Dexia: an

imposed decision,

with necessary tran-

sitional measures

As liquidity tensions once again

began mounting in May 2011, Dexia

examined various scenarios for the dis-

posal of its subsidiaries. The flight of

deposits in Belgium and Luxembourg

drove the authorities of both countries

to step up the spin-off of –Dexia Banque

Belgique

and

Dexia

Banque

Internationale à Luxembourg –from the

rest of the group. The take-over of Dexia

Banque Belgique by the Belgian govern-

ment generated an accounting loss of

€4.048 billion, leaving the French local

public sector financing division, repre-

sented by Dexia Crédit Local, comple-

tely isolated. At this point, the Deputy

Director was authorised to launch nego-

tiations to have the main subsidiary of

Dexia Crédit Local (Dexia Municipal

Agency) be backed by French public

entities, led by Caisse des dépôts et

consignations.

The State governments negotiated

temporary aid consisting in renewing

the funding guarantee mechanism for an

amount limited to €45 billion, tempora-

rily

approved

the

European

Commission in December 2011. This

mechanism was then extended to

September 2012, with a maximum limit

on State guarantees raised to €55 billion.

When the guarantee agreement was

signed, Dexia used a “self-subscribed”

shares mechanism allowing it to obtain

Summary of the

Thematic Public Report from the

Court of Accounts

From the sovereign debt crisis to the

break-up of the group

(October 2011–early 2013)

less expensive funding than it could get

from

the

national

central

banks.

However, the European Central Bank

decided in July 2012 to significantly

limit the volume of these shares for euro

zone banks, thus undermining certain

assumptions on the funding of the

break-up plan.

“Orderly resolution”

plan

After the failed bail-out, the govern-

ments had to agree on how to organise

the group’s run-off management in

accordance with Community principles

on government aid. The positions and

interests of national and community

players alike initially diverged, and the

discussions

were

highly

complex.

Consequently, in March 2012, the

European Commission rejected the first

version of the break-up plan.

The second version, known as the

“orderly resolution” plan, submitted in

November 2012, was approved by the

European Commission. This plan calls

for Dexia Crédit Local, –which became

the group’s only major remaining asset,

to –keep its banking license, allowing it

to continue granting loans but on a very

limited basis until 2014. This also gives

it continued access to ECB refinancing

operations and prevents the creation of a

public defeasance structure in France,

which would cause national public debt

to increase by some six GDP points.

Under the orderly resolution plan,

the amount of the permanent State gua-

rantee comes to

€85 billion and

France’s share was increased from 36.5%

to 45.59%, i.e. significantly higher than

under the 2008 bail-out plan. Eleven

Dexia Group entities are now under

run-off management. In principle, the

loan books and bond portfolios of these

entities will be held to maturity to avoid

selling them at a loss. As regards the

group’s funding through to 2020, the

aim is to regain access to the market by

limiting and then significantly reducing

its use of the various central bank facili-

ties.

In December 2012, a new capital

increase was carried out by the Belgian

and French governments for a total of

€5.5 billion (the French government

subscribed for €2.585 billion). The

French State now holds a 44.4% stake

and the Belgian State a 50.02% stake in

Dexia’s capital. The Caisse des dépôts

Group now holds only 1.30%.

The painstaking

creation of a new

credit institution

The break-up of the Dexia Group

left the French public authorities with

the task of deciding what the future

would

for

subsidiary

Dexia

Municipal Agency (DMA) which, as

part of the sub-group Dexia Crédit

Local, housed the large majority of the

outstanding local public sector loans

and whose purpose is to refinance local

public sector loans by issuing high cre-

dit-quality covered bonds (

obligations

foncières

Summary of the

Thematic Public Report from the

Court of Accounts

From the sovereign debt crisis to the

break-up of the group

(October 2011–early 2013)

The subsidiary’s fate was the focus of

a long and particularly painstaking deci-

sion-making process. The State carried

out two successive mediation proce-

dures, and considered various successive

schemes to arrive at a compromise with

its partners, –Caisse des dépôts and La

Banque Postale–. The first memoran-

dum of understanding (MoU), submit-

ted to the European Commission in

March 2012, was rejected, mainly

because it did not sever the ties between

Dexia Crédit Local (which had also

become a shareholder) and DMA.

In September 2012, a second MoU

was approved. Under the second plan,

three different entities were created:

CAFFIL

(French

local

financing

scheme) to take over DMA’s balance

sheet; the SFIL (local financing com-

pany) to back the mortgage company

(

société de crédit foncier

); and a joint ven-

ture, La Banque Postale collectivités

locales, between Caisse des dépôts et

consignations and –La Banque Postale.

Caisse des dépôts et consignations and

La Banque Postale, initially called upon

to take over DMA’s balance sheet at the

end of 2011, are therefore still involved

in the funding of local authorities. The

European Commission justified the use

of State aid by agreeing for the newly

created structure to be considered as a

“development bank”

in response to a

market failure. Within three years it will

examine the possibility for the SFIL to

be recognised as a commercial bank.

The objective is therefore to demons-

trate the profitability of the structure as

a whole.

The State owns 75%

of the new cre-

dit institution, acquired for the symbo-

lic sum of €1. Caisse des dépôts et consi-

gnations only holds a 20% stake and La

Banque Postale a 5% stake.

Accredited as a credit institution in

January 2013, the main purpose of the

SFIL is to renegotiate high-risk loans in

particular, to restructure these loans and

to negotiate additional loans that will

count as new outstandings of €1 billion

per year. An initial covered bond issue

was carried out by its subsidiary, –CAF-

FIL–, on 9 July 2013.

From the sovereign debt crisis to the

break-up of the group

(October 2011–early 2013)

Summary of the

Thematic Public Report from the

Court of Accounts

Diagram No. 2: creation of entities dedicated to the funding of local authorities

(December 2012)

Source: Court of Accounts

Summary of the

Thematic Public Report from the

Court of Accounts

Consequences for public

finances

Weakening of local

public sector

financing

Withdrawal of a major

contributor

Beginning in 2008, the gradual

withdrawal of Dexia Crédit Local spar-

ked fears of a restriction in available fun-

ding.

To offset this withdrawal, the public

authorities asked the Fonds d’épargne to

structurally intervene in the long-term

lending

segment,

with

budgets

of €3.6 billion in 2011 and €2 billion in

2012. Furthermore, three exceptional

budgets of €5 billion each were set up in

2008, 2011 and 2012 to provide shor-

ter-term loans.

Another budget totalling €20 billion

was recently approved for the 2013-

2017 period. Made available to local

authorities by Caisse des dépôts et consi-

gnations, its purpose is to finance pro-

jects for which market funding is inade-

quate concerning long-term invest-

ments, based on a list of possible uses of

funds established by the government

(construction of social housing, deploy-

ment of very high-speed digital net-

works, etc.).

It will be necessary to supervise the

coordination and consistency of the

offers proposed by the Fonds d’épargne

and the SFIL in order to prevent the

“crowding-out” of the new credit insti-

tution.

Inheritance of Dexia

Crédit Local’s structured

loans

Structured loans are complex vehi-

cles that include a loan and a derivative

product in the same contract. Often

beneficial in the initial repayment phase,

they usually involve a riskier second

phase in which the interest rates payable

by the local authority can increase shar-

ply. These structured loans, broadly dis-

tributed to the local public sector, have

also been granted by credit institutions

other than Dexia.

During

the

restructuring

plan

implemented from 2008 to 2011, total

outstanding structured loans on Dexia

Crédit Local’s balance sheet fell by

nearly 18% from €26.58 billion in

2008 to €21.88 billion in 2011. Most of

these loans were recorded on the balance

sheet of Dexia Municipal Agency (now

CAFFIL), which refinanced them.

Consequently, the highest volumes

of “high-risk” and “very high-risk” loans

are recorded on CAFFIL’s balance sheet

and, to a lesser extent, on that of Dexia

Crédit Local, totalling nearly €12 billion

at the time the resolution plan was sub-

mitted in late 2012.

Summary of the

Thematic Public Report from the

Court of Accounts

Sales of structured loans gave rise to

legal disputes, which are liable to have a

substantial impact on the income of

Dexia Crédit Local and CAFFIL. There

are two main reasons for the civil pro-

ceeding in progress: reasons inherent to

the structured loan agreements and rea-

sons linked to the annual percentage rate

(APR). If the court rules in favour of the

plaintiff, the penalty is to return to the

legal interest rate, which is especially low

today (0.04% in 2013), from the start of

the

loan

agreement.

Furthermore,

besides the opportunity loss on the inte-

rest, there is an additional cost associa-

ted with unwinding the interest rate

swaps set up to hedge against the interest

rate risk on each of the loans.

The risk of an unfavourable ruling

materialised for the first time with the

decision handed down by the Nanterre

Court of First Instance on 8 February

2013. Dexia Crédit Local, which was

joined by the SFIL, appealed the deci-

sion.

Depending on the case, the financial

risk for Dexia Crédit Local and the SFIL

ranges from 100% to 130% of the outs-

tanding loan. Due to the budgetary

impacts of these legal disputes for public

entity shareholders, there may be suffi-

cient general interest to call for legisla-

tive validation measures.

Costs observed to

date

Direct cost for the State

Since 2008, public involvement

with Dexia has generated a significant

cost for public entities, which has only

been partially offset by the fees earned

from the provision of financial guaran-

tees and interest on loans granted by the

Banque de France.

To date, the direct cost for the State

government has been €2.72 billion,

which is the difference between budget

expenditures related to the State’s invest-

ment in the 2008 capital increase

(€1 billion, a total write-down) and in

the December 2012 capital increase

(€2.585 billion), on the one hand, and

the fees earned from guarantees issued to

the Dexia Group from 2008 to 2012

(€864 million), on the other.

Cost for the Caisse des

dépôts Group

As one of Dexia’s historic sharehol-

ders, the general section of Caisse des

dépôts et consignations lost the value of

its investment, i.e. a loss of €2.859 bil-

lion.The Fonds d’épargne’s loss follo-

wing the 2008 capital increase came to

€1.038 billion.

CNP Assurances’ investment, howe-

ver, did not directly impact its financial

statements because it was predominantly

borne by the life insurance policyhol-

ders.

Consequences for

public finances

Summary of the

Thematic Public Report from the

Court of Accounts

Consequences for

public finances

Cumulative costs from

2008 to 2012

Excluding “second round” effects,

cumulative Dexia-related costs for

French public entities are estimated at

€6.618 billion. To get an overview of the

costs linked to the break-up of the group

for national taxpayers, it would also be

necessary to include the costs incurred

by Belgian entities, which added up to at

least an equivalent amount.

Persistent risks for

public finances

A scenario based on major

uncertainties

The orderly resolution plan relies on

the long-term run-off management of

the remaining Dexia Group. The base-

line scenario of the plan includes projec-

tions on a 2020 horizon, with three

main uncertainty factors. The first factor

is external and has to do with how the

situation in the euro zone evolves

(macroeconomic assumptions on inte-

rest rates and on changes in the coun-

tries’ financial ratings). The second fac-

tor is internal and relates to the valua-

tion of assets remaining on the balance

sheet and how fast the volume of these

assets can be reduced. The assumption is

that the residual Dexia Group will conti-

Table No. 3: cumulative costs related to Dexia (2008-2012)

(in

€

bn)

State

CDC -

general section

Fonds

d’épargne

Total

Historic equity investments

1.593

0.592

2.185

2008 recapitalisation

(via SPPE)

1.266

0.446

2.712

Guarantee fees

-0.864

2012 recapitalisation

2.585

Total

2.721

2.859

1.038

6.618

Source: Court of Accounts calculations

Consequences for

public finances

Summary of the

Thematic Public Report from the

Court of Accounts

nue to carry these assets over the long

term, with a balance sheet that will still

total €150 billion in 2020 if all goes to

plan. The third factor is the decrease in

the use of State guarantees, following a

peak in 2014. The group will need to

obtain funding primarily through unse-

cured market loans.

Vulnerability to

unforeseen circumstances

The baseline scenario of the orderly

resolution plan has given rise to several

stress assumptions, but no alternative

scenarios have been considered. The

main risks are linked to changes in inte-

rest rates, which can substantially alter

the availability and cost of liquidity for

the group; the downgrading of the credit

rating on the group’s balance sheet assets

(particularly

sovereign

government

bonds); poor investor appetite for Dexia

bonds without government backing;

and unforeseen strains on financial

expenses undermining income.

Simulated possibilities are neither

correlated nor are they necessarily

cumulative. Nevertheless, adding up

their impacts shows that additional fun-

ding requirements compared to the

baseline scenario could reach €20

bil-

lion for several years, and this amount is

included in the maximum State guaran-

tee limit of €85

billion authorised by

the European Commission. The risk of

calling on the State guarantee thus

appears to be relatively low. However,

the risk of recapitalisation, which has

not been precisely quantified, is not insi-

gnificant in the event of additional costs

affecting financing conditions, a deterio-

ration in the value of financial assets or

insufficient regulatory prudential capi-

tal.

Overall, the run-off management

scenario with the prospect of a return to

breakeven in terms of defeasance by

2018 was considered cautious but

uncertain by the players themselves. The

Court would stress the highly unpredic-

table nature of these projections, which

are based in particular on the assump-

tion of a return to growth in the euro

zone.

Summary of the

Thematic Public Report from the

Court of Accounts

Potential areas of

improvement for

the future

In addition to the observations

already made on the specific characteris-

tics of Dexia’s governance, the inadequa-

cies of prudential supervision, and the

cost in terms of public finances and the

funding model for the local public sec-

tor, the Court has identified a number

of potential areas for improvement

concerning corporate governance and

banking regulation in particular.

Enhanced

governance of

financial companies

Considerable progress has been

made since the 2000s in terms of risk

management through governance in lis-

ted groups. Having said that, external

controls of governance bodies - above

and beyond self-assessments or peer

reviews - need to be expanded by giving

more control powers to Shareholders’

Meetings and prudential supervisors.

Rules of governance, and particularly

those pertaining to executive manage-

ment remuneration policies, need to be

strengthened.

A change is called for in order to

align shareholder and executive manage-

ment interests with the interests of local

authorities to prevent and avoid the use

of public funds. The national prudential

supervisor is probably the most qualified

to exercise control over the governance

of credit institutions. The current draft

law on the segregation and regulation of

banking activities calls for expanding the

French

Prudential

Supervisory

Authority’s scope of expertise in terms of

banking resolutions and giving it greater

powers over governance bodies. The

effectiveness of such measures would

need to be verified.

Critical European

reforms underway

for crisis resolution

The European Commission is deter-

mined to learn from the crisis, and has

launched the “banking union” reform to

establish overall banking supervision by

the European Central Bank and define a

framework for the management of ban-

king resolutions.

The implementation of a single

supervisory mechanism at the European

level was considered to be the most

urgent project because it was the prere-

quisite for calling on the European

Stability Facility to recapitalise banks.

The single supervisory mechanism

could be effective by summer 2014. If

this mechanism had been in place,

Dexia would have been under central

supervision, and consequently the

group’s various entities would have been

subject to consistent and effective super-

vision.

Summary of the

Thematic Public Report from the

Court of Accounts

Potential areas of improvement

for the future

The crisis also proved that it was

necessary to bolster bank liquidity. This

initiative must go hand-in-hand with

the limitation of the balance sheet leve-

rage ratio. Similarly, the raising of capi-

tal requirements would help improve the

resilience of banks. The new Basel III

prudential capital rules deal with these

issues. These rules are the focus of the

future CRD IV and should come into

force as of 1

January 2014.

However, not all of these projects

have been finalised and some will proba-

bly take a long time to implement.

Given the shortcomings of the

European regulatory framework, the cri-

sis saw the consequences of the bank fai-

lures impact the governments that step-

ped in to support their banking sector.

This effort sometimes weighed heavily

on national debts and budgets, with

management of these failures often pro-

ving complex and difficult, as was the

case with Dexia.

The Dexia disaster caused and will

continue to cause -for many long years-

high costs and risks for the State and the

associated public entities. It led to the

resurgence of public financing mecha-

nisms for the local public sector. In light

of the vulnerability of the institutions

under public control taking up the

baton for the Dexia Group, the major

risks for public finances, and the impor-

tance of the fundamental issues raised by

this incident, the Court intends to exer-

cise a high level of vigilance on the mat-

ter and will re-examine it in its various

public communications.

Summary of the

Thematic Public Report from the

Court of Accounts

Main focuses and

recommendations

____________________________

(1)

Court of Accounts,

2013 Annual Public Report, Part II

. Bank support plan: a provi-

sional financial overview, incomplete supervision of remuneration, pg. 155-190. French

documentation, February 2013, 605 pages, available at www.ccomptes.fr

The findings of the report point to

potential areas of reform to improve

the supervision of the banking sector.

Following the recommendations issued

in the annual public report in February

2013

(1)

, the Court has focused on

several additional possible actions:

–

ensure the effectiveness of the

future single supervisory authority by

supporting projects aimed at harmoni-

sing prudential regulations in the diffe-

rent euro zone countries;

–

establish legal mechanisms allo-

wing for the reconsideration of variable

pay, benefits and additional indemni-

ties to executive managers of financial

institutions whenever public aid is

given;

–

increase criminal and financial

penalties, both for executive managers

and for members of the Boards of

Directors of financial institutions in

the event of excessive risk-taking lea-

ding to the recognition of losses.

In order to limit Dexia’s impacts on

public finances, and in accordance with

the lessons learned from this situation,

the Court has issued the following

recommendations:

–

use, before the statute of limita-

tions is up in 2014, any means of legal

recourse still available to challenge the

supplementary pension scheme gran-

ted to Dexia’s former executive mana-

gers;

–

challenge the possibility offered

to civil servants to take another civil

service job while receiving indemnities

associated with the termination of

management duties in a public com-

pany or a company receiving public

financial aid;

–

take the legislative validation

measures needed to secure the condi-

tions for the signing of loan agreements

between credit institutions and the

local public sector;

–

verify the consistency of practices

exercised by Dexia Crédit Local and

the SFIL concerning the renegotiation

of structured loans issued to the local

public sector;

–

make sure public intervention is

consistent and effective in financing

the local public sector, by concretely

coordinating the budget for the Fonds

d’épargne and new loans by La Banque

Postale refinanced by CAFFIL.