T
HEMATIC
P
UBLIC
R
EPORT
Paris, 18 July 2013
Dexia:
a high cost with persistent risks
This private Franco-Belgian banking group was hit by a liquidity crisis and began receiving public aid
in October 2008. The Court of Accounts, the competent authority as of the date in question to monitor its
French subsidiary, decided to examine the conditions of the bank's creation and development, the impact
of its failure on public spending and the reasons for this failure.
Its observations are limited to the French part of Dexia, as the Court does not have the authority to
audit the Belgian part.
1)
A high-risk strategy that neither Dexia's governance nor the supervisory
authorities were able to prevent
The creation of transnational group Dexia as of 1996 suffered from
structural weaknesses
from the
beginning.
Dexia's
financing model
, both unusual and untenable, was based on the
funding of very long-
term loans using medium-term resources and, for a significant portion, short-term resources
. The
search for ever-higher profitability and the distribution of substantial dividends
to shareholders
were responsible for the very fast growth of the group's assets, including during the period immediately
before the crisis.
This model relied on the smooth operation of the money market and easy access to this market
thanks to a solid financial rating. Starting in 2008, however, these conditions were no longer met, thus
sparking a major liquidity crisis (September 2008).
Dexia's Board of Directors
, highly dependent on bi-national balances,
failed to anticipate the
risks
that began growing in summer 2007 and did nothing to
halt a strategy
that should have been
completely overhauled well before mid-2008. Though only a minority shareholder,
Caisse des dépôts et
consignations
remained in the background until 2008
.
Similarly, the Court noted that the
supervisory authorities were unable to prevent these risks
before 2008
, and
even after this date refrained from sanctioning the failures observed in the
course of their prudential controls
.
2)
Failure of the restructuring plan
The two components of the bail-out plan, which was urgently put together in 2008 by the Belgian and
French governments, consisted of a capital increase reserved for public entities (€2.7
billion for the
French part, incl
uding €1
billion contributed by the State and €1.7
billion by the Caisse des Dépôts
Group) and
the provision of State guarantees
enabling Dexia to obtain funding on the market again.
The Caisse des dépôts et consignations called on the Fonds d
épargne (in charge of centralising
regulated savings deposits) to contribute part of the requested effort, thus passing some of the risk on to
savers.
In exchange for accepting State aid, the European Commission wanted a restructuring plan whose
main objective was to reduce Dexia's balance sheet size. While the objectives of the plan were met for
the most part,
Dexia's high exposure to sovereign debt meant that the group had to be dismantled
once the sovereign debt crisis hit in 2011
.
This dismantling called for anoth
er capital increase of €2.58
billion, subscribed for by the French
State at the end of 2012. After the French State acquired the main French subsidiary, the gradual
extinguishing of the "residual" Dexia Group was begun.
3)
A high cost in terms of public spending, with added risks over the long term
To date, the direct cost of this banking debacle, for the French part alone, comes to
€6.6
billion.
This breaks down into a net cost of €2.7
billion for the State and €3.9
billion (including the
Fonds d'épargne) for the Caisse des dépôts et consignations, linked to the impairment losses on their
respective shareholdings.
The
future risks concern the extinguishing of Dexia
, whose unchanged financing model remains
highly sensitive to increases in interest rates, and which will undoubtedly extend well beyond 2020.
They
also concern local financing
and the risks associated with the
"toxic loans"
issued by Dexia,
liable to result in payment defaults
or legal disputes. Should these risks materialise, they will be hard
on the French State, which is now directly involved in the entity being extinguished ("residual" Dexia) and
in the new public entities (SFIL/CAFILL) that will come after Dexia in funding French local authorities.
4)
A late and incomplete search for accountability
The bail-out of Dexia was followed by a change in its Management teams, then the substantial
overhaul of the Board of Directors in 2009.
At the request of the State governments, the two main directors of the bank
–
Mr Pierre Richard
,
Chairman of the Board, and
Mr
Axel Miller
, CEO (chief executive officer)
–
resigned from office.
However,
neither
the new Management team appointed in 2008, nor the shareholders already
present or that bought into the company in 2008, nor the French or Belgian governments,
questioned
the accountability of the previous Management team
.
True, this team was removed, but its members nevertheless held onto substantial financial
benefits. For the French directors, this included questionable "top hat" pension schemes
.
5)
Main recommendations
The reform projects under way in terms of supervision and banking resolution reflect much-needed
recognition and awareness. The project under which the
European Central Bank is given
supranational authority over financial institutions
appears in particular to have drawn lessons from
the shortcomings observed in the supervision of Dexia.
These reforms must be expanded, however, especially with regard to
the accountability of bank
directors
.
Penalties
need to be more
clearly defined, stronger and systematically applied
whenever
public aid is granted for restructuring.
The Court has issued a total of
eight recommendations
, including:
establish legal mechanisms allowing for the revision of variable pay as well as benefits and
additional indemnities granted to directors of financial institutions, whenever public aid is provided;
enhance the criminal and financial penalties, both for bank directors and for members of the boards
of financial institutions, in the event of unreasonable risk-taking leading to losses;
use (before the statute of limitations is up in 2014) any legal means of recourse still available to
challenge the supplemental pension schemes paid to the former directors of Dexia;
challenge the possibility given to civil servants to take government jobs again while receiving
indemnities for previous positions as directors in a public company or while receiving public
financial aid;
take the legislative validation measures needed to secure the conditions for the establishment of
loan agreements between credit institutions and the local public sector.
Read the report
Press contact:
Ted MARX - Head of Communication - Tel: +33 (0)1 42 98 55 62-
tmarx@ccomptes.fr
Denis GETTLIFFE - Head of Press Relations - Tel +33 (0)1 42 98 55 77 -
dgettliffe@ccomptes.fr
Follow the Court of Accounts at @Courdescomptes