The liquidity risk can be defined as the risk that Dexia Municipal Agency may not be able to settle its privileged debt commitments at the due date owing to the fact that there is too great a gap between the reimbursement of the assets and the redemption of its privileged resources.
The limitation to three years of the asset-liability duration gap decided by Dexia Municipal Agency enables the Company to limit its future liquidity needs.
To meet its liquidity requirements, Dexia MA will issue new obligations foncières to replace those that mature and the reimbursement of which creates the need for liquidity.
If the situation in the covered bond market does not make it possible to launch new issues, Dexia MA may first make use of the backing of its parent company Dexia Credit Local, which has committed itself in its “
declaration of support”.
Thus, Dexia Municipal Agency holds at any time written commitments from Dexia Credit Local for irrevocable and on first demand financing covering the reimbursements of obligations foncières in the next 12 months. In the event of use, such financing will have a maturity of two years.
In addition, Dexia Municipal Agency has its own solid resources that enable it to cover its temporary liquidity requirements, even in the event of the default of its parent company (
article L.515-21 of the Monetary and Financial Code). Because of the nature of the assets that make up its cover pool, Dexia Municipal Agency has a large number of assets that are directly eligible for refinancing by the Central Bank, so that its cash requirements are easily covered.
Since it is a credit institution, Dexia Municipal Agency can post these eligible assets:
either by using, in its own name, the refinancing possibilities offered by the European Central Bank via the Banque de France. - or by using interbank financing in the form of repurchase agreements.
In practice, Dexia Municipal Agency first uses new issues of obligations foncières and financing made available by Dexia Credit Local, but it has also demonstrated its real capacity to obtain financing from the Banque de France when the primary covered bond market remained closed from September 2008 to June 2009.
The maximum cumulated liquidity requirements are presented below.
In addition, Dexia Municipal Agency manages its liquidity risk by means of the following three indicators:
- the liquidity ratio for one month (regulatory reporting to the prudential control authority - ACP);
- the duration gap between the assets and the resources benefiting from the legal privilege (limited to three years), which is published quarterly;
- cash requirements over the next 180 days: Dexia Municipal Agency’s management enables it to provide structural coverage for its liquidity requirements up to the extinguishment of the privileged liabilities by assets eligible for refinancing by the Banque de France. Moreover, Dexia Municipal Agency ensures that at any time, its cash requirements over a period of 180 days are covered by replacement assets, assets eligible for credit operations with the Banque de France, or by refinancing agreements signed with credit institutions with the best short-term credit quality.
At the end of September 2011, Dexia MA had no net cumulated need for cash over the next 180 days, except during the next seven weeks*, as shown in the following graph.
* This graph has been designed on the assumption that the cash collateral received (approximately EUR 2.5 billion) should be completely reimbursed at the next calculation date. This explains the need for cash in the first week of October.
