European Banking Union D: Cross-Border Resolution — Dexia Group

Yale Program on Financial Stability Case Study 2014-5D-V1

15 Pages Posted: 14 Mar 2015

See all articles by Rosalind Wiggins

Rosalind Wiggins

Yale Program on Financial Stability

Natalia Tente

Deutsche Bundesbank

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: November 1, 2014

Abstract

In September 2008, Dexia Group, SA, the world’s largest provider of public finance, experienced a sudden liquidity crisis. In response, the governments of Belgium, France, and Luxembourg provided the company a capital infusion and credit support. In February 2010, the company adopted a European Union (EU)-approved restructuring plan that required it to scale back its businesses and cease proprietary trading. In June 2011, Dexia withdrew from the government-sponsored credit support program before its expiration date, and in July, the company announced that it had passed an EU stress test. However, just three months later, Dexia wrote down its substantial position in Greek debt and posted its largest loss ever. The company’s shares plummeted, and its Common Equity Tier 1 capital became negative. To avoid a disorderly resolution, the governments of Belgium, France, and Luxembourg nationalized Dexia’s assets. This case examines the attempted rescue of Dexia, provides an analysis of the successes and failures of that cross-border effort, and discusses the impact that Dexia’s holdings of sovereign debt had on the company’s viability and on the ability of its host countries to rescue it.

Keywords: Systemic Risk, Financial Crises, Financial Regulation

JEL Classification: G01, G28

Suggested Citation

Wiggins, Rosalind and Tente, Natalia and Metrick, Andrew, European Banking Union D: Cross-Border Resolution — Dexia Group (November 1, 2014). Yale Program on Financial Stability Case Study 2014-5D-V1. Available at SSRN: https://ssrn.com/abstract=2577351 or http://dx.doi.org/10.2139/ssrn.2577351

Rosalind Wiggins

Yale Program on Financial Stability ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Natalia Tente

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Andrew Metrick (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States
(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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