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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Blog

Jun 6

Written by: Donald van Deventer
6/6/2011 4:55 AM 

Today’s blog focuses on the funding shortfall that took place at Dexia SA during the period from February 8, 2008 to March 16, 2009. Today’s blog confirms that Dexia, through the New York Branch of Dexia Credit Local, was one of the largest borrowers from the Federal Reserve during the credit crisis, a fact that hasn’t received as much attention as it should. At its peak, Dexia was borrowing $50 billion from the Federal Reserve, almost double the funding shortfall at Lehman Brothers on September 15, 2008, the day after its bankruptcy filing. This amount of aid is four times the Dexia “rescue” amount that was announced by the Netherlands, Belgium, and Luxembourg on September 30, 2008.

This is the ninth case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, Merrill Lynch, a consolidation of the latter three firms, Lehman Brothers, Morgan Stanley, and Citigroup.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base. We use this data to determine to what extent there was a funding shortfall at Dexia during the credit crisis. Although most observers implicitly assume that the primary beneficiaries of Fed support in the credit crisis were U.S. organizations, there were some major European beneficiaries of Federal Reserve lending programs, and Dexia ranked high among that group.

The data used for Dexia in this analysis is described in more detail below. The data consists of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included in this definition put forth by the Federal Reserve. 

A detailed chronology of the credit crisis through February 28, 2008 is given in this recent blog post:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog,, May 13, 2011.

The key dates in the chronology relevant to Dexia are summarized below. 

October 31, 2007
Dexia’s FSA reports $190 million in third quarter mark-to-market losses (Source: Reuters)
August 6, 2008
Dexia injects USD 300 million in FSA (Source:
August 7, 2008
Dexia's FSA Faux Pas (Source:
September 18, 2008
Dexia announces Lehman-related losses estimated to be around EUR 350 million (Source: press release)
September 30, 2008
European governments bail out Dexia in €6.4bn rescue deal (Source:
October 1, 2008
Dexia chairman and president resign (Source: Associated Press)
November 14, 2008
Dexia sells Financial Security Assurance after Euro 1.5 billion Third Quarter Loss (Source:
March 9, 2009
Dexia posts 3.3 billion Euro losses for 2008 (Source:

Dexia’s losses have continued long after the September 30, 2008 bail-out by European governments. On May 27, 2011, it was announced that Dexia would make a  $5.1 billion provision for losses on accelerated asset sales (Source:

This blog reports on “primary, secondary, or other extensions of credit” by the Federal Reserve to Dexia during the period February 8, 2008 to March 16, 2009. Dexia’s borrowings from the Federal Reserve can be summarized as follows:

Borrowing dates:
First borrowing $6 billion on April 17, 2008, with borrowings continuously outstanding through March 16, 2009, even after the September 30, 2008 bail-out by three European governments.
Average from
2/8/2008 to 3/16/2009
$12.9 billion
Average when Drawn
$15.5 billion
Maximum Drawn
$50.0 billion on March 12, 2009
Number of Days with
Outstanding Borrowings

The graph below shows the Dexia 1 month (yellow line) and 1 year default probabilities (blue line) for the Jarrow-Chava version 5.0 default probability models from Kamakura Risk Information Services from February 8, 2008 through the effective nationalization of Dexia on September 30, 2008.


Cumulative default risk peaked just prior to the nationalization of Dexia SA on September 29, 2008 with a 5 year cumulative default risk of 18.90%.

Dexia’s first borrowing from the Federal Reserve was $6 billion on April 17, 2008. Dexia Credit Local New York Branch borrowed from the Federal Reserve for 311 days, a longer period than any of the U.S. financial institutions that we have examined in this series so far. The peak borrowing was $50 billion on March 12, 2009, 5 months and 12 days after Belgium, the Netherlands, and Luxembourg announced their Euro 6.4 billion “rescue” of Dexia SA.  We also know that Dexia began borrowing under the Commercial Paper Funding Facility as shown below. 


In the chart below, we compare Dexia’s funding short fall to those firms whose liquidity risk we have previously analyzed in this series.  Dexia’s average drawn borrowing of $15.5 billion ranks fourth among the firms analyzed so far, just barely behind Morgan Stanley and Merrill Lynch as beneficiaries of support from U.S. taxpayers via the Federal Reserve.

If one ranks the same firms by largest outstanding borrowing on a single day, Dexia ranks third, with a peak borrowing of $50.0 billion, almost quadruple that of Bank of America when Countrywide and Merrill Lynch-related borrowings are excluded.

Dexia began borrowing under the Commercial Paper Funding Facility on October 27, 2008 and did a total of 42 transactions which are listed here:

Implications of Funding Shortfall Data

Dexia’s peak funding need of $50.0 billion on March 12, 2009 was almost double the $28 billion funding shortfall at Lehman Brothers on September 15, 2008, the day after Lehman Brothers filed for bankruptcy. As noted in our May 31, 2011 blog on Lehman, it is clear that the U.S. government dramatically revised its decision making on which firms were too big to fail in the aftermath of the Lehman Brothers bankruptcy. What is surprising is the Fed’s willingness to provide double the aid that Lehman Brothers required to a non-U.S. institution after a supposed rescue by three European governments.  In reality, obviously, the United States was an eager and active participant in the September 30, 2008 rescue of Dexia SA. The internet is silent on the “thank you” to the United States from the shareholders of Dexia SA (who would otherwise have been completely wiped out) and the three European nations whose September 30, 2008 bail-out was only roughly one-fourth of the aid provided by the Federal Reserve at its peak, excluding the other amounts extended through the Commercial Paper Funding Facility.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:

Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
June 7, 2011

© Copyright 2011 by Donald R. van Deventer, All Rights Reserved.