La excursión a Blois

Credit valuation adjustments

The credit valuation adjustments (‘CVAs’) represent an estimate of the adjustment to fair value that a market participant would make to incorporate the credit risk inherent in counterparty derivative exposures.

The widening of credit spreads of corporate and financial institution counterparties during the year contributed to a significant increase in the level of CVA adjustments recorded across all counterparties particularly, monoline insurers and credit derivative product companies (‘CDPCs’) as set out in the table below.

(in millions of euros) 31 December

2008 2007

Monoline insurers 2,822 606

CDPCs 591 61

The monoline insurer CVA is calculated on a trade-by-trade basis, and is derived using market observable monoline credit spreads. The majority of the monoline CVA is taken against credit derivatives hedging exposures to ABS. The CDPC CVA is calculated using a similar approach. However, in the absence of market observable credit spreads, the cost of hedging the counterparty risk is estimated by analysing the underlying trades and the cost of hedging expected default losses in excess of the capital available in each vehicle.

Monoline insurers

The Group has purchased protection from monoline insurers, mainly against specific ABS, CDOs and CLOs.

Monoline insurers are entities which specialise in providing credit protection against the notional and interest cash flows due to the holders of debt instruments in the event of default by the debt security counterparty. This protection is typically held in the form of derivatives such as credit default swaps (‘CDS’) referencing the underlying exposures held by the Group.

During the year, the market value of securities protected by monoline insurers continued to decline as markets deteriorated. As the fair value of the protected assets declined, the fair value of the CDS protection from monoline insurers increased. As the monoline insurers had concentrated their exposures to credit market risks, their perceived credit quality deteriorated as concerns increased regarding their ability to meet their contractual obligations. This resulted in increased levels of CVA being recorded on the purchased protection. The

combination of greater exposure and widening credit spreads has increased the level of CVA required.

The tables below analyse the Group’s holdings of CDSs with monoline counterparties.

(in millions of euros) 31 December

2008 2007

Gross exposure to monolines 5,278 1,695

Credit valuation adjustment (2,822) (606)

Hedges with bank counterparties (283) –

Net exposure to monolines 2,173 1,089

The change in CVA is analysed in the table below.

(in millions of euros) 2008

At 1 January 2008 606

Net loss through income 3,515

CVA utilised during 2008 (1,346)

Foreign currency and other movements 44

Balance at 31 December 2008 2,822

The following table sets out the ratings of the insured assets covered by the credit insurance contracts and a detailed overview of the related movement in the gross exposure to monoline insurers.

31 December 2008 31 December 2007

Notional Fair value: Gross Notional Fair value: Gross (in millions of euros)

amount: protected exposure to amount: protected exposure to protected assets monoline protected assets monoline

assets assets

The Group also has some indirect exposure through wrapped securities and assets which have an intrinsic credit enhancement from monolines. These securities are traded with the benefit of this credit enhancement and therefore any deterioration in the credit rating of the monoline is reflected in the fair value of these assets.

This indirect exposure declined during 2008 as most of these exposures were transferred to RBS.

Credit derivative product companies

CDPCs are companies that sell protection on credit derivatives that initially had AAA credit rating, based on models for capital allocation agreed with the rating agencies. CDPCs are similar to monoline insurers. However, unlike monoline insurers, they are not regulated as insurers.

The Group has exposures with CDPCs mainly relating to correlation trading activity. Correlation trading transactions are primarily driven by counterparties seeking credit exposure to specific baskets of underlying assets. The protection purchased from these counterparties by the Group are single name and index CDSs.

As CDS spreads have widened and, credit protection has become more valuable during the year, the gross exposure to CDPC counterparties has increased.

The credit quality of CDPC counterparties has declined during the year, in particular in the second half of the year, reflecting the negative impact of credit risk concentrations in a declining market. As a result CVA adjustments to fair value taken against these derivatives have increased significantly.

The table below presents a comparison of mark to market of the credit protection purchased and the CVA on the CDPC. The rating is based on the rating of the CDPC:

31 December 2008 31 December 2007

Notional Mark to Credit Notional Mark to Credit amount market valuation amount market valuation

reference adjustment reference adjustment

assets assets

AAA / AA rated 6,547 1,282 256 25,942 1,054 61

A / BBB rated 4,646 954 335 – – –

11,193 2,236 591 25,942 1,054 61

The notional amount decreased significantly due to the transfer of a significant part of the CDPC position to RBS during 2008.

A significant proportion of the gross exposure at 31 December 2008 comprises CDS tranches with 16% - 53%

attachment-detachment points for those hedged by AAA / AA CDPCs and 16% - 38% for those hedged by lower rated CDPCs.

The year on year movement in the CDPC CVA is analysed below:

(in millions of euros) 2008

Balance at 1 January 2008 61

Losses through income 1,293

Realised CVA – transfers to RBS (693)

Foreign currency movement (70)

Balance at 31 December 2008 591