Tercera Etapa Implementación

By business units Santander Consumer 5.7% Banesto 6.2% Wholesale Banking in Spain 8.7 % Santander Branch Network in Spain

8.1% Financial Management and

Equity Stakes 31.6% Portugal 3.3% Others 5.7% Latin America 25.5%

DISTRIBUTION OF ECONOMIC CAPITAL

By types of risk Structural Interest 5.9% Rest of Market 9.1% Equity market 21.4% Business 3.9% Operational 6.6% Others 5.0% Credit 48.2% Abbey 5.3%

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Grupo Santander’s capital planning framework gives a global vision of the capital sufficiency situation for various time periods and stress scenarios, which, in turn, complement some aspects in the PAC guide, drawn up by the Bank of Spain in compliance with the objectives set in Pillar II of Basel II.

If one compares the economic capital results with available capital one can conclude that the Group is sufficiently capitalised to support the risk of its activity with a confidence level equivalent to an objective rating of AA.

RETURNONRISKADJUSTEDCAPITAL METHODOLOGY(RORAC)

Grupo Santander has been using RORAC methodology in its credit risk management since 1993, with the following purposes:

•To analyze and set prices during the decision-taking process for operations (admission) and clients (monitoring).

•To estimate the capital consumption of each client, portfolio or business segment, in order to facilitate the optimal allocation of economic capital.

•To calculate the level of provisions that correspond to average expected losses.

If one looks at each operation, the economic capital calculation is based on the same variables needed to calculate the expected loss (i.e. the client’s rating, the maturity and the guarantees of the operation). By aggregation, the economic capital of the rest of the operations of this client can be calculated and, bearing in mind the appropriate factors of diversification/correlation, of a portfolio of clients, a business unit and the Bank as a whole.

The spread on operations must not only cover costs, including the expected loss or the cost of risk, but also be sufficient for an adequate return on the economic capital consumed by them.

As a result. RORAC methodology enables one to assess whether the return on a transaction covers costs of the risk – expected loss – and the cost of the capital invested in the transaction.

The minimum return on capital which a transaction must obtain is determined by the cost of capital. If an operation or portfolio obtains a positive return, it is contributing to the Group’s profits, but it is not really creating value for the shareholder if the return does not cover the cost of capital.

RORAC methodology enables the return on operations, clients, portfolios and businesses to be made on a homogeneous basis, identifying those that obtain a risk adjusted return higher than the cost of the Group’s capital, and so aligning risk and business management with the overall objective of maximising the creation of value.

7. REPUTATIONAL RISK

All areas of Grupo Santander regard management of the reputational risk of their activities as a key part of their business. The mains instruments for managing this risk in the sphere of marketing products and services are as follows:

Global Committee of New Products (GCNP)

All new products or services that any institution of Grupo Santander wants to market must be first submitted to this committee for approval.

The committee held 14 meetings in 2007 (two of them by writing and without meeting) at which 186 products or families of products were analysed.

A Local Committee of New Products is established in each country where there is a Grupo Santander institution. Once a new product or service is ready, this Committee must request

permission from the Global Committee for it to be marketed. In Spain, the Local Committee falls within the Global Committee.

The areas that participate in the Global Committee of New Products, chaired by the Secretary General, are: Tax Advice, Legal Advice, Customer Service, Internal Auditing, Retail Banking, Global Corporate Banking, Santander Private Banking, Compliance, Financial Control and Management Control, Financial Operations and Markets, Operations and Services, Global Wholesale Banking Risks, Corporate Risks and IFIs, Credit Risks, Financial Risks, Risks- Methodology, Processes and Infrastructure, Operational Risks, Technology, Global Treasury, Universities and, lastly, the unit proposing the new product or a representative of the Local Committee of New Products.

Before a new product or service is launched, these areas, as well as, where applicable, other independent experts considered necessary in order to correctly evaluate the risks incurred (for example, Prevention of Money-laundering) , exhaustively analyse the aspects that could affect the process, stating their opinion on each product or service.

The Global New Products Committee, in the light of the documentation received, and after checking that all the

requirements for approving the new product or service have been met and bearing in mind the risk guidelines set by the Board’s Risks Committee approves, rejects or sets conditions for the new product or service.

The Global Committee gives particular consideration to the suitability of the new product or service to the framework where it is going to be marketed. Particular importance is attached to:

- Each product or service is sold by those who know how to sell it.

- The client knows what he or she is investing in and the risk of each product or service and this can be accredited with documents.

- The product or service is adjusted to the customer’s risk profile. - Each product or service is sold where it can be, not only for

legal or tax reasons (i.e. it fits into the legal and tax regime of each country), but also on the basis of the financial culture. - When a product or service is approved, maximum placement

limits are set.

Manual of Procedures for the Marketing of Financial Products

This manual, which has been used by Banco Santander since 2004 for the retail marketing of financial products in Spain, was profoundly reviewed in 2007, as a result of the entry into force on November 1 of Directive 2004/39 on Markets in Financial

Instruments Directive (MiFID), which establishes new requirements for selling financial products.

The objective of the Manual is to guarantee: (i) the appropriate valuation of financial products before their commercial use; (ii) adequate development of commercial activities in accordance with the features of the service, product and client; and (iii) compliance with the regulations applicable to the marketing of financial products, including the MiFID.

The Manual covers the provision of investment services for financial products including securities and other fixed-income or equity instruments, money market instruments, participations in

collective investment institutions, savings and investment insurance, traded derivatives and OTC and atypical financial contracts. The Global Committee of New Products can include other instruments in the sphere of the Manual of Procedures.

The Manual segments customers and products, and establishes different regimes of business treatment largely depending on the type of service being provided. The combination of these elements (category of client, type of product and commercial treatment) produces a matrix which determines the type of mechanism to be applied (test of advisability and suitability) in order to assess the adaptation of the client to the product, and the type of warnings to be issued to the client.

Customer and product segmentation comes from crossing the internal classification already applied by Santander before the MiFID to the classification established by the MiFID, with which a level of protection above the minimum required by the MiFID is attained.

The different types of commercial treatment, graded on the basis of greater to lesser involvement of the Bank, are: (i) advised sale, including, portfolio advice and management; and (ii) unadvised sale, which covers marketing and execution.

In 2007 120 products covered by the manual were submitted for approval. Most of them were mutual funds, but other categories such as warrants, hedging products, preferred shares and public offerings and/or subscription to securities were also authorised.

Of the 120 products, 68 were new ones submitted to the Global Committee and 52 were not new and were submitted to the Office of the Manual, created to ensure enforcement of the manual and part of Compliance Management. The 120 products were categorised as follows: 36 were classified as green (30%), 49 yellow (41%) and 32 red (27%). Three products were not assigned a colour: two because they are generic and a colour will be assigned for each issue and the other because its approval depended on a further review. The colour red, yellow or green is assigned not only on the basis of the risk of loss in each product, but also reflects the greater or lesser difficulty for customers to understand their features.

Of the 28 products approved as of November 1, 19 were catalogued as complex (under the MiFID) and nine as not complex.

The Board’s Risks Committee, as the maximum body

responsible for global management of risk and all types of banking transactions, assesses, with the support of the General Secretary Division, reputational risk in its sphere of action and decisions.

The Audit and Compliance Committee supervises the Group’s reputational risk and monitors, among other functions, compliance with the Group’s Code of Conduct in the Securities Markets, with the manuals and procedures to prevent money laundering and, in general, with the Bank’s rules of governance and compliance. It also makes the necessary proposals for improvements.

The appendices of this Annual Report (pages 345 to 357) set out the Group’s main activities in the sphere of Compliance and Prevention of Money-laundering. The Report of the Audit and Compliance Committee, issued by the Committee and distributed together with this Annual Report, contains a full description of its activities in 2007.

8. TRAINING ACTIVITIES IN RISKS

Santander has a Corporate School of Risks, which helps to consolidate the risk management culture in the Bank and guarantees the training and development of all risk professionals with homogeneous criteria.

The school, which gave 32,872 hours of classes to 3,032 employees during 2007, is the base for strengthening the Bank’s leadership in this sphere by continuously enhancing the skills of all those working in the risks area.

The school also trains employees in other business segments, particularly the commercial area, aligning the demands of risk management with business objectives.

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INTERNAL CONTROL MODEL AND