2007 REGISTRATION DOCUMENT

CONSOLIDATED FINANCIAL STATEMENTS5Notes to the financial s tatements p repared in accordance with I nternational Financial Reporting S tandards as adopted by the European Union< Contents >■Three internal ratios are used to manage medium/long-term liquidityat Group level:■ the one-year internal liquidity ratio for financing with contractualmaturities, corresponding to the maturity gap beyond one yearbetween sources of funds with the same characteristics andmaturities and uses of funds with the same characteristics andmaturities;■ the one-year internal liquidity ratio for total financing, correspondingto the maturity gap beyond one year between sources of funds withthe same maturities and uses of funds with the same maturities,and carried on and off-balance sheet in the form of contractualcommitments with no fixed maturity. The ratio was capped at 25%until 2006 and at 20% in 2007;■ the own funds and permanent capital ratio, corresponding to theratio between (i) Tier One capital less non-current assets plusnet customer demand deposits and (ii) the maturity gap beyondone year for financing with contractual maturities. The minimumratio is 60%.These three internal ratios are based on maturity schedules of balancesheet and off-balance sheet items for all Group entities, whethercontractual (including undrawn confirmed credit facilities contractedwith banks - 100% weighted, and with customers - 20% or 30%weighted), theoretical (i.e. based on customer behaviour: prepaymentsin the case of loans, behaviour modelling in the case of regulated savingsaccounts) or statistical (demand deposits, regulated savings deposits,trust deposits, non-performing loans and general accounts).The Group’s consolidated liquidity position by maturity (1 month,3 months, 6 months, then annually to 10 years, then 15 years) ismeasured regularly by business line and currency.In addition, regular stress tests are performed, based on market factorsand factors specific to BNP Paribas that would adversely affect itsliquidity position.Regulatory ratios represent the final plank in the liquidity riskmanagement system.These include the 1-month liquidity ratio and observation ratios, whichare calculated monthly for the parent company BNP Paribas SA (Frenchoperations and branches) and separately by each subsidiary concernedby the regulations.Foreign subsidiaries and branches may be required to comply with localregulatory ratios.4.d.3Risk m itigation t echniquesAs part of the day-to-day management of liquidity, in the event of atemporary liquidity crisis, the Group’s most liquid assets constitute afinancing reserve enabling the Bank to adjust its treasury position byselling them on the repo market or discounting them with the centralbank. If there is a prolonged liquidity crisis, the Bank may have to graduallyreduce its total balance sheet position by selling assets outright.Less liquid assets may be swiftly converted into cash as part of the dayto-daymanagement of liquidity, by securitising pools of home loans andconsumer loans granted to retail banking customers, as well as poolsof corporate loans.Liquidity risk is also reduced by the diversification of financing sourcesin terms of structure, investors, and secured/unsecured financing. Inthe last quarter of 2006, BNP Paribas set up a EUR 25 billion coveredbond programme. Issuance under this programme at 31 December 2007totalled EUR 9 billion.4.e INSURANCE RISKSThe insurance subsidiaries’ risk exposures result from the sale, in Franceand abroad, of savings and personal risk contracts.4.e.1Financial r isksFinancial risks arise in the Savings business, which accounts for over95% of the insurance subsidiaries’ liabilities.There are three types of financial risk:Interest rate riskPolicyholder yields on life insurance policies are based on either afixed rate specified in the policy or a variable rate, with or without ayield guarantee. All of these policies give rise to an interest rate risk,corresponding to the risk that the return on admissible assets (i.e. assetsacquired by investing premiums) is less than the contractual yield payableto policyholders.This risk is managed centrally by the BNP Paribas Assurance Asset/Liability Management unit, which coordinates its activities with theBNP Paribas ALM-Treasury Department. Regular asset-liability matchingreviews are performed to measure and manage the financial risks,based on medium and/or long-term income statement and balancesheet projections prepared according to various economic scenarios.The results of these reviews are analysed in order to determine anyadjustments to assets (through diversification, use of derivatives, etc.)that are required to reduce the risks arising from changes in interestrates and asset values.To cover potential financial losses estimated over the life of the policies,a provision for future adverse deviation (provision pour aléas financiers)is booked when the guaranteed yield payable to policyholders is notcovered by 80% of the yield on the admissible assets. No provision forfuture adverse deviation was booked at 31 December 2007 or 2006 asthe yields guaranteed by the insurance subsidiaries are low and theguarantees are for short periods, resulting in only limited exposure.Surrender riskSavings contracts include a surrender clause allowing customers torequest reimbursement of all or part of their accumulated savings. Theinsurer is exposed to the risk of surrender rates being higher than theforecasts used for ALM modelling purposes, forcing it to sell assets ata loss in order to free up the necessary cash for surrenders in excessof forecast.The surrender risk is limited, however, as:■ Most policies provide for the temporary suspension of surrender rightsin the event that the insurer’s financial position were to be severelyimpaired such that the surrenders would deprive other policyholdersof the ability to exercise their rights.12345678910112007 Registration document - BNP PARIBAS 149