2007 REGISTRATION DOCUMENT

3 RiskRISK MANAGEMENTmanagement frameworkTHE BANK MAY HAVE DIFFICULTY INIMPLEMENTING ITS EXTERNAL GROWTHSTRATEGY, WHICH COULD MATERIALLY HARMTHE BANK’S RESULTS OF OPERATIONSThe Bank considers that external growth opportunities form part ofits overall strategy. This strategy involves numerous risks. Althoughthe Bank undertakes an in-depth analysis of the companies it plans toacquire, it is generally not feasible for these analyses to be complete in allrespects. As a result, the Bank may assume unanticipated liabilities, or anacquisition may not perform as well as expected. It is also possible thatsome or all of the planned synergies do not arise or that an acquisitionleads to higher-than-expected costs. In addition, the Bank might havedifficulty integrating an entity with which it combined its operations.Failure to complete announced business combinations or failure tointegrate acquired businesses successfully into those of the Bank couldhave a material adverse effect on the Bank’s profitability. It could alsolead to departures of key employees, or give rise to increased costs anderoded profitability if the Bank felt compelled to offer them financialincentives to remain.< Contents >INTENSE COMPETITION, ESPECIALLY IN THEBANK’S LARGEST MARKET IN FRANCE , COULDADVERSELY AFFECT NET BANKING INCOMEAND PROFITABILITYCompetition is intense in all of the Bank’s primary business areas inFrance and the other countries in which it conducts large portions of itsbusiness, including other European countries and the United States. If theBank is unable to respond to the competitive environment in France orin its other major markets by offering attractive and profitable productand service solutions, it may lose market share in key areas of its businessor incur losses on some or all of its activities. In addition, downturns inthe French economy could add to the competitive pressure, through,for example, increased price pressure and lower business volumes forthe Bank and its competitors. In addition, new lower-cost competitorsmay enter the market, which may not be subject to the same capitalor regulatory requirements or may have other inherent regulatoryadvantages and, therefore, may be able to offer their products andservices on more favorable terms.12343.2 Risk management framework5CREDIT AND C OUNTERPARTY R ISK6(See section 5.5 Financial statements – note 4.a. – Credit risk.)MEASUREMENT OF COUNTERPARTY RISKCounterparty risk exposures fluctuate significantly over time due toconstant changes in the market parameters affecting the value of theunderlying transactions. Accordingly, any assessment of counterparty riskmust consider possible future changes in the value of these transactionsas well as their present value.Potential future exposures to counterparty risk are captured usingValRisk, an internal model allowing analysts to simulate several thousandpossible market scenarios and revalue transactions carried out with eachcounterparty at several hundred future points in time (from 1 day to morethan 30 years for very long-term transactions). To aggregate transactionson each counterparty, ValRisk takes into account the legal jurisdictionin which each counterparty operates, and in particular any netting ormargin call agreements.MONITORING AND CONTROLOF COUNTERPARTY RISKEvery day, potential future exposures calculated by ValRisk are checkedagainst the approved limits per counterparty. ValRisk allows analysts tosimulate new transactions and measure their impact on the counterpartyportfolio, making it an essential tool in the risk approval process.ECONOMIC AND REGULATORY CAPITALValRisk is also used to produce the information needed to computeeconomic capital (distribution of potential future exposures on eachcounterparty) and Basel II regulatory capital (expected effective positiveexposures).7891011742007 Registration document - BNP PARIBAS