Liquidity Swaps Accomplishments Company project Human Resources. Sensitive credits. Credit risk

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1 Who are we? Dexia told in images Portfolio Down the road Solvency Liquidity Swaps Accomplishments Company project Human Resources Systémic risk Residual bank Transparency Cost Sensitive credits Credit risk These sheets are provided solely for guidance purposes. If the information given herein conflicts with regulated information published by Dexia, only the latter will prevail. No express or implied warranty or discharge is given as to the completeness or the accuracy of information published here. Use of the information is subject to the terms and conditions of our website.

2 Before the 2008 financial crisis, Dexia was the global leader in public sector financing, with significant exposure in terms of the local public sector, sovereign bonds and project finance (infrastructure, public utilities and renewable energy). Through a coordinated intervention by the Belgian, French and Luxembourg governments in 2011, an orderly resolution plan was set up and a systemic crisis averted. Today, Dexia has a clearly defined mission and its balance sheet is being managed in wind-down according to the business plan underpinning the orderly resolution plan and which is regularly updated considering new market conditions among other things. Dexia s management and organisation were adapted to fit this specific task and to suit to the new size of the group. However, it will take decades before Dexia's balance sheet will have been reduced to zero. Profil Who are we? Profile Dexia is a 95% State-owned Belgian-French banking group in orderly resolution. As most other major Belgian and French banks, Dexia SA, the group s financial holding company, and Dexia Crédit Local, the most important subsidiary and issuer of the group, are under the supervision of the European Central Bank (ECB) since 4 November Dexia s mission is to manage in winddown its balance sheet ( 241 billion at 30 June 2015) while protecting the financial interests of its shareholders and guarantors. Dexia s mission is to manage in wind-down its balance sheet (241 billion euros at 31 June 2015) while protecting the financial interests of its shareholders and guarantors. After a serious liquidity crisis in 2008, Dexia launched a restructuring plan. This plan, carried out with government aid, was intended to enable the group to scale down to its core activities, to lower its risk profile and improve its balance sheet structure. Although considerable progress was made in restoring financial equilibrium, Dexia was hit hard by the European sovereign debt crisis in To avoid the systemic risk associated with a disorderly liquidation of the group, it was decided in October 2011 to establish an "orderly resolution plan" with the support of the States. The orderly resolution plan Scope: Dexia SA 31/12/ /12/ /06/2015 Balance sheet (EUR bn) Tier 1 Ratio Staff % Group Restructuring 7.6% 36,700 22,460 Group Resolution ,0% (1) 1,216 (1) Common equity Tier 1 ratio 1. Total Capital ratio (Basel 3) The orderly resolution plan approved by the European Commission at year-end 2012 calls for the sale of the viable commercial franchises and the management in wind-down of the group s residual assets. To allow for the orderly resolution of Dexia SA, the group has been provided with State support under the form of a liquidity guarantee of 85 billion euros provided by the States of Belgium, France and Luxembourg and a capital increase of 5.5 billion euros pursuant to which the group is now largely owned by the State of Belgium (50.02%) and France (44.4%). To allow for the orderly resolution of Dexia SA, the group has been provided with State support under the form of a liquidity guarantee of 85 billion euros provided by the States of Belgium, France and Luxembourg and a capital increase of 5.5 billion euros pursuant to which the group is now largely owned by the States of Belgium (50.02%) and France (44.4%). Key milestones of the resolution plan: Autumn 2011 Sale of Dexia Bank Belgium (now Belfius Bank and Insurance) to the Belgian State Approval of the orderly resolution plan by the European Commission (28 December 2012); Capital increase of Dexia SA subscribed by the Belgian and French States (31 December 2012); Sale of RBC Dexia Investor Services, DenizBank and Banque Internationale à Luxembourg Liquidity guarantee granted by the Belgian, French and Luxembourg States (24 January 2013); Sale of Société de Financement Local (parent company of Caisse Française de Financement Local, formerly known as Dexia Municipal Agency) as part of the creation of a new local public sector financing scheme in France; Sale of Dexia Kommunalkredit Bank Polska, Dexia Bail, Public LLD, Sofaxis, Domiserve and Associated Dexia Technology Services Sale of Dexia Asset Management and the participation of 40% in Popular Banca Privada; Launch of the Company Project to adapt the operating model to Dexia s new mission and the evolving size of its balance sheet. Management and organisation The Board of Directors is composed of four representatives of the French and Belgian States, plus three independent and two executive directors. Dexia has simplified and unified the governance of Dexia SA and Dexia Crédit Local in line with the new scope of the group. The Board of Directors is composed of four representatives of the French and Belgian States, plus three independent and two executive directors. In line with its new mission, Dexia s organisation was streamlined around two business lines: an "Assets business line" which manages the Group s assets while protecting and, when possible, enhancing their value, as well as the group s customer relations; a "Funding & Markets business line" which ensures and optimises the refinancing of the group, oversees the derivatives portfolio and executes market transactions with the relevant counterparties. The support lines include Risk, Finance, General Secretary, Legal Affairs & Compliance, Operations and Information Systems, Communication, Human Resources and Transformation.

3 Seldom occurs a day without Dexia being mentioned in the press. To trace the history and better explain the Dexia case we have made an animated film for the larger interested public. In this way, you may understand better the tasks of each of Dexia s employees to bring Dexia back into safe waters and keep it there until the very last euro will have been repaid by the last borrower. Dexia en images Dexia told in images The movie is available in French and Dutch only. French Click here to see the movie (wmv) Click here to see the movie (mp4) Dutch Click to see the movie (wmv) Click here to see the movie (mp4)

4 The quality of a bank s loan portfolio and its margin income largely determine its profitability. The loans granted by Dexia in the past have for the most part a good credit quality, but they yield very low margins compared with the spreads currently asked for in the market, leaving no other option but to hold on to them and manage them carefully until their maturity. Portefeuille A frozen residual portfolio of good-quality A portfolio of good quality As at 30 June 2015, Dexia had 172 billion euros worth of exposure representing over 30,000 lines spread over 8,000 debitors. As at 30 June 2015, Dexia had 172 billion euros worth of exposure representing over 30,000 lines spread over 8,000 debitors. It reflects the bank s former position as a market leader in public sector financing mainly to local authorities, sovereigns and project finance (infrastructure, public utilities and renewable energy). Most transactions are very long: over 60% of the portfolio has a maturity of over 10 years. But on average the portfolio s credit quality is good: 88% of the exposures are rated investment grade at 30 June And most exposures below investment grade are rated BB. The portfolio is being monitored by experienced professionals. A 21% BBB 28% Exposure¹ by rating BB 9% AA 20% AAA 19% Non rated 1% B and below 2% France 14% Italy 15% United States and Canada 18% Exposure¹ by country Germany 12% Others 12% 1 Maximum Credit Risk Exposure (MCRE) at 30 June 2015 calculated according to the IFRS 7 standard, represents the accounting net carrying amount of exposure, after deduction of the hedging instruments presented at market value, and the off-balance elements calculated as the maximum commitment of Dexia to its counterparties. Spain 10% United Kingdom 12% Japan 4% Belgium 1% Portugal 2% Local public sector 49% Exposure¹ by counterpart Central governments 19% Financial institutions 14% Project finance 8% ABS/MBS 5% Corporate Monolines 4% 1% but with low returns The asset portfolio margin is frozen and remains low. This reflects both the fairly low risk associated with the assets, and the fact that a significant proportion of the portfolio was acquired between 2005 and 2008, when the returns on financial assets and the premium coupled to the credit risk were at their lowest levels. Dexia financed itself in the very short term to produce a positive "carry" on its portfolio. Extending the maturity of its financings in order to reduce Dexia s liquidity risk puts pressure on such positive "carry". Therefore, restoring financial equilibrium is truly challenging. The Group s profitability mainly relies on its financing costs, its cost of risk and external parameters which may impact the accounting volatility elements of the group's results. The Group s profitability mainly relies on its financing costs, its cost of risk and external parameters which may impact the accounting volatility elements of the group's results. and that cannot be sold without a loss As the assets have relatively low credit margins, their sale would result in substantial losses at current market conditions which require substantially higher margins. And because every asset is protected against interest rate movements, their sale would necessarily require unwinding the hedging transaction as well, which proves to be very costly in current market conditions. Diligent and careful management accompanied by conscientious monitoring and optimisation of the risks is absolutely essential in the light of these low margins. Diligent and careful management accompanied by conscientious monitoring and optimisation of the risks is absolutely essential in the light of these low margins. As the group is not allowed to issue any new loans, it is unable to generate any additional income at current market levels to compensate for an increase in the financing costs or any other events that would cause costs to increase.

5 " In the wake of the financial crisis the European authorities have imposed sounder and better rules to wind down failing banks. Large banks are often organised in a complex way, with their economic and operational activities cutting straight across national frontiers and the legal structure of the organisation. This complexity makes it hard to achieve an orderly resolution. Large banks nowadays have to submit a tailor made resolution plan, also called "living will". As far as Dexia is concerned, such a plan has been created after the liquidity crisis it faced following the sovereign crisis in At the end of 2012 the European Commission approved an 'orderly' resolution plan that stipulates how the bank will be wound down. Trajectoire The 'orderly' resolution or wind-down Why is Dexia put in run-off? Until 2008, Dexia was an international bank and market leader in public sector financing. In order to lend money to its clients, Dexia itself raised funding on the When the financial crisis broke out in 2008, it suddenly became impossible to raise funds on the interbank market causing a liquidity crisis. Dexia had to seek help from the Belgian, French and Luxembourg governments to avert bankruptcy. financial markets, mainly the interbank market. To limit the refinancing cost, Dexia raised short term funding, whereas it generally lent money for the very long term. When the financial crisis broke out in 2008, it suddenly became impossible to raise funds on the interbank market causing a liquidity crisis. Dexia had to seek help from the Belgian, French and Luxembourg governments to avert bankruptcy. Thanks to a capital increase and the funding guarantee Dexia was able to raise funding in order to continue to operate. The bank subsequently mapped out a restructuring plan to re-focus on its core business, namely the financing of local authorities, and retail banking in Belgium, Luxembourg and the growth market of Turkey. Gradually, the bank also had to close the gap between the long term maturity of its assets and the short term structure of its financing. But during the European debt crisis that erupted in the autumn of 2011 despite the considerable progress already made in carrying out the restructuring plan, Dexia again had to cope with a liquidity crisis and, one more time, it was forced to seek help from the States. It was then decided that the States would submit an orderly resolution plan to the European Commission (EC) for approval. Scope: Dexia SA 31/12/ /12/ /06/2015 Balance sheet (EUR bn) Tier 1 Ratio Staff % Group Restructuring 7.6% 36,700 22,460 Group Resolution ,0% (1) 1,216 (1) Common equity Tier 1 ratio Why did the plan require the approval of the European Commission? Short of a few exceptions (related to the strategic nature of some businesses), companies in the European Union (EU) are not allowed to benefit specifically from state aid. Every The EC requires companies who benefit from state aid to satisfy certain conditions so as to restore free competition. instance of state aid must therefore be reported to the European Commission and submitted for its approval. The EC requires companies who benefit from state aid to satisfy certain conditions so as to restore free competition. The aid granted to Dexia by Belgium, France and Luxembourg in 2008 was regarded as state aid. Consequently, the EC watched over the execution of the restructuring plan of Equally, the liquidity guarantees granted by the states in 2011 were regarded as state aid. As a consequence, the orderly resolution plan was drawn up in consultation with the EC, which formally approved the plan on 28 December Approval of the plan paved the way for the capital increase of 5.5 billion euros, which was underwritten by the Belgian and French States, and also the delivery of the definitive liquidity guarantee of 85 billion euros. From thereon, Dexia has been executing the orderly resolution plan under the supervision of the EC. Why is there an orderly resolution plan? At the end of 2011, Dexia s balance sheet represented a total of 413 billion euros, an amount that exceeds Belgium's gross domestic product (GDP). At the end of 2011, Dexia s balance sheet represented a total of 413 billion euros, an amount that exceeds Belgium's gross domestic product (GDP). What's more, the bank had a sizeable portfolio of government bonds and loans to European local authorities, as well as a very significant derivatives portfolio. The liquidation of the group would have cost the Belgian and French taxpayers tens of billions euros. It would also have ushered a systemic risk for the European banking system and for the Belgian and French economies. Therefore, an immediate liquidation of the bank was set aside and instead the parties opted for an "orderly resolution" of the group: the wind-down of the bank s balance sheet over time while carefully monitoring its risks. In return, in order to comply with EU free competition rules, the EC asked the States to stop all commercial activities and to sell off the viable commercial entities. How was the level of state support determined? To enable Dexia to fulfil its mission over the long horizon of the resolution, it was granted a 10-year funding guarantee for an amount of 85 billion euros by the States of Belgium, France and Luxembourg. Belgium and France also provided 5.5 billion euros fresh capital. The level of the guarantee and the capital increase was determined to enable Dexia to comply with its regulatory and statutory obligations for the entire period of the resolution. The level of the guarantee and the capital increase was determined to enable Dexia to comply with its regulatory and statutory obligations for the entire period of the resolution. The calculation was predicated on several assumptions, predominantly concerning the economic and financial environment, such as interest rates, the risk environment, the rating of various government bonds and the credit margins or spread thereof, the evolution of the regulatory regime and the ability of the group to continue to refinance its balance sheet. What is the expected track record of such orderly resolution? The plan calls for the wind-down of the balance sheet over a very long period of time that matches the maturity of the group s assets. In order to minimise the group's losses over time, except for the sale of the viable commercial entities, the plan does not require a forced sale of assets or even the sale of risky assets. Taking into account the conditions and the assumptions of the business plan updated as per December 2014, the balance sheet total is expected to be reduced by one-third to 188 billion euros by Taking into account the conditions and the assumptions of the business plan updated as per December 2014, the balance sheet total is expected to be reduced to 188 billion euros by The expected path of the group's solvency ratio according to the latest revision of the business plan is highly sensitive to assumptions with respect to the regulatory and accounting framework such as the application of IFRS or regulatory treatments. Forecast total capital ratio Any deviation from the parameters of the business underpinning the orderly resolution plan may impact the path of the group s orderly resolution. What are the main risks for the orderly resolution plan? Any deviation from the parameters of the business underpinning the orderly resolution plan may impact the path of the group s orderly resolution. For example, the group remains particularly sensitive to movements in interest rates and credit margins. Deterioration of the credit environment might increase the group s cost of risk and weigh on its results and, ultimately, on its solvency (refer to 'Solvency'). Finally, changes to accounting rules also greatly affect the group s results and trigger volatility. Changes in the method of calculating the regulatory ratios are another factor involving great uncertainty and that may influence the track record of the defined resolution plan. In the current environment, state guaranteed funding remains one of Dexia s most important sources of funding. For the time being, a fast and complete withdrawal of the State guarantees is therefore excluded. Is it feasible to end the use of the State guarantees sooner? Bearing in mind the very long maturity of the group s assets, there are few buyers in the market capable of buying and financing the assets unless there is a substantial discount. As a consequence, to preserve its capital the bank cannot afford to sell its assets and is bound to carry them through their individual maturity. In the current environment, state guaranteed funding remains one of Dexia s most important sources of funding. For the time being, a fast and complete withdrawal of the State guarantees is therefore excluded. On the other hand, according to the business plan update as per December 2014, the use of the state guarantees is expected to decrease significantly from 2015 onwards to approximately 65 billion euros. The guaranteed debt issued under the 2008 agreement has now been fully repaid and the 12.8 billion euros of state guaranteed debt held by Belfius was completely reimbursed at the start of In order to accomplish this, the teams have been working very hard to broaden Dexia s funding sources, such as secured financing which is done by using the assets on its balance sheet. In the course of 2014, there was a sharp increase in this type of funding. The number of counterparts has risen substantially across Europe and in the United States, and Dexia also gained broader access in the main financial markets in Europe. Over time secured funding is expected to become the group s most important financing source (refer to Liquidity ). 1. For illustration only, according to the business plan update as of December 2014

6 A company's solvency expresses to what extent it can absorb losses and honour its financial obligations towards lenders, suppliers, employees, bondholders and other stakeholders. Generally it is expressed as the ratio of equity (capital plus reserves) to borrowed capital. The method of calculating the solvency ratio of banks has been regulated internationally because of the nature of their activities. Solvabilité Which factors affect Dexia's solvency? Which standards must Dexia meet? Dexia and its banking subsidiary Dexia Crédit Local fall under the European Union s prudential regime. They must meet the new 'Basel 3' regulatory framework which, amongst other things, requires banks to keep their solvency ratios above a certain minimum threshold. The regulatory solvency ratios, the 'Total Capital ratio' or 'Common Equity Tier 1 ratio', is the ratio of two elements: the numerator: the bank s share capital including some hybrid debts or semi-capital from which At the end of December 2014, Dexia s regulatory capital reached 9.2 billion euros (the numerator) and the risk weighted assets 53 billion euros (the denominator) resulting in a Total Capital ratio of 17.2%. under the new Basel 3 rules several items must be deducted such as the unrealised losses on non-sovereign bonds 1, also called the AFS 2 reserve; the denominator: the bank s risk weighted assets. The risk weighted assets are calculated by multiplying the amount of every position by a weighting factor that varies according to the risk of the asset class. For example, sovereign debt will require less capital than a loan issued to a start-up company. At the end of December 2014, Dexia s regulatory capital reached 9.2 billion euros (the numerator) and the risk weighted assets 53 billion euros (the denominator) resulting in a Total Capital ratio of 17.2%. How do the new Basel rules impact Dexia's solvency ratio? The amendments made to the regulatory regime, such as the transition on 1 January 2014 from Basel 2 to Basel 3, directly impact the group s solvency. Under the new regime, some elements that previously formed part of the regulatory capital (the numerator) no longer do so. At the same time, Basel 3 imposes different rules for calculating risk weighted assets (the denominator). In the case of Dexia, this increases the risk weighted assets significantly. A pro forma calculation of the regulatory capital (the numerator) as a result of the application of Basel 3 is shown below. The introduction of the Basel 3 rules have lowered the group s solvency ratios by approximately 5%. a) Deduction of 20% from the AFS reserve for non-government bonds and loans and receivables. b) Limited recognition of subordinated loans as capital. c) Complete deduction of the Debit Value Adjustment (DVA); issued bonds must be presented at their face value and not at their market value. d) Miscellaneous: limited recognition of minority interests, deduction of deferred taxes on carried-over losses, threshold for the deduction of qualifying participating interests has not been reached, and the threshold for shares and subordinated claims in financial institutions that do not represent an important investment has been exceeded. The introduction of the Basel 3 rules have lowered the group s solvency ratios by approximately 5%. At year-end 2013, the Total Capital ratio of Dexia SA stood at 22.4%. By March 2014, it had dropped to 16.9%. However, at the end of December 2014 it had risen again to 17.2%. Despite the sharp reduction of the solvency ratio due to application of the new Basel 3 rules, the most recent financial projections of the business plan (at per December 2014) indicate that the regulatory and legal solvency requirements are still met during the entire resolution period without the need for an increase in capital. This is possible because the reduction of risk weighted assets (the denominator) and the reduction of capital due to the expected losses in this period (the numerator) are in step with each other. However, the execution of the orderly resolution plan remains subject, amongst other factors, to the evolution of interest rates and the credit environment and also the regulatory changes described above. The expected path of the group's solvency ratio according to the latest revision of the business plan is highly sensitive to assumptions with respect to the regulatory and accounting framework such as the application of IFRS or regulatory treatments. Expected path of the group s capital ratio 3 Why is Dexia's solvency ratio volatile? Even though Dexia is in resolution, its solvency still varies. Besides the regulatory and accounting framework, there are other external factors over which the group has little if any control, such as: The evolution of the unrealised losses recorded as AFS reserves for non-sovereign bonds: at the end of December 2014, they represented a negative value of 3.2 billion euros. This value depends Dexia had to stop all commercial activity and, hence, the income from its asset portfolio is frozen. very much on the parameters prevailing in the market and by consequence it can be particularly volatile. Even if Dexia were to keep these assets on its books until their final maturity date and, as a result thereof, not incur any losses, the regulator still requires the deduction of the potential losses from the bank s capital for the calculation of the solvency ratio. A deterioration of the credit risk may cause the solvency ratio to decrease. The group s financial results (profit or loss): at every closing date of the accounts they are settled up against the regulatory capital. Unlike other banks, Dexia had to stop all commercial activity and, hence, the income from its asset portfolio is frozen. The group's future results will be greatly influenced by the evolution of its costs, in particular the financing cost and its cost of risk. This 1. To take into account the specific status of a bank being dismantled with a State guarantee, the National Bank of Belgium and the ACPR stipulated that neither Dexia SA nor its subsidiary Dexia Crédit Local may deduct the AFS reserve from sovereign bonds from their regulatory capital for the calculation of the solvency ratios in the transitional period from 1 January 2014 to 31 December But the other part of the AFS reserve, which does not concern sovereign securities, will be deducted from the regulatory capital from 1 January 2014 onwards at a rate of 20% per year. 2. Assets in the AFS ('Available For Sale') category are freely tradable. This contrasts with assets intended to remain on the books until their final maturity date. 3. For illustration only, according to the business plan update as of December 2014

7 Securing liquidity is crucial for every bank. Banks receive short term deposits from their clients and they lend money for medium to long term periods. So there is a time gap between the period a bank borrows money for and the maturity of its loans which is potentially dangerous when, for one reason or another, refinancing is interrupted. In the case of Dexia, which in the past lent its clients money for long and sometimes very long periods (15 years on average), this gap was very large at the time of the financial crisis. Today, securing the group s refinancing capacity over the long time horizon of the resolution remains a challenge, even with the help of the liquidity guarantees. Liquidité Securing the group s liquidity over the long time horizon of the resolution is a crucial task How does the group secure its refinancing over the long resolution period? The business plan underpinning Dexia's resolution plan assumes that the group will continue to be able to refinance its residual assets. It took a huge amount of work for Dexia to regain access to the markets. Recently, thanks to the definitive financing guarantee granted by the States in 2013, and taking advantage of favourable market conditions and restored confidence Thanks to the definitive financing guarantee granted by the States in 2013, and taking advantage of favourable market conditions and restored confidence in the capital markets, Dexia has made its comeback as a frequent issuer of debt in the markets. in the capital markets, Dexia has made its comeback as a frequent issuer of debt in the markets. After the definitive guarantee was provided, issuance programmes were developed in 2013 for the placement of guaranteed government debt denominated in euro, US dollar and pound sterling, both in the short and long term. Dexia issued 7.1 billion euros long-term government guaranteed debt in 2013, and 10 billion euros more, or a total of 17.3 billion euros, in Dexia also worked hard on raising funding that is not guaranteed by the States, by pledging the assets on its balance sheet, the so-called 'repos'. As a result, it was able to reduce its funding from the central banks. At the end of December 2014, 39% of total funding came from secured transactions, 31% from the issuance of state guaranteed paper and 19% from central banks. In this way, Dexia succeeded in diversifying its funding sources and also extending the maturity of its financings while steadily reducing the overall financing cost in 2013 and According to the update of the business plan as per December 2014, from 2017 onwards, the funding mix will converge to 60% non guaranteed funding, 30% state guaranteed funding placed in the markets and 10% central bank funding. Which are the group s strategic objectives in terms of funding? Taking into account its particular nature of a bank in run-off, Dexia finances itself on the capital Taking into account its particular nature of a bank in run-off, Dexia finances itself on the capital markets and through central banks. markets and through central banks. In terms of market financing, the group s strategy is to source funding through three different channels: The issuance by Dexia Crédit Local and its subsidiary Dexia Crédit Local New York Branch of short and long term state guaranteed paper mainly in euros and US dollars, both in the form of public transactions ('benchmark') and private placements; secured financing that is not guaranteed by the States, usually in the form of 'repos'. Dexia Kommunalbank Deutschland (DKD) is also an active issuer of Pfandbriefe in Germany; and unsecured financing.

8 A swap is a financial derivative transaction whereby two parties agree to exchange certain cash flows, usually with the aim of hedging specific risks. In the case of banks, these cash flows are often derived from assets in their portfolio or funding transactions in the markets. Swaps are traded on the derivatives market. Swap THE truth behind swaps Why does Dexia use swaps? In the past Dexia systematically used interest rate swaps for all fixed rate assets (bonds By adopting this policy Dexia was able to mitigate the interest rate risk in relation to its balance sheet and, as a consequence, reduce the regulatory capital required to conduct its business. However, such interest rate policy definitely has an impact on the group's liquidity needs. and loans) and funding transactions in order to protect itself against a possible rise in interest rates. Under these transactions Dexia pays the fixed interest rate to the counterparty of the swap and, in return, receives a floating interest rate. Dexia also uses exchange rate swaps and basis swaps 1. By adopting this policy Dexia was able to mitigate the interest rate risk in relation to its balance sheet and, as a consequence, reduce the regulatory capital required to conduct its business. However, such interest rate policy definitely has an impact on the group's liquidity needs. At 31 December 2014, Dexia still had approximatively 13,000 derivatives on its books, representing a gross notional of 413 billion euros. How do swaps impact Dexia's liquidity needs? One of Dexia s main issues is that it has to reckon with the inherited maturity mismatch of its balance sheet, i.e. the assets run far longer than the financing thereof. Because the swaps were made in connection with such assets and funding transactions, this imbalance also One of Dexia s main issues is that it has to reckon with the inherited maturity mismatch of its balance sheet, i.e. the assets run far longer than the financing thereof. filters through to the group s derivatives portfolio. The swaps linked to the assets have a far longer maturity than the reverse swaps on the funding transactions. This explains why the net value of the derivatives portfolio becomes negative when interest rates fall. Conversely, when rates rise, the net value of the derivatives portfolio increases as well. In the present market, the counterparty on the interest rate swaps would receive a far lower fixed rate than the contractual swap rate. In other words, the counterparty attributes a high value to the derivative and, as a consequence, the counterparty will wish to cover against the risk that Dexia would discontinue the payments under the swap, because of liquidity problems, for example, or due to its insolvency. As customary in the derivatives market, Dexia is requested to pledge an amount in cash ('cash collateral') equal to the 'market value' of the position. The 'market value' of the derivatives is As customary in the derivatives market, Dexia is requested to pledge an amount in cash ('cash collateral') equal to the 'market value' of the position. The 'market value' of the derivatives is recalculated everyday. And, if necessary, Dexia must provide extra funds. re-calculated every day. And, if necessary, Dexia must provide extra funds. These cash payments, which at the end of 2014 reached approximately 31 billion euros, involve an extra cost because Dexia must source this money in the market. The net refinancing cost 2 is equal to the difference between the remuneration paid by the counterparty on the cash collateral and the cost of borrowing the sums in the market. As these loans run longer than one day for precautionary reasons and with a view to curbing the liquidity risk the borrowing cost is higher than the remuneration paid for the funds. This explains the additional cost. Is it not possible to reduce the liquidity needs? By way of illustration, for a 10-year swap denominated in euro, the break-even rate at which Dexia would no longer have to pay cash collateral is approximately 4.5%. This indicator corresponds fairly well with the amount of cash collateral Dexia has had to come up with so far. If we use this indicator, we can measure the variation in the amount of cash collateral corresponding to the increase or decrease of the 10-year swap rate: if the 10-year swap rate in euro decreases by 0.1%, Dexia must pay roughly 1 billion euros more in cash collateral. And the opposite for a decrease in the 10-year swap rate. The business plan of June 2014 provides for a reduction over time of the cash collateral as a consequence of the shrinking balance sheet but also based on the market assumptions of the plan. However, if interest rates rise more than the level embedded in the plan, the need for cash collateral will be lower, and vice versa. 1. A basis swap is a swap of two floating rate cash flow streams, often derived from financial instruments that are traded on various money markets, e.g. a swap between one-month USD Libor against six-month USD Libor. 2. The market standard is the difference between at the daily interest rate on the currency in which the margin amount is paid or OIS (Overnight Indexed Swap) and EONIA (Euro Over-Night Index Average ), and the remuneration paid by the counterparty for use of the cash collateral

9 Competent teams have successfully resolved numerous complex and atypical cases to minimise risks for the Belgian and French taxpayers during the long resolution period. Competent teams notch up numerous successes Réalisations The sales program of commercial entities was successfully completed in 2 years The Dexia teams were involved in over ten disposals of major entities between the announcement of Dexia s resolution in October 2011 and February 2014 when Dexia Asset Management was sold. Despite a difficult market environment, in particular for mergers and acquisitions, Dexia Bank Belgium was sold in 2011, followed in 2012 by the sale of RBC Dexia Investor Services, DenizBank and BIL, and in 2013, the sale of SFIL (Dexia Municipal Agency), Dexia Bail, DKB Poland, Sofaxis, Public Location Longue Durée and ADTS. The sale of Dexia Asset Management and the 40% interest in Popular Banca Dexia successfully completed the sales program of entities in 2014 in accordance with the orderly resolution plan. Privada were completed in early Other entities were either closed, merged or put in run-off. Despite the market downturn, Dexia successfully completed the sales program of entities in 2014 in accordance with the orderly resolution plan. Dexia went even further by also selling entities including ADTS, Domiserve and Exterimmo. Except for Dexia Israel, all remaining entities within the group are now being managed in run-off. Split and fast re-building of essential competences to avoid operational risks Once the sales agreements have been signed, a long and complex process starts to split the activities and the teams: on the one hand, based on the ongoing activities, the various divisions have to be allocated either It goes without saying that the simultaneous split and reconstruction of some activities and the sale of entities put an enormous strain on all Dexia teams. to Dexia or the sold entities, depending on which entity pursues the activities, and on the other hand, skills have to be kept where they are needed, and in some cases rebuilt if they move to one of the sold entities. The 'Treasury' skills, for example, had been centralised at Dexia Bank Belgium, so this expertise had to be rebuilt at Dexia so as to ensure the management of the group s treasury. It goes without saying that the simultaneous split and reconstruction of some activities and the sale of entities put an enormous strain on all Dexia teams. Continuous management to limit the risks and the costs for taxpayers Although it is today impossible for Dexia to sell parts of its securities portfolio, it still With a few exceptions, Dexia cannot find any additional income from market level margins which would counterbalance any increase in financing costs or other shocks such as an increase in the cost of risk. has to be actively managed and monitored to minimise the risks. Although Dexia s overall cost of risk remains well below the average compared to other banks (whether active or in run-off), its portfolio represents a significant concentration in certain sectors that could constitute a source of risk. Disciplined and diligent management is all the more necessary since the interest margins are so low and since Dexia may not grant any new loans. With a few exceptions, Dexia cannot find any additional income from market level margins which would counterbalance any increase in financing costs or other shocks such as an increase in the cost of risk. Regained access to the markets thanks to the return of confidence The orderly resolution plan relies a.o. on Dexia s ability to continue to refinance its balance sheet. The guarantees provided by the Belgian, French and Luxembourg States (totalling 85 billion euros) All in all, taking advantage of a favourable market environment, the Dexia teams succeeded in diversifying the group s funding sources and extending the maturity thereof while reducing the overall cost of financing. allow for the issuance of guaranteed debt in euro, US dollar and British pound sterling, both for long and short term maturities. Dexia also worked actively on regaining access to funding without state guarantees using the assets it has on its balance sheet as collateral (the so-called 'repos'). All in all, taking advantage of a favourable market environment, the Dexia teams succeeded in diversifying the group s funding sources and extending the maturity thereof while reducing the overall cost of financing. prevail. No express or implied warranty or discharge is given as to the completeness or the accuracy of information published here. Use of the information is subject

10 Managing a financial institution in run-off is a very difficult and sensitive task. Dismantling a group like Dexia is a unique undertaking, no examples are at hand. The first objective of Dexia s management is to keep the company on track with the orderly resolution plan such that the interests of the principal stakeholders, especially the Belgian, French and Luxembourg states, are preserved. Projet d entreprise How do you run a company that is being dismantled? A new company project Having completed the sale of the Group s commercial entities as planned, Dexia has reached its target perimeter for a long term run-off. The Group continues to be present in eight countries winding down its portfolio of residual assets. Taking into account the assets amortisation profile, the resolution will take a very long time during which Dexia must continue to The company project will be conducted in several steps. In a first stage, in 2014, Dexia has laid a solid foundation by defining a clear mission. be operational and preserve its capacity to refinance its balance sheet. At this juncture the company s management and business model had to be adapted to its new mission. Each of the Group s entities had its own business model and proper IT systems, inherited from the past, thereby limiting the scope for synergies. Therefore, a new "company project" was launched in May The company project will be conducted in several steps. In a first stage, in 2014, Dexia has laid a solid foundation by defining a clear mission, a simplified organisation and governance. Subsequently, activities will be progressively centralised and standardised, supported by harmonised information systems, and legal structures will be simplified further when possible. Meticulous preparation Four working groups carry out the following tasks: Define the new mission, the company s strategic objectives and the associated key performance Adapt the operational model: adjust the group s structure, key processes and the interaction between head office and individual entities, simplify corporate governance and the associated system of committees and delegated authorities. indicators; Adapt the operational model: adjust the group s structure, key processes and the interaction between head office and individual entities, simplify corporate governance and the associated system of committees and delegated authorities; Overhaul the IT systems: define the target information systems architecture, taking into account current infrastructure and applications as well as the future needs of the various business lines and support functions; Social vision, communication and change management: manage the transformation process resulting from the company project by focusing on the alignment of the strategy, human resource management tools and the new values defined for the Group. The objective is to ensure that the various stakeholders receive high-quality, relevant information, and to maintain an active dialogue with the different social partners during the process of change. Mission and strategic objectives As a group in resolution and majority-owned by the Belgian and French States benefiting from a funding guarantee provided by the Belgian, French and Luxembourg Dexia s mission is to manage its residual assets in runoff while protecting the interests of its shareholders and guarantors. States, Dexia s mission is to manage its residual assets in run-off while protecting the interests of its shareholders and guarantors. Consequently, the strategic priorities have been aligned with this new mission: Funding capacity: Dexia will secure its funding capacity during the orderly resolution of the Group; Operational continuity: Dexia will work to avoid operational discontinuities during the implementation of the resolution plan; Solvency: Dexia will make the necessary efforts to protect their capital base in order to meet the minimum regulatory and legal solvency requirements. Key principles of the new business model A simplified organisational framework for the business lines, control and support functions; Clear relationship between the head office and the Group s subsidiaries and branches; Organisational flexibility: while remaining robust, the organizational structure will need to adapt to changes in the size of the Group, allow for economies of scale and provide cost management flexibility. Based on these principles, Dexia has decided to make the following changes to its structure: Creation of an Assets business line responsible for managing the assets and maintaining client relationships; Creation of a Funding and Markets business line to secure and optimise the funding for the group, monitor the derivatives portfolio and execute market transactions; Creation of a Product Control business line within the Finance department, responsible for the day-to-day monitoring of the transactions and the delivery of data in relation thereto; Refocus the Risk division on its core control functions. The reporting lines between Head Office and the Group s subsidiaries and branches have also been redefined. Several committees in charge of executing the corporate strategy have been integrated at the level of the Management Board. Finally, all decisions with respect to those transactions that have an impact on Group s risk profile, its P&L, solvency and/or liquidity are taken within a dedicated Transaction Committee. Adapt the information systems to the new business model Dexia s IT strategy has been reviewed to ensure that the Group has efficient, resilient and adaptable information systems throughout the resolution period. Dexia s IT strategy has been reviewed to ensure that the Group has efficient, resilient and adaptable information systems throughout the resolution period as follows: Centralise the IT platforms used for market transactions and loans; The Group will adapt the architecture of its databases, as well as the data available, in order to meet the needs of the various users, both upstream and downstream. A study has been launched to explore merging and simplifying databases within the Group. Social vision and communication for an effective change management To support employees and recruit new talents, new HRM management tools have been put in place to reflect the Group s strategic objectives and mission. Training courses have been expanded and opportunities for internal mobility are managed centrally. Special attention The values the Group promotes are professionalism, adaptability and cohesion. is paid to the retention of key skills. The values the Group promotes are professionalism, adaptability and cohesion. To provide guidance to employees in an environment of constant change, an intensive communication plan was worked out so as to strengthen the dialogue between management, employees and staff representatives. This works across the borders thanks to smooth communication via the intranet. Workshops, formal and informal meetings between the employees and the members of the Group Committee ultimately bring the company project alive. prevail. No express or implied warranty or discharge is given as to the completeness or the accuracy of information published here. Use of the information is subject

11 As any other company Dexia aims at recruiting and retaining talented young people and experienced and competent professionals. A tailored and proactive human resources policy has been developped for this purpose taking into account the specific challenges of a company in run-off. Ressources humaines Dexia, a unique human and professional experience An extraordinary challenge, an unusual opportunity Dexia is the world s largest residual bank. We provide a unique workplace that presents a rich multifaceted environment for ambitious professionals wishing to face many new challenges and demonstrate their skills. Our international presence in eight countries offers the opportunity to look beyond purely national boundaries and to take up challenges and solve problems in a stimulating international environment. Dexia actively promotes training programmes and career development and strives for a good balance between work and family. Pursuing a career at Dexia gives professionals an opportunity to discover an entirely different side of the business, as the bank is managed in run-off, and hence the focus is on rationalisation, simplification and risk reduction. Dexia s sharp downsizing has significantly compacted the organisation by condensing the management strata which allows employees to work closely together with senior management. Finally, Dexia actively promotes training programmes and career development and strives for a good balance between work and family. A general interest mission Due to the size of Dexia s balance sheet the stakes are still high for the Belgian and French States as guarantors and for the tax payers of both countries. At Dexia each employee serves a mission of public interest every day. It is all the more unfortunate that all the work done is not always perceived this way. Even in a company in run-off, one may be proud of performing his/her job in a coherent, professional and agile manner. This is undeniably a serious and tough mission, but that is precisely why it is a source of pride and motivation. It is all the more unfortunate that all the work done is not always perceived this way. Restrictions on remuneration, but other HR tools are available Dexia has had to review its Human Resources policy after going into orderly resolution. Given that Dexia is a state-owned company, it must comply with various obligations imposed by the European Commission and the States. These mainly relate to the variable remuneration which is capped at 30% of the fixed portion of the remuneration while it is strictly prohibited for Given that Dexia is a state-owned company, it must comply with various obligations imposed by the European Commission and the States. members of the Management Board. Taking into account the company s specific challenges though, specific tools have been developed by the HR teams to promote career development and exert a positive influence on the staff s motivation and performance. Corporate culture and behaviour has become increasingly important for financial institutions and Dexia actively promotes values and rules of conduct to be observed equally by employees at each level in the organisation. The Group s core values are: professionalism, adaptability and cohesion. prevail. No express or implied warranty or discharge is given as to the completeness or the accuracy of information published here. Use of the information is subject

12 A major financial crisis seriously impacting a bank may quickly spread to other financial institutions and gain strength thereby jeopardising the entire financial system. In the case of Dexia, the scenario of an immediate liquidation, i.e. excluding state support has been analysed. Because of the major financial systemic risk (within the Eurozone and beyond) and the potentially dramatic impact thereof on the public finances of the States involved, such option was discarded and an orderly resolution plan has been set up striving for a run-off over time. While the systemic risk has been reduced since, Dexia continues to face significant challenges. Risque systémique Why an immediate liquidation is not an option There is a lot at stake Even though Dexia s balance sheet has shrunk to one third its size at the time of the 2008 financial crisis, an immediate liquidation would still significantly impact the financial markets. Even though Dexia s balance sheet has shrunk to one-third its size at the time of the 2008 financial crisis, an immediate liquidation would still significantly impact the financial markets. Still, this may impact the entire euro zone and jeopardise the financial system due to (i) the size of Dexia s balance sheet: 241 billion euros as at 30 June 2015, (ii) the amount of central bank funding: 34 billion euros at the end of 2014, (iii) the significant size of derivative contracts between Dexia and its banking counterparties, i.e. a notional amount of 413 billion euros at the end of 2014, and (iv) the simultaneous sale by Dexia and/or its counterparties of a large number of assets. Which factors can lead to a systemic crisis? State guarantees Dexia has a liquidity guarantee of 85 billion euros of which 43.7 billion euros (51.41%) from the Belgian State, 38.7 billion euros (45.59%) from the French State and 2.5 billion euros (3%) from the Luxembourg State. If one or more creditors were to invoke these guarantees, the aforementioned States would have to pay the interest and also the principal sum of the guaranteed debt in accordance with the initial conditions of the issuance. This would increase the amount of debt and put pressure on the rating of the States leading to higher credit spreads and, by consequence, increased funding costs for the States. As at 30 June 2015, the outstanding State guarantees totalled 67 billion euros. As at 30 June, the outstanding State guarantees totalled 67 billion euros. A full draw on the State guarantees would represent, respectively, 10%, 1% and 4.5% of the current Belgian, French and Luxembourg public debt. The sale of sovereign bonds As at 30 June 2015, Dexia held 32 billion euros sovereign bonds in its portfolio. An immediate liquidation would result in a subsequent sale of these assets and considerably destabilise sovereign debt markets. The sale of assets currently used to secure funding If Dexia were to become insolvent, the counterparties would take control of these assets and sell them in the market. With the onset of the financial crisis, Dexia has had to use the assets on its balance sheet to sway investors and secure funding. If Dexia were to become insolvent, the counterparties would take control of these assets and sell them in the market. The simultaneous sale of large quantities of such assets would obviously bring about a sharp drop in prices causing the counterparties to accelerate sales resulting in a negative downward spiral movement in valuations. Derivatives portfolio Dexia s derivatives portfolio is characterised by their long term maturities and one directional Dexia s derivatives portfolio is characterised by their long term maturities and one directional positions. positions (see 'Swaps'). Their early termination in a scenario of immediate liquidation scenario could therefore cause substantial losses for the counterparties, even though they are protected by cash collateral, triggering a snowball effect in the markets given the sizable derivatives portfolio and the long maturity of transactions, it is highly unlikely in such a scenario that sufficient market capacity is at hand to replace Dexia as counterparty for their derivatives transactions.

13 A bad bank is a company that acquires non-performing assets from one or more banks in order to shield the latter from potential bankruptcy. A bad bank usually purchases them at a deep discount, and the objective is to manage the assets and secure their funding until they can be sold. When the market recovers, there are potentially large gains to be booked. Défaisance In the wake of the financial crisis such bad banks were often created to rescue European banks hardly hit by the financial crisis. In many instances the State owns or co-owns the bad bank. Is Dexia a Bad bank? How many assets do European bad banks hold? According to the financial press, six years after the start of the financial crisis, more than 1000 billion euros in toxic assets sit on the balance sheet of European defeasance structures. Even though these structures share similar objectives i.e. to isolate toxic and/or nonstrategic assets to avoid jeopardising the bank s core business and to keep them attractive to investors and clients they have taken different forms. Some assets are being managed in run-off out of ad-hoc structures that are still part of the originating And its must be said: thanks to the use they made of such defeasance structures, the originating banks have been able to reposition themselves post crisis in a competitive market. bank. This is the case for the virtual bad bank within RBS which was not segregated from the group, or for Natixis GAPC division as well as the IEC branch of Société Générale. In other cases, the assets have been transferred to external entities. This is the case for Hypo Real Estate whose assets were moved to FMS Wertmanagement, or for the Irish banks which were able to shift their non-strategic assets to NAMA (National Asset Management Agency) in order to sell them at the appropriate time. Most of these entities benefit from public support to successfully carry out their mission. And it must be said: thanks to the use they made of such defeasance structures, the originating banks have been able to reposition themselves post crisis in a competitive market. In Belgium, the impaired loan portfolio of Fortis Bank was transferred to Royal Park Investments in It acquired such assets at a substantial discount and received a funding guarantee from the Belgian State. This enabled management to sell the assets and the entity itself in 2013 when market conditions had improved thereby booking substantial gains. A residual bank with an 'orderly resolution plan' In the autumn of 2011, Dexia was confronted by the sovereign debt crisis and its rating went down. This put pressure on the group s liquidity and an orderly resolution plan had to be drawn up, built mainly on two pillars: The sale of the Group s viable commercial entities; The management in wind-down of the remaining balance sheet, supported by an 85 billion euros funding guarantee provided by the Belgian, French and Luxembourg States, and thanks to a recapitalisation underwritten by the Belgian and French States. As such, Dexia, as the originating bank, has itself become the defeasance structure, and cannot be considered as a bad bank but should be viewed as a residual bank. Moreover, it manages a good-quality asset portfolio. It is not a matter of toxic assets but merely of assets which cannot be sold without incurring significant losses in current market conditions. At March 31, 2015, 87% of its assets were rated investment-grade. Hence, it is not a matter of toxic assets but merely of assets which cannot be sold without incurring significant losses in current market conditions. Finally, unlike bad banks, Dexia has kept a banking license and it has to satisfy minimum regulatory and legal solvency requirements. Its main objectives are to secure its funding capacity throughout the resolution process and to protect its capital basis while maintaining its operational continuity. For illustration purposes, here is an overview of the main European defeasance structures. Features of a panel of true "bad banks" (B=billion, m=million, IG=investment grade) Source: publications of the above mentioned defeasance structures. Model Portfolio 2013 Quality of portfolio Assets sold in 2013 Net result in 2013 Stock provisions 2013 EAA Independent public entity 97.6B 70.7B Without derivatives 55% better than IG 23.7B 25% of portfolio 59m 341m FMS W. Independent publicentity 136.4B 75% better than IG 17.9B 12% of portfolio 116.6m 1 220m NAMA StabFund UCCMI National structure guaranteed by the State Fund, subsidiary of the Swiss National Bank Private ad hoc structure without State guarantee 19.6B Not disclosed. At the time of creation the value of Stabfund was $38.7B; the fund was acquired by UBS for $3.76B Not disclosed Not disclosed 3.2B 14% of portfolio Portfolio is now held by UBS; in H $2.3B was sold on the market m Not disclosed None Not disclosed 11B Not disclosed Not disclosed Not disclosed Not disclosed

14 Since the start of its resolution, Dexia has chosen to openly communicate on its business plan, the underlying parameters, the strategic choices that result from the plan that was approved by the European Commission and the impact of evolving regulations and accounting rules. In this way, Dexia is probably the most transparent company in the financial sector, and certainly among the defeasance structures. Transparence Communicating as transparently as possible As a company governed by Belgian law and whose shares are listed in Belgium, France and Luxembourg, Dexia makes sure that it meets all its legal and regulatory obligations concerning the disclosure of occasional and periodic information. Throughout the year, Dexia sends out press releases containing information about its financial results, the progress in the execution of the orderly resolution plan and all information that needs to be published in due course. Throughout the year, Dexia sends out press releases containing information about its financial results, the progress in the execution of the orderly resolution plan and all information that needs to be published in due course. All press releases are posted on the website as they are published. Dexia releases an annual and half-year report in 3 languages and an annual risk report available in English. At the general meeting of 8 May 2013, Dexia unveiled for the first time its business plan through It provided information about the underlying assumptions of such plan and other key elements that determine the financial results and the use of State guarantees. At the general meetings of 2014 and 2015, Dexia provided an update of the business plan incorporating the historical performance and changes in external parameters. Finally, it is noteworthy that Dexia's CEO has attended various hearings of the special parliamentary commission created in Belgium to draw lessons from the financial crisis. Finally, the chairman of the Board of Directors attended the hearing of the Finance Commission in France regarding Dexia.

15 By bailing out Dexia, the Belgian, French and Luxembourg States have averted a systemic crisis. The ultimate cost of such rescue operation to the taxpayer will only be known once the group s orderly resolution will reach its end. Meanwhile, various guestimates have shown up in the media and must be put into perspective. Coût How much does the bail out of Dexia cost the Belgian and French taxpayers? How can one calculate the cost of bailing out Dexia? In its report of 15 July 2013, the French National Audit Office provided an estimate of the cost of the Dexia bail-out for the French taxpayer. It can help to understand the guestimates written up by the Belgian press. According to the French National Audit Office, the total cost to French taxpayers was 6.6 billion euros during the period from 2008 to 2012, i.e.: According to the French National Audit Office, the total cost to French taxpayers was 6.6 billion euros during the period from 2008 to Impairment of CDC s share of capital: billion euros; recapitalisation in 2008: billion euros; recapitalisation in 2012: billion euros; minus commission income received for the guarantees from 2008 to 2012: 864 million euros. If one would apply the same method to estimate the cost to the Belgian tax payer, the amount would reach approximately 7 billion euros, i.e.: impairment of the Municipal Holding s share of capital: 3.3 billion euros; recapitalisation in 2008 (Federal State, Regions and Municipal Holding): 2.5 billion euros; recapitalisation in 2012 (Federal State): billion euros; minus commission income received for the guarantees from 2008 to 2012: 1.4 billion euros; How can one reconcile with the figure mentioned in the Belgian press? Some Belgian media sources guestimated the cost of Dexia s bailout for the Belgian taxpayer at 15 billion euros. It includes: the acquisition cost of Dexia Bank Belgium: 4 billion euros; the loss on the Municipal Holding guarantee: 0.8 billion euros; Yet the final cost will only be known once the balance sheet has been reduced to zero, which will span over several decades. the guarantee on Ethias Dexia bonds : 0.2 billion euros; the Arco guarantee: 1.5 billion euros. All together this works out to approximately 13.5 billion euros. However, this estimate is founded on a wider perimeter than the one considered by the French National Audit Office. If we disregard the commission income paid for the guarantees to the Belgian State between 2008 and 2012, the figure would rise to approximately 15 billion euros. Yet the final cost will only be known once the balance sheet has been reduced to zero, which will span over several decades. The employees of the group tackle this wind-down every day in order to reduce to a minimum the impact thereof on the taxpayers of those countries involved. prevail. No express or implied warranty or discharge is given as to the completeness or the accuracy of information published here. Use of the information is subject

16 Over the past three years Dexia has undergone sweeping changes due to implementation of the orderly resolution plan. Winding down the bank is a complex undertaking. Over and above it, many untruths are doing the rounds, notably about "sensitive" structured loans. 1 Crédits sensibles "Sensitive" structured credits Managing the balance sheet in run-off Dexia was hard hit by the sovereign crisis in Given its sizable balance sheet, an immediate liquidation would have completely destabilised the European banking system. To avert a systemic crisis, the French and Belgian States together with the European Commission reached an agreement to sell all viable commercial entities and, subsequently, manage the residual ones as well as their assets in run-off over time. Today, Dexia s mission is to manage the balance sheet, still standing at 247 billion euros on 31 December It is a delicate task and can only be executed successfully by experienced specialists with a know how of banking systems and asset management. 2014, in run-off. Dexia s experts must now manage the portfolio with the twin goal to minimize potential losses and manage the residual assets in run-off until they are completely reimbursed. It is a delicate task and can only be executed successfully by experienced specialists with a know how of banking systems and asset management. It also means that Dexia will continue to serve its clients, and potentially assist them with the restructuring of their financial transactions, even though Dexia has now discontinued all commercial activities. In 2012 the French government developed a new financing scheme for local authorities. Dexia Municipal Agency, Dexia s covered bond issuer, was transferred to SFIL. 2 On 31 January 2013, SFIL was sold to the French State (75%), the Caisse des Dépôts et Consignations (20%) and La Banque Postale (5%). Dexia Municipal Agency was renamed CAFFIL. 3 At the time of the sale CAFFIL had a total balance sheet of approximately 95 billion euros. The sale resulted in a total loss of 1.85 billion euros for Dexia spread over the years of 2011, 2012 and At 31 December 2014, Dexia still counted 5,025 local public sector clients in France, with 13.6 billion euros in financings, of which less than 1.2 billion euros represented sensitive structured loans. A large number of clients who contracted these structured loans still pay an interest rate that is lower than the fixed rate of interest that prevailed at the time they took out their loan. Indeed, in the years , many public sector and private borrowers chose to actively manage their debt and diversify their funding sources in order to curb their financing costs. In 2013, fewer than 10 clients paid a rate of interest exceeding 10%, and none of them paid more than 16%. In 2014 the situation remained largely unchanged. Facilitate desensitisation The Dexia teams closely monitor the structured credits portfolio. In 2014 both lenders and borrowers have pursued their efforts to desensitise as much as possible the structured credits. As such, the Dexia teams have again presented to their clients all opportunities to convert their credits into fixed rate loans. Just as at the time they entered into the loan agreement, 4 clients are informed regularly of the risks and the alternative solutions. Some proposals contain the option for clients to borrow more money to finance new investments, as agreed with the European Commission. 5 The balance of sensitive structured loans has been reduced by 36% between 2012 and At 31 December 2014 the amount of such loans dropped below the threshold of 1.2 billion euros, and represented less than 10% of all such loans outstanding in France. It is in this context that Dexia succeeded in 2013 and 2014 with a growing number of clients to convert their sensitive loans into fixed rate loans. The balance of sensitive structured loans has been reduced by 36% between 2012 and At 31 December 2014 the amount of such loans dropped below the threshold of 1.2 billion euros, and represented less than 10% of all such loans outstanding in France. Within this portfolio, 21% consisted of loans with an interest rate directly and explicitly linked to the exchange rate between the euro and the Swiss franc, at least for a certain period during the life time of the loan. These credits were impacted by the decision, on 15 January 2015, of the Swiss National Bank. 6 Dexia immediately stepped up its efforts to assist its clients without waiting for the measures to be taken by the French government to reinforce the fund (see below). Working within an evolving legal framework At the end of 2014, only a few cases had been judged in court. In its first 3 judgements of 8 February 2013 the Superior Court in Nanterre ruled in favour of Dexia as to the substance of the matter with respect to the litigation of the Department of Seine-Saint-Denis against Dexia. The court upheld that Dexia had not failed in its duty to advise the client. However, the court did point out a procedural error in the documents sent to clients (there was no mention of the Effective Global Interest Rate in the confirmation fax), but Dexia, together with CAFFIL, has filed an appeal. On 4 December 2014, the Department of Seine-Saint-Denis announced that it had signed an agreement to convert the loans to a permanent fixed interest rate loan thereby settling also the litigation out of court. At the initiative of the French State, a new Act came into force on 29 July 2014 to create legal stability in disputes with public legal entities concerning the mention of the Effective Global Interest Rate. It states that the Effective Global Interest Rate for structured loans cannot be disputed, in particular as At the initiative of the French State, a new Act came into force on 29 July 2014 to create legal stability in disputes with public legal entities concerning the mention of the Effective Global Interest Rate. it applies to the circumstance in which the Effective Global Interest Rate or the periodic interest rate or the duration of the interest rate period would not be mentioned in the contract. By 31 December 2014, more than 200 clients had taken their matter to court, but only a few are actually clients of the bank. The vast majority of the litigations involve loans held by CAFFIL. The clients have been informed in writing that CAFFIL is their lender from the outset of the transaction. Support fund for the desensitisation of structured loans A special fund was created under the French Finance Act (Section 92-I) late 2014 to help local authorities, inter-municipal authorities and other public institutions desensitise their loans. The amount of the fund will reach 1.5 billion euros to be financed over a period of 15 years. The purpose of the fund is to desensitise structured loans by providing a contribution towards their early repayment. The contribution is limited to a maximum of 45% of the debt repayment allowance. Candidates are required to submit their application The purpose of the fund is to desensitise the sensitive structured loans. by 30 April 2015 at the latest. At the end of 2014, a similar fund was created for public healthcare institutions in the amount of 100 million euros to be financed over 3 years. Given the impact of the decision taken by the Swiss National Bank on 15 January 2015, French authorities decided to double the amount of the public sector fund to 3 billion euros and the one for public hospitals was increased to 400 million euros spread over 10 years. The Dexia teams are in contact with all clients that are eligible for the fund to help them gain access to the fund by providing them with all legal and financial information. Dexia also keeps regular contact with clients who do not wish to make use of the fund. 1. A structured loan is a loan with an interest rate linked to certain market parameters clearly defined in the loan agreement. A structured loan is labeled "sensitive" as defined in the decree of 29 April 2015 creating the public sector support fund. ( do?cidtexte=jorftext &fastpos=1&fastreqid= &categorielien=cid&oldaction=rechtexte) 2. Société de Financement Local 3. Caisse Française de Financement Local 4. The decision by a public entity to enter into a loan (structured or otherwise) is subject to strict legal constraints. Public entities usually select several banks to obtain the funding necessary for the investments. Based on their offers, it chooses freely the institution providing the loan, and also the financing terms and conditions. The prefecture generally checks whether the decision satisfies the legal requirements, and the financial jurisdictions and regional audit offices also devote particular attention to this matter. 5. To reduce the risk of legal disputes concerning local authorities' structured loans and to enable their desensitisation, the European Commission gave permission under the orderly resolution plan to award up to 600 million in new loans to clients during two periods, namely from February 2013 to July 2013 and from June 2014 to November

17 Credit risk refers to the risk of deterioration in credit quality and the probability of default or even bankruptcy of the bank s debtors or counterparties. If this risk materialises, losses may ensue on the loan or bond portfolio. The prudent management of these portfolios through to their maturity is Dexia s main banking task under its orderly resolution plan. However, some exposures are unusually large and, in the event of a deterioration of their credit risk, may have a serious impact on Dexia s periodic results. Risque de crédit Why credit risk can create havoc How is credit risk monitored? Dexia s maximum credit risk exposure 1 amounted to EUR 182 billion at the end of March As a result of the group s historical development and the influence of current risk measures, Dexia has to contend with a certain degree of debtor concentration. As a result of the group s historical development and the influence of current risk measures, Dexia has to contend with a certain degree of debtor concentration. This means that some exposures are substantial, even for a portfolio that is 87% investment grade. Despite the careful monitoring and supervision of the portfolio, any deterioration of the credit risk of one of these large exposures may significantly impact Dexia s periodic results. The Dexia teams do their utmost to limit any impact. One example is the case of the city of Detroit, which filed for protection under US bankruptcy laws on 18 July At that time Dexia had an exposure of USD 305 million. Of this, USD 75 million was covered by a performing reinsurance company, and the rest by an insurer with a weaker credit quality profile. Despite the careful monitoring and supervision of the portfolio, any deterioration of the credit risk of one of these large exposures may significantly impact Dexia s periodic results. Dexia had been closely monitoring the situation for some time. In July 2013, it announced an additional provision of USD 59 million. By the end of 2013, this provision had grown to USD 154 million 2. In the first quarter of 2014, Dexia increased the provision yet again. In the second quarter of 2014, the teams managed to sell USD 75 million 3 of the exposure. The remaining USD 230 million was covered at that time by a provision of USD 157 million. In July 2014, a further USD 55 million of Detroit debt was sold. Thanks to the continuing active management of the balance sheet, all direct exposure to the city of Detroit was reduced to zero by the end of After reversing the provision, the group was able to record a gain of USD 32 million in All in all, the impact of the Detroit exposure on the consolidated accounts remained under control. At the beginning of this year, Dexia faced another difficult situation when the Austrian financial regulator announced a temporary moratorium on debt issued by local bad bank Heta. The Dexia teams do their utmost to limit any impact. The Dexia teams are doing their utmost to recover as much as possible of the exposure to Heta and they are currently investigating all the steps that are necessary in the wake of the recent decision of the Austrian financial regulator. Thanks to the continuing active management of the balance sheet, all direct exposure to the city of Detroit was reduced to zero by the end of What is the impact of exposure to Austrian Heta Asset Resolution AG? Heta Asset Resolution is a wind-down company owned by the Republic of Austria. It is charged with the task of managing the remaining assets of the former Hypo Alpe Adria Group (HAA) so as to ensure the orderly and active disposition of these assets on the best terms possible. In 2014, HAA was split into bad bank Heta and commercially viable holding company Hypo SEE, which was put up for sale. The Dexia teams are doing their utmost to recover as much as possible of the exposure to Heta and they are currently investigating all the steps that are necessary in the wake of the recent decision of the Austrian financial regulator. Heta does not have a banking licence, but is nonetheless at least partially subject to Austrian legislation governing the restructuring and dismantling of banks. This new legislation came into force on 1 January On 1 March this year, the Austrian financial regulator issued an administrative ruling initiating the resolution of Heta. For the time being, this concerns a temporary moratorium (until 31 May 2016) on a substantial proportion of Heta s debt (including interest). The nominal value of Dexia s exposure to Heta, to which this moratorium relates, is EUR 395 million. This exposure has the benefit of a guarantee granted by the State of Carinthia. During the first quarter of 2015, Dexia created a provision of EUR 197 million to cover its Heta exposure. Has the rescue of financial institutions entered a new phase? When the crisis occurred, European banks were generally rescued by a bailout or capital injection by the national governments. Originally, governments did not dare to impose losses on depositors and creditors, such as bondholders, (a bail-in ) due to the major risk that this would create additional panic in the financial markets. To avoid a financial crisis again leading to a crisis in public finances in Europe in future, the EU has adopted a raft of protective measures to safeguard the financial system and to limit the impact on public finances. In addition to the establishment of a Single Supervisory Mechanism (SSM) and the setting up of a European Resolution Fund to protect depositors, the European Parliament approved This directive explicitly provides for losses to be allocated to shareholders and creditors in the event of a bank getting into financial difficulties. The directive has to be transposed into national legislation in every EU country by the beginning of 2016 at the latest. the Bank Recovery and Resolution Directive (BRRD) in May This directive explicitly provides for losses to be allocated to shareholders and creditors in the event of a bank getting into financial difficulties. The directive has to be transposed into national legislation in every EU country by the beginning of 2016 at the latest. In Austria, it came into force on 1 January Nevertheless, the Austrian regulator s sudden announcement of a temporary moratorium on a major part of Heta s debt instruments (bail-in) came as a complete surprise to the financial markets, as Heta has not held a banking licence since October Maximum Credit Risk Exposure (MCRE). This comprises inter alia: The outstanding net amount for accounting purposes The market value of derivatives and financial guarantees to cover the risk 2. Including in relation to hedging instruments. 3. Including in relation to hedging instruments.