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 wind-down its balance sheet ( 234 billion at 30 September 2016) while protecting the financial interests of its shareholders and guarantors. Dexia s mission is to manage in wind-down its balance sheet (234 billion euros at 30 September 2016) 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 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 Redemption of the remaining guaranteed debt subscribed by Belfius and guaranteed bank bonds used within the framework of the special own-use mechanism approved by the ECB The Board of Directors is composed of four representatives of the French and Belgian States, plus three independent and two executive directors. Simplification of the Group structure and launch of significant projects to optimise the operating model Further reduction of asset portfolios Management and organisation 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 appointed in 2012 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 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 September 2016, Dexia had 175 billion euros worth of exposure (EAD) representing over 34,000 lines spread over 7,000 debitors. As at 30 September 2016, Dexia had 175 billion euros worth of exposure (EAD) representing over 34,000 lines spread over 7,000 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: 89.5% of the exposures are rated investment grade at 30 September And most exposures below investment grade are rated BB. The portfolio is being monitored by experienced professionals. 1 Exposure at default (EAD) on 30 September 2016 corresponds to the best estimate of credit risk exposure at default by the debtor. 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 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. 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. 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 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 The EC requires companies who benefit from state aid to satisfy certain conditions so as to restore free competition. 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 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). 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 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. 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 2015, the balance sheet total is expected to be reduced by one-third to 138 billion euros by Taking into account the conditions and the assumptions of the business plan updated as per December 2015, the balance sheet total is expected to be reduced to 138 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 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. 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. Is it feasible to end the use of the State guarantees sooner? 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. 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 June 2015, 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 2015, 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 2015

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 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 At the end of September 2016, Dexia s Common Equity Tier1 capital reached billion euros (the numerator) and the risk weighted assets 46 billion euros (the denominator) resulting in a Common Equity Tier1 ratio of 17.2%. 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 September 2016, Dexia s Common Equity Tier1 capital reached billion euros (the numerator) and the risk weighted assets 46 billion euros (the denominator) resulting in a Common Equity Tier1 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. 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 The introduction of the Basel 3 rules have lowered the group s solvency ratios by approximately 5%. 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 June 2015) 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 2015, they represented a negative value of 2 billion euros. This value depends 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 Dexia had to stop all commercial activity and, hence, the income from its asset portfolio is frozen. 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 makes the group's capital subject to 'natural erosion' that might accelerate due to an event in the financial markets or in relation to one of its debtors. The evolution of the risk weighted assets: even though Dexia is not allowed to grant new loans or acquire assets, its risk weighted assets may go up or go down depending on the evolution of the creditworthiness of its debtors or changes in exchange rates such as the euro/us dollar rate. 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 2015

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 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. 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 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, 17.3 billion euros in 2014 and 13.7 billion euros in At the same time, the group has been very active again in the short term segment of the market issuing a total amount of 62 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 2015, 42% of total funding came from secured transactions, 37% from the issuance of state guaranteed paper and 10% 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, 2014 and According to the update of the business plan as per December 2015, from 2017 onwards, the funding mix will converge to 40% non guaranteed funding, 55% state guaranteed funding placed in the markets and 5% central bank funding. Taking into account its particular nature of a bank in run-off, Dexia finances itself on the capital markets and through central banks. 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 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 and loans) and funding transactions in order to protect itself against a possible rise in 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. 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 2015, Dexia still had approximatively 13,000 derivatives on its books, representing a gross notional of 371 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 2015 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 2015 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.

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 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 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. 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.

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 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.