BANKING GROUP RISKS

In observance of current norms, the UBI Banca Group has adopted a risk control system which disciplines and integrates the organisational, regulatory and methodological guidelines of the system of internal controls with which all Group member companies must comply. This also allows the Parent Bank to perform its activities of strategic, management and operational control in an effective and economical manner.

Group member companies co-operate pro-actively in identifying the risks to which they are subject and in defining the relative criteria for measuring, managing and monitoring them.

Furthermore, important integration and/or development activities were set in motion following the merger, designed to pursue an increasingly more knowledgeable and efficient allocation of economic and supervisory capital within the new UBI Banca Group, based on the key principles set forth below.

ƒ Rigorous containment of financial and credit risks and strong management of all types of risk: an important process of unequivocal identification and definition of risks and of integrating and sharing methods previously adopted within the former BPU Banca Group and the former Banca Lombarda Group was conducted in the first six months of the year to guarantee integrated reporting of financial risks right from moment when the merger deed was first signed. Rigorous internal processes were defined for the approval and start up of new products. The capital adequacy of the new Group, from both a supervisory viewpoint (Basle 1 and Basle 2) and that of economic capital, is monitored constantly and is subject to periodical reporting to senior management.

ƒ The use of sustainable value creation logics in defining the propensity to risk and the allocation of capital: to achieve this the two models for measuring EVA previously adopted by the two former Groups were made to converge onto a single target model for value creation, now in use throughout the whole of the new UBI Group, within which there is also a strong accent on risk- adjusted pricing approaches.

ƒ Definition of the Group’s propensity to risk with reference to specific types of risk and/or specific activities in a set of policy regulations for the Group and for single entities within it.

1.1. CREDIT RISK Qualitative information

The two original Groups had undertaken appropriate initiatives in good time to equip themselves with instruments, processes and models to measure and manage credit risk in compliance with the rules of the new Basle 2 Accord.

A new focus Group was therefore formed following the creation of the new UBI Banca Group named “Basle 2” for the purpose of achieving compliance with IRB (Internal Rating Based) approach requirements by the end of 2008 and with advanced IRB approaches by the end of 2009, capitalising on the pre-merger activities already performed in this area.

Integrated reporting to senior management was also implemented on asset quality and on the distribution of the UBI Group’s lending portfolio by class of risk, using a ‘master scale’, which reconciles counterparty ratings generated by the models used by the two original groups.

The orientation of support to local economies (good geographical diversification can be achieved at consolidated level thanks to the multi-regional size of the Group) families, businessmen, professionals and small to medium size enterprises (the size of the lending portfolio and the types of customer allow good sectoral diversification and the concentration of risk to be contained) was

confirmed with regard to credit policies. The particular attention paid to maintaining relations established with customers and to developing them as time goes on is one of the strong points of the Group and it helps to eliminate information asymmetries and to strengthen continuity with customer relations in a perspective of long term support.

More specifically, credit policy guidelines were developed during the first half in the light of the new lending portfolio of the Group. These guidelines contributed to the definition of the industrial plan with regard to:

the change in the composition by sector of lending to corporate clients, as a function of the attractiveness of the different sectors;

the approach to the core corporate market as a function of the current and the target

distribution by class of rating;

the approach to the large and top corporate market as a function of the rates and charges applied to counterparties in determined rating classes.

Furthermore the UBI Group has also adopted a policy on “single name” concentration based on the following key points:

credit facility limits on the largest customers as a function of the internal rating class;

limits on total credit facilities granted to the largest customers with respect to supervisory capital

limits on total credit facilities granted to the largest customers with respect to total credit facilities granted by the Group

Quantitative information

Classification of exposures on the basis of external and internal ratings

The internal rating system of the UBI Banca Group consists of the following three families of models:

x Large Corporate Models - the rating is made on the basis of balance sheet analysis, the

qualitative characteristics of the enterprise, the performance profile and the Group it belongs to.

x Corporate Models – a rating model is applied to corporate counterparties not classified as large

corporate with the rating made on the basis of balance sheet analysis, the qualitative characteristics of the enterprise and the performance profile;

x Private models – models for rating private retail customers generate a counterparty rating

calculated as a function of the type of product (mortgages, loans, cards and overdrafts). The final rating is a summary of an analysis of the sociological profile of the counterparty, of the product and of the performance profile.

The degree to which exposures to ordinary customers are covered by the different internal rating models in use in the Group’s network banks are given below by market/commercial portfolio. For the purposes of providing an estimate of the total percentage cover for the lending portfolio, exposures covered by the performance analysis model of rating are also considered.

Network banks: degree to which exposures are covered by internal rating with the UBI internal rating system by market/commercial portfolio

Graph No. 1

The results of the different models mentioned are reproduced on a single reconciliation scale which groups the results of the rating analyses by clusters with homogenous PD (Probability of Default). The distribution of corporate market lending by master scale classes is given below.

Network banks: Corporate Market – Distribution of lending by master scale Graph No. 2 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% MS 1 MS 2 MS 3 MS 4 MS 5 MS 6 MS 7 MS 8 MS 9 MS 10 MS 11 MS 12 MS 13 MS 14 MS 15 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% Lending % Cumulative Lending

1.2. MARKET RISK

1.2.1. Interest rate risk – Supervisory trading book Qualitative information

A. General aspects

The considerations that follow relate exclusively to the “trading book”, as defined by IAS standards. Equity investments in other companies classified as for trading according to IAS and the portfolios for balanced trading are excluded.

The main portfolios of the trading book (Balance sheet item: financial assets held for trading) of the UBI Group are listed below: