Directors' report

Chairman and Chief Executive's introduction - Fair value accounting

Under International Financial Reporting Standards introduced in 2005, for certain assets which include a derivative as part of their structure, the fair value change of that derivative is required to be shown in the Income Statement. Such changes on our portfolio of synthetic CDOs amount to £49.7m. It is important to emphasise that all these assets continue to perform and this change in fair value may not be permanent.

In addition, the hedging of fixed rate mortgage and savings, using interest rate swaps to remove the economic risk, creates a small amount of fair value movement described as hedge ineffectiveness. This amounted to a charge of £23.5m in 2007 (2006: £0.3m income).