2020 Universal registration document and annual financial report - BNP PARIBAS 281

5risks and CaPital adequaCy Pillar 3

5

The purpose of Pillar 3 market discipline is to complement the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2) with a set of disclosures completing the usual financial disclosures.

This chapter presents the information relative to the BNP Paribas Group s risks and in this respect meets:

■ the requirements of part 8 of Regulation (EU) No. 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms(1) set out in the various technical standards published by the European Commission and European Banking Authority guidelines aimed at improving the comparability of information published by the institutions;

■ the accounting standards requirements relating to the nature and the extent of the risks. Some information required by accounting standards IFRS 7, IFRS 4 and IAS 1 is included in this chapter and covered by the opinion of the Statutory Auditors on the consolidated financial statements. This information is identified by the mention [Audited] and must be read as being part of the notes to the consolidated financial statements.

The Basel current measures (known as Basel 3), approved in November 2010, strengthen the ability of banks to withstand economic and financial shocks of all kinds by introducing a series of regulatory provisions. The content of this reform was transposed into European law in Directive 2013/36/EU (CRD 4) and Regulation (EU) No. 575/2013 of 26 June 2013 (CRR), supplemented in June 2019 by Directive (EU) No. 2019/878 (CRD 5) and Regulation (EU) No. 2019/876 (CRR 2).

The regulatory framework of Basel 3 had the following main impacts:

■ strengthened solvency:

The Basel 3 rules harmonise the definition of capital and strengthen the ability of financial institutions to absorb losses.

A detailed description of the composition of regulatory capital is given under Regulatory capital in section 5.2.

Rules on calculating risk-weighted assets were also revised to strengthen related capital requirements. These calculation rules are detailed by risk type in the corresponding sections.

Strengthened solvency is implemented through the Single Supervisory Mechanism (SSM) overseen by the ECB and the application of the European Banking Authority (EBA) Supervisory Review and Evaluation Process (SREP) guidelines.

The BNP Paribas Group, identified as a financial conglomerate , is subject to additional supervision. As a financial conglomerate, the Group s own funds cover the capital requirements for banking activities as well as insurance activities (see Capital adequacy and capital planning in section 5.2).

■ introduction of a leverage ratio:

The leverage ratio acts primarily as a supplementary measure to the risk-based capital requirements (backstop principle). Banks are now required to publish their leverage ratios which will be subject to a minimum requirement from 28 June 2021.

The Group s leverage ratio as at 31 December 2020 is presented in section 5.2 Capital adequacy and capital planning.

■ liquidity management:

The implementation of liquidity requirements with the introduction of a short-term liquidity ratio (Liquidity Coverage Ratio LCR) and a long-term liquidity ratio (Net Stable Funding Ratio NSFR) is presented in section 5.8 Liquidity risk.

The minimum liquidity coverage ratio has been set at 100% of total net cash outflows during the 30-day stress period.

The NSFR, the one-year minimum liquidity coverage ratio will be applicable from 28 June 2021.

■ introduction of the new bank resolution scheme:

The new bank resolution scheme introduced on 1 January 2016 has been accompanied, since 27 June 2019, by a TLAC (Total Loss Absorbing Capacity) minimum ratio applicable to global systemically important banks (G-SIBs).

This requirement will be supplemented in Europe by the introduction of a MREL (Minimum Requirement for own funds and Eligible Liabilities) ratio from 1 January 2024. (see Capital adequacy and capital planning in section 5.2).

Furthermore, on 7 December 2017, the Group of Governors and Heads of Supervision (GHOS) approved the reforms finalising the Basel 3 regulatory framework. They consist of a revision of the framework for credit risk, credit valuation adjustment (CVA) risk, and operational risk, as well as the introduction of a floor for the calculation of risk-weighted assets when an internal method is used. The Basel Committee plans an application as of 1 January 2023. To be applicable, these reforms must be transposed into European law.

In chapter 5, the figures shown may not appear to add up in certain columns and rows due to rounding.

(1) The disclosures required under article 450 concerning the Group s compensation policy are available in the Compensations of regulated employees section of the Investor Relations website: https://invest.bnpparibas.com/en/compensation-regulated-employees.