2020 Universal registration document and annual financial report - BNP PARIBAS 289

5risks and CaPital adequaCy Pillar 3

5

Annual risk survey

Evolving regulatory environments

In addition to the regulatory measures recently adopted or pending adoption, and already cited as top risks, the trend towards growing complexity and regional differences in the bank regulatory environment and related supervision is creating relative uncertainty over future developments, compliance costs, and proper performance risk concerning the various measures. The Group has established an active monitoring system for its regulatory environment, enabling it to minimise these risks.

Possible future divergence by type of regulated entity, for example, depending on their degree of innovation, may also introduce risk of a competitive nature.

Health risks

A new viral or bacteriological infection that is potentially resistant to antibiotics, antiviral drugs or other treatments is an increasing possibility and could become more significant.

Despite the experience gained with the Covid-19 crisis, such an infection could lead to new failures in infrastructure and production chains, with significant consequences for all stakeholders.

Demographic risk

The ageing population is a major underlying trend in many countries. In the years and decades to come, this change significantly impact economic growth (which is already visible), as well as healthcare and retirement budgets, or saving and consumption behaviours.

Societal issues

In addition to responses designed to meet its customers changing needs, the Group is seeks, on a more general basis, to responding to the expectations of the society in which it operates in terms of how it conducts its business, respect for human rights and environmental protection. The BNP Paribas Group Code of conduct defines standards of conduct in line with the values and missions determined by the Bank.

AREAS OF SPECIAL INTEREST IN 2020

United Kingdom

The United Kingdom withdrew from the European Union on 31 January 2020, the withdrawal agreement having been voted on 22 January 2020 by the United Kingdom Parliament and on 29 January 2020 by the European Parliament. The transition period, during which the regulatory environment remained unchanged, ended on 31 December 2020.

The cooperation and trade agreement between the European Union and the United Kingdom entered into force provisionally on 1 January 2021, pending ratification by the European Parliament, which will ensure its definitive application.

The BNP Paribas Group operates in the United Kingdom through several branches and subsidiaries (see section 8.6 Locations by country in chapter 8 General Information). Its business, which it carries out mainly

with corporates through its BNP Paribas SA branch in the United Kingdom, is of limited size for the scale of the Group and does not include a Retail Banking network in that country. At 31 December 2020, BNP Paribas generated 13.9% of its pre-tax operating income in the United Kingdom (see section 8.6 Profit and loss account items and headcount by country in chapter 8 General Information).

With respect to exposure to counterparties whose main business is in the United Kingdom, commercial commitments at 31 December 2020 represent 4.4% of the Group s total gross commitments, on- and off- balance sheet (see Table 28: Credit risk exposure by geographic region). Similarly, exposure to British sovereign risk is contained at 5.6% of the banking book s sovereign exposure (see Appendix 1 Sovereign exposures). The Bank s structural foreign exchange and interest rates position in pounds sterling is very moderate: outstanding loan amounts are low and funding in pounds sterling is largely matched.

The Group has taken all measures, required by the ECB and the UK regulatory authorities, to be allowed to operate in the UK. The operational framework has also been adjusted to take account of the disappearance of the European passport, as businesses located in the UK lose their ability to sell financial services to European clients, and the ECB s expectations as a supervisor. Four hundred new commercial and support jobs are being created on the continent, mainly in information technology.

These various adaptation measures ensure the continuity of the Group s activities, whose clients, whether located in the United Kingdom or in Europe, continue to benefit from the Group s broad banking offer.

Turkey

In 2020, macroeconomic uncertainties and the geopolitical context penalised local foreign exchange markets. At the end of the year, the new monetary and fiscal policy measures began to stabilise, in a regional geopolitical context which continues to make the use of foreign currency borrowing costly.

BNP Paribas presence in Turkey is primarily through its TEB subsidiary (ranking No. 10 in Retail Banking in Turkey with a market share of approximately 3%). At 31 December 2020, the Group generated 2.1% of its pre-tax operating income in this country (see section 8.6 Profit and loss account items and headcount by country in chapter 8 General information). The entity TEB had a solvency ratio (Capital Adequacy Ratio CAR) of 18.5% at 31 December 2020, in excess of the regulatory requirements.

In 2020, TEB Group s balance sheet liquidity remained solid, with a Liquidity Coverage Ratio (LCR) of 209% at 31 December 2020, versus 229% at 31 December 2019. With outstanding loans of TRY 81.2 billion and deposits of TRY 93.7 billion, TEB Group s financing structure is largely self-financed.

With respect to exposure to counterparties whose main business is in Turkey, commercial commitments as at 31 December 2020 represent 1.2% of the Group s total gross commitments, on- and off-balance sheet (see Table 28: Credit risk exposure by geographic region). Exposure to Turkish sovereign risk is contained at 2.2% of the banking book s sovereign exposure and is essentially borne by TEB Group.