2020 Universal registration document and annual financial report - BNP PARIBAS290

5 risks and CaPital adequaCy Pillar 3

5

Annual risk survey

Others

Geopolitical tensions abated in Asia on the Korean peninsula but remain high in certain other areas, particularly in the Middle East, with the potential involvement of Western powers to varying degrees. In the Mediterranean, tensions have arisen as a result of disputed maritime areas. Latin America has also been experiencing political tensions.

Although the possible consequences of such risks are hard to assess, the regional economies in question, and the global economy, could be affected through different channels (confidence, trade ties and commodity prices).

The risks associated with changes in the macroeconomic and market environment are described in the following section Risk factors(1).

The analyses relating to the sectors (particularly leveraged finance, shipping, the oil and gas sector, the hotel, tourism and leisure sector, the non-food distribution sector excluding e-commerce, and commercial real estate) are set out in the Industry diversification paragraph in section 5.4.

The risk principles are presented in the Risk Appetite Statement approved by the Board of directors (see Risk Appetite in section 5.3).

(1) In particular the risk factor 5.3 Given the global scope of its activities, the Bank may be vulnerable to certain political, macroeconomic or financial risks in the countries and regions where it operates .

RISK FACTORS

The main categories of risk inherent in the BNP Paribas Group s business are presented below. They may be measured through risk-weighted assets or other quantitative or qualitative indicators, to the extent risk-weighted assets are not relevant (for example, for liquidity and funding risk).

In billions of euros

RWA

31 December 2020 31 December 2019

Credit risk 527 524

Counterparty credit risk 41 30

Securitisation risk in the banking book 14 11

Operational risk 71 69

Market risk 25 19

Amounts below the thresholds for deduction (subject to 250% risk weight) 17 16

TOTAL 696 669

More generally, the risks to which the BNP Paribas Group is exposed may arise from a number of factors related, among others, to changes in its macroeconomic or regulatory environment or factors related to the implementation of its strategy and its business.

The risks specific to the BNP Paribas Group s business are presented below under seven main categories, pursuant to article 16 of Regulation (EU) 2017/1129, known as Prospectus 3 , dated 14 June 2017, of which the provisions relating to risk factors entered into force as of 21 July 2019: credit risk, counterparty risk and securitisation risk in the banking book; operational risk; market risk; liquidity and funding risk; risks related to the macroeconomic and market environment; regulatory risks; and risks related to the BNP Paribas Group s growth in its current environment.

The Group s risk management policies have been taken into account in assessing the materiality of these risks; in particular, risk-weighted assets factor in risk mitigation elements to the extent eligible in accordance with applicable banking regulations.

1. CREDIT RISK, COUNTERPARTY RISK AND SECURITISATION RISK IN THE BANKING BOOK

BNP Paribas Group s credit risk is defined as the probability of a borrower or counterparty defaulting on its obligations to the BNP Paribas Group. Probability of default along with the recovery rate of the loan or debt in the event of default are essential elements in assessing credit quality. In accordance with the European Banking Authority recommendations, this category of risk also includes risks on equity investments, as well as those related to insurance activities. At 31 December 2020, the BNP Paribas Group s credit risk exposure broke down as follows: corporates (41%), central governments and central banks (26%), retail customers (25%), credit institutions (5%), other items (2%) and equities (1%). At 31 December 2020, 34% of the BNP Paribas Group s credit exposure was comprised of exposures in France, 15% in Belgium and Luxembourg, 10% in Italy, 19% in other European countries, 12% in North America, 5% in Asia and 5%