2020 Universal registration document and annual financial report - BNP PARIBAS 295

5risks and CaPital adequaCy Pillar 3

5

Annual risk survey

3.3 Adjustments to the carrying value of the BNP Paribas Group s securities and derivatives portfolios and the BNP Paribas Group s own debt could have an adverse effect on its net income and shareholders equity.

The carrying value of the BNP Paribas Group s securities and derivatives portfolios and certain other assets, as well as its own debt, in its balance sheet is adjusted as of each financial statement date. As at 31 December 2020, on the assets side of the BNP Paribas Group s balance sheet, financial instruments at fair value through profit or loss, derivative financial instruments used for hedging purposes and financial assets at fair value through shareholders equity amounted to EUR 689.6 billion, EUR 15.6 billion and EUR 58.2 billion respectively. In the liabilities column, financial instruments at fair value through profit or loss and derivative financial instruments used for hedging purposes amounted to EUR 729.5 billion and EUR 13.3 billion, respectively, at 31 December 2020. Most of the adjustments are made on the basis of changes in fair value of the BNP Paribas Group s assets or debt during an accounting period, with the changes recorded either in the income statement or directly in shareholders equity. Changes that are recorded in the income statement, to the extent not offset by opposite changes in the value of other assets, affect the BNP Paribas Group s consolidated revenues and, as a result, its net income. All fair value adjustments affect shareholders equity and, as a result, the BNP Paribas Group s capital adequacy ratios. The fact that fair value adjustments are recorded in one accounting period does not mean that further adjustments will not be needed in subsequent periods.

4. LIQUIDITY AND FUNDING RISK Liquidity risk is the risk that the BNP Paribas Group will not be able to honour its commitments or unwind or offset a position due to market conditions or specific factors within a specified period of time and at a reasonable cost. It reflects the risk of not being able to cope with net cash outflows, including collateral requirements, over short- to long-term horizons. The BNP Paribas Group s specific risk can be assessed through its short-term liquidity ratio (Liquidity Coverage Ratio LCR), which analyses the hedging of net cash outflows during a thirty-day stress period. The monthly average in 2020 of the BNP Paribas Group s LCR was 154%. The liquidity reserve was EUR 432 billion at the end of 2020.

4.1 The BNP Paribas Group s access to and cost of funding could be adversely affected by a resurgence of financial crises, worsening economic conditions, rating downgrades, increases in sovereign credit spreads or other factors.

The financial crisis, the eurozone sovereign debt crisis as well as the general macroeconomic environment have at times adversely affected the availability and cost of funding for European banks in recent

years. This was due to several factors, including a sharp increase in the perception of bank credit risk due to exposure to sovereign debt in particular, credit rating downgrades of sovereigns and of banks, and debt market speculation. Many European banks, including the BNP Paribas Group, at various points experienced restricted access to wholesale debt markets and to the interbank market, as well as a general increase in their cost of funding. Accordingly, reliance on direct borrowing from the European Central Bank ( ECB ) at times increased substantially. If such adverse credit market conditions were to reappear in the event of prolonged stagnation of growth, deflation, resurgence of the financial crisis, another sovereign debt crisis or new forms of financial crises, factors relating to the financial industry or the economy in general (including the economic consequences of the health crisis) or to the BNP Paribas Group in particular, the effect on the liquidity of the European financial sector in general and the BNP Paribas Group in particular could be materially adverse and have a negative impact on the BNP Paribas Group s results of operations and financial condition.

4.2 Protracted market declines can reduce the BNP Paribas Group s liquidity, making it harder to sell assets and possibly leading to material losses. Accordingly, the BNP Paribas Group must ensure that its assets and liabilities properly match in order to avoid exposure to losses.

In some of the BNP Paribas Group s businesses, particularly Global Markets (which represented 15.4% of the BNP Paribas Group s revenue in 2020) and Asset/Liability Management, protracted market movements, particularly asset price declines, can reduce the level of activity in the market or reduce market liquidity. These developments can lead to material losses if the BNP Paribas Group cannot close out deteriorating positions in a timely way. This is particularly true for assets that are intrinsically illiquid. Assets that are not traded on stock exchanges or other public trading markets, such as certain derivative contracts between financial institutions, may have values that the BNP Paribas Group calculates using models rather than publicly-quoted prices. Monitoring the deterioration of prices of assets like these is difficult and could lead to significant unanticipated losses (see section 5.8, paragraph Stress tests and liquidity reserve).

The BNP Paribas Group is exposed to the risk that the maturity, interest rate or currencies of its assets might not match those of its liabilities. The timing of payments on certain of the BNP Paribas Group s assets is uncertain, and if the BNP Paribas Group receives lower revenues than expected at a given time, it might require additional market funding in order to meet its obligations on its liabilities. While the BNP Paribas Group imposes strict limits on the gaps between its assets and its liabilities as part of its risk management procedures, it cannot be certain that these limits will be fully effective to eliminate potential losses arising from asset and liability mismatches.