2020 Universal registration document and annual financial report - BNP PARIBAS 315

5risks and CaPital adequaCy Pillar 3

5

Capital management and capital adequacy

The exposure amounts used for regulatory purposes are presented:

■ in section 5.4 for credit risk;

■ in section 5.5 for securitisation positions in the banking book;

■ in section 5.6 for counterparty credit risk;

■ in section 5.7 for market risk.

SIGNIFICANT SUBSIDIARIES The risk-weighted assets of BNP Paribas significant subgroups and subsidiaries are given in Appendix 4 to this chapter.

The following subgroups are considered significant, based on the criterion that their risk-weighted assets amount to more than 3% of the Group s

total risk-weighted assets (excluding entities consolidated under the equity method) at 31 December 2019:

■ BNP Paribas Fortis;

■ Banca Nazionale del Lavoro (BNL);

■ BNP Paribas USA Inc.(1);

■ Bank of the West;

■ BNP Paribas Personal Finance;

■ BGL BNP Paribas.

The risk-weighted assets reported correspond to the sub-consolidation scope of each group. Thus, BGL BNP Paribas and Bank of the West subgroups are also included in BNP Paribas Fortis and BNP Paribas USA Inc. subgroups respectively.

(1) Since 1 July 2016, BNP Paribas USA, Inc. has been the Group s intermediate holding company for its US subsidiaries.

(2) Subject to the required agreements.

REGULATORY CAPITAL

The BNP Paribas Group is required to comply with the French regulation that transposes European Directives on Access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and Financial Conglomerates into French law.

In the various countries in which the Group operates, BNP Paribas also complies with specific regulatory ratios in line with procedures controlled by the relevant supervisory authorities. These ratios mainly address the issues of capital adequacy, risk concentration, liquidity and asset/liability mismatches.

As of 1 January 2014, Regulation (EU) No. 575/2013, establishing the methods for calculating the solvency ratio, defines it as the ratio between the regulatory capital and the sum of:

■ the amount of risk-weighted assets for credit and counterparty risks, calculated using the standardised approach or the Internal Ratings- Based Approach (IRBA) depending on the particular entity or the activity of the Group concerned;

■ capital requirements for market risk, for credit valuation adjustment risk and for operational risk, multiplied by a factor of 12.5.

BREAKDOWN OF REGULATORY CAPITAL Regulatory capital is divided into three categories (Common Equity Tier 1 capital, Additional Tier 1 capital and Tier 2 capital), which consist of equity and debt instruments, to which regulatory adjustments have been made.

Common Equity Tier 1 capital

Common Equity Tier 1 capital instruments mainly comprise:

■ the consolidated equity attributable to shareholders restated for the anticipated distribution of a dividend and Undated Super Subordinated Notes, which are ineligible for this category;

■ minority interest reserves of regulated entities, adjusted for their capitalisation surplus. Minority interests of unregulated entities are excluded.

The main regulatory adjustments are as follows:

■ gains and losses generated by cash flow hedges;

■ adjustments to the value of instruments measured at fair value required by prudent valuation;

■ goodwill and other intangible assets, net of deferred tax liabilities. Since 31 December 2020, in accordance with Regulation (EU) No. 2020/2176, certain software products have benefited from a specific prudential amortisation allowing the application of a preferential weighting instead of a deduction from CET1 capital;

■ net deferred tax assets that rely on future profitability and arising from tax loss carry-forwards;

■ expected losses on equity exposures;

■ share of expected losses on outstanding loans measured using the Internal Ratings-Based Approach (IRBA) which is not covered by provisions and other value adjustments;

■ securitisation tranches for which the Group has opted for the own funds deduction instead of a 1,250% weighting;

■ the additional restitution of 29% of the 2020 net income intended after the end of September 2021 as soon as the European Central Bank repeals its recommendation, which is expected by the end of September 2021 in the absence of negative changes (2).

Treasury shares held or granted a buy back authorisation are deducted from this category.