2020 Universal registration document and annual financial report - BNP PARIBAS 325

5risks and CaPital adequaCy Pillar 3

5

Capital management and capital adequacy

CAPITAL ADEQUACY AND CAPITAL PLANNING

CAPITAL ADEQUACY The BNP Paribas Group is required to comply with a range of regulations:

■ European banking regulations under the CRR and CRD 4, which also cover banking supervision;

■ regulation relating to financial conglomerates in respect of additional supervision of its banking and insurance activities. BNP Paribas insurance business is governed by Solvency II insurance regulations since 1 January 2016.

Within the context of the Single Supervisory Mechanism, the ECB thus became the direct supervisor of BNP Paribas as of 4 November 2014. The ECB draws on the competent national supervisory authorities in fulfilling this role.

Requirements under banking regulations and supervision

With respect to Pillar 1, the Group is required to meet:

■ a minimum Common Equity Tier 1 (CET1) capital ratio of 4.5%;

■ a minimum Tier 1 capital ratio of 6%;

■ a minimum Total capital ratio of 8%.

Additional requirements known as buffers In addition to the minimum capital requirements regarding Pillar 1, BNP Paribas have to maintain additional CET1 capital buffers:

■ the capital conservation buffer is equal to 2.5% of the risk-weighted assets. The aim of this buffer is to absorb losses in a situation of intense economic stress;

■ the following two buffers were defined to limit systemic institutions failure risk. Only the highest of these two buffers is applicable:

■ the buffer for Global Systemically Important Banks (G-SIBs) consists of a surcharge of CET1 capital defined by the Financial Stability Board based on the methodology developed by the Basel Committee, which corresponds to the global systemic importance of banks. Global systemic importance is measured in terms of the impact a bank s failure can have on the global financial system and the wider economy.

The measurement approach of the global systemic importance is indicator-based. The selected indicators reflect the size of banks, their interconnectedness, the use of banking information systems for the services they provide, their global cross-jurisdictional activity and their complexity. The methodology is described in the document published in July 2013 by the Basel Committee, entitled Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement (BCBS 255).

In April 2020, BNP Paribas published the values of the G-SIBs indicators as at 31 December 2018. Details of the values of G-SIBs indicators can be found (according to GSIB1 format) in the Conferences and publications section of the Investor Relations website: https://invest.bnpparibas.com/en/conferences-and- publications.

The Financial Stability Board published the list of systemically important banks for 2020 on 11 November 2020. Since 2017, BNP Paribas is classified in group 2 which sets the additional Common Equity Tier 1 capital requirement at 1.5% until 2022.

The next update of the Group indicators is due for publication at the end of April 2021,

■ the buffer for Domestic Systemically Important Banks (D-SIBs) aims to strengthen the capital requirements for institutions whose failure would have an impact on the national economy. The D-SIBs buffer for BNP Paribas is set at 1.5% until 2022;

■ the systemic risk buffer aims to limit systemic or macroprudential non-cyclical risks in the long term. This buffer is null for the Group;

■ the countercyclical capital buffer is defined as a surcharge of CET1 capital whose purpose is to adjust over time to increase the capital requirements in periods when credit growth is accelerating and reduce them in slower periods. A rate may be activated in each country by a discretionary decision from the appointed national authority. In view of the notified rates by country, the BNP Paribas countercyclical capital buffer is 0.02% at 31 December 2020 compared with 0.17% at 31 December 2019. This decrease is explained by the reduction in rates applicable in certain countries in the first half of 2020 in the context of the health crisis (see Appendix 3 Countercyclical Capital Buffer).

Pillar 2 requirements With respect to supervision, the second Pillar of the Basel Agreement provides that the supervisor shall determine whether the policies, strategies, procedures and arrangements implemented by the Group on the one hand, and the capital held on the other hand, are adequate for risk management and risk coverage purposes. This evaluation exercise by the supervisors to determine the adequacy of mechanisms and capital with respect to bank risk levels is designated in the regulations under the term SREP (Supervisory Review and Evaluation Process).

ICAAP (Internal Capital Adequacy Assessment Process) is the process by which institutions assess the adequacy of their capital with their internal measurements of the levels of risk generated by their usual activities. ICAAP is used by the supervisory authorities for the annual SREP.

Within the BNP Paribas Group, the ICAAP is based on two key principles: the verification that the level of available capital is adequate with respect to the capital requirements, and the forward-looking capital planning.

The capital adequacy assessment relies on two perspectives:

■ the regulatory perspective, described in the CRD 4 and the CRR, according to which all Pillar 1 risks must be covered by regulatory capital;

■ the internal perspective, built around a comprehensive review of the Pillar 1 risks specified by Basel regulations, as well as the Pillar 2 risks defined in the Group s risk appetite framework and identified as material within the framework of the Group s risk inventory system. From this perspective, Pillar 1 and Pillar 2 risks are assessed using internal quantitative approaches, supplemented, as necessary, by qualitative approaches and dedicated monitoring frameworks.