2020 Universal registration document and annual financial report - BNP PARIBAS328

5 risks and CaPital adequaCy Pillar 3

5

Capital management and capital adequacy

At 31 December 2019, own funds eligible for the Solvency Capital Requirement stood at EUR 16,364 million. The amount of SCR was EUR 8,249 million and the SCR coverage ratio was 198%. Eligible own funds for the SCR Group Minimum amounted to EUR 12,997 million. The amount of SCR Group Minimum was EUR 3,785 million, and the SCR Group Minimum coverage ratio was 343%.

The Solvency Report at 31 December 2020 will be published on 21 May 2021.

Compliance with the regulation on the additional supervision of financial conglomerates

As a bancassurer, the BNP Paribas Group is also subject to additional supervision as a financial conglomerate, pursuant to European Directive 2002/87/EU, supplemented by Delegated Regulation 342/2014 of the European Commission and implemented into French law by the Order of 3 November 2014.

The financial conglomerates directive has established additional prudential supervision, added to the rules existing in the banking and insurance sectors, because it has introduced additional constraints on capital adequacy, the monitoring of large exposures, and intragroup transactions.

A financial conglomerate is required to meet additional capital adequacy requirements on a consolidated basis. The purpose is to require sufficient capital to cover both banking sector and insurance sector risks, while eliminating multiple gearing.

The capital surplus or shortfall results from the difference between the financial conglomerate s equity capital and the solvency requirements applicable to the banking and insurance industries:

■ the financial conglomerate s capital is determined based on the sector s solvency rules (CRR for the banking sector and Solvency II for the insurance sector);

■ the requirements for the financial conglomerate are determined on the basis of banking sector requirements, calculated according to the CRR and CRD 4 rules, including all capital buffers as well as the requirement resulting from the SREP 2019 applicable in 2020, and on the basis of the solvency capital requirement (SCR) for the insurance sector, calculated in accordance with the Solvency II regulation.

In calculating the financial conglomerate s capital adequacy, the requirements and deductions of insurance entities are treated in compliance with Solvency II rules in replacement of the rules defined in the CRR. The latter consist primarily of a 370% weighting of investments in equities treated according to the simple weighting method (see section 5.4 Credit risk: equities under the simple weighting method).

Governance for the prudential supervision of financial conglomerates falls to the Capital Committee, which meets quarterly under the Chairmanship of the Chief Operating Officer.

As at 31 December 2020, BNP Paribas Group, as a financial conglomerate, had capital of EUR 123.6 billion compared to a total requirement of EUR 98.8 billion, which represents a capital surplus of EUR 24.8 billion.

RECOVERY AND RESOLUTION Following the 2008/2009 financial crisis, international banking regulatory bodies adopted a series of regulations and directives based on the recommendations of the Financial Stability Board to facilitate the authorities management of crises involving financial institutions and limit the impact of a potential collapse on the economy and public finances. They provide for:

■ powers and instruments for the supervisory authorities to allow for better anticipation and oversight of the recovery of banks in difficulty, particularly by means of recovery plans;

■ powers and instruments for the resolution authorities in order to implement orderly resolution of a bank that would not have been able to recover by itself and would be placed in resolution. This is based among other things on the resolution documents and detailed reports required from banks to enable authorities to prepare resolution plan;

■ the addition of further regulatory requirements for institutions. These requirements which overlap quite largely aim to ensure a sufficient quantity of liabilities able to absorb losses or be converted into equity. In particular, they consist of:

■ a TLAC (Total Loss Absorbing Capacity) ratio for Global Systemically Important Banks (G-SIBs),

■ a MREL (Minimum Requirement for own funds and Eligible Liabilities) ratio applicable to all European institutions;

■ bail-in rules for banks, with a review of the ranking of creditors including a category of TLAC eligible debt (non preferred senior) created in 2016, plus the creation in 2014 of a resolution fund financed by the banks, with the aim of avoiding any recourse to public assistance.

The recommendations of the Financial Stability Board were transposed into French banking law in July 2013, introducing in particular the obligation to create recovery and resolution plans, and giving resolution powers for the ACPR (Autorité de contrôle prudentiel et de résolution).

On a European level, the Directive 2014/59/EU (BRRD Bank Recovery and Resolution Directive) was passed in 2014 and has been transposed into the law of all European Union Member States. This directive, as well as Regulation (EU) No. 806/2014 (SRM Regulation Single Resolution Mechanism Regulation) of 2014 and various additional delegated regulations, form all of the current regulations governing the recovery and resolution of European financial institutions. The amendments contained in BRRD 2, CRD 5 and CRR 2 proposed by the European Commission in November 2016 were approved and published in the Official Journal on 7 June 2019. In France, the transpositions of BRRD 2 and CRD 5 have been finalised on 21 December 2020.