2020 Universal registration document and annual financial report - BNP PARIBAS 341

5risks and CaPital adequaCy Pillar 3

5

Risk management [Audited]

STRESS TESTING

To ensure dynamic risk supervision and management, the Group has implemented a comprehensive stress testing framework.

STRESS TESTING FRAMEWORK The stress testing framework forms an integral part of the risk management and financial monitoring system and is used with a threefold objective of forward-looking risk management, planning of regulatory resources and liquidity requirements, and optimisation of the deployment of these resources within the Group, mainly through the Group s and its main entities ICAAP and ILAAP processes.

Different types of stress tests

There are two types of stress tests:

■ regulatory stress tests:

These involve primarily the stress tests requested by the European Banking Authority, the European Central Banks, or any other supervisory authority.

In 2020, the EBA and the ECB launched their biennial stress test exercise. Due to the health context linked to the Covid-19 epidemic, the EBA decided on 12 March 2020 to postpone the exercise to 2021. No results have therefore been published for the 2020 exercise. On 29 January 2021, the EBA published the macroeconomic scenarios and methodological assumptions to be applied for the 2021 exercise, which will be conducted among the 50 largest European banks until the third quarter of 2021.

In 2019, the ECB had conducted liquidity stress tests on 103 European banks. This exercise consisted of a sensitivity analysis to assess changes in the banks net liquidity position in different impact scenarios that may arise in the event of the bank experiencing a liquidity crisis. The shocks applied to assets and liabilities were defined using observed liquidity crises that have impacted banks in Europe and were calibrated for different levels of severity. This liquidity stress test showed the comfortable Group s liquidity position.

In 2018, the EBA and the ECB had conducted EU-wide stress tests of the forty-eight largest European banks. All banks were required to apply certain macroeconomic scenarios and methodological assumptions for comparison purposes. A scenario of severe macroeconomic stress over a period of three consecutive years (the adverse scenario ) was used to test the impact on exposure to credit, market, operational and revenue (rates and commission) risk. This was the first European regulatory year completed under the new IFRS 9 accounting standard, enabling its potential impact in the event of a major macroeconomic crisis to be analysed.

This stress test demonstrated the Group s ability to withstand the scenario proposed by the European Systemic Risk Board (ESRB) as part of the test. As a reminder, the impact of this major stress scenario on BNP Paribas capital consisted in reducing the full CET1 ratio by 288 basis points compared with the level at 31 December 2017, restated for calculation changes in the first half of 2018(1), versus an average reduction of -385 basis points across all of the forty-eight European banks tested;

■ internal stress tests:

■ stress tests dedicated to risk anticipation: they contribute to the forward-looking risk management, in particular of credit, market, counterparty, interest rates in the banking book, operational, activity and liquidity risks. The results of the transverse stress tests are used, among other purposes, to formulate the Bank s risk appetite and periodically measure its risk profile. They are periodically submitted to Group Executive Management as well as the Board of directors Internal Control, Risk Management and Compliance Committee (CCIRC) through the quarterly Group risk dashboard. Moreover, ad hoc stress testing is performed, when appropriate, within Risk & Development Policy Committees, portfolio reviews or Country Strategic Committees to identify and assess areas of vulnerability within the Group s portfolios,

■ stress tests for the budget process: they contribute to three-year capital planning. Stress tests are carried out annually as part of the budget process and are included in the ICAAP and the ILAAP. They are reviewed at divisional and business line level before being consolidated at Group level to provide a comprehensive view of the impact on the Bank s capital, liquidity and earnings.

The purpose of stress testing in the budget process is to assess the impact of an adverse macroeconomic scenario on the Group and its activities. These stress tests are part of the yearly budget process which is run on the basis of baseline and adverse scenarios.

The impact of the adverse scenario is measured on profil and loss (revenues, cost of risk, etc.), balance-sheet, risk-weighted assets, and capital.

(1) Relating to the entry into force of IFRS 9, to the deduction from CET1 capital of irrevocable payment commitments (IPC) and to risk-weighted assets associated with operational risk in advanced measurement approach which have been raised to the level of the standardised approach.