2020 Universal registration document and annual financial report - BNP PARIBAS342
5 risks and CaPital adequaCy Pillar 3
5
Risk management [Audited]
The calculated final output is a range of projected Group s solvency ratios, as well as possible adjustment measures. The scenarios used, the outcomes of the stress tests and the proposed possible adjustment measures (such as reducing exposures to a sub-segment or changes in funding or liquidity policies, etc.) are included in the budget synthesis report presented to the Group Executive Management at the end of the budget process. In addition, in the Group s ICAAP, its solvency can be analysed in adverse scenarios other than an adverse budget scenario, defined by risk topics occasionally identified by the Group,
■ reverse stress tests: they were conducted as part of the Bank s recovery and resolution plan and ICAAP. Reverse stress tests consist of identifying scenarios likely to result in a drop in the Bank s solvency ratios to below levels set in advance in line with the methods of use in question. These exercises enable any areas where the Bank is fragile in terms of changes in certain risk factors to be detected and facilitate in-depth analyses of the remedial actions that could be implemented by business lines or Group-wide.
Governance and implementation
This framework is based on a well-defined governance, with responsibilities shared between the Group and operational entities in order to encourage operational integration and relevance. Since 2017, the Group has set up a Stress Testing and Extended Planning (STEP) programme serving both the Group and its subsidiaries and business lines. The aim of the STEP programme is continue to respond effectively to the various regulatory stress tests, such as the EBA and ECB ones, and to develop internal stress test practices required for proper risk management and Group resource planning.
Finance, RISK and ALM Treasury functions have created a shared team Stress Testing and Financial Synthesis ( STFS ), responsible for implementing the STEP programme and its deployment across the Group s entities and activities.
The STFS team is responsible in particular for:
■ the definition and the implementation of the Group s target structure in terms of stress testing while covering the associated organisational issues, modelisation, IT systems and governance;
■ the performance of all of the Group s stress testing exercises, relying in particular on existing teams within RISK and Finance functions;
■ the support of the stress test initiatives of the Group s business lines and legal entities in order to ensure overall consistency and streamline procedures;
■ the management of the Group s financial synthesis and its adaptation to the challenges of SREP;
■ the production of the Group s ICAAP report and, for certain risks, the quantification of internal capital.
Stress test methodologies are tailored to the main categories of risk and subject to independent review.
Stress tests may be run at Group, business line or portfolio level, dedicated to one or more risk types and on a more or less large number of variables depending on the pursued objective. Where appropriate, the results of quantitative models may be adjusted on the basis of expert judgement.
Since its creation, the Group s stress testing framework has evolved continuously in order to integrate the most recent developments in stress tests, whether in terms of methodologies or improved operational integration in the Group s management processes. The stress test framework by type of risks is detailed in sections 5.4 Credit risk, 5.6 Counterparty credit risk and 5.7 Market risk.
INTERNAL STRESS TEST SCENARIO DEFINITION In stress testing exercises, it is common practice to distinguish baseline scenario and adverse (and favourable, where applicable) scenarios. A macroeconomic scenario is typically a set of macroeconomic and macrofinancial variables (GDP and its components, inflation, employment and unemployment, interest and exchange rates, stock prices, commodity prices, etc.) values projected over a given future period of time.
Baseline scenario
The baseline scenario is considered as the most likely scenario over the projection horizon. The baseline scenario is constructed by Group Economic Research in collaboration with various functions or business lines possessing a specific expertise, in particular:
■ Group ALM Treasury for interest rates;
■ Wealth Management for equity indices;
■ BNP Paribas Real Estate regarding commercial real estate;
■ local economists when regional expertise is required;
■ RISK for coordination and overall consistency of the scenario.
The global scenario is made up of regional and national scenarios (eurozone, France, Italy, Belgium, Spain, Germany, United Kingdom, Poland, Turkey, United States, Japan, China, India, Russia, etc.) consistent with each other.
Adverse scenario
An adverse scenario describes one or several potential shocks to the economic and financial environment i.e. the materialisation of one or several risks to the baseline scenario over the projection horizon. An adverse scenario is thus always designed in relation to a baseline scenario, and the shocks associated with the adverse scenario are translated in the set of macroeconomic and financial variables listed above as deviations from their value in the baseline scenario. The adverse scenario is constructed by RISK with the benefit of the expertise of the same team from Group functions or business lines used for the baseline scenario.
