2020 Universal registration document and annual financial report - BNP PARIBAS 347

5risks and CaPital adequaCy Pillar 3

5

Credit risk

MONITORING AND PORTFOLIO MANAGEMENT PROCEDURES [Audited]

Monitoring exposures

A comprehensive risk monitoring system is organised around control units, which are responsible for ensuring that lending commitments comply with the loan approval decision, that credit risk reporting data are reliable and that risks accepted by the Bank are effectively monitored. Daily exception reports are produced and various early warning tools are used to identify early the deterioration of credit risks. The various monitoring levels are carried out under the supervision of RISK. Non- performing loans or those placed under credit watch (see Exposures, provisions and cost of risk) are overseen more closely via dedicated quarterly committee meetings (see the Governance part of section 5.3 Risk management). To supplement this mechanism, the General Management Doubtful Committee meets on a monthly basis to determine individual provisions for doubtful loans based on expected financial flows.

The responsibilities of the control teams include the monitoring of exposures against approved limits, covenants, and guarantees. This allows the identification of any signs of deterioration against the risk profile approved by the Credit Committee. Control teams flag up (to the RISK teams and business units) any cases that fail to comply with Credit Committee decisions and oversee their resolution. In some cases, a specific alert is sent to the senior management of RISK and of the relevant business unit. These are mainly where exceptions remain unresolved and/ or where there are serious indications of deterioration in the risk profile compared with that approved by the Credit Committee.

Furthermore, since 2018 the General Credit Policy has included specific checks to be conducted for loans granted to clients presenting high leverage ratios, in accordance with European Central Bank guidelines.

Since 30 June 2020, the Group has set up a specific monitoring system within its entities for cases that have been subject to moratoria granted following the health crisis. Thus, the amount of loans subject to moratoria is reported monthly to the ECB, and moratoria are subject to quarterly regulatory reporting in accordance with EBA guidelines (see Exposures subject to moratoria and public guarantee schemes). In addition, the monitoring of moratoria is presented to the internal governance bodies and a summary is prepared for the CCIRC.

Overall portfolio management and monitoring

The selection and careful evaluation of individual exposures are supported by a reporting system based on more aggregated portfolio levels in terms of division/business line, regions, industry, business/product.

The overall portfolio management policy, including concentration of risk by single name, industry and country, is based on this reporting system and Group Risk Committees review all reports and analyses produced:

■ risk concentration by country is managed through country risk limits that are set at the appropriate level of delegated authority for each country. The Group, which is naturally present in most economically active areas endeavours to avoid excessive concentrations of risk in countries with weak economic or unstable political structures or which economic position has been undermined. Country envelope limits are reviewed at least once a year, and quarterly reports are drawn up on their use;

■ the Group closely monitors individual concentrations, in particular on business groups, corporates, banks or sovereign debts. These concentrations are reported in the quarterly risk report to CCIRC. Related policies implemented by the Group are described in the Credit risk diversification section (section 5.4);

■ regular reviews by the Group are carried out of portfolios in certain industries, either because of the magnitude of the Group s exposure to the sector or because of sector-specific risks, such as the cyclical nature of the industry or rapid technological developments. In conducting these reviews, the Group draws on the expertise of the relevant business lines and independent industry specialists working in RISK (Industry and Sector Studies). These reviews provide Executive Management, and if appropriate the CCIRC, with an overview of the Group s exposure to the sector under consideration, and assist it to decide on strategic guidelines. As an illustration, in 2020, an internal portfolio review was undertaken on the metal & mining, the oil & gas, new technologies and aviation sectors (see the paragraph on Industry Diversification in this section). In addition, the Group also monitors certain sectors on a regular basis such as, for example, commercial or residential real estate.

Stress tests assess portfolio vulnerabilities by measuring the impact of various adverse scenarios. They are conducted on a quarterly basis on the entire portfolio and on an ad hoc basis on sub-portfolios to identify any concentrations. They help to ensure that the Bank s credit risk exposure is in line with its risk appetite.

Lastly, BNP Paribas may use credit risk transfer instruments, such as securitisation programmes, credit derivatives or credit insurance, to mitigate individual risks, reduce portfolio concentration or cap potential losses arising from adverse scenarios.