2020 Universal registration document and annual financial report - BNP PARIBAS 349
5risks and CaPital adequaCy Pillar 3
5
Credit risk
➤ TABLE 26: INDICATIVE MAPPING OF INTERNAL COUNTERPARTY RATING WITH AGENCY RATING SCALE AND AVERAGE EXPECTED PD
Internal rating
BNP Paribas
LT Issuer/ Unsecured
issuer s ratings
S&P/Fitch Average
expected PD
Investment Grade
1+ AAA 0.01%
1 AA+ 0.01%
1- AA 0.01%
2+ AA- 0.02%
2 A+/A 0.03%
2- A- 0.04%
3+/3/3- BBB+ 0.06% to 0.10%
4+/4/4- BBB 0.13% to 0.21%
5+/5/5- BBB- 0.26% to 0.48%
Non-Investment Grade
6+ BB+ 0.69%
6/6- BB 1.00% to 1.46%
7+/7 BB- 2.11% to 3.07%
7- B+ 4.01%
8+/8/8- B 5.23% to 8.06%
9+/9/9- B- 9.53% to 13.32%
10+ CCC 15.75%
10 CC 18.62%
10- C 21.81%
Default 11 D 100.00%
12 D 100.00%
The Group has developed an indicative equivalence between the Bank s internal ratings and the long-term issuer ratings assigned by the major rating agencies. Nevertheless, the Bank has a much broader clientele than just those counterparties rated by an external rating agency. An indicative equivalence is not relevant in Retail Banking. It is used when the internal ratings are assigned or reviewed in order to identify any differences between the Bank s assessment of a borrower s probability of default and that of one or more of the rating agencies. However, the internal ratings do not aim to reproduce or even approximate the external ratings. There are significant variances in both directions within the portfolio. Some counterparties rated 6 or 7 by BNP Paribas could be considered Investment Grade by the rating agencies.
For further details, see the sections Internal rating system sovereign, financial institution, corporate and specialised financing portfolios and Internal rating system specific to retail customers.
CREDIT RISK STRESS TESTING Quantitative models have been developed and are used to connect credit risk and rating migration parameters with macroeconomic and financial variables projected in stress testing scenarios (see section 5.3 Stress testing), for historical data as well as the relevant forecast period.
The quality of the methods used is guaranteed by:
■ strict governance in terms of the separation of duties and responsibilities;
■ a review of existing systems (models, methodologies, tools) by an independent entity;
■ periodic evaluation of the effectiveness and pertinence of the system as a whole.
This governance is based on internal policies and procedures, the supervision of the Credit Risk Stress Testing Committees by business line and the integration of the stress tests within the risk management system.
There is a Group-level credit-risk stress testing policy, approved by the Capital Committee in July 2013. It is used for different types of stress testing (regulatory, periodic and ad hoc).
The central stress testing framework is consistent with the structure defined in the EBA guidelines for European stress tests:
■ it is based on the parameters used to calculate capital requirements (regulatory EAD, PD and LGD);
■ the expected loss conditional to the macroeconomy is used as a measure of the cost of risk resulting from new defaults;
■ the stressed cost of risk is supplemented with impacts on stage 1 and 2 provisions and provisions on the outstanding non-performing loans;
■ the regulatory capital stress testing is performed on the basis of rating migrations, default events, and the stressed regulatory PD used in calculating regulatory capital requirements.
In the case of the stress of risk-weighted assets, the Loss Given Default is not stressed as it is considered as downturn LGD. In that of stress on the cost of risk, the rate of loss (also known as Point-in-time LGD) can be stressed through a link with macroeconomic and financial variables or with default rates.
Stress testing of credit risk is used in the evaluation of the Group s risk appetite, and more specifically during portfolio reviews.
