2020 Universal registration document and annual financial report - BNP PARIBAS362

5 risks and CaPital adequaCy Pillar 3

5

Credit risk

➤ TABLE 31: CREDIT RISK-WEIGHTED ASSETS MOVEMENTS BY KEY DRIVER (EU CR8)

In millions of euros

RWAs Capital Requirements

Total of which IRB

approach Total of which IRB

approach

31 December 2019 524,231 259,552 41,939 20,764

Asset size 15,727 16,056 1,258 1,284

Asset quality (8,192) (7,126) (655) (570)

Model update 13,954 13,954 1,116 1,116

Methodology and policy (363) (214) (29) (17)

Acquisitons and disposals (2,173) 1,961 (174) 157

Currency (16,038) (5,811) (1,283) (465)

Others 41 (170) 3 (14)

31 DECEMBER 2020 527,189 278,202 42,175 22,256

Credit risk-weighted assets increased by EUR 3 billion in 2020, primarily as a result of the following:

■ an increase in line with business activity, particularly in the context of health crisis-related support for the economy (net of securitisation transactions) of EUR 16 billion, of which EUR 9 billion for CIB and EUR 6 billion for Domestic Markets;

■ a EUR 14 billion increase due to model updates;

■ a EUR 8 billion decrease relating to asset quality effects;

■ a downward methodology and policy effect of EUR 0.4 billion in line with regulatory changes;

■ a EUR 2 billion decrease related to perimeter effects;

■ a EUR 16 billion decrease due to currency effects, particularly with the depreciation of the US dollar and Turkish lira.

CREDIT RISK: INTERNAL RATINGS-BASED APPROACH (IRBA)

The internal rating system developed by the Group covers the entire Bank. The IRBA framework, validated in December 2007, covers the portfolio described in Approaches used to calculate capital requirements in the section entitled Exposure to credit risk.

The Group has developed specific internal models adapted for the most common categories of exposure and clients in its loan portfolio. BNP Paribas bases these developments on internal data gathered over long periods. Each of these models is developed and maintained by a specialist team, in conjunction with relevant RISK and business line experts. Moreover, verification is performed to ensure compliance with the floors set by the regulation on these models. The Bank does not use models developed by external suppliers.

Counterparty rating (or the Probability of Default) and the Loss Given Default are determined either using purely statistical models for portfolios with the highest degree of granularity (loans to individuals or to very small enterprises) or a combination of models and expert judgement based on indicative values.

Loss Given Default is defined as the loss that the Bank would suffer in the event of the counterparty s default in times of economic downturn,

as required by regulations. For each transaction, it is measured using the recovery rate for a senior unsecured exposure to the counterparty, adjusted for any risk mitigation techniques (collateral or guarantees). Amounts recoverable against these mitigants are estimated each year using conservative assumptions as well as haircuts calibrated to reflect economic downturn conditions.

The Bank models its own conversion factors on financing commitments by using internal default data. Conversion factors are used to measure the off-balance sheet exposure at risk in the event of a default. This parameter is assigned automatically depending on the transaction type for all portfolios and therefore, is not determined by the Credit Committees.

Internal estimates of risk parameters are used in the Bank s day-to- day management in line with regulation recommendations. Thus, apart from calculating capital requirements, they are used, for example, when setting delegated limits, granting new loans or reviewing existing loans to measure profitability, determining stage 1 and stage 2 impairment and for book analyses.