2020 Universal registration document and annual financial report - BNP PARIBAS 367

5risks and CaPital adequaCy Pillar 3

5

Credit risk

➤ TABLE 34: BACKTESTING OF LGD

Portfolio

2019

Arithmetical average of the estimated LGD

Historic arithmetic average of the observed LGD

Sovereigns and public sector entities 42% 17%

Institutions(*) 40% 27%

Large corporates(**) 39% 27%

Individuals 27% 24%

Professionals and SME retail 29% 27%

SME corporate 37% 34%

(*) Corresponds to Financial institutions and Insurance. (**) Corresponds to Large corporates, Real Estate non-retail in France and Specialised financing.

INTERNAL RATING SYSTEM SOVEREIGN, FINANCIAL INSTITUTION, CORPORATE AND SPECIALISED FINANCING PORTFOLIOS The IRBA for sovereigns, financial institutions, corporates and specialised financing portfolios is based on a consistent rating procedure in which RISK has the final say regarding the rating assigned to the counterparty and the Global Recovery Rate (GRR) assigned to transactions. Credit Conversion Factors (CCF) of off-balance sheet transactions are automatically assigned according to counterparty and transaction type (see paragraph Rating system in the section Credit risk management policy).

The generic process for assigning a rating to each segment is as follows:

■ for large corporates and specialised financing, an analysis is carried out by the unit proposing a rating and a Global Recovery Rate to the Credit Committee, using the rating models and tools developed by RISK. The rating and Global Recovery Rate are validated or revised by the RISK representative during the Credit Committee meeting. The Committee decides whether or not to grant or renew a loan and, if applicable, reviews the counterparty rating at least once a year;

■ for financial institutions, the analysis is carried out by analysts in the RISK Function. Counterparty ratings and Global Recovery Rates are determined during review committees by geographical area to ensure comparability between similar banks;

■ for sovereigns, the ratings are proposed by the Economic Research Department and approved at Country Committee (Rating Committee) meetings which take place several times a year. The Committee comprises members of Executive Management, the RISK Function and the business lines;

■ for small and medium-sized companies (other than retail customers), a score is assigned by the RISK analysts.

For each of these sub-portfolios, the risk parameters are measured using a model certified and validated by the RISK teams, based mainly on an analysis of the Bank s historical data. The model is supported as far as possible by tools shared Group-wide to ensure consistent use. The method is supplemented by expert judgement provided it can be justified.

The method for assessing risk parameters is based on a set of common principles, and particularly the two pairs of eyes principle which requires at least two people, at least one of whom has no commercial involvement, to give their opinion on each counterparty rating and each transaction Global Recovery Rate.

The same definition of default is used consistently throughout the Group for each asset class, in accordance with regulations.

The chart hereafter presents a breakdown by PD range of non-defaulted loans and commitments for the asset classes: central governments and central institutions, corporates for all the Group s business lines, measured using the internal ratings-based approach (see Table 26: Indicative mapping of internal counterparty rating with agency rating scale and average expected PD).

This exposure represented EUR 1,072 billion at 31 December 2020 compared with EUR 870 billion at 31 December 2019.

The majority of commitments are towards borrowers rated as good or excellent quality, reflecting the heavy weighting of large multinational groups and financial institutions in the Bank s client base. A significant proportion of commitments to non-Investment Grade borrowers are highly structured or secured by high quality guarantees implying a high recovery rate in the event of default. They include export financing covered by export credit insurance written by international agencies, project finance, structured finance and transaction financing.