2020 Universal registration document and annual financial report - BNP PARIBAS 401
5risks and CaPital adequaCy Pillar 3
5
Credit risk
FUNDED CREDIT PROTECTION Funded credit protection is divided into two categories:
■ financial collateral:
This consists of cash amounts (including gold), shares in collective investment funds, equities (listed or unlisted) and bonds;
■ other diverse forms of collateral:
These include real estate mortgages or ship mortgages, pledge of equipment or inventories, transfer of commercial receivables or any other rights to an asset of the counterparty.
To be eligible, funded credit protection must fulfil the following conditions:
■ the value of the collateral must not be highly correlated with the risk on the obligor (in particular, shares of the obligor are not eligible);
■ the pledge must be documented;
■ the pledged asset must be traded on a liquid secondary market to enable rapid resale;
■ the Bank must have a regularly updated value of the pledged asset;
■ the Bank must have a reasonable level of comfort in the potential appropriation and realisation of the asset concerned.
In the Retail Banking business, the presence or absence of a particular type of collateral may, depending on the coverage ratio, lead to assigning the exposure to particular LGD class on a statistical basis.
UNFUNDED CREDIT PROTECTION Guarantors are subject to the same rigorous credit risk assessment process as primary obligors and are assigned risk parameters according to similar methods and procedures.
Guarantees are granted by the obligor s parent company or by other entities such as financial institutions. Other examples of guarantees are credit derivatives, guarantees from public insurers for export financing or private insurers.
Consideration of a guarantee consists of determining the average amount the Bank can expect to recover if the borrower defaults and the guarantee is called in. It depends on the amount of the guarantee, the risk of simultaneous default by the borrower and the guarantor (which is a function of the probability of default of the borrower, of the guarantor, and the degree of correlation between borrower and guarantor default, which is high if they belong to the same business group or the same sector and low if not) and the enforceable nature of the guarantee.
OPTIMISING CREDIT RISK MANAGEMENT THROUGH CDS (EU CR7) As part of its role of optimising credit risk management for CIB, Portfolio Management (PM) sets up hedges using credit derivatives, and mainly credit default swaps (CDS). These CDS are used as part of an active management policy, the main aim being to hedge migration and concentration risks and manage major exposures. The underlying assets are loans made to large corporates by CIB Corporate Banking, and occasionally those made by the Retail Banking & Services activity.
Considered from a regulatory standpoint to be guarantees, CDS hedges totalled EUR 778 million at 31 December 2020, compared with EUR 640 million at 31 December 2019. These hedges are put on by CIB to hedge exposures mainly treated under the IRB approach. Provided they are eligible, they have the effect of decreasing the estimated Loss Given Default for the underlying asset, and, therefore, reducing its consumption in terms of risk-weighted assets. At 31 December 2020, the reduction in risk-weighted assets resulting from hedging operations via CDS concerns only the corporate asset class, and represents EUR 325 million (EU CR7).
The following tables give the breakdown for the central governments and central banks, corporates and institutions portfolios, of the risk mitigation resulting from all the collateral and guarantees relating to the portfolio of loans and credit commitments for all the Group s business lines.
