2020 Universal registration document and annual financial report - BNP PARIBAS428

5 risks and CaPital adequaCy Pillar 3

5

Market risk

➤ TABLE 82: MARKET RISK-WEIGHTED ASSETS MOVEMENTS BY KEY DRIVER (EU MR2-B)

In millions of euros VaR SVaR IRC(*) CRM(**) Standardised

approach Total RWAs Total capital

requirements

1 31 December 2019 4,644 9,999 2,384 494 1,776 19,296 1,544

2.a Asset size 579 4,722 864 181 552 6,898 552

2.b Asset quality 2,997 (168) - - - 2,829 226

3 Model update (1,190) (2,366) 47 - - (3,509) (281)

4 Methodology and policy - - - - - - -

5 Acquisitions and disposals - - - - (4) (4) -

6 Currency - - - - - - -

7 Other (56) 11 (26) - (228) (299) (24)

8 31 DECEMBER 2020 6,974 12,198 3,268 675 2,096 25,210 2,017

(*) Incremental Risk Charge. (**) Comprehensive Risk Measure.

The change in market risk-weighted assets in 2020 is explained mainly by:

■ a EUR 6.9 billion increase in line with business activity;

■ a EUR 2.8 billion increase due to the deterioration in risk parameters;

■ a -EUR 3.5 billion decrease following decrease in the VaR and SVaR multiplication factor.

MARKET RISK RELATED TO TRADING ACTIVITIES

INTRODUCTION Market risk arises mainly from trading activities carried out within Corporate and Institutional Banking (CIB), mainly within Global Markets and encompasses different risk factors defined as follows:

■ interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates;

■ foreign exchange risk is the risk that the value of an instrument will fluctuate due to changes in foreign exchange rates;

■ equity risk arises from changes in the market prices and volatilities of equity shares and/or equity indices;

■ commodities risk arises from changes in the market prices and volatilities of commodities and/or commodity indices;

■ credit spread risk arises from the change in the credit quality of an issuer and is reflected in changes in the cost of purchasing protection on that issuer;

■ option products carry by nature volatility and correlation risks, for which risk parameters can be derived from option market prices observed in an active market.

Trading activities at BNP Paribas are directly related to economic relations with business line customers, or indirectly as part of market- making activities. BNP Paribas s proprietary trading activities, transferred to the Opera Trading Capital subsidiary in mid-2015, were shut during the first quarter of 2019.

MARKET RISK MANAGEMENT ORGANISATION The market risk management system aims to track and control market risks as well as control financial instrument valuation whilst ensuring that the control functions remain totally independent from the business lines.

Within RISK, three departments are responsible for monitoring market risk:

■ Global Markets RISK (GM RISK) covers Global Markets activities;

■ Enterprise Risk Architecture (ERA ALMT RISK) covers ALM-Treasury activities;

■ International Retail Banking RISK (IRB RISK) covers International Retail Banking activities.