2020 Universal registration document and annual financial report - BNP PARIBAS440

5 risks and CaPital adequaCy Pillar 3

5

Market risk

MARKET RISK RELATED TO BANKING ACTIVITIES

Interest rate and foreign exchange risks related to banking intermediation activities and investments are managed by the cross-functional ALM Treasury Department. At Group level, the ALM-Treasury Department is directly overseen by current Chief Operating Officer. BNP Paribas SA s ALM Treasury Department exercises functional authority over the ALM Treasury teams of each entity or group of entities covering the entire Group perimeter. Strategic decisions are made by the Asset and Liability Committee (ALCo), which oversees ALM Treasury s activities. These committees have been set up at Group, entity or group of entities level.

The foreign exchange risk gives rise to a weighted assets calculation under Pillar 1. The interest rate risk falls under Pillar 2.

FOREIGN EXCHANGE RISK

Calculation of risk-weighted assets

Foreign exchange risk relates to all transactions part of the banking book.

Group entities calculate their net position in each currency, including the euro. The net position is equal to the sum of all asset items less all liability items plus off-balance sheet items (including the net forward currency position and the net delta-based equivalent of the currency option book), less structural, non-current assets (long-term equity interests, property, plant and equipment, and intangible assets). These positions are converted into euros at the exchange rate prevailing on the reporting date and aggregated to give the Group s overall net open position in each currency. The net position in a given currency is long when assets exceed liabilities and short when liabilities exceed assets. For each Group entity, the net currency position is balanced in the relevant currency (i.e. its reporting currency) such that the sum of long positions equals the sum of short positions.

The rules for calculating the capital requirement for foreign exchange risk are as follows:

■ matched positions in currencies of Member States participating in the European Monetary System are subject to a capital requirement of 1.6% of the value of the matched positions;

■ CFA and CFP francs are matched with the euro, and are not subject to a capital requirement;

■ positions in closely correlated currencies are subject to a capital requirement of 4% of the matched amount;

■ other positions, including the balance of unmatched positions in the currencies mentioned above, are subject to a capital requirement of 8% of their amount.

The amounts involved are set out in Table 81: Market risk under the standardised approach (EU MR1).

Foreign exchange risk and hedging of net income generated in foreign currencies [Audited]

So-called operating foreign exchange risk exposure relates to net earnings generated by activities conducted in currencies other than the functional currency of the entity concerned. The Group s policy is to hedge

the variability of its net income due to currency movements. To this end, earnings generated in a currency other than the functional currency of a given entity of the Group are hedged locally. Net income generated by foreign subsidiaries and branches and positions relating to portfolio impairment are managed centrally.

Foreign exchange risk and hedging of net investments in foreign operations [Audited]

The so-called structural foreign exchange position of an entity relates to investments in currencies other than the functional currency. This position mainly results from the capital endowment of the branches and equity investments in foreign currencies financed by buying the investment currency. This structural foreign exchange position, adjusted for any intangibles, constitutes patrimonial exposure.

The Group s policy is to hedge portfolio exposure to liquid currencies, while at the same time maintaining the solvency ratio s limited sensitivity to exchange rate fluctuations. For this, borrowings in the same currency as the investment are used as an alternative to financing by purchasing the currency in question. Borrowings are recognised as hedges of investments.

INTEREST RATE RISK [Audited]

Interest rate risk in the banking book, or global interest rate risk, is the risk of variability in results as a result of mismatches in interest rates, maturities and nature between assets and liabilities in the banking book. This risk arises in non-trading portfolios.

Organisation of the Group interest risk management

The Board of directors assigns responsibility to the Chief Executive Officer for management of interest rate risk in the banking book. The Board of directors is informed quarterly on the principles governing interest rate policy and the Group s position through the Internal Control, Risk and Compliance Committee (CCIRC).

The Chief Executive Officer delegates management responsibility to the Group ALM Treasury Committee (Asset and Liability Management Committee). The permanent members of the Group ALM Treasury Committee are the Chief Operating Officer (Chairman), the Deputy Chef Operating Officers heading up Core Businesses, the Group Chief Risk Officer, the Group Chief Financial Officer, the Group ALM Treasury Head. The Head of General Inspection and the Head of Compliance are also invited. This Committee is responsible for tracking interest rate risk monitoring indicators, proposing the Group s interest rate risk profile and assigning limits.

ALM Treasury is responsible for the analysis of the management proposals and operational implementation of decisions related to managing the interest rate risk of the banking book as part of its delegated management.