2020 Universal registration document and annual financial report - BNP PARIBAS 441

5risks and CaPital adequaCy Pillar 3

5

Market risk

The RISK Function participates in the Group ALM Treasury Committee and the local ALM Treasury Committees (ALCo) and oversees implementation by ALM Treasury of the relevant decisions made by these committees. It also provides second-line control by reviewing the models and risk indicators, monitoring the level of risk indicators and ensuring compliance with the limits assigned.

The banking book consists of the Group s total bank balance sheet, excluding trading book transactions. This includes intermediation transactions (deposits, loans, etc.), non-commercial balance sheet items (equity, fixed assets, etc.) and banking book risk management activities, including derivatives used for the management of interest rate risk on the banking book (notably when they are ineligible for hedge accounting under IFRS).

Banking book interest rate risk in each BNP Paribas entity is systematically transferred to ALM Treasury, through internal analytic contracts or lending/borrowing transactions. For the Group as a whole, ALM Treasury is responsible for managing the interest rate risk transferred in this way.

Decisions concerning the management of interest rate risk are made and monitored during monthly or quarterly committee meetings by entity or group of entities, attended by representatives of local ALM Treasury, Group ALM Treasury, Finance and RISK Functions and senior management of the entities and/or businesses.

Measurement of interest rate risk

Rate positions are measured taking into account the specific features of the risks managed. Hence, the Group has defined the concepts of standard rate risks and structural rate risks. The standard rate risk corresponds to the general case, namely when it is possible to define uniquely the most appropriate hedging strategy for a given transaction. The structural rate risk is the interest rate risk for equity and non-interest-bearing current accounts: these balance sheet items generate regular revenues but are sensitive to interest rate levels. However it is not possible to define a single hedging strategy to fully neutralise this sensitivity. In this case, the Group included all the possible so-called neutral management strategies in terms of interest rate risk.

Interest rate risks are analysed in terms of interest rate gaps that measure for each future period the potential rate characteristic mismatches between assets and liabilities (fixed rate and indexation type). In the interest rate gaps, the optional effects, in particular linked to behavioural options, are embedded and translated into their delta equivalent.

The maturity split is determined on the basis of the contractual terms of the transactions and historical observations of customer behaviour. For Retail Banking products, behavioural models are based on historical or forward data and econometric studies. These possible management strategies notably relate to early redemption and savings accounts. Moreover, the maturities of non-interest-bearing current accounts and of equity are calculated according to a more conventional approach defining a range of investments taking into account the objective of stabilising results and stability of deposits.

Interest rate risk is also measured through indicators of the sensitivity of revenues to interest rate changes on a going concern basis, incorporating

dynamic changes in balance sheet items. This enables the partial or zero correlation between customer interest rates and market interest rates to be taken into account on the one hand, and the volume sensitivities to interest rates on the other hand, which create a risk to future revenues.

The choice of indicators and risk modelling are reviewed by RISK. The results and the adjustments following these reviews are presented and monitored to the committees on a regular basis.

The interest rate risk measurement indicators are consistently presented to the ALCos and serve as the basis for operating risk management decisions.

As stated in the introduction to the section Market risk related to banking activities, the interest rate risk comes under Pillar 2.

Risk limits

Interest rate risk indicators span the entire banking book.

The interest rate gaps are subject to interest rate risk limits across all time horizons. These limits are calibrated based on the nature of the risks (standard or structural) at Group and entity level. They are reviewed annually.

The Group s revenue sensitivity indicator is subject to limits and a warning threshold relative to the overall sensitivity level, also broken down by division and the main entities. Moreover, the Group regularly monitors the impact of stress scenarios on its revenues.

Ecconomic hedges transactions that do not qualify for hedge accounting under IFRS are subject to specific limits.

Sensitivity of revenues to global interest rate risk

These sensitivities are calculated on the total banking book. They factor in the direct impacts of market rates and business trends over a period of up to three years. In addition, indirect effects on commercial activity linked to changes in outstandings and customer rates, notably the effects of inertia on margins of changes in interest rates (tightening or widening of margins on loans with an upward or downward in interest rate moves and conversely on deposits) are taken into account.

In a very low or negative interest rate environment, the effects of a 0% floor on customer deposit rates led to an increase in non-interest- bearing current accounts. These increases in non-interest-bearing current account balances, that are deemed temporary, are invested over prudent horizons. Sensitivities take into account hedging transactions limiting negative impacts related to holding interest rates at their current level or lower level, as well as the change in income from liquidity surpluses placed with the ECB.

The consolidated indicator is presented in the table hereafter. Over one-, two- and three-year timeframes, the sensitivity of revenues to a parallel, instantaneous and definitive increase in market rates of 50 basis points (+0.5%) across all currencies has an impact of respectively +EUR 125 million, +EUR 309 million and +EUR 600 million, or +0.3%, +0.7% and +1.4% of the Group s revenues.